New Report on Silicon Valley

High-Tech Start-Ups and Industry Dynamics in Silicon Valley by Junfu Zhang is the latest word on what's happening to Silicon Valley. It was published by the Public Policy Institute of California and you download it here.

Zhang’s research concludes that, collectively, new firms represent a major force in the economic dynamics of Silicon Valley. For example, firms founded after 1990 created almost all of the job growth experienced by Silicon Valley between 1990 and 2001.

Why, then, do we find ourselves in the midst of the current bust cycle? The theory most applicable to the current situation was developed by Joseph Schumpeter in 1911. In The Theory of Economic Development, he explained, “The economic system does not move along continually and smoothly. Countermovements, setbacks, incidents of the most various kinds occur, which obstruct the path of development; there are breakdowns in the economic value system which interrupt it.” And, he argued, these setbacks lead to the development of new ideas, new entrepreneurs rise to the occasion, and soon the cycle begins all over again. The cycle of firm startups, closures, and new start-ups is very much part of the economic development process, and the very entrepreneurs who are in abundant supply in Silicon Valley will make the process happen all over again.

Zhang concludes that start-ups in Silicon Valley have more rapid access to venture capital than comparable firms elsewhere in the nation; that large, established firms spin off more start-ups than firms in other parts of the country; and that the high-tech sector is subject to rapid structural change where “hot spots” of growth may appear in some industries while firms in other industries are simultaneously dying out. He observes that a dynamic labor force has been, and will be, essential to successful adaptation with each new structural change. In sum, human capital, venture capital, entrepreneurial zeal, and product cycles all contribute to the health and success of the economy of Silicon Valley.

Although Zhang makes no predictions about the future, the fact that the region has weathered these cycles in the past, that the basic ingredients are still there in abundance, and that new demands for high-technology products are following on a worldwide concern for secure environments suggests that the prospects are good for yet another rebirth of the valley. Zhang suggests that the dynamics of economic development favor Silicon Valley and that yet another replay of the rebirth part of the cycle lies before us.

The report contains some useful comparative data you will also find useful. It's worth a serious browse.