497542

2013

SSI52410.1177/0539018413497542Social Science InformationHenton & Held

The dynamics of Silicon Valley:

Creative destruction and the
evolution of the innovation
habitat

Social Science Information

52(4) 539557
The Author(s) 2013
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DOI: 10.1177/0539018413497542
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Doug Henton & Kim Held

Collaborative Economics, San Mateo, California, USA

Abstract
Understanding 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 boombust 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 Schumpeters 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

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Keywords
Austin, Los Angeles, New York, Perez, Schumpeter, Silicon Valley
Rsum
Comprendre la dynamique de la Silicon Valley requiert une apprciation en profondeur
de limpact dune destruction crative sur un habitat rsistant linnovation: un
cosystme complexe de relations entre entrepreneurs, chercheurs, bailleurs de capital
risque, fournisseurs de services, hommes de loi, comptables et professionnels du
marketing qui change constamment de forme. Telle un Prote moderne, la Silicon Valley
a impuls et fait face des cycles successifs dexpansionrcession en adaptant tout
moment ses infrastructures sociale et institutionnelle aux nouvelles technologies et
aux forces du march, et en les r-utilisant au cycle suivant. Joseph Schumpeter, qui
lon doit la notion de destruction crative, a vu le capitalisme comme un processus
de mutation industrielle qui rvolutionne tout instant la structure conomique du
dedans, en dtruisant lancienne et en en crant tout instant une nouvelle (Schumpeter,
1942 : 83). Pendant un demi-sicle la Silicon Valley a t le modle dune destruction
crative continue. Carlota Perez a repris la thorie de Schumpeter mais est alle plus
loin encore en dmontrant comment les rvolutions technologiques conduites par la
destruction crative rsultent non seulement en une redfinition des industries mais
aussi en une redfinition des infrastructures industrielles et des institutions conomiques
(Perez, 2002). Larticle fournit un cadre danalyse des dynamiques de la Silicon Valley
partir des perspectives de Schumpeter et de Perez et dcrit comment la rgion
continue voluer en tant quhabitat dinnovation sociale qui soutient la diversit des
changements technologiques et des secteurs industriels convergents. Il pose la question
dune ventuelle rplication de ce modle et de son application dautres rgions
conomiques, en partant des leons apprises de la Silicon Valley. Les auteurs dfendent
la thse que les rgions doivent accepter la destruction crative en tant que processus
naturel dexpansionrcession, et quil leur faut pendant ces cycles adapter et appliquer
les technologies importantes et vitales pour chacune dentre elles. Toutes les rgions
ne doivent pas vouloir tout prix tre des rpliques de la Silicon Valley, elles doivent
au contraire sappuyer sur leurs propres points forts et investir dans des infrastructures
dinnovation et dans le capital humain pour devenir leur tour une Silicon Valley.
Mots-cls
Austin, 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, characterizes 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 phenomenon 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 incessant 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 development. In his introduction to Schumpeters 1934 book The Theory of Economic
Development, John E Elliott summarizes Schumpeters 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 economic 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 boombust cycle by discussing how
socio-economic institutions at first inhibit the new technologys expansion, and then
eventually promote the technologys diffusion and are the foundation for future innovations. 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.

Figure 2. Techno-economic paradigm: phases of development.

Source: Technological Revolutions and Financial Capital.

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: 1519).
Perez clearly outlines the structural adaptation required to fully adopt a transformative innovation:
The socio-institutional framework must change to accommodate transformations in the technoeconomic sphere, and is what enables the full deployment of the technological revolution; the
economic and non-economic activities become congruent. (Perez, 2002: 1719)

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,

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Henton & Held

Table 1. Industries and infrastructures of each technological revolution.
Technological revolutions

New industries

New infrastructure

First from 1771:

The Industrial Revolutions

Mechanized cotton industry

Machinery

Canals and waterways

Water power

Second from 1829:

Age of Steam and Railways

Steam engines
Iron and coal mining

Railways
Ports

Third from 1875:

Age of Steel and Electricity

Cheap steel
Electrical equipment

Worldwide shipping
Electrical networks

Fourth from 1908:

Age of Oil and Automobiles

Mass produced automobiles

Cheap oil and chemicals

Network of roads
Oil refineries

Fifth from 1971:

Age of Information and
Telecommunications

Cheap microelectronics
Computers and
telecommunications

Digital network
Internet

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

is when new technologies enter the market, supported by capital, and their potential success 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 regulations 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, signifying the end of that paradigm and the rise of the next (Perez, 2002: 4748).
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 Britains Industrial Revolution, for example, include factory production and mechanization, and during the Age of Information and Telecommunications
include globalization/interaction between the global and the local and decentralized integration/network structures (Perez, 2002: 1718). Similarly, with the emergence of personal 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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Figure 3. Evolution of Silicon Valley 19502010.

