Stanford University

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NEWS RELEASE

10/28/98

CONTACT: Kathleen O'Toole, News Service (650) 725-1939;

e-mail kathleen.otoole@stanford.edu

Lessons for those who want to replicate Silicon Valley

There are two ways to replicate the Silicon Valley but neither is easy, a panel of valley experts said at Stanford on Oct. 21 as part of a conference on globalization held by the Institute for International Studies to inaugurate the university's new Bechtel Conference Center.

Although many countries and regions have failed in their attempts to replicate Silicon Valley's high-tech industrial growth, one way is to build enclaves that may be similar, if somewhat smaller, as Israel and Taiwan are doing now, panelists said.

The second way is not to reproduce the valley at all in high tech, but in other industries that are poised for rapid change as a result of the information and communication revolution. Opportunities for new and reinvented business exist in every field from selling books to title insurance, panelists said.

"What people haven't got is that the Internet, along with a good education system, will create a level playing field between small companies and large companies," said John T. Chambers, president and CEO of Cisco Systems, known for its highly profitable expansion through Silicon Valley acquisitions. "A small company in Beijing or London or Paris can compete on a global basis in a way it never could before." He and others cited the case of Amazon.com, whose worldwide sales of books through the Internet is reported to have been growing at 6 percent a day, unseating the more established bookstore chains.

The broader economy could earn tremendous returns from the raw technology invented to date, said Timothy Bresnahan, a Stanford economist specializing in the organizational economics of the information industry. No one knows what existing inefficiencies will be escaped first, he said. "It was pretty easy to replace Encyclopedia Brittanica with its highly abusive sell and its $2,000 price with a CD-ROM. It's going to be little harder to get rid of title insurance or the insurance brokers."

There are social barriers to overcome if other regions are to dramatically spur their economic growth either through high tech itself or by taking advantage of the Internet's new opportunities, said Annalee Saxenian, an economist from the University of California-Berkeley. "If you have drastic income and education inequalities like in Malaysia, you are just going to get a little pocket. It's not going to diffuse," she said.

Other panelists cited the need for good, broad-based educational systems and noted their current weakness in California, where some reports indicate 40 percent of 8-year-olds can't read. "Our K-12 system is broken here. If we don't get that fixed, our employees won't stay here because they won't raise their children here," Chambers said.

The "running joke" in the valley now, venture capitalist John Doerr added, "is that if your kids are born in California you move to Texas to have them educated. It's got the biggest, most improving public education system in the country."

Research by Saxenian, Bresnahan and others established today's conventional wisdom about how the Silicon Valley developed from a new form of industrial organization that allowed companies to experiment and recombine with one another to speed innovation. "The key here is not simply a decentralized industrial structure," Saxenian said, "but also a set of social structures that grew up alongside it social networks, gossip." While good schools are essential, she said, "people are also learning through this community, so you can generate more net new ideas through this networked kind of system" than with the same quantity of un-networked human talent.

The valley's social structures are unique in high tech, she said, but similar systems exist in other industries in parts of Italy, Germany and Hollywood.

The most dynamic new high-tech regions are Taiwan, Israel and parts of India. "One of the key overlooked elements to understanding how those new places emerge is that they themselves have special ties to the Silicon Valley," Saxenian said. "Someone said to me, 'Silicon Valley is built on ICs. Not integrated circuits Indians and Chinese.' "

Valley venture capital firms provide money, but their management and marketing expertise is more important to startups, Chambers said. "They've done it before. They know how to recruit engineers, recruit heads of sales. They know at the point in time when many companies start to run out of gas with their existing management team how to develop or replace that team in a very humane way."

Doerr, one of 10 partners in the venture capital firm of Kleiner Perkins Caufield & Byers, said his firm limits itself to 20 start-up or speed-up projects a year. The firm invests capital for others including Stanford and other universities, he said, and venture capital is responsible for 40 percent of the growth in the nation's gross domestic product.

Regions should not characterize success as simply "getting people employed in high-tech industries, but in genuine company building and taking advantage of a nation like Israel's intellectual assets," Bresnahan said. "That seems to me more than just doing the scut work of the really high-rent inventors here."

India has the engineering talent, but none of the speakers was willing to predict it will become a high-tech center. "There's a million ways that you could use technology to revolutionize life in India," Saxenian said, and Indian engineers are "starting great companies in Silicon Valley, but they aren't going back to India and starting companies very much. They want to live here. So there are a lot of barriers. This is about politics and markets and a lot of other things besides technology and the power of technology to lower barriers to entry."

Even as more people learn how to replicate the valley, the window of opportunity could be closing, Bresnahan said. "I don't want to call the moment when this will happen, but the way the reversal would work would be something like this: All of these new technologies would find their most valuable uses in business information systems . . . they would stable down into mature well-understood application areas, and that would tilt the center of gravity of innovation away from the technical, experimental and entrepreneurial back toward commercialization in the large company with close relationships to customers."

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By Kathleen O'Toole

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