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The dynamics of Silicon Valley: Creative destruction and the evolution of the innovation habitat

Doug Henton & Kim HeldCollaborative Economics, San Mateo, California, USA

AbstractUnderstanding the dynamics of Silicon Valley requires a deep appreciation of the impact of creative destruction on a resilient innovation habitat: a complex ecosystem of relationships among entrepreneurs, researchers, venture capitalists, service providers, lawyers, accountants and marketing professionals that is constantly shape-shifting. As a modern Proteus, Silicon Valley has initiated and weathered successive boom–bust cycles by constantly adapting its social and institutional infrastructure to new technologies and market forces, and leveraging these foundations in the next wave. Joseph Schumpeter, who is credited with the notion of ‘creative destruction’, saw capitalism as a ‘process of industrial mutation … that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one’ (Schumpeter, 1942: 83). For over half a century, Silicon Valley has been a model for continual creative destruction. Carlota Perez has taken Schumpeter’s theory to the next level by demonstrating how technological revolutions driven by creative destruction result in not only redefined industries but also redefined industrial infrastructures and economic institutions (Perez, 2002). This article provides a framework for analyzing the dynamics of Silicon Valley based on the perspectives of both Schumpeter and Perez, and describes how the region continues to evolve as a social innovation habitat that supports the diversity of changing technologies and converging industry clusters. Whether this can be replicated by other economic regions is discussed, with key lessons learned from the Silicon Valley experience and how they might be applied to other places. We argue that regions must accept creative destruction as a natural process of boom and bust, and adapt and apply technologies during these cycles that are important and vital to the specific region. Each region does not have to strive to be Silicon Valley, but instead should build on its strengths and invest in innovation infrastructure and human capital in order to become its own Silicon Valley.

Corresponding author:Kim Held, Project Manager, Collaborative Economics, 520 S. El Camino Real, Suite 710, San Mateo, CA 94402, USA. Email: held@coecon.com

497542 SSI52410.1177/0539018413497542Social Science InformationHenton & Held2013

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KeywordsAustin, Los Angeles, New York, Perez, Schumpeter, Silicon Valley

RésuméComprendre la dynamique de la Silicon Valley requiert une appréciation en profondeur de l’impact d’une destruction créative sur un habitat résistant à l’innovation: un écosystème complexe de relations entre entrepreneurs, chercheurs, bailleurs de capital à risque, fournisseurs de services, hommes de loi, comptables et professionnels du marketing qui change constamment de forme. Telle un Protée moderne, la Silicon Valley a impulsé et fait face à des cycles successifs d’expansion–récession en adaptant à tout moment ses infrastructures sociale et institutionnelle aux nouvelles technologies et aux forces du marché, et en les ré-utilisant au cycle suivant. Joseph Schumpeter, à qui l’on doit la notion de ‘destruction créative’, a vu le capitalisme comme un ‘processus de mutation industrielle … qui révolutionne à tout instant la structure économique du dedans, en détruisant l’ancienne et en en créant à tout instant une nouvelle (Schumpeter, 1942 : 83). Pendant un demi-siècle la Silicon Valley a été le modèle d’une destruction créative continue. Carlota Perez a repris la théorie de Schumpeter mais est allée plus loin encore en démontrant comment les révolutions technologiques conduites par la destruction créative résultent non seulement en une redéfinition des industries mais aussi en une redéfinition des infrastructures industrielles et des institutions économiques (Perez, 2002). L’article fournit un cadre d’analyse des dynamiques de la Silicon Valley à partir des perspectives de Schumpeter et de Perez et décrit comment la région continue à évoluer en tant qu’habitat d’innovation sociale qui soutient la diversité des changements technologiques et des secteurs industriels convergents. Il pose la question d’une éventuelle réplication de ce modèle et de son application à d’autres régions économiques, en partant des leçons apprises de la Silicon Valley. Les auteurs défendent la thèse que les régions doivent accepter la destruction créative en tant que processus naturel d’expansion–récession, et qu’il leur faut pendant ces cycles adapter et appliquer les technologies importantes et vitales pour chacune d’entre elles. Toutes les régions ne doivent pas vouloir à tout prix être des répliques de la Silicon Valley, elles doivent au contraire s’appuyer sur leurs propres points forts et investir dans des infrastructures d’innovation et dans le capital humain pour devenir à leur tour une Silicon Valley.

Mots-clésAustin, Los Angeles, New York, Perez, Schumpeter, Silicon Valley

What fuels the continuous evolution of Silicon Valley? What makes the region tick and can the magic be replicated in other areas? Similar to the Greek god Proteus, the god of elusive sea change, Silicon Valley has constantly changed its shape even before entering the hyper-connected and dynamic world that we live in today. The word protean, derived from this mythological figure, and meaning ‘flexible’, ‘versatile’ and ‘adaptable’, char-acterizes Silicon Valley and how it keeps forming, changing and evolving throughout each redefining stage.

