List of Contents
2 The formation and development until today
3 Reasons for Silicon Valley’s success
3.1 Reasons in purely geographical terms
3.2 Reasons from an economic point of view
3.3 Socio-political factors
4 The importance of Silicon Valley
4.1 Relevance in the USA
4.2 Importance on the international market
5 Problems of Silicon Valley
5.1 Decreasing quality of life
5.2 Rising social opposites
5.3 Environmental problems
7 Works Cited
7.1 Articles from a web page
7.3 Newspaper articles
Against expectation, Silicon Valley is not defined by its location, as the name might reveal, but much more by the mindset of its residents. It is a lot more than a bay area, it is a culture of thinking and doing. Silicon Valley is characterised by a mentality that accepts failing as a step towards success. Furthermore, it is the motivation of start-up founders to make a change from which humanity can ideally benefit. It is a culture of exchange and help. Enterprises from the bay including their services and products have influences on the entire world. The innovations of our time seem to have one origin: Silicon Valley. Computers, the internet, smartphones or social media are world changing products that all come from an area that is smaller than the Saarland. Steve Jobs and Elon Musk are considered to be the new Edisons and Gutenbergs. The whole world seems to be uncompetitive as if the Valley had its own natural laws with boundless success. Has Silicon Valley a monopoly on the innovations of our time, being built in a factory without any capacity limits?
It is not surprising that the world is looking up to the bay area at the west coast of America. It is even less surprising that the world is trying to repeat the success story of Silicon Valley and wondering: Does it pay to be emulated? In order to find a substantiated answer to this question, it can be subdivided into two further questions: Is it feasible to copy Silicon Valley? Is it worth emulating it?
Chapters 2 and 3 explore the question of reproducibility by referring to historical events taking into account random and plannable geographic, economic and socio-political success factors. Which were the historical steps? Is it justified by historical events? Or is it rather a matter of geographical incidents? Are economic factors required and social factors even more indispensable? Might a healthy mixture of all of them be necessary to be emulated? Answers to these questions are given in these chapters.
Chapters 4 and 5 seek to examine the advantages to the US, to international markets, and to humanity in general through Silicon Valley-based companies. The question of Silicon Valley’s benefits cannot be closed without also addressing potential disadvantages and problems caused by the growing development of Silicon Valley.
Chapter 6 is to find an appropriate conclusion by evaluating the possibility of creating another Silicon Valley. Irrespective of the practicability, the conclusion deals with a short reference to Silicon Valley’s advantages and disadvantages; above all the conclusion questions the meaningfulness of a one to one duplicate.
This term paper cannot and should not be seen as a concrete set-up guide to a second Silicon Valley.
2 The formation and development until today
Nobody could have surmised 150 years ago that one day people would communicate via a small flat device – these days known as “smartphone”. Similarly, at that time no one could have pictured an area called “Silicon Valley” overcrowded by tech-companies, which develop these flat appliances. Understandable when considering that it sprang up from a bay area close to the then small town San Francisco.
Dr. Mario Herger, living in Silicon Valley since 2001 and advising companies on how to transfer the innovative mindset from Silicon Valley to their organisations, begins depicting the history of the Valley in year 1849 when hundreds of ships were sailing around the Bay Area, in order to get to the American River (53). One year before John Wilson Marshall had found a gold nugget in this region causing thousands to lead an expedition to the American River in hope of finding some as well (51). This event is considered to be the beginning of the American gold rush. Nowadays the capital of California – Sacramento – is located in this region (51). Between 1848 and 1850, the population of San Francisco grew from 1,000 to 20,000 making California become the 31st federal state of the United States (52). The railway expansion amplified the tremendous growth of San Francisco and San Jose resulting in the first farm workers settlements in Palo Alto, Cupertino and Los Altos (52). Herger points out that whereas the majority of the gold seekers could not become rich, those who offered the required goods and services for the “conquest” could even more (53). The railway entrepreneur Leland Stanford had been among the profiteers. When his only son had died at the age of 15, he and his wife decided to use their property to set up a university (53).
In 1891, the Stanford University was opened (53). There are two key features of the University. Firstly, it has been the goal ever since the beginning of a working exchange between university, economy and government (53). On the other hand, Leland Stanford insisted in the applicability of science to “life, liberty, and the pursuit of happiness” – Leland Stanford.
In 1909, Cyril Elwell, who had built his first wireless radio station in Palo Alto, won the former Stanford president and a few professors as investors for his Federal Telegraph Company (53). In 1910 they managed a radio transmission of about three thousand kilometres to Hawaii (53). Herger calls it the “first technical germ cell” (53), which worked as a magnet for many more engineers. Through the American entry into the First World War radio technology became decisive and electrical engineering got a crucial faculty of Stanford (54).
