Silicon Valley and the Economics of Geography
posted by Darian Ibrahim
Thanks very much to Dave and the Co-op gang for having me back! Richard Florida has a provocative new piece in The Atlantic on how the economic crisis could reshape the geography of America. For those familiar with Florida’s work on the “creative class,” his predictions come as little surprise: populated, talent-attracting regions like New York, L.A., and Silicon Valley will continue to thrive due to the spillover benefits of talent agglomeration, while cities like Phoenix and Las Vegas that were “developed on development” will take at least a short-term hit, and Midwestern cities still tied to industries of the past – well, it isn’t good. (One interesting nugget: Florida notes that mega-law firm Jones Day no longer considers Cleveland its headquarters, which is now in D.C., but its “founding office.”)
In my new paper Financing the Next Silicon Valley, I borrow a page from Florida and tackle the issue of geography and tech-driven economic growth. Based on anecdotal data, Florida appears to be right: talented entrepreneurs that start in other locales – including those Midwestern cities that would love to keep them – inevitably move to Silicon Valley for agglomeration benefits, including its plethora of venture capitalists. My question in the paper is what “non-tech” regions could do to keep their talent local. One solution is to offer local financing for their start-ups. Flush with cash, entrepreneurs might resist the limelight of Silicon Valley and stay home, providing a boon to struggling local economies.
Is cash enough? Perhaps not. Silicon Valley not only offers financial capital but also a deep labor pool, specialty law firms, and networks of customers and suppliers. But at some point Silicon Valley will get too big, too expensive, its traffic too bad, and talent will look for friendlier venues. Apropos, Florida observes that New York’s loss of investment banking jobs will drive down real estate prices and make the city more attractive to new talent. Until the millionaires leave Silicon Valley, entrepreneurs may be priced into new markets – which offers some hope that new high-tech regions can sprout in places that desperately need them.
March 2, 2009 at 7:42 pm
Posted in: Current Events
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Responses (5)
A.J. Sutter - March 3, 2009 at 9:06 am
If your idea is to describe how to create a new “Silicon Valley lite” (your paper@3), it’s not clear why you are so quick to dismiss the experience of RTP and Austin (id. @6). To develop a new “lite,” wouldn’t it be more instructive to look at the experience of some early lites?
Also, you say, “[A] number of factors explain Silicon Valley’s particular brand of success. Whether they are causes of that success or effects, however, is not always clear” (id.@9). Maybe not always, but at least sometimes — e.g., Stanford University and the Valley’s history of military investment were causes. These factors, along with some modern ones such as globalized ethnic networks of expertise and money, suggest that the Valley isn’t the most instructive role model (just as Microsoft is often a useless role model in many business contexts).
Darian Ibrahim - March 3, 2009 at 11:27 am
Thanks for your comment, A.J. I don’t focus on RTP or Austin because they came about by a different model than the one I’m interested in. Both were centrally-planned processes that began by attracting the research divisions of established corporations to town; I’m more interested in organic, spontaneous processes driven by nascent start-ups. (My reasons for this preference are outlined in the paper.) Therefore, if I want to look at SV “lites” as role models, San Diego might be a better option than RTP or Austin.
But to address your broader point on whether the role model should be SV itself or an already established SV lite, I still think we can learn the most from SV itself. For example, your point about military funding driving early SV is well taken, but I’d propose a broader lesson from that which *is* translatable to new regions: the importance of financial capital. It is unlikely that military grants will ever have the same transformative effect in new regions, but the takeaway from SV is that financial capital in some form will be needed for start-ups to develop. Maybe the form will be different — e.g., military funding replaced by angel investor group/venture capitalist collaborations — but the idea is the same.
Maryland Conservatarian - March 3, 2009 at 11:57 am
…and successful people, looking to keep some of their money in an, umm, changing environment, may also be attracted by Florida’s lack of a state income tax.
Prolific Programmer - March 4, 2009 at 2:44 pm
Any region has certain industries that are best suited for it. San Diego has a large navy presence (IIRC) as well as the San Diego Supercomputing Centre at UCSD, which gave birth to Qualcomm. SV had Stanford and Berkeley, in addition to the factors you cite. DC has the government. Zurich has ETHZ and so on. ETH has other campuses, but Zurich has been designated the flagship. A country can only have one seat of government. Stanford and Berkeley are unique institutions, whose academic excellence is unmatched anywhere in the world. SDSC and the Pacific fleet cannot easily be moved.
A.J. Sutter - March 4, 2009 at 8:32 pm
BTW, it would be interesting to understand why Los Angeles has not turned into a tech entrepreneurial hotbed in the way the Bay Area, S.D., and even Orange County have been considered to be. The L.A. area has Cal Tech, UCLA (which includes a top-notch med school), and the Hughes Foundation, as well as a long history of aerospace funding. Yet when I was working there from about 1985-1995, the scene was very fragmented in tech and a mess in biomedical. (I moved to SV after that, which was booming even before the dot-com madness.)
I gather from a cite to a 2008 FT article in Darian’s paper that recently there is VC funding for L.A.-based media companies. But why was this newsworthy in 2008, rather than much sooner? And why didn’t fields like electronics, software, biomedical and transport never ignite despite the world-class resources? L.A. is no further from money than Irvine or San Diego, after all.
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