Source: Silicon Valley Edge.

Hence, after the boombust 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 innovation, 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 program 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 semiconductor firms were developed in the Valley during the 1960s. Only five of the 45 independent 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 specialized 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,

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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 technology 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 Valleys next act would be. The answer became clear with the commercial development 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 recovery 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 consumption drives innovation where firms such as Google and eBay are collaborating with

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Figure 4. Total employment by year, Santa Clara County, 19752012.

Note: Data for 2012 is preliminary. Data source: Employment Development Department; Analysis: Collaborative Economics.

Figure 5. Value added per employee, Santa Clara & San Mateo Counties, California and the United States,
19902012.
Source: Moodys Economy.com; Analysis: Collaborative Economics.

their customers in the development of new products. Through crowd sourcing, a phenomenon 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.

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Figure 6. Change in residential employment, Santa Clara & San Mateo Counties, San Francisco
County, California and the United States, 20102012.
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.

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 professional 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 todays 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).

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Figure 7. Venture capital investment, Silicon Valley, 20002012.

Data source: Pricewaterhousecoopers/National Venture Capital Association Moneytreet Report;
Data: Thomson Reuters; Analysis: Collaborative Economics.

As with the changing technology field, the system for supporting burgeoning innovations 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 investment 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 innovation 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,

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Figure 8. Angel investment, Silicon Valley, 20072012.

Data source: CB Insights: Bureau of Labor Statistics; Analysis: Collaborative Economics.

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 Valleys 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 Valleys 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 regions economy reinvents itself regularly by riding these constant waves of
innovation that build on the technology, expertise and institutional changes of prior generations. The favorable conditions for the next revolution are created when the potential
of the previous one approaches exhaustion. But as Schumpeter and Perez argue, its 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 bubble 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.

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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 technologies and products with some of the old, and helping to generate the revolutionary potential. 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 maintaining 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 encouraging and structuring the development of support services and networks to underpin innovation. 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, venturecapital 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
Valleys 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 transform 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 technology challenge from Japan. This was built on groundwork laid by the accomplishments 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 catapulted the university into the top tier of research universities in these fields. The university then succeeded in attracting SEMATECH, a second national consortium, which
included another set of major technology firms. Business and civic leaders supplemented 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 people 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 Austins leaders, selected it as an expansion site. Within a decade, Austin had added more manufacturing 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 technology 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 similar 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 regions successes in areas such as capacity
building, including physical infrastructure, intellectual infrastructure and capital formation infrastructure. This has helped Austin compete for funding and also attract technology companies to the area (Collaborative Economics, 2008: 5658).
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 Manhattans Roosevelt Island,
giving the financial center a leg-up in the technological arena. Recognizing this opportunity to enhance the regions 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 citys innovative environment. Often thought of as the second start-up
ecosystem after Silicon Valley, New York Citys standing has fallen behind that of Los
Angeles and Seattle according to a recent report (Startup Genome, 2012). When compared to Silicon Valley, New York Citys start-up environment has less funding, is slower
to adopt new technologies, possesses only half the number of start-ups and has a significantly 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 environment 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 position will help define the region and attract talent based on this regional identity. New

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Yorks 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 recession, it also resulted in the loss of significant employment in New Yorks 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 economic 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
citys 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 innovative 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 innovation 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 Countys 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 downturn, 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 support 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 projected 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 innovation. 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 exhausting 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 employees 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 opportunities, 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 service sector, will hold the key to the future. For example, IT was applied to the telephone, 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 boombust 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 technology to a broader array of industries. This opens the door for other non-technologydriven 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 information 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 improvements 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 biometric 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 services, 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 destruction and supported by infrastructure networks. Regions that learn to build upon their
assets and create social innovation habitats that support entrepreneurs and creative thinkers 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 mentality if they aim to be a future Silicon Valley themselves.
Note
1 The Milken Institute (see DeVol et al., 2009) ranks Silicon Valley (San JoseSunnyvaleSanta
Clara, CA MSA) number one on the tech-pole scale, twice as high as second-ranked Seattle
BellevueEverett, WA MSA. The tech-pole ranking is based on employment and wages, and
the concentration of technology in the local economy and each metros relative share of aggregate North American activity.

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Author biographies
Doug Henton is Chairman and CEO of Collaborative Economics with more than 30 years experience 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.