The limits of Silicon Valley

My latest comment from Fund Strategy argues the Silicon Valley model is not as good at producing innovation or economic growth as generally assumed. A link to the related cover story will follow in my next post.

It is remarkable that the Silicon Valley business model is being so widely emulated when its record of producing innovation is relatively poor.

Many countries other than America are intent on developing innovation in a model built around start-up companies, venture capitalists and technological collaboration with universities. David Cameron is backing a campaign called Startup Britain, Israel is promoting itself as a Start-Up Nation, and Barack Obama has taken the whole thing full circle with a Startup America initiative.

Of course, it is undeniable that some exciting inventions have come out of Silicon Valley and similar clusters. Many key developments in computing emerged from the system. Brands such as Apple, Facebook and Google have become synonymous with “cool” because of the popularity of the gadgets and services they offer.

But there are several good reasons to question the hype around this technology. For a start, computing attracts so much attention at least partly by default.

IT looks good compared with other sectors because of their slower growth. Similarly, the fixation with start-ups has emerged largely because of the reluctance of many large companies to engage in innovation.

The actual contribution of IT to raising productivity, and therefore to improving the welfare of society, is also questionable. Back in 1987 Robert Solow, a Nobel prize-winning economist, famously remarked that: “You can see the computer age everywhere but in the productivity statistics”. There are good reasons to believe this paradox still holds true.

Tyler Cowen, a professor of economics at George Mason University in Washington DC, recently wrote a controversial book arguing that official statistics overstate American economic and productivity growth. If he is right, and his case looks sound, the upbeat technology story is undermined.

Finally, much of the discussion of innovation understates the role of the state in the process. The internet, first developed in the 1960s with American government backing, is a prime example.

The Silicon Valley model is not nearly as good at promoting innovation as generally assumed.