What is the significance of Silicon Valley?

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Every once in a while, AnnaLee Saxenian, the dean of the School of Information and a professor in the Department of City and Regional Planning at UC Berkeley, will find herself in a meeting where someone decides to explain to her why Silicon Valley has been so spectacularly successful. Her interlocutor will tell her a story of ever-evolving networks, of workers who leap from startup to startup, of companies that fail and then recombine with other failures into big successes. Says Saxenian, laughing a little, “I’ll just sit there and say, ‘Oh really? Yeah, I think I have heard about that.’”

She hasn’t just heard about it. She was the first to really tell the story, in one of the most important and influential business books of the past quarter century. In Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Saxenian set out to describe what differentiated California’s Silicon Valley from the tech industry outside Boston, which started out stronger than its West Coast rival but withered in the 1980s and 1990s. In the process, she gave Silicon Valley much of the framework and vocabulary by which the region now makes sense of itself.

On the occasion of the 20th anniversary of the book’s publication, I talked to Saxenian for an HBR Ideacast, which you can listen to here. What follows is an edited and condensed version of that interview and a subsequent conversation.

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HBR: How did you come to write this book?

Saxenian: I grew up outside of Boston. Parents of my friends were engineers at MIT or they worked at Digital Equipment Corporation or Data General. So that was my universe, until I came to graduate school in California in the late 1970s and started learning about San Jose and Silicon Valley and quickly realized that there were actually two very different worlds, although we all saw them as the same, as technology hubs. So that really was the genesis.

Route 128 is, for readers who aren’t familiar with Boston, sort of a northern and western beltway around Boston.

It got named America’s Technology Highway sometime in the ’70s or ’80s, because there were a lot of very big, very successful technology companies — Wang, Data General, DEC, Prime Computer.

You then went back to the East Coast to get your PhD at MIT?

I started as a master’s student looking at Silicon Valley because I had learned that San Jose was the fastest growing city in the country. Actually I predicted at the time, which was like 1980, that Silicon Valley would stop growing, because the transportation was too congested, the housing costs were too high, salaries were rising, and companies that had founded themselves there would be expanding into lower-cost areas around the country.

So I did that, went off to MIT to do my PhD, and quickly realized that I had been totally wrong. Silicon Valley was continuing to boom, despite my predictions, and then I spent my time in graduate school trying to understand why I had been so wrong.

Did the book grow out of your doctoral dissertation?

It sure did. My dissertation was only about Silicon Valley, and then I built the Boston piece in, partly as a foil to make the Silicon Valley model more comprehensible to people who had never been there.

It’s really fun to read, for a doctoral dissertation. Did you get in trouble for that?

I have to say that I had a great editor, and we did cut out a bunch of the theory. I probably didn’t do my career any great favors by doing that. People say, “Well, what’s the theory?” And there’s an answer to that, but it’s not as explicit in the book as it could be. It also meant that many more people read it than would have read it if I had kept it in the more traditional academic format and language.

What was it that enabled Silicon Valley to keep growing? Those were real constraints you were describing.

Boy, they are there today, too. The short answer is that the advantages of being within the Silicon Valley ecosystem outweighed the very high costs. I had been assuming that in this emerging technology business competition was based solely on cost. What I learned was that being able to innovate very quickly, being able to be first to market with new products, being able to adapt to crises and to change quickly was much more of an enduring advantage for the region. The dynamism of Silicon Valley was rooted in a structure that was very decentralized and very flat and allowed for very rapid change.

And the Boston area didn’t have that, right?

The Boston area was organized around these big, vertically integrated minicomputer companies — DEC, Data General. They were classic postwar American companies, with vertical hierarchies and career ladders. Planning and research happened at the top of the organization and then funneled down. Whereas in Silicon Valley you had, really by chance not design, a series of flat companies, with project-based teams that moved around. People moved between companies much more fluidly. At a time that technology and know-how were sort of trapped within the vertically integrated companies of Route 128, they were being continually recombined in Silicon Valley. That gave them a real edge in innovation.

You say this was largely by accident. What were the factors? How did that happen?

Imagine the Bay area in the immediate aftermath of the Second World War. It was just apricot orchards, prune orchards — the biggest exporter of apricots and prunes in the world at that time, in fact. There was a sleepy university here called Stanford that really hadn’t made much of a mark on the country yet. A few key companies were located here — Hewlett Packard was here, largely serving the military industry, and you had a couple of older companies.

Then you had a semiconductor company started by William Shockley that was one of the pioneers in the transistor, and that company became a magnet for skill. Its engineers then became part of Fairchild, an East Coast company. That company failed, all of the key engineers left and went into their own businesses and really set the model for the Silicon Valley ecosystem, which is one of working together for a short period of time and then moving on and spawning successors. So in some ways the founding myth of Silicon Valley was a kind of genealogical one. People start companies, they fail, they succeed, they move on. And that seeds new companies, and those people carry on the knowledge and the know-how but it gets recombined with other skills and technology.

Whereas you can think about the 128 company as being autarkic. The company was the family was the unit, and everything stayed within the company.

The book came across as hopeful about Silicon Valley’s future. Still, what’s happened since is pretty incredible. Have you been surprised by how successful the region has continued to be?

I have been surprised by the scale of the booms as well as the busts. It’s always been a cyclical region where you get enthusiastic waves of innovation and then waves of disinvestment. But the late ’90s really surprised me, just the scale of investment. Capital flowed into the area from all over the world. It was just way out of proportion to the capacity of the regional economy to deliver.

