How to Build a Silicon Valley Elsewhere

Efforts to build new versions of Silicon Valley have not been successful yet because of “the conflict […] between two logics on how to create an ecosystem”, argues Fiona Murray, Professor of Entrepreneurship and Associate Dean of Innovation at the MIT Sloan School of Management. Governments focus on “specialized inputs” such as developing tech park infrastructure believing that organizational matters are too important to be left to entrepreneurs. The other logic stresses the importance of individual input and networks. Murray believes that the optimal course of action combines both top-down and bottom-up practices. However, striking the right balance is still a challenge.

Marc Andreessen, a co-founder and general partner of venture capital firm Andreessen Horowitz, advises policymakers not to try to copy Silicon Valley but to develop a region-specific concept of an innovation ecosystem instead. Once they have identified the core domain of their specialization, they should remove all regulations which could hinder progress in that domain. “Imagine a Bitcoin Valley, for instance, where some country fully legalizes cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally. A Driverless Car Valley in a city that allows experimentation with different autonomous car designs, redesigned roadways and safety laws. A Stem Cell Valley. And so on,” explains Andreessen. This approach would drive “regulatory competition between city, state, and national governments” across business sectors in order to attract entrepreneurs, researchers and divisions of corporates interested in developing innovations.

“If you could attract a critical mass of nerds and investors to live somewhere, you could reproduce Silicon Valley,” claims Paul Graham, a venture capitalist and co-founder of seed accelerator Y Combinator. He observes that all US tech hubs are located next to top universities or universities with highly-ranked computer science departments. A university should have an attractive location for a so-called ‘creative class’: creative people prefer towns with unique architecture, intact centres, “well-preserved old neighborhoods, and locally-owned shops and restaurants”. Graham notes that towns should especially appeal to young nerds, who show a great interest in setting up their own businesses. He observes that they tend to go to towns which foster an entrepreneurial culture.

According to Larry Downes, an Internet industry analyst and Project Director at the Georgetown Center for Business and Public Policy, Silicon Valley is built on 2 infrastructures: (1) the physical one, based on Stanford’s campus, research parks and tech communities; and (2) the regulatory one, which includes pro-business laws and policies established over decades. He points out 4 regulations which have especially contributed to the growth of California’s tech sector:

  • Non-compete clauses. Local employers cannot prohibit employees from working for competitors. This “keeps a steady flow of engineering and entrepreneurial talent circulating around the Valley”, observes Downes.
  • Employment at will. Hiring and firing are quite simple legal procedures for both sides. Scaling down or up staff does not cause any big problems either.
  • The Prudent Man Rule. In 1978, the US Department of Labor lifted the main restriction on the participation of institutional investors in high-risk business activities, known as the Prudent Man Rule. This decision increased the availability of venture capital in Silicon Valley.
  • Differential capital gains rates. Between 1978 and 1981, the tax rate for capital gains versus ordinary income was lowered from 49% to 20%. The tax cut reduced the risk of venture capital investments, and marked the start of intense funding for new technologies.

Downes thinks that Europe and other regions should take notice of “the profound role regulation (or the lack of it) plays in the creation of economic value in the Internet economy”, as the US case shows, and start building their own legal infrastructure which would help develop thriving innovation ecosystems. He believes that they could even gain a competitive advantage over Silicon Valley if they review US legal drawbacks which hinder innovation, and pass regulations which address them. For example, they could think of an alternative to US immigration policy towards international talent. Downes is especially critical of the practice of sending visiting engineering and business students home as soon as they graduate ignoring the fact that their knowledge could be utilized in developing innovative solutions. “Equally counter-productive are tax policies that force foreign earnings to be spent offshore, instead of allowing them to be repatriated and invested in more innovation at home,” he adds.

Silicon Valley has become a tech market leader thanks to close proximity to top universities and military research facilities (historical factor), and access to venture capital (financial factor), says Keith Breene, Senior Writer at marketing agency Formative Content. Venture capital fund White Star Capital has estimated that “Silicon Valley has over three times as many early stage tech investors as Europe”. Mariana Mazzucato, Professor of the Economics of Innovation and Public Value at University College London (UCL), stresses that government investment in the US tech sector is equally important. She mentions that US state agencies provided funding for all the revolutionary technologies which Apple has utilized in developing its iPhone product line such as the Internet, GPS, touch-screen display and Siri, a voice-recognizing personal assistant. She also draws attention to the legal input of the US government: in her opinion, the US innovation ecosystem would not thrive so much without innovation-oriented policies. The US case shows that would-be Silicon Valleys need both financial and legal state support.

References:  Antonio Regalado, MIT Technology Review | Marc Andreessen, | Paul Graham, | Larry Downes, Harvard Business Review | Keith Breene, | Mariana Mazzucato, YouTube