Silicon Valley: Challenges Ahead

​​​​​​​December 21, 2017

by Eilif Trondsen

In my recent post on Silicon Valley, I took issue with Steinar Hoel Korsmo’s prediction that Silicon Valley would (relatively soon) become “irrelevant.” At least in my mind, the region—still the leading and most dynamic innovation ecosystem in the world—will not easily or quickly be toppled from its current position. But let me quickly point out that this does NOT mean that Silicon Valley will not face a increasingly fierce competition, as “the battle of innovation ecosystems” will likely intensify and we may well see the distance between Silicon Valley and its competitors shrink. How much is not clear, but LOTS of things are happening around the world, so the next decade or two will be exciting to watch.
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Before I address some of the major challenges that I see Silicon Valley facing in the future—the solutions to which will determine whether, how much, and how fast the region may lose its current top ranking among innovation ecosystems—I will provide a bit more context around all of this, in part by referring to some graphics I am showing below.

The Evolution of the Valley

Many foreign observers often forget how the Valley has evolved over a number of phases which Doug Henton and John Melville—eminent regional economists and former SRI colleagues of mine (Doug is former, and John is the current, CEO of Collaborative Economics)—included in the opening of the Silicon Valley Competitiveness and Innovation Project (2015)—shown in Figure 1. The graphic summarizes key characteristics of each of the five phases. To me, underlying the 5 phases evolving over about 5 decades is a dynamic in which each phase drew on the best talent and resources of the previous phase, or phases, to build the companies and industries that have cumulatively resulted in an increasingly sophisticated, dynamic and resilient regional innovation ecosystem. This system has adapted very well to the changing and evolving needs of the regional, national and global economy, and, of course, a big part of this has been the tremendous talent base built by great number of highly skilled and eager workers coming in from around the US and other countries (more on this below).

Strong Components of the Innovation Ecosystem

It is challenging to create a graphic that includes, and does justice to, the many factors or elements that shape and characterize the Silicon Valley innovation ecosystem. I have given many presentations about Silicon Valley to visiting delegations from the Nordics and elsewhere, and I often use the figure shown below, as a way to summarize and discuss some of the major factors that I think have played, and continue play, an important role in shaping the Valley. [I revise the figure when I realize I have left some things out, so please let me know if you see some things that are missing and I will add them to my next version of the figure].

Current and Emerging Challenges Facing Silicon Valley

For those of us who live in Silicon Valley, some of the issues addressed below enter into daily evaluation and weighting the pros and cons of being here, and trying to decide “should I stay or leave”, but in some ways this is probably true for anyone living in urban areas (around the world) that are “under stress” by challenges of housing (availability and costs), transportation/traffic, and cost of living. It is far beyond the scope of this blog post to take a deep dive into these issues, but only point to some of the developments that now threaten the long term health of our ecosystem.

Housing

Lack of affordable housing has long been a problem in the Bay Area, not only in San Francisco, but up and down the Peninsula. While highly paid software engineers, business executives, lawyers, and many other professionals don’t have problems paying for housing, growing numbers of others are struggling and now face long and painful commutes as they are forced to move (to the South Bay or East Bay, in most cases) as they search for housing they can afford. Most people in the retail and service industries that support the high tech industries are severely affected, but so are “entry level professionals”, and even with new efforts by many Bay Area cities making plans for more low-income housing, it will not likely come close to meeting current or future needs.

As the tech giants—including Apple, Google Facebook, and others—expand their operations and footprint in Silicon Valley (Google, for example, has plans to occupy large parts of downtown San Jose, near the train station and will dramatically expand its footprint in that part of the Bay), the cost of housing will likely see continue to rise. The effect of Apple’s new campus in Cupertino has had some amazing impacts, and a recent local news article pointed out that someone had paid around $730,000 above asking price for a 2,000 square foot house near the new Apple Campus. The joint impact of Apple’s growth and the inflow of wealthy Chinese who regularly pay $1.5 million for small houses around Cupertino, make housing increasingly unaffordable for large segments of the labor force in Silicon Valley.

Increasingly dense housing—including (relatively) low-cost housing—near public transportation hubs, including Caltrain stations—is one (partial) solution that could alleviate some of the current housing problems, and projects of this kind are now underway. However, so far, most cities are avoiding high rise solutions, in sharp contrast to what one finds in other urban areas around the world.
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Traffic

Yes, worsening traffic congestion is not unique to the SF Bay Area, and you may note that this is the cost of having a vibrant economy—and undoubtedly, congestion will improve when the economy slows down, and which of these evils do you want? A significant part of the traffic problem is caused by growing numbers of people being forced (by high cost of housing) to move (to the south Bay and beyond) or towards Sacramento, spending perhaps 2 or more hours commuting to and from work. Figure 3 shows how traffic has changed in recent years, and how this compares to other heavily trafficked areas of the country.

