What makes Silicon Valley so innovative?

Spring 2010

Originally Posted on Excapite in October 2010 and updated in 2013 to include the Global Financial Centre Rankings and the ieee.org Patent Power Study.

I was in Perth earlier this week checking out Australia's boom town economy looking out for signs of where the Federal Government's $43 Billion NBN investment could deliver a potential ROI.

The most obvious place to start the search was the purpose built Technology Park situated adjacent to Curtin University.

From memory the High Tech Park has been a key part of Western Australia's innovation strategy since the 1970's when the WA Institute of Technology (the original name for Curtin University) was busy conducting research into Solar Energy. So it was interesting to see how the park had evolved from its early days as an R&D test facility for Solar Panels.

I began my search by surfing Datalysed's new Start-Up Map of the world's most innovative cities and discovered that Perth was the home to 5 tech start ups.

Admittedly this figure was low but it did make me think about a new coefficient for measuring the potential for innovation in any economy.

Perth has a population of about 1 Million people. 5 Start ups provides us with an Innovation Coefficient of 5 Start-ups per Million inhabitants. I wondered how that figure measured up against other cities around the world. Just how innovative was Perth compared to Singapore, Sydney or San Francisco?

Here is what I discovered. Perth, like all of Asia (including Australia, Singapore, India, Korea, China and Japan), averages less than 30 start-ups per Million.

In comparison the major European innovation centres (e.g London Stockholm and Tel Aviv) average between 50 to 125 start-ups per Million. As do New York, Chicago and LA in the USA.

Meanwhile, way out in front, is Silicon Valley with 570 start-ups per Million.

Another way of looking at this is to visualise the Long Tail of Technology Innovation with Silicon Valley at the Top, followed by London, New York, Stockholm, Tel Aviv and LA with Asia scattered out prospecting out on the long tail.

This is why it it comes as no surprise to discover that over 50% of Silicon Valley's start-ups are founded by immigrants. Asia's brightest and the most entrepreneurial all gravitate towards the top of the tail and instinctively move to the valley. Australian's are no different (Think Andrew Lacy of Tapulous) and even the Europeans continue to make the exodus to the valley.

Note: If you factor in the estimated 52.4% of Silicon Valley start-ups that are founded immigrants the start-up ratio for the valley is around 275 to 1 Million or double that of its nearest competitor (London).

Even the World's financiers, investors and VC gravitate to the valley (Think: Jeremy Liew of LSVP who coincidentally is from Perth). You only have to use the Linksviewer to map the relationships between investors, industry sectors and funding across Silicon Valley to see how complex and interdependent the valley's ecosystem has become.

These metrics suggest something fairly obvious - i.e. Innovation is a numbers game and the world's innovation centres are successful simply because more start-up companies are actively involved in invest their resources and capital in commercialising new ideas.

What I find more interesting however - and as I have said many times before - is how little impact all this energy, investment and hype in the Silicon Valley innovation engine has had on the US Economy .

Table displaying a sample of the Long Tail of the Innovation Coefficient

Now I was reading Richard Florida's excellent piece in the Atlantic on What Makes Countries Corrupt and I thought it would be interesting to apply the same methodology to further our exploration of the Innovation Coefficient.

First up is the relationship between Innovation and the GDP for each city. As you can see there is a strong correlation here but the question must be asked. Does Innovation drive the growth in GDP? or Does a higher GDP allow a city to invest (Think: Indulge) in innovative start-up activity?

Next up is the correlation between Innovation and what Richard terms the Creative Class index.

Again the correlation is high but given the fact creative people are drawn towards innovation hubs this should come as no surprise.

Then there is the correlation between Innovation and acceptance of Gays and Lesbians. (Note these figures are based on national averages.)

Followed by the correlation between Innovation and Lifestyle Satisfaction. (Note these figures are based on national averages.)

For good measure I have included the correlation between Innovation and the Corruption Index (Note these figures are based on national averages.)

