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The Innovation RegionDoug HentonPresident Collaborative Economics

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1990 2003

SV Share of CA Population SV Share of CA GDP

Silicon Valley’s Growing Contribution to California’s Economy

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Silicon Valley’s Long Term Advantage: Highest Productivity per EmployeeSilicon Valley’s Long Term Advantage: Highest Productivity per Employee

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

United States California Silicon Valley

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Evolution of Silicon Valley 1950 - 2000Evolution of Silicon Valley 1950 - 2000

Value Added

Time1950 1960 1970 1980 1990 2000

Defense

Integrated Circuit

Personal Computer

Internet

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The Valley is Driven by Waves of InnovationThe Valley is Driven by Waves of Innovation

• New technologies drive dynamic waves of innovationNew technologies drive dynamic waves of innovation

• Entrepreneurs take advantage of new opportunitiesEntrepreneurs take advantage of new opportunities

• Swarm of new firms cluster around new technologies creating short term Swarm of new firms cluster around new technologies creating short term bubblesbubbles

• New products eventually become commodities and investment leads to New products eventually become commodities and investment leads to breaking of bubbles. breaking of bubbles.

• New technologies emerge from the convergence of old technologies and New technologies emerge from the convergence of old technologies and the process of “creative destruction” begins againthe process of “creative destruction” begins again

• Next wave of innovation builds on prior waves of innovationNext wave of innovation builds on prior waves of innovation

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Recent Short-Term BubbleRecent Short-Term Bubble

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Silicon Valley Employment Waves:A Boom, Bust, Build PatternSilicon Valley Employment Waves:A Boom, Bust, Build Pattern

First Wave: Defense

Second Wave:Integrated Circuit

Third Wave: Personal Computer

End of Vietnam War

Commercialization of the Integrated Circuit

Semiconductorcompetition intensifies

Cold War: defense cuts

Internet Commercialization

Fourth Wave:Internet

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30070 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

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Silicon Valley Jobs Return to Pre-Bubble Employment LevelsSilicon Valley Jobs Return to Pre-Bubble Employment Levels

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Current Silicon Valley Industry Portfolio: Led by Biomedical, Five Silicon Valley Industry Clusters Grow in Employment Concentration Relative to the Nation

Current Silicon Valley Industry Portfolio: Led by Biomedical, Five Silicon Valley Industry Clusters Grow in Employment Concentration Relative to the Nation

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…VC Shifts Toward Medical Devices and Biotechnology…VC Shifts Toward Medical Devices and Biotechnology

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Innovation is the Key to Valley SuccessInnovation is the Key to Valley Success

Innovation is the key to success in today’s global economy across all industries

Continuous reinvention is required to keep pace with the rapid pace of change.

The basis of increasing productivity is innovation not competing on cost

Productivity is the basis for prosperity.

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Competing on InnovationCompeting on Innovation

Prosperity(rising real income per capita)

Productivity(increased output per worker)

Innovation

increasingly higher-value products and services

produced more efficiently

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Regional Leadership Makes the Difference in Innovative RegionsRegional Leadership Makes the Difference in Innovative Regions

Build fundamental intellectual assets.

Connect entrepreneurs to these assets.

Promote a habitat for innovation and entrepreneurship.

Make quality of life an innovation asset.

Invest in the future

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Silicon Valley Has Higher Proportion of High Skilled, High Pay Occupations Compared With the NationSilicon Valley Has Higher Proportion of High Skilled, High Pay Occupations Compared With the Nation

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Talent is the Most Critical Innovation Asset in the ValleyTalent is the Most Critical Innovation Asset in the Valley

Talent is Based on Skills and Training

Technology Is Created by Talent

Quality of Life Attracts and Retains Talent Housing Transportation Environment

Creative People Want to Live in Creative Places

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Risks to the Innovation RegionRisks to the Innovation Region

Valley risks losing talent because of Declining Educational Quality Housing Costs Declining Quality of Life Transportation Congestion

Requires investing in future as well as addressing cost issues

K-12, community colleges and universities Affordable housing Transportation initiatives

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A Balanced Approach to Innovation: Add the “Positives” and Remove the “Negatives”A Balanced Approach to Innovation: Add the “Positives” and Remove the “Negatives”

Add Productivity Enhancing Factors K-12 Education College and Universities Community Quality of Life

Mitigate Cost Factors Housing Costs Health Care Costs Regulatory Costs

Create a High Value, Innovative Region

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Next Wave May be a ConvergenceNext Wave May be a Convergence

1990s Convergence Next Convergence

InternetRevolution

HARDWARE

SOFTWARE

MEDIA

NANO

BIO

INFO

?Revolution

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Examples of ConvergenceExamples of Convergence

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Preparing for the Next Waves: State and Regional ResponsesPreparing for the Next Waves: State and Regional Responses

Do leaders understand the opportunity?

What must we do to ensure it happens here?

What are the requirements?

How can local people and communities benefit?

Can we avoid some of the pitfalls of past waves?

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Key PointsKey Points

The recent bubble has broken, so let's learn and move on.

Goal: sustain habitat advantages in productivity and innovation.

We can anticipate a next wave: a new convergence building on prior waves

Silicon Valley is well-positioned, but there is no permanent franchise.

Must work together to ensure that next wave happens here, works for us.