The Nation : A Cultural Difference With Bottom-Line Effects

In 1970, more than 90,000 people were working in high-tech jobs inside Boston’s Route 128. In California’s Silicon Valley, 60,000 were so employed. Twenty years later, Silicon Valley’s employment exploded to 265,000, while Route 128 grew to just 150,000.

Furthermore, in 1990, 39 of the 100 fastest-growing electronics firms in the country called Silicon Valley home; only four were headquartered in Route 128. 1992 total sales of Silicon Valley’s largest public companies rose to a record $77 billion, an increase of more than 15%. Route 128’s major computer firms--Digital Equipment Corp., Wang, Prime and Data General--experienced spectacular failures and retrenchment.

Why the gap in achievement?

In her new book, “Regional Advantage: Culture and Competition in Silicon Valley and Route 128,” Berkeley professor AnnaLee Saxenian explains that the Silicon Valley greatly benefited from the state’s open, entrepreneurial yet highly collaborative business culture. Saxenian’s findings are important because they highlight the fundamental organizational practices behind California’s economic successes in several key sectors, a reality dangerously ignored by many of the state’s political and business leaders.

None of the industrial-development proposals currently emanating from state and federal governments--R&D; subsidies, consortia, “conversion” grants, training schemes, access to technology, capital and major research universities, or encouraging “clusters” of firms in related industries--explains why Silicon Valley boomed and Route 128 didn’t. Both regions enjoyed similar resources.

But unlike the inflexible, cradle-to-grave employment typical of Massachusetts, Silicon Valley’s culture encouraged talented engineers to leave their companies and join or open new ones. As a result, cutting-edge managerial and technical knowledge was spread around and informal, but crucial business links created. Route 128 companies tended to be vertically integrated, doing most phases of a product’s design and manufacturing in-house; Silicon Valley’s perfected a system of collaborative subcontracting in which companies specialized in one or two design or manufacturing tasks, then combined their expertise with other highly specialized suppliers to produce a continually improving array of new, advanced products.

In head-to-head competition, California’s approach, which Saxenian calls a “network” economy, repeatedly outperformed Route 128 in adjusting to new market trends. Silicon Valley became so good at this game that it not only displaced its Massachusetts competitors, it also beat back a challenge from the prototype network economy, Japan.

This history offers important economic-development lessons. More than technology, capital and infrastructure are needed to compete successfully in the global economy. Most important is the ability to stimulate and sustain a culture of openness, opportunity, collaboration and entreprenuerialism. Regions able to organize their economies along these lines spawn industries that constantly learn, develop new products and adapt to a world in which even the most sophisticated breakthrough can be copied virtually overnight by cheaper producers from somewhere else.

The good news is that California is unquestionably one of the world’s most hospitable places for network economies. Indeed, the core of the state’s industrial base is organized much like Silicon Valley’s, resulting in such thriving sectors as entertainment, computers, agriculture, business services, medical equipment and fashion. This advantage allowed California to perform better during the last recession than many other areas that, on the surface, seemed healthier.

From peak to trough, California lost 4.8% of its non-farm employment. New York and New Jersey each lost more than 7%, and Massachusetts, a staggering 11.5%. If heavily defense-dependent Los Angeles County is excluded from the figures, the remaining parts of the state lost just 1.8% of their non-farm jobs from an employment base larger than New York or Texas--a better record than such supposedly “lucky” states as Illinois, Ohio or North Carolina.

The bad news is that much of California’s business and political elite is not only unaware of this economic reality, their policies often work against expanding the industrial culture Saxenian describes. Particularly misguided, for example, is the language of withdrawal, closure and insularity that has infected the politics of regulatory reform, trade and immigration. Neither the notion of ruggedly individualistic “cowboy” firms--which either want to be left alone or they’ll ride away to greener pastures--nor the idea of an economy protected from international trade and purged of its burgeoning Latino and Asian participants--which have rates of learning achievement and income increases several times higher than the statewide average--is consistent with building and maintaining the collaborative relationships state industries need to survive.

Route 128’s decline illustrates the danger of ignoring industrial fundamentals. For years, the Massachusetts High Technology Council lobbied for lower taxes to improve a “bad” business climate. At the same time, however, no one was paying attention to Route 128’s real competitive challenge--building more flexible technology- and product-development relationships. Massachusetts eventually enacted pro-business tax reforms, only to see its treasured high-tech industrial base decline even more rapidly.

Equally troublesome are the big-science, retraining and R&D; programs relentlessly pushed by state and federal officials to “save” California. Such programs inevitably end up subsidizing and protecting politically savvy but industrially dysfunctional groups at the expense of network economies. Ironically, many of the organizations favored by such policies exhibit cultures that crippled Route 128.

No party or individual is now putting forth a political message consistent with the network economies that Saxenian describes. The essential starting point for such a strategy would be to adopt the networks’ core values of openness, opportunity and regional responsibility as baseline political principles guiding public policy. Government efforts would then be reoriented to support activities consistent with network creation. States such as Pennsylvania have shaped their economic policies according to this strategy, insisting that regulatory, tax, financial and other business incentives be coupled with explicit commitments by private-sector recipients to foster regional relationships.

The widespread diffusion of Silicon Valley practices enabled California to generate jobs and assimilate a diverse population on an unprecedented scale. Perhaps one day the state will create a political system worthy of its remarkable industrial achievements.*