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Creative destruction, the hype cycle and the shifting infrastructure of Silicon Valley

What causes this regular shape-shifting that positions Silicon Valley at the forefront of many technological innovations? Economic analysis from Joseph Schumpeter (1942) and further development from Carlota Perez (2002) help to characterize this phenome-non by weaving together the cyclic process of emerging technology and the subsequent institutional transformation that increases technology diffusion and fuels the next wave of innovation. Creative destruction, as described by Schumpeter (1942: 83), is the inces-sant destruction of the old and the incessant creation of the new. Perez takes analysis of this reinvention cycle further by examining the role of socio-economic institutions in the widespread adoption of new technologies and how it establishes the foundation for the next expansion.

The process of creative destruction leads to a pattern of uneven economic develop-ment. In his introduction to Schumpeter’s 1934 book The Theory of Economic Development, John E Elliott summarizes Schumpeter’s answer to the question ‘why is it that economic development does not proceed evenly?’:

… innovations are not ‘evenly distributed through time,’ but ‘appear, if at all, discontinuously in groups or swarms’ … Entrepreneurs, financed by bank credit, make innovative investments embodying new technologies, resource discoveries, and so on. If these innovative investments are successful, imitators follow, in the original industry and elsewhere … and the economy embarks upon a dramatic upward surge: prosperity. Eventually, innovations are completed and investment subsides; an avalanche of consumer goods pours onto the market with dampening effects on prices; rising costs and interest rates squeeze profit margins: and the economy retracts: recession. (Schumpeter, 1982 [1934]: xxvii)

A single wave of the Schumpeterian process can be illustrated as a ‘hype cycle’, in which early excitement about a promising technology fuels inflated expectations and eventually a crash (see Figure 1). Waves are initiated by a new technology, leading to profits for early investors and an increase in the visibility of the sector. A burst of eco-nomic activity follows; entrepreneurs and investors enter the market to take advantage of the new opportunity, proliferating new companies and jobs. The super-saturation of the market leads to declining profits and significant job losses. Surviving businesses refine their products or services and develop more productive processes. Entrepreneurs, researchers, venture capitalists, service providers, lawyers, accountants and marketing professionals who have been displaced by the contraction apply the knowledge and expertise they have gained in this hype cycle to new industries in the next wave.

Perez further develops this framework of the boom–bust cycle by discussing how socio-economic institutions at first inhibit the new technology’s expansion, and then eventually promote the technology’s diffusion and are the foundation for future innova-tions. Social institutions such as laws, social norms and education systems, as well as the physical infrastructure of buildings, broadband networks and such, become outdated with the arrival of new technologies and must adapt in what she terms a techno-economic shift. This societal structure change and social acceptance process is combative and can

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Figure 1. Hype cycle of emerging technology.Source: Gartner Group Inc.

take a decade or more; the new paradigm must overcome the success of the previous paradigm, becoming a battle of old versus new (Perez, 2002: 15–19).

Perez clearly outlines the structural adaptation required to fully adopt a transforma-tive innovation:

The socio-institutional framework must change to accommodate transformations in the techno-economic sphere, and is what enables the full deployment of the technological revolution; the economic and non-economic activities become congruent. (Perez, 2002: 17–19)

The techno-economic adjustment process involves multiple stages, the first two of which resemble the first stages of the hype cycle (see Figure 2). The first stage, called irruption,

Figure 2. Techno-economic paradigm: phases of development.Source: Technological Revolutions and Financial Capital.

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Table 1. Industries and infrastructures of each technological revolution.

Technological revolutions New industries New infrastructure

First from 1771: Mechanized cotton industry Canals and waterwaysThe Industrial Revolutions Machinery Water power

Second from 1829: Steam engines RailwaysAge of Steam and Railways Iron and coal mining Ports

Third from 1875: Cheap steel Worldwide shippingAge of Steel and Electricity Electrical equipment Electrical networks

Fourth from 1908: Mass produced automobiles Network of roadsAge of Oil and Automobiles Cheap oil and chemicals Oil refineries

Fifth from 1971: Cheap microelectronics Digital networkAge of Information and Telecommunications

Computers and telecommunications

Internet

Source: Adapted from Perez (2002: Table 2.2).

is when new technologies enter the market, supported by capital, and their potential suc-cess is evident. Following this is the second stage of frenzy, in which new infrastructure and technologies are built around the new paradigm backed by financial support. The paradigm is ready for full deployment, but structural tensions must be overcome. This leads to a recession or a collapse, which is followed by the turning-point, in which regula-tions change and the paradigm is ready for full deployment. Stage three is synergy, in which the new paradigm is in full production and predominant throughout the economy. The fourth and final stage, maturity, comes when the last technologies are introduced, and signs of the impending decline of investments and market demand begin to appear, signi-fying the end of that paradigm and the rise of the next (Perez, 2002: 47–48).