In the early 1930s the US Navy was in search of an appropriate location for an Air Force defence base on the West Coast (54). An advertising campaign of the local economic associations managed to raise almost half a million dollars during the depression (54). This giant amount of donations had been used to purchase land, which in turn was sold to the US Army for one dollar (54). Today the NASA is located in this area – known as the “Moffett Federal Airfield” (54). The number of military enterprises and research institutions increased because of the growing importance of the military reinforcement after the attack on Pearl Harbour (55). After the Second World War the NASA instituted the Ames Research Center (55), which has become the mecca of spaceshuttle technologies. From approximately 1950 to 1978 the military was the biggest client of Silicon Valley’s high-tech companies, as Herger concludes (60). Thus, it can be considered as the first phase of its success story. Christoph Keese, Executive Vice President of the Axel Springer SE, explains that the cold war required increasingly sophisticated electronic engineering (28). Consequently, the military was the engine for the technological growth in this field.
Particularly responsible for the successful development of Silicon Valley was Frederick Terman, in 1945 Chairman of the engineering faculty in Stanford (Herger 55). He employed eleven members of the Harvard Radio Research Lab and founded own research labs (55). Thereby, he made Stanford collaborate with the CIA and the NASA after being deemed as inferior compared to institutions such as Harvard or Columbia (55). Two of Terman`s most popular students – Bill Hewlett and Dave Packard – started their own enterprise in a garage in Palo Alto in 1939 (56). Their first large customer were the Walt Disney Studios (56). The computer company HP was established. In 1946, Stanford University initiated the Stanford Research Institute, today known as SRI (56). One task of this independent institution was and is the discovery and use of science resulting in start-ups which humanity can benefit from in the best case (56). In 1951, Stanford founded the Stanford Research Park (56). Herger stresses that it is considered the first industrial and commercial district operated by a university (56). These days more than 150 companies with more than 20,000 employees are situated in this park (56).
The physicist William Shockley, who had won the Nobel Prize in Physics in 1956, founded the Shockley Semiconductors Laboratory in 1954 (57). In 1957 eight colleagues left the company after a conflict and founded the Fairchild Semiconductor (57). Dr. Mario Herger defines the departure of these “Treacherous Eight” as another essential cornerstone for the beginning of Silicon Valley (57). On the one hand, Fairchild could put forth several substantial developments for the computer industry, on the other hand a number of the “Treacherous Eight” founded further companies, such as Intel or AMD (57).
In this context, it is important to understand which kind of culture could be formed in the Silicon Valley. For example, Herger explains that entrepreneurs like Hewlett and Packard encouraged their employees to take time for own projects and found companies themselves (57). They supported them with money, time and were their first customers. In the next chapter, this specific mindset and enterprise culture are analysed in detail.
The boom of Silicon Valley began when numerous companies, among them Apple, Oracle and Netscape ushered in the computer age (58). Recent companies emerging from this region were Airbnb, Instagram, WhatsApp and Tesla, Google, Adobe or Facebook (58). All in all, the number of technology start-ups of Silicon Valley amounts to 30,000 (58).
In summary, the evolution of the Silicon Valley can be divided into six phases (60): Between about 1950 and 1978 military projects were in the focus, until the computer chip industry was at its peak from 1979 to 1986 (60). The third area from 1987 to 1996 is known as the PC-Era, until it was replaced by the internet between 1997 and 2005 (60). This was followed by social media from 2006 to 2013 (60). The sixth and current phase is the Internet of Things, for which hardware- and software combinations are central issues (60).
3 Reasons for Silicon Valley’s success
Every national economy dreams of innovation systems like Silicon Valley, as they are a guarantor for workplaces and a high national revenue. It stands to reason that countries around the world are trying to integrate the same system into their economies. As brought up in the introduction, many factors have led to the successful story of Silicon Valley. Some might be implemented easier than others might, whereas several factors mainly occurred by incidence. While it is difficult to repeat the whole history, particularly social and economic elements can enter our systems at least partially.
3.1 Reasons in purely geographical terms
In commerce, geographical location can play a significant role in the success story of a company, for instance the proximity to suppliers, ports and airports or universities. The latter enables an exchange between the economy – consequently companies – and science – especially research. Moreover, enterprises that cooperate with universities – often supported thanks to local proximity – can find trainees and young talents much easier. Since personnel costs are one of the highest expenses for firms, especially “techies” try hard to find employees who have a high education but have lower salaries than experienced ones at the same time. These requirements are fulfilled by graduates. The prime example is Stanford Research Park as more than 150 enterprises with more than 20,000 employees are located in this area (Herger 56). Barry Jaruzelki confirms in his article “Why Silicon Valley´s Success is So Hard To Replicate” that “the surrounding area has its share of universities, government research centers and commercial labs”. He also points out that “Silicon Valley has no monopoly on any of those features”, meaning we can duplicate these circumstances. However, they do not seem to be sufficient for building a second Silicon Valley.
