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9/23/96

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Networking lessons from the Silicon Valley

STANFORD --A long-standing flow of people and information between Stanford and surrounding industries has contributed to the Silicon Valley's regional advantage over that other famous high-tech region ­ Route 128 in the Boston area, AnnaLee Saxenian, a professor of city and regional planning at the University of California-Berkeley, told a campus audience Sept. 11.

Unlike the Massachusetts Institute of Technology near Route 128, she said, Stanford "from its earliest days opened its doors to local business."

Formal and informal regional networking systems "have provided regional advantage to the Silicon Valley firms in a turbulent, competitive global environment, an environment that demands ever greater flexibility and ever decreasing time to market," Saxenian told participants in a three-day international conference on local and regional electronic networking. The conference was hosted by Smart Valley Inc., an electronic networking organization begun by businesses in the Silicon Valley.

But networking in the Silicon Valley has not been confined to electronic communication. It includes the face-to-face shop talk and gossip of workers in bars and restaurants, at trade association meetings and in more formal business-sharing arrangements, Saxenian said. Networking allows people to react more quickly to a changing environment than does a more closed, vertically integrated industrial structure, she said she found in her comparative study of the two regions. That study is detailed in her 1994 book, Regional Advantage: Culture and Competition in Silicon Valley and Route 128.

In the Silicon Valley, she told her audience, "production is organized by networks of specialist companies who compete in principle but also cooperate in both formal and informal ways with each other and with local institutions like universities. Relationships are what matter."

Saxenian admitted that she hasn't always held this view. As a Berkeley master's student from the Boston area, she used conventional economic theories and business models in 1979 to predict the valley's decline. "I argued that housing and labor costs were too high. I was convinced [that] while corporate headquarters and research might remain, the region had reached its physical limits and that innovation and job growth would occur elsewhere in the 1980s."

The valley's semiconductor industry did lose thousands of jobs in a competition with Japan, but was "flourishing again by the late '80s in sectors ranging from workstations to disk drives to biotech medicine and high-tech manufacturing," she said. "It also expanded geographically from its traditional hold in Santa Clara County south into Santa Cruz County, east into Alameda County and now it extends [north] to San Francisco and even into Marin County."

Route 128 "stalled in 1984 and continues to stagnate," she said. Between 1975 and 1990, the Silicon Valley generated an additional 150,000 technology jobs, triple the number created on Route 128. By 1990, Silicon Valley accounted for about 30 percent of the nation's electronic exports compared to Route 128's 10 to 12 percent.

Both regional industries got their start by commercializing university-based research after the second World War, she said, and both were sustained by access to venture capital and to highly skilled labor forces produced by "world-class engineering universities."

"If anything, Route 128 had an advantage in the early years. It had a much longer industrial history, much greater proximity to Washington, D.C., and therefore to government contracts," she said.

"I argue in my book that Route 128's problem is that it is organized around a structure of independent firms, rather than regional networks. . . . It became dominated by a small number of large, integrated computer companies that had no relationship with each other or with local and regional institutions."

Motorists, she said, can see the difference from their car windows: Beautiful lakes and forests separate Route 128 companies from each other. The snarled freeways of the narrow San Francisco Peninsula provide no similar beauty, she said, but geography has helped to keep Silicon Valley firms from isolating themselves.

"One of the most obvious differences is in labor market behavior and the attitude toward risk taking," she said. "Engineers in Silicon Valley boast that they can change jobs without changing carpools. People change jobs with great frequency there. On Route 128, by contrast, the normal career path is to find a job in a large company and work one's way up the corporate ladder. It was rare for one to leave a corporate job to work for a startup, while in Silicon Valley, it is almost glorified. The point is that a tremendous amount of learning occurs through this process of entrepreneurship and even through failure."

Stanford played a role in the early networking of the Silicon Valley. "It reached out through the person of Fred Terman and later his successors to local industries; large companies to small start-ups," she said. "As a result, what you see is a continual flow of people and information between Stanford and local industries and, I should say, Berkeley, too."

MIT "oriented itself primarily toward Washington for cultivating military contracts and built its relationships very selectively, only with very large, established corporations of the East Coast. Even today, engineers from firms on Route 128 complain that they have better relationships with Stanford than they do with MIT," Saxenian said.

Capital investment is also different, she said. On Route 128, "venture capitalists lend money to firms who will hopefully succeed and give them a payoff. In Silicon Valley, the venture capital industry grew out of the technology industry ­ people who had made it in local technology then decided to reinvest their money. . . . Very often a venture capitalist provides not simply cash but also contacts, information, advice and a set of networks in the region that prove to be very important to the success of the ventures they fund."

Small and large companies also create more formal networks, producing different components of a product. Former managers of Route 128's self-reliant, vertically integrated companies have described the Silicon Valley to her, Saxenian said, as a "shopping mall of suppliers" that frees them from having to buy everything at the "company store."

Most regions won't become Silicon Valleys if only because the area already has a first-in advantage in computing and electronics, Saxenian said. But she urged her listeners from other communities to realize "it is no longer possible to go it alone."

In her book, Saxenian also offered advice to the Silicon Valley: The semiconductor crisis of the mid-1980s, she wrote, "underscores the potential weaknesses of its decentralized system." Networks "must continually be renewed and redefined," and can easily fall apart in recessionary times, she said, especially in a culture dominated by "individualistic world views."

Adapting elements of the Silicon Valley's success to other regions, she said, "probably means breaking down the often rigid boundaries that separate firms from each other or separate firms from the public sector or other institutions, be they universities, venture capitalists or training institutions."

-kpo-

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