There are many historical examples of successful techno-economic shifts, though these are difficult to recognize in retrospect, as the principles that make up these shifts become common knowledge (see Table 1). ‘Common-sense’ innovation principles that Perez points to during Britain’s Industrial Revolution, for example, include factory pro-duction and mechanization, and during the Age of Information and Telecommunications include globalization/interaction between the global and the local and decentralized inte-gration/network structures (Perez, 2002: 17–18). Similarly, with the emergence of per-sonal computers and the Internet, the old organizational hierarchy models that successfully shaped many institutions and workplaces are no longer applicable. These principles come to define the entire period, including the politics and ideology, not solely the institutions in the specific sphere or economy.

The mystery of Silicon Valley: Waves of innovation and resilient habitat

Through creative destruction we find an answer to the mystery of Silicon Valley. The creative destruction propelled by the dynamics of the hype cycle creates a time-lag between technology change and the change required in institutional infrastructure.

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Hence, after the boom–bust of the Internet explosion, we now see the echo of social media a decade later as institutions begin to catch up with the technology innovation.

This type of hype cycle, generated by the creative destruction of technology innova-tion, has spurred several waves of innovation in Silicon Valley over the last half-century:

Defense (1950s, 1960s). World War Two and especially the Korean War had a dramatic impact on the Valley by increasing the demand for electronic products from Valley firms such as Hewlett-Packard and Varian Associates. Defense and space spending helped to build the technology infrastructure of firms and support institutions during the 1950s and 1960s. This wave came to an end with cutbacks in defense spending and the space pro-gram in the 1970s, which stimulated the development of commercial applications of defense technology.

Integrated circuits (1960s, 1970s).: The invention of the integrated circuit in 1959 led to the explosive growth of the semiconductor industry in the 1960s and 1970s. Starting with the Shockley Semiconductor – which begat Fairchild and its many offspring, including Intel, Advanced Micro Devices, and National Semiconductor – more than 30 semicon-ductor firms were developed in the Valley during the 1960s. Only five of the 45 indepen-dent semiconductor firms started in the United States between 1959 and 1976 were outside Silicon Valley (Henton, 2002: 395). The technology wave had an additional push at Intel in 1971 with the invention of the microprocessor, which laid the groundwork for the next wave, led by the personal computer. Foreign competition in the commodity chip business challenged this wave and forced the semiconductor industry to shift into spe-cialized chips, including microprocessors.

Personal computers (1970s, 1980s). The technology foundation established by both the defense and integrated-circuit waves created a rich environment to launch this wave. Silicon Valley had attracted a critical mass of technology firms, support industries,

Figure 3. Evolution of Silicon Valley 1950–2010.Source: Silicon Valley Edge.

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venture capital and talent that helped ignite the personal computer (PC) revolution. Young talent meeting at the Homebrew Computer Club eventually gave birth to more than 20 computer companies, including Apple. The explosive growth during this tech-nology wave led to an increase in the number of Valley firms and a significant increase in employment. During this wave, personal computers became commodities, and the seeds were sown for the next wave, built around networks.

Internet (1990s). After a period of slow economic growth in the early 1990s during the defense cutbacks following the end of the Cold War and growing global competition in both the semiconductor and computer hardware industries, the question arose as to what Silicon Valley’s next act would be. The answer became clear with the commercial devel-opment of the Internet in 1993 and the creation of the World Wide Web. Building on its prior technology strengths, the region became a leader in the Internet revolution. The result was the explosive growth of Internet-related firms. At the forefront were Netscape, Cisco and 3Com. Between 1992 and 1998, software jobs grew by more than 150%, and jobs in computer networking doubled (Henton, 2002: 396). Computer firms, including Hewlett-Packard and semiconductor firms such as Intel and AMD, grew along with their Internet markets. The employment growth created during the Internet bubble was not sustainable and led to a dramatic loss of employment in the early 2000s.

Into the 21st century. The hype-cycle pattern caused by the creative destruction of each wave can be seen dramatically in the employment chart of Santa Clara County, the heart of Silicon Valley (Figures 4 and 5). While employment has risen and fallen with each successive hype cycle, value added per employee – a measure of productivity – has grown steadily and far exceeds that of the nation. This demonstrates the power of the evolving Silicon Valley technology infrastructure, which allows the region to adapt to the inevitable pattern of creative destruction.