The thing that I described in my book is an adaptive capacity that I observed in the mid-’80s when the semiconductor industry, really the core industry at the time, was outcompeted by Japan. Japanese memory-chip makers really were producing much higher-quality, lower-cost chips. And at that time it looked like the economy of Silicon Valley was just going through the tubes. It was going to become a Detroit, or Pittsburgh, because its leading companies were destroyed, and with them tens of thousands of jobs.

The model that I saw at that time was that those people all went and started new companies, joined new teams, and regenerated. That mechanism of adaptation is what we see repeating in all of the booms and busts in the area. So I’m not surprised that it has remained as resilient as it is. I continue to be amazed by what emerges as the leading technology of each era, because it changes so quickly.

Do you see any signs of calcification, of getting away from that openness and flexibility?

There have always been lawsuits in Silicon Valley, there have always been companies that are more or less closed than others. Apple has historically been a much more closed culture than HP was, or than many of the startups are today. So it’s not that it’s a homogeneous culture, but the dominance of this open and recombinatorial system has prevailed. It keeps evolving in some ways. As it’s moved away from hardware and toward software and integrated more design innovation, you see this simultaneous shift toward San Francisco, to this very different hipster culture. It used to be Midwestern engineers and now you’ve got a very different culture on the surface, but the dynamics of the economy look very similar to me.

Obviously one of the things that Silicon Valley created, aside from the technologies, is this institution called venture capital. Venture capital, angel funding — just the idea that people with good ideas can be funded to start businesses, they don’t have to have money from their family or from the state. This is a huge revolution, and the continuing reinvestment of capital that gets generated in the region into new ventures is one of the most significant features of the regional economy. I don’t think it’s been matched anywhere in the world, although obviously there are venture capital firms and industries in the rest of the world.

You wrote a subsequent book — The New Argonauts — about how immigrants who had come to Silicon Valley were now taking the network global. Has that just extended the reach of Silicon Valley, or has it created new networks elsewhere?

I think it has done both. It has certainly extended the network, and you’re seeing pieces of the value chain moving. Manufacturing of a lot of the technology products we use — the mobile devices, the laptops — really shifted in the ’90s to Taiwan and now to China. And that’s an extension, I would say, of the network. There are people, companies, capital that flow between those regions very fluidly. So it feels to me like an extension of Silicon Valley. I think you could say the same thing for the cluster in Israel and some of the activity in India today in the software industry. There are regions around the world and cities that even to this day are trying to grow the next Silicon Valley, looking for a recipe. Increasingly what I believe is the places that have succeeded are the ones that have connected to the markets and the value chains here in the Bay area.

The thing that remains distinctive about Silicon Valley is that there are literally thousands of startups annually, and thousands of them fail in their first five years, more than half for sure. But in each generation you see a couple of big companies emerge. You saw Apple, you saw Cisco, you saw Intel then you started to see Yahoo and then Google and Facebook. And so with each technology wave you see global giants. The ability to not only innovate but also scale to global reach is quite distinctive.

We have a set of institutions that are very supportive of this kind of entrepreneurial ecosystem. You have people who have been here for 40 or 50 years who have seen wave after wave of technology and have continued to invest or work on boards. They have a depth and a breadth of talent here that’s really unparalleled in the world. Young graduates who are really motivated, from almost anywhere in the country and the world, this is a place that draws a disproportionate number of them. So there is a kind of increasing-returns phenomenon here that people just keep wanting to be here and it keeps drawing great people. The professional service providers are so specialized: the lawyers, the realtors, they’re willing to take equity as payment, they’ve seen everything. So you’ve just got a tremendous depth of talent here that would take a long time accumulate elsewhere.

One of the things that keeps striking me is that I’ll go to a tech conference, and somebody will be up on stage and just sort of spout back your arguments for why Silicon Valley is so successful. I’m sure a lot of these people haven’t actually read it, but the framework for how people in Silicon Valley understand why their region is successful is the framework you figured out doing that book.

Yeah, I do think that’s true. I’ll be in meetings and people will tell me why Silicon Valley is so successful and I’ll just sit there and say, “Oh really. Yeah, I think I have heard about that.” It’s been much more influential than I ever would have ever expected, in that sense. Partly because there was nobody else really asking the same question. Scholars, at least historically, didn’t think about regions. They thought about companies, and they thought about industries. To even use the region as a unit of analysis was kind of a break from what had come before.

In the book, you describe the dominant explanation for corporate success at the time as having to do with how efficiently you could produce and how low your costs were.

We had the models of the car industry and the steel industry which were kind of driving our understanding of industries, and those were both dominated by a small number of big firms. There was this whole story about product life cycles, where products would emerge in one place but then it would decentralize over time as the product was standardized and the process was made more consistent. I had grown up with this theory of the product life cycle that went: Detroit is the center of the innovation, then the innovation slows down and then they move the factories to the South, and then maybe they move to Asia, where it’s even cheaper, or to Mexico. That was the dominant meme at the time.

With some of tech manufacturing, this has happened.

Yes. The thing that’s changed is that the pace of innovation has just accelerated. Product life cycles in the age of the toaster or the black-and-white TV were 10 years. Now they’re nine months. So the kind of manufacturing that you have has to be much more responsive and flexible.

What would be the warning signs that ‘OK, this Silicon Valley thing is over’?

I think if you saw a falloff in startups, if you saw a flight of capital, if you saw more of these price-fixing, legal things that made people feel less comfortable about moving between firms or trying new things. The things that I worry about, to be honest, have much more to do with the failure of the state to reinvest in our higher education system, our infrastructure, just basic things that in the postwar period we took for granted. California had a remarkable three-tiered public higher education system that was really unparalleled. The infrastructure was new, it was all very functional. All of those things have been deteriorating and we’re not reinvesting in those. That won’t be a fast impact, and maybe it won’t slow things down dramatically, but I do worry about that.