Another key in its success story is migration. Christoph Keese claims that most of the founders immigrated, such as PayPal founder Peter Thiel from Germany or Yahoo!`s inventor Jerry Yang from Taiwan (57). Brad Templeton considers migration in his newspaper article “Silicon Valley, The Real Secret Behind Silicon Valley’s Success” as the “key aspect of the Silicon Valley”. He describes that people – “often somewhere outside the USA” – left their old life to build up a new life in the Valley, in order to “start or participate in something big”. Templeton adds that “immigrant-founded companies created over 450,000 jobs in 2005”. It shows that in the Silicon Valley single visionaries can provide many others with jobs and thus make them participate in their visions. At first glance, migration does not count to the biggest strengths of the US. When taking into consideration that US president Trump campaigned with plans to build a wall, the impression gets even worse. It is fair to acknowledge that the United States of America is not only a confederacy of states but is also a formation of several cultures since day one. Reasons for this multiculturalism are historically based, resulting mainly from the various immigration waves of the last centuries, which largely live a peaceful coexistence (“Bevölkerung”). Greg Horowitt and Vicor W. Hwang state in their book “The Rainforest: The Secret to Building the Next Silicon Valley”: “We are designed to trust people closer to us and to distrust those further from us”. Ironically, the greatest economic value is created in transactions between people who are the most different from one another (10). Bringing people from different cultures and nations together is a strength and big value of the USA.
David A. Kaplan gets to the heart of Silicon Valley’s value in his book “Silicon Valley: Die digitale Traumfabrik und ihre Helden”. He claims that the special feature of Silicon Valley is based on its intellectual resources and not on its geographic location (41). Not least because silicon is the second most common element on earth (41). Consequently, Silicon Valley is not dependent on its geographic location regarding for example raw material reserves or ports but much more on its surrounding like universities and on multiculturalism.
3.2 Reasons from an economic point of view
When conducting research on Silicon Valley, you get the impression that almost everything but money plays a role. It seems that start-up`s only capital are their ideas and visions. Innovations make the Valley that effective. Yet a single idea is not an innovation at the same time. All start-ups working on an innovation have something in common: They need a seed money. Even the Valley can not leverage this economic law. Heitor Martins, Yran Bartolomeu Dias and Somesh Khanna confirm in their article “Business Model. What Makes Some Silicon Valley Companies So Successful.” that “[i]nnovation can have a short shelf life, so entrepreneurs with great ideas but little business experience need coaching and infrastructure as much as cash”. However, starting capital is different in the Valley. Over the decades, not only a start-up culture has been formed, but also a venture capital culture. Dr. Mario Herger characterises venture capital as investments of high risk, because start-ups offer unchecked products and services for an unknown market (76). The advantage for the young start-ups is two-tier: On the one hand, it enables a financial fundament, which is the base for an innovative and successful product. On the other hand, most of the venture capital investors have received money through the sale of their own company (76). Consequently, they can support start-ups with capital and experience. Herger stresses that venture capitalists coach the founders and help them build up a network (77). Thus, this gives start-ups faster access to expertise, suitable employees, media and customers (78). According to Dr. Michael A. Peschke, Silicon Valley alone provides around 15 billion dollars in venture capital for successful horizons and start-ups each year (“Supermacht”). In accordance to Christoph Keese there is no venture capital of this size in Europe (150).
It is not only venture capital that belongs to the economic factors making Silicon Valley that effective. Moreover, the way of business thinking is different from other systems. Heitor Martins, Yran Bartolomeu Dias and Somesh Khanna explain that “[i]n Valley companies all levels of the business, from the CEO to coders to cross functional teams […] [are] expected to solve customer and user problems whenever and wherever they find them” (“Business”). The combination of user and engineer perspective is permanently integrated into the business thinking. In addition, the experts point out that “valley companies think in terms of ecosystems, networks, and sharable services – elements that are crucial to scaling very quickly” (“Business”). As a result, companies in Silicon Valley mainly “[b]uild platforms, not products” (“Business”).
Another advice, which is part of the business culture in Silicon Valley, is to give the employees a firmly established place including responsibility and participation in the success of the firm. It enables them “the opportunity to shape the path of innovation, to play a meaningful role in growing the business, and to develop their own leadership chops” (“Business”).
The quintessence or the most crucial factor of the enterprise culture on the West Coast is the creation of values and the belief in innovations and changes (Herger 57). In contradiction to the highly engineer-oriented bay area short-term monetary successes are dominated in the East Coast culture (Herger 57).