Retaining and Recruiting Talent

To some extent, this issue is also partly tied in with the two earlier issues/challenges of housing and traffic, and solving them will definitely make Silicon Valley a more attractive option for talented workers from around the US and the world, who in the past have come in droves to Silicon Valley. The immigrants from other countries have helped launch over half of all startups in Silicon Valley over the last decade or so (much has been written on this topic of immigrant entrepreneurs, and a Google search will reveal a significant literature), so any slow down or reversal of this trend could significantly harm the Silicon Valley innovation engine.

While the housing and traffic elements discussed above are to a large extent within the control of the SF Bay Area residents/policy makers (not true of the federal funding that may be needed for some parts of the ‘mega measure’), this is not true for the issue of foreign immigrant entrepreneurs. Current federal policies and regulations in these areas already have hurt not only foreign students who want to come and study in the US but foreign immigrants who would likely start companies or provide deep, needed technical expertise to Silicon Valley companies, are now reluctant to even try to seek visas that are now much more difficult to obtain, especially if you are from certain countries. And as other, competing “innovation hubs” in other countries, in Europe and Asia, especially, which are more welcoming to foreigners and also often provide significant funding in the form of grants and seed investments, will make it more difficult for Silicon Valley tech companies to hire the talent they need, at least for their Silicon Valley-based operations.

On top of the immigration challenges that Silicon Valley may face in the near future—especially if future regulations and policies don’t change their current trajectory—we must add a worrying situation for education sysems in the SF Bay Area. A presentation by Michael Kirst, Professor Emeritus of Education and Business Administration at Stanford University—and a recognized expert on the US, California and local post-secondary educational system and trends—at a Media X workshop at Stanford (on Innovation Ecosystems for AI-Based Education, Training and Learning) on November 13, 2017 made it very clear that current conditions are NOT good. Here are just a small sample of the statistics that Professor Kirst shared, all with potentially serious implications for the vitality of Silicon Valley’s long term economic health (especially when seen in combination with the other factors discussed above):

• San Jose State University, which is a key provider of engineering talent to Silicon Valley, has 50,000 applicants and can only take 20,000
• Completion rates at Community Colleges are very low (20-30%), implying a significant waste of resources
• Qualified K12 graduates can’t find places in post-graduate institutions
• Because of inadequate funding and other factors, many students can’t get into the majors they prefer
• The region has very few workforce development centers (for helping people who often already have college degrees)

Concluding Remarks

“Prediction is hard, especially about the future”, according to an old Danish proverb (and often attributed to Niels Bohr). And predicting what the condition and future ranking of Silicon Valley as a regional innovation ecosystem will be is obviously difficult and highly uncertain. But, as noted in my first blog post on this topic, I have heard many wrong predictions over the last 40 years, most assuming Silicon Valley would not be able to retain its position as the world’s leading innovation ecosystem. Too many other dynamic regions with strong innovation ecosystems would no doubt catch up and surpass Silicon Valley. The region’s resilience has surprised many, but perhaps not so much the local regional economists, like Doug Henton and John Melville, among those who has a deep understanding of the region.

But let me be clear: The past is (obviously) not necessarily a good predictor of what the future will be! And many regional economists and Silicon Valley policy makers and business leaders are now concerned about the issues I have noted above, and likely also many other issues that I have not included in this post (some of the other issues are noted in the Scorecard shown in Figure 4). And many excellent reports and articles have been written about interesting changes in other parts of the world, and what these may mean for Silicon Valley. Let me point to just two interesting reports that address what is happening on the European and Chinese technology fronts, both written by excellent analysts at the Bay Area Council Economic Institute (both available, for free, at the BACEI website):

• Innovation Bridge: Technology, Startups, and Europe’s Connection to Silicon Valley (August 2017)
• Chinese Innovation: China’s Technology Future and What it Means for Silicon Valley (November 2017)

These two reports discuss both the strengths and weaknesses of the innovation ecosystems in Europe and China, but point to significant changes that have taken place and that are underway, which may make both regions more competitive with Silicon Valley in the future. But, as the reports also point out, both Europe and China have extensive, and often deep, connections to Silicon Valley, and these connections will likely evolve and perhaps strengthen. Chinese tech companies, with huge domestic advantages (as China continues to protect its domestic markets and so far refuse to embrace “reciprocity” trade principles that others obey, mostly), could give Chinese tech companies significant “big data advantages” that they can leverage in combination with huge investments being planned for AI and machine learning in China.

Some Nordic analysts and prominent executives and entrepreneurs also think that Europe could (finally) start