Saturday, March 12, 2011

Is Silicon Valley Losing Its Edge?

The lifeblood of technology innovation in the United States over the past half-century has been a steady flow of venture capital dollars. This made both the United States and Silicon Valley's entrepreneurs the envy of others around the globe.

That picture, however, is changing rapidly. Last year, only $12.3 billion of new money found its way into venture capital funds. This is less than half the level of two years earlier. With a retreat from private equity underway, many American start-up financiers are predicting a historic contraction in their industry.

One reason for this is that US venture capitalists have begun to hunt elsewhere for big ideas. Many US venture capital firms have been looking increasingly to China to invest in areas such as clean technology. VantagePoint, one of the biggest Silicon Valley investors in this field, last year launched a $100 million fund for emerging clean technology in China. This made it one of the largest investment vehicles of its kind.

Some venture capital firms are doing so because the legislative environment at home is not as conducive to backing local companies. But there are other reasons.

American Innovation

So the question has to be asked – why China and not the United States? A closer look is warranted.

When Facebook was accorded a $50 billion valuation in private financing in January, it looked like business as usual in Silicon Valley.

To some industry veterans, however, eye-catching successes such as the social networking site provide little indication of the underlying trend in the country's underlying technological competitiveness.

If anything, the success of companies like Facebook may be masking a deeper malaise that threatens the American system of innovation.

John Seely Brown is the former head of the Palo Alto Research Center for Xerox. This center was once one of the Valley's most renowned corporate research and development laboratories.

Mr. Brown believes that drawn by the quick profit of high-flying internet and social networking firms, US technology investors have lost interest in the more serious work needed to sustain a lead in some of the world's most advanced industries. He said, “We've lost the will for patient investment.”

American Psyche Bruised

In the popular psyche, American technological leadership seems almost innate. It is seen as the product of an ingenuity, a sense of risk-taking and a hunger for the new that could only have taken root in a country as democratic, socially mobile and close to its pioneer roots as the United States.

But that is just a quaint notion. Michael Moritz, one of Silicon Valley's leading venture capitalists, said that the belief that American individuality and creativity somehow assure future leadership is “a clear exposition of the arrogance of empire.” He added that today “the need to succeed is far greater in the emerging markets.”

Nor is there any inherent US resource advantage, as information and talent flow freely. “We're not smarter than they are,” says Bill Watkins, another Silicon Valley veteran.

Let's look at what has happened over the past few decades. The United States suffered the loss of electronics manufacturing to Asia, which began in the 1980s. Then there is the shift of information technology services to India, which has been the story of the past decade.

And in entirely new markets such as green technology, the center of gravity has been moving to Asia. The aforementioned Mr. Watkins is the chief executive of Bridgelux – a company at the forefront of the promising new LED industry. His company makes low-power lighting using light emitting diodes.

He warns that promising new industries like his continue to quickly slip away to Asia: “We [the US] invented LEDs but we're losing the business to Asia, and it's the same with solar.” Yes, just ask First Solar about increased competition from China.

Now today, the R&D and design work that goes into many areas of electronics manufacturing – bringing with it high-paying jobs – has also been moving elsewhere. For instance, Applied Materials startled many last year when it announced that its chief technology officer would move to China to be closer to the company's manufacturing facilities.

There is a close tie between design and manufacturing of products that characterize the evolution of new technologies. Developing prototypes and manufacturing processes becomes harder when the design and manufacturing of products takes place half a world apart. As a result, the US is losing, as Mr. Seely Brown says, “the capabilities to build serious, complex stuff.”

Possible Solutions

The solution to such a long-term problem that the United States and Silicon Valley face is not easy or simple. Many things need to be done. Here are just a few ideas.

First, the US educational system needs to upgraded, with an emphasis on science. The nation is simply not graduating enough science, engineering and technology students to feed the national demand for such skills and to keep the country ahead in the global technology race.

Second, the US government needs to decide it is “open for business” and willing to compete in the global marketplace for factories and jobs. Technology companies say that costs are higher here in the US, mainly because of the lack of incentives or tax credits that are available to US corporations in most other countries.

Third, change the focus for Silicon Valley. The nation needs its emphasis to be on the key industries of the future, such as green energy, that will produce lots of jobs. We don't need a million Facebooks and other companies related to leisure-time activities. We need some genius to develop an alternative to oil, not develop a new app for the App store for Apple.

And the United States needs to begin implementing changes immediately.

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