.. and the correlation between Innovation and the level of Business Investment in R&D as a % of GDP (Note these figures are based on national averages.)

then there is the correlation between Innovation and Financial Services based on the 2010 Global Finance Centre rankings.

and who could forget to map Innovation vs Military Expenditure as a % of GDP? (Note These figures are based on national averages)

Finally I have mapped the most obvious correlation between Innovation and the Expenditure on Public Education as a % of GDP.

Note these figures are based on national averages.

What I find interesting about all these charts is they all provide some insight into why start-up innovation don't thrive so readily in some parts of the world . What they don't explain are the qualities that makes Silicon Valley so exceptional.

Then I remembered that if you factor in the estimated 52.4% of Silicon Valley start-ups that are founded immigrants the start-up ratio for the valley is around 275 to 1 Million or double that of its nearest competitor (London).

So what happens to the charts when you remove the immigrant factor from the Valley's Innovation coefficient?

Well the answer is not much. The immigration factor amplifies what ever makes Silicon Valley different but, as you can see by this resampled chart, it doesn't explain what makes Silicon Valley different.

In the end I decided to simply map the Innovation Coefficient against Business Week's latest list of the Top 50 Most Innovative Companies and as you can see below the Valley and the NYC/NJ region are the HQs of more the world's innovation leaders than anywhere else in the world. This may suggest that the high number of start-ups are spin offs from - and/or feeders - into the market leaders. i.e Children of the market's innovation leaders. If this is the case it is hard to see how other regions and/or countries will replicate the Valley's economy unless they provide economic incentives for the Valley's leaders to move their HQs into their region.

In the end though I suspect that perhaps the real reason why the Valley's innovation model has failed to ignite in other parts of the world is simply that the statistical evidence doesn't support the general consensus that the model actually works.

A cursory glance at Fast Companies Top 50 Innovative companies for 2011 indicates that 7 out of the top 10 are from the valley. Earlier this year 7 of the Top 10 in the Forbes list of Most Innovative Companies were leading US technology brands. While last year the Businessweek Top 50 Innovative Companies indicated the Top 4 companies were Apple, Google, Microsoft and IBM.

However when we scratch the surface of the Valley's innovation story and take a look at the patent activity being undertaken in the US market we discover a very different story. For example, if we take a look at the 2010 PatentPower study by the ieee.org we discover that 7 out of the top 10 electronics innovators are Japanese corporations. We see a similar pattern emerging in the Business Insider’s Top 15 Innovative Companies of all time. Based on US patent office records only two US companies (IBM and GEC) are in the top 10. The rest are from Japan and South Korea.

What each of these studies suggests is that contrary to popular belief the new breed of 21st Century innovation leaders are not to be found in Silicon Valley but in Asia. This evidence also tends to suggest that the Valley's innovation model is more attune to creating a close network of smaller specialist niche players than delivering the next generation of global game changers.

More importantly it suggests there may be less of a correlation between the number of start-ups in a location and global market leadership than there is between the level of business investment in R&D and global market leadership.

Nor is this a short term trend. Back in 1996 the USA ranked 6th to Japan and South Korea's 2nd & 3rd GERD/GDP. The leader was Sweden.

While at the time of the launch of the iPhone Japan's ratio of patents per million population was 3.5 times higher than that of the United States.

We see a similar story in relation to the model's often stated ability to create new high-tech jobs. The Valley is frequently represented as the US's boom economy and yet a recent study by PWC indicates there has been no new net creation of jobs in Silicon Valley in the last 15 years.

The same applies to the Valley's funding model where we discover that the Wall St Journal reported back in 2009 that the number of active VC's had fallen by 31% in the period 2000-2008.

One thing we do know is the endless commentary on the myriad of start-ups and personalities that operate in Silicon Valley's innovation economy generates a lot of page views in the tech media and this is probably the true measure of the runaway success of the Valley's innovation model.

It is a great success story full of heroes, the occasional heroine and great achievements... and like any great success story accomplished against seemingly great odds people enjoy reading and dreaming about it.

As for the secret recipe that will allow you to replicate the success of Silicon Valley in your part of the world? Well let's just say that even if you have more days of sunshine than they have in Southern California you will struggle to be the next Hollywood.