After the deep job losses following the Internet bust and the recession of 2009, the Valley is currently riding its fifth wave – social media.

Silicon Valley 2.0: Technology revolution creates a social transformation

Silicon Valley has pulled out of the recent recession, as evinced by strong job growth (+7.8%) over the past two years. San Francisco County has witnessed similar job recov-ery at 7.6%, followed by California (+3.7%) and the US (+2.8%) (See Figure 6). The recovery has been driven in part by robust job growth in Software (+9.8%), Internet and Information Services (+8.7%) and Technical and R&D (+14.5%).

The current wave of social media can be described as Silicon Valley 2.0, with a shift from engineering-innovative technology products and services toward creativity in applying technology for the consumer market. We can see this in the evolution from personal computers and the Internet to smart phones and social networking. Smart phones can now be used for mobile computing, allowing people to easily access social media applications (Facebook, Instagram, etc.) or emails anywhere. ‘Downstream’ con-sumption drives innovation where firms such as Google and eBay are collaborating with

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Figure 5. Value added per employee, Santa Clara & San Mateo Counties, California and the United States, 1990–2012.Source: Moody’s Economy.com; Analysis: Collaborative Economics.

their customers in the development of new products. Through ‘crowd sourcing’, a phe-nomenon where users have a direct say in what actually gets produced, developed and designed, the walls between users and producers have fallen. Silicon Valley now applies all the tools of prior technology waves – hardware, software and the Internet – to create new business models that connect buyers and inventors in creative ways.

Figure 4. Total employment by year, Santa Clara County, 1975–2012.Note: Data for 2012 is preliminary. Data source: Employment Development Department; Analysis: Collabo-rative Economics.

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Social networking websites such as Facebook, YouTube and LinkedIn have exploded in growth as consumers have become producers. However, the success of these social media companies after their initial public offerings has been uneven. LinkedIn is one of the few that still trades above its initial public offering price (Financial Times, 2013). The market values of other social media companies, including Facebook, Zynga and Groupon, have fallen between 25% and 60% since going public.

Growing its corporate platform and adjusting its design to fit the constantly shifting industry, LinkedIn has found its niche, which has proved to be profitable. The profes-sional networking website is now valued at US$18 billion, compared with US$4 billion when it went public in 2011. In the future, investors may look to Internet companies that provide a product companies will pay for rather than those that rely on advertisements as the main source of revenue. While LinkedIn continues to grow and redefine its position in today’s social media landscape, it must constantly reevaluate its role in the future (Rusli, 2013). This will remain a struggle in the fast-paced world of social media.

High levels of competition, very narrow profit margins and waning venture-capital investment could be early signs of the next phase of creative destruction in the current innovation wave as the hype-cycle process continues (see Figure 7).

Figure 6. Change in residential employment, Santa Clara & San Mateo Counties, San Francisco County, California and the United States, 2010–2012.Note: Data for 2012 is preliminary, and data is not seasonally adjusted.Data source: US Bureau of Labor Statistics, Current Population Survey (CPS) and Local Area Unemployment Statistics (LAUS); Analysis: Collaborative Economics.

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As with the changing technology field, the system for supporting burgeoning innova-tions is also shifting. Silicon Valley has always been known as a region of innovation and of strong venture-capital investment, with annual investment having exceeded US$31 billion at its zenith in 2000. While this was an anomaly, the pattern of venture funding post-2000 has mirrored employment trends (as seen in Figure 4). In 2012, venture invest-ment fell to US$6.5 billion. While this could be an initial sign of the decline of the social media era or the hype curve, it could also mean that the funding model is shifting. Venture capitalists have historically been the main investors for entrepreneurs hoping to turn their idea into a profitable company. While this has been a successful model, the process for creating a business with the advent of the Internet and the speed of communication has opened the door for smaller investors with less monetary commitment, such as angel investors, to enter the field. Because of their more informal investment methods, it proves more difficult to track angel investments. Nonetheless, we have seen a jump in overall investment, and from 2011 to 2012, angel investment more than doubled in Silicon Valley (see Figure 8). We could be entering a new era of early-stage financing.

Innovation habitat

What explains the resilience of Silicon Valley? The answer is its ever-changing innova-tion habitat or the social infrastructure that continues to grow and adapt underneath these waves, helping to propel the region into new phases (Henton, 2000).

The innovation habitat of Silicon Valley is composed of entrepreneurs, researchers, venture capitalists, lawyers, marketing professionals, accountants and service providers who have acquired technological and business knowledge through previous hype cycles,

Figure 7. Venture capital investment, Silicon Valley, 2000–2012.Data source: Pricewaterhousecoopers/National Venture Capital Association Moneytreet Report;Data: Thomson Reuters; Analysis: Collaborative Economics.

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and who provide the resilient network that helps the region adapt to each new wave. Today, while there are over 300,000 employees in Silicon Valley’s Information Products & Services industries, including software and Internet services, there are also over 150,000 employees in Innovation & Specialized Services, including technical R&D, legal, marketing and design, as well as 50,000 in administrative services and business support (Joint Venture Silicon Valley, 2013: 76).

Entrepreneurs from prior waves play a particular role in Silicon Valley’s innovation habitat. Many innovators have become serial entrepreneurs who are now applying the wealth earned in prior waves to fund new start-ups as angel investors. For example, Marc Andreessen, founder of the first Internet company Netscape, has become a major angel investor in social media companies such as Facebook.

The region’s economy reinvents itself regularly by riding these constant waves of innovation that build on the technology, expertise and institutional changes of prior gen-erations. The favorable conditions for the next revolution are created when the potential of the previous one approaches exhaustion. But as Schumpeter and Perez argue, it’s not a simple passing of the baton from wave to wave, but rather a struggle and battle between the old institutions and societal mindset and the new technology. When the Internet bub-ble burst in the early 2000s, many wondered whether Silicon Valley would be able to bounce back from unprecedented job losses. The physical infrastructure and business and investment networks built around the Internet and previous waves attracted creative minds such as Mark Zuckerberg, founder of Facebook, to the region. This helped serve as the foundation for the current wave of social media, but it was not a seamless process.

Figure 8. Angel investment, Silicon Valley, 2007–2012.Data source: CB Insights: Bureau of Labor Statistics; Analysis: Collaborative Economics.

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Facebook was not an instantly successful company; it took time for the company to develop its platform and for society to fully understand and value the idea of social media and all it entails.

Emerging industries create new infrastructure, interlinking some of the new technolo-gies and products with some of the old, and helping to generate the revolutionary poten-tial. However, there is a period of mismatch, where the old infrastructure and the new technologies do not yet meet up, thereby halting the distribution of a new technology.

Is Silicon Valley relevant to other regions?

Can the success of Silicon Valley be replicated by other regions? The answer is ‘yes’, and it already has been replicated where regions have developed a resilient innovation habitat.

While creative brainstorming has historically occurred in face-to-face exchanges within teams; with advanced technology, innovative work can now be supported across many locations. Ideas can be more easily shared across regions, and entrepreneurs can better collaborate with individuals in other areas. What is required is creating and main-taining an innovation habitat that can sustain the social technologies. It also involves getting the right people to the table and forming joint, collaborative plans instead of working in silos. This includes redefining the role of local government, community and business organizations, and linking these with universities and other established agencies in their region. These institutions can help provide education and infrastructure within the innovation habitat, and once a collaborative effort is initiated, it is easier to attract further funding and investment.

Rather than focusing on technologies that are constantly evolving, a region should invest in the institutions and networks that are essential for supporting these changing technologies. Education and training are important components, in addition to encourag-ing and structuring the development of support services and networks to underpin inno-vation. These institutions and assets, as Perez argues, are the backdrop to success when the next wave of innovation surfaces. Rather than being fixed systems, these models must be sturdy but also malleable, morphing to support the next phase of innovation.

We have already seen this with Silicon Valley expanding into San Francisco as social media firms have started up and continue to grow in this fertile environment, building on networks of the adjacent Silicon Valley. From December 2011 to December 2012, San Francisco added 15,900 jobs, many of which fall under the social media umbrella. Angel investment continues to expand in San Francisco, having reached US$23.54 million over the past year, a 5% growth since 2011. And while declining in Silicon Valley, venture-capital investment in San Francisco increased by 20% to US$3.4 billion in 2012.

Social media initiated in Silicon Valley has spread to other regions, including New York City with the growth of ‘Silicon Alley’, focused on media and entertainment. In addition, regions that include Austin and Los Angeles have taken steps to create this type of innovative environment surrounding other industries unique to their region. Each of these regions has started to not only attract and nurture entrepreneurs but to create an innovation habitat to support their development.

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Silicon Valley has a long history of creative destruction, but do other regions have to partake in the same large-scale government-supported research process as Silicon Valley’s defense era to get started? Governmental and university backing has supported the gathering of momentum when laying the groundwork for innovation cycles, but it is not the only answer. A group of civic entrepreneurs paved the way for an innovation system in Austin for example.

Austin: Developing an innovation habitat

Austin is a prime example of a region that created an innovation habitat from the ground up. In the early 1980s, Austin was still in a growth/no-growth debate that blocked regional progress. The university was not connected to the business community, and the state government, more attuned to oil and real-estate issues, did not see Austin as its main focus. A group of regional stewards recognized an opportunity for collaboration to trans-form Austin into an innovation hub and seized it.

Regional business leaders, the university and the state joined forces to help attract the Microelectronics and Computer Technology Consortium (MCC), the first major US, private-sector, technology consortium, which assembled to meet the competitive tech-nology challenge from Japan. This was built on groundwork laid by the accomplish-ments of the IBM, Texas Instruments and Motorola manufacturing operations (Powers, 2004: 56). In succeeding, Austin set its sights on becoming a major player in global technology and added a critical asset – an R&D consortium that included many of the top technology firms in the country.

Austin used this new ‘asset’ as leverage to attract and support the consortium. Leaders secured new investments for the University of Texas, including the endowment of 32 individual million-dollar faculty chairs in engineering and natural sciences, which cata-pulted the university into the top tier of research universities in these fields. The univer-sity then succeeded in attracting SEMATECH, a second national consortium, which included another set of major technology firms. Business and civic leaders supple-mented these assets with new entrepreneurial support programs, including incubators, seed-capital funds and mentoring.

In response to these regional efforts, leading technology firms began committing peo-ple and resources to Austin, which helped fuel innovation in the region. More and more companies came to know the region, and with the collaborative efforts of Austin’s lead-ers, selected it as an expansion site. Within a decade, Austin had added more manufactur-ing jobs than any other metropolitan area. Since the 1990s, jobs in the region have grown by more than 5% per year, and per capita income rose dramatically compared to the rest of the nation (Collaborative Economics, 2008: 53).

Then in the 2000s, Austin was hit by a hype cycle. The telecommunications industry went bust when the dot.com bubble burst, and Austin, like other technology regions, lost a significant number of jobs. But because of investments in its human capital and tech-nology infrastructure, the region has been able to regain its technology momentum in both wireless communications, or digital convergence, and biotechnology. Austin was able to morph and discover a new identity through a process of creative destruction simi-lar to that of Silicon Valley because it had laid the groundwork for creating an innovation

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habit. Austin has continued to build on the region’s successes in areas such as capacity building, including physical infrastructure, intellectual infrastructure and capital forma-tion infrastructure. This has helped Austin compete for funding and also attract technol-ogy companies to the area (Collaborative Economics, 2008: 56–58).

The region is now taking the successful model of SEMATECH and transitioning the Texas Technology Initiative (TTI) into its new role of enabling R&D and technology advances by serving as a technology platform for advanced technology entrepreneurs with a semiconductor capability (Collaborative Economics, 2008: 67).

New York City: Silicon Alley?

As major metropolitan regions and, respectively, financial and technological centers, New York City and Silicon Valley often regard each other as competitors as well as examples of success. Recently, Cornell University won a bid to build CornellNYC Tech, an engineering and applied-science graduate school on Manhattan’s Roosevelt Island, giving the financial center a leg-up in the technological arena. Recognizing this opportu-nity to enhance the region’s innovation capacity, New York is creating infrastructure to support the university, with up to US$100 million in infrastructure improvements on the island, as well as the students, entrepreneurs and businesses that the university will attract. The university plans to host companies on campus as resident entrepreneurs and guest lecturers.

The technical university is inviting interest from California technology companies, including Facebook, Google and eBay, who intend to collaborate with the university, some donating office space, and recruit skilled engineers for their New York offices. While replicating aspects of Silicon Valley, New York City, as a world center of finance, fashion, advertising and retail, offers different industry opportunities to entrepreneurs than does the technology center (Chaykowski, 2012).

While the addition of CornellNYC Tech will help supply the region with a talented entrepreneurial base in the long run, additional resources will be required to bolster the growth of the city’s innovative environment. Often thought of as the second start-up ecosystem after Silicon Valley, New York City’s standing has fallen behind that of Los Angeles and Seattle according to a recent report (Startup Genome, 2012). When com-pared to Silicon Valley, New York City’s start-up environment has less funding, is slower to adopt new technologies, possesses only half the number of start-ups and has a signifi-cantly smaller target market size. However, New York City remains the second largest ecosystem for software start-ups in terms of output, and distinguishes itself from the Valley with a larger focus on consumer start-ups. Additional capital, a system of mentors and an environment that aids and nurtures entrepreneurs is necessary for any successful start-up ecosystem, but determining your niche is also key. New York City is an apt envi-ronment for a start-up that has already reached product/market fit and is in the process of scaling up (i.e. raising money and seeking global exposure) (Startup Genome, 2012).

Although regions strive to be the next Silicon Valley, each area is equipped with its unique set of university assets, funding models and industry clusters. Regions can learn from the successful examples in Silicon Valley, but determining their own unique posi-tion will help define the region and attract talent based on this regional identity. New

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York’s start-up system should build upon its specialties: e-commerce, advertising, media and fashion, and the innovation assets available from its world-class universities (e.g. NYU, Columbia).

New York City has clearly gone through its own hype cycle with the 2008 collapse of the financial markets. While this was a catalyst for the national economic reces-sion, it also resulted in the loss of significant employment in New York’s financial industry. Some of the talent in the financial industry has moved into technology industries, including financial software and e-commerce. Once again, we see the effects of creative destruction on a region and the subsequent build-up of a new eco-nomic infrastructure. So far the financial crisis may have had positive impacts, such as stimulating the creative industries. In his Atlantic article shortly following the crash of 2008, Richard Florida argued that the financial crisis would in fact re-energize the city’s creative economy. Before the crash, skyrocketing real-estate prices had made it difficult for people to afford to live in New York, creating a less diverse and innova-tive city. But with the bursting of the financial bubble, people and industries have been able to relocate back into the city, creating the infrastructure for a thriving inno-vation economy (Florida, 2009).

Los Angeles: Creative industries

Los Angeles is known as an international hub for the arts, design and entertainment industry. Encapsulating this mega-industry is Los Angeles’ Creative Economy. Otis College of Art and Design has qualified this broad industry in its annual report. Out of Los Angeles County’s 66 industry clusters, the creative industry ranks fourth, supporting one out of every eight jobs in the region in 2011. The creative economy registered a regional output (Los Angeles and Orange Counties) of US$230.7 billion in revenues, but has been taken for granted since it has been occurring naturally for such a long period. The creative economy is diverse and incorporates a range of sectors, including visual and performing arts, fashion and furniture and home design, while entertainment accounts for 42.2% of revenues gleamed by the creative economy. Despite the economic down-turn, creative jobs held steady, led by growth in Digital Media (Otis College of Art and Design, 2012).

To further develop and solidify this important regional industry, the report suggests that Los Angeles should lower the cost of doing business, and actively incubate and sup-port innovative enterprises; educate a creative workforce; and develop a coalition of creative drivers to propel the industry forward.

Recognizing the paradigm shift that is taking place, Los Angeles must discontinue working in silos and join up its workforces, creating a cross-sector dialog, for the good of the region. Los Angeles has distilled its own identity, and continues to mold and modify its ways in order to adapt to the changing landscape of globalization and foreign competition from other regions, including China and Singapore. However, upcoming challenges include the outsourcing of manufacturing jobs and the pro-jected slow growth of the creative economy until 2015 (Otis College of Art and Design, 2012).

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Next wave of the hype cycle: From social media to IT applications

By following the hype cycle, we can anticipate that the current social media bubble will eventually be punctured. Declining venture-capital trends may be a sign of the initial fall in the hype cycle. When exploring the national venture-capital playing-field, Wall Street Journal author Pui-Wing Tam pointed out a drop in this hallmark funding source of inno-vation. National venture-capital investment fell from US$10.1 billion in the third quarter of 2011 to US$6.9 billion in the third quarter of 2012. Scott Sandell, a venture capitalist at New Enterprise Associates, explains that ‘what happened this year was a peak of a hype cycle’, and going into 2013 venture capitalists are dialing back on investing in areas such as consumer-oriented Internet companies (Tam, 2013). The nation may be exhaust-ing its stay at the peak of the hype cycle and could soon be on the decline when it comes to social media.

Metropolitan areas should concentrate on developing their own applied information technology industries – creative industries, advanced manufacturing, energy, healthcare and education – which are increasingly dependent on technically sophisticated employ-ees and service providers. These regions need to create the basics of supportive social infrastructure – entrepreneurs with creative ideas, a supportive business community and investors – to create their own Silicon Valley. In this way, infrastructure and networks will be in place for the installation of their next innovation wave.

Lessons for future Silicon Valleys

Bob Metcalfe, one of the inventors of the Internet at Xerox PARC, is famous for saying ‘Silicon Valley is the only place on Earth not trying to figure out how to become Silicon Valley’ (Metcalfe, 1998). Silicon Valley is an innovation center because of its history of technological success. Other regions must focus on their own attributes and opportuni-ties, and build on this momentum.

It is important for future Silicon Valleys to understand there is a difference between Consumer Information Technology and Applied Information Technology:

– Consumer Information Technology: IT software (e.g. Facebook, Google, publishing and entertainment) will continue to be important during this next wave.

– Applied Information Technology: Technology across a broad array of industries, harnessing technology to improve productivity in traditional industries and the ser-vice sector, will hold the key to the future. For example, IT was applied to the tele-phone, changing the PC and traditional telephone industries, creating smart phones and mobile computing.

While Consumer IT has been the foundation of modern Silicon Valley waves, Applied IT will oftentimes be the driver of innovation in other regions. As in previous cycles, Silicon Valley will most likely see too many businesses enter the social media space, initiating the next Schumpeterian boom–bust cycle. This social media wave may be overhyped, as we tend to overestimate the short-term impacts of a new technology and underestimate

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the long-term impacts. In the long term, we will see the application of information tech-nology to a broader array of industries. This opens the door for other non-technology-driven regions to lay the foundation for innovation waves in other industry sectors.

As signs begin to emerge that this current wave of social media will soon be on the downward slope, what will be the next innovation wave of the Valley? Potential waves on the horizon include:

Creative industries: Social technologies are changing the nature of creative industries, allowing consumers greater access to the arts, culture and entertainment. Applications also include the vast global markets of tourism and travel.Education and lifelong learning: Transforming education and publishing using infor-mation technology. The application of social media and information technology has opened new opportunities for online learning that will create the potential for lifelong education as well as new business opportunities for educational institutions and the private sector.Clean energy and environmental technologies: The vast sums plowed into developing alternative energy resources, products and services will lead to incremental improve-ments and revolutionary breakthroughs. The deployment of renewable energy results in lower costs that speed up further adoption.Advanced manufacturing: The application of information technology, simulation tools and sensors to create precision manufacturing, including additive manufacturing or 3D printing, a process of making three-dimensional solid objects from a digital model.Health care: Using information technology to create opportunities for personalized medicine, including Web-based medical platforms and genomics, which uses a biom-etric profile to target diagnosis and treatment to the genetic make-up of individuals.

In his keynote speech to a group of Silicon Valley community business and education leaders, James Fallows predicted that future technology breakthroughs will occur in response to major global challenges, including those of energy, environmental-disaster anticipation and response, healthcare and education (Fallows, 2013). Regions that apply technology to help solve these challenges, not just technology developers, can become the next innovators.

Conclusion

While Silicon Valley got a head start after the Second World War and still has the highest concentration of technology, talent and entrepreneurial networks today,1 other regions could follow the Silicon Valley model if they were to invest in critical elements of an innovation habitat and adapt to the inevitable cycles of creative destruction that follow the adoption of disruptive technologies. The key to the future is which region can apply technologies to help solve major challenges to the economy, energy, health and education sectors, not just invent new technologies.

In other words, it will not be solely the places that create the industry, but rather places that apply the power of information technology to other industries. McKinsey reports that there is US$900 billion to US$1.3 trillion of annual value that could be unlocked by

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social technologies in four sectors (consumer packaged goods, consumer financial ser-vices, professional services and advanced manufacturing), and 20% to 25% of potential improvement is possible in knowledge-worker productivity (Chui et al., 2012).

The key to success is learning to ride waves of change generated by creative destruc-tion and supported by infrastructure networks. Regions that learn to build upon their assets and create social innovation habitats that support entrepreneurs and creative think-ers will prosper as future Silicon Valleys. Once the groundwork has been laid and the infrastructure is in place, these regions too will generate their own host of innovation waves around their regional strengths.

It is not about imitating the technology innovations of Silicon Valley but instead about applying technology that is appropriate to each region. It is therefore a mistake to see Silicon Valley in terms of the current wave. It is instead an example of a resilient region that has successfully adapted to constant change. Regions must adopt this protean men-tality if they aim to be a future Silicon Valley themselves.

Note

1 The Milken Institute (see DeVol et al., 2009) ranks Silicon Valley (San Jose–Sunnyvale–Santa Clara, CA MSA) number one on the tech-pole scale, twice as high as second-ranked Seattle–Bellevue–Everett, WA MSA. The tech-pole ranking is based on employment and wages, and the concentration of technology in the local economy and each metro’s relative share of aggre-gate North American activity.

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Author biographies

Doug Henton is Chairman and CEO of Collaborative Economics with more than 30 years’ experi-ence of leading regional technology development projects in Silicon Valley, Austin, New York, Los Angeles, Boston, San Diego, Chicago and Washington DC, as well as in Hong Kong and Japan.

Kim Held was Project Manager at Collaborative Economics for the Index of Silicon Valley and coordinates regional research for the Silicon Valley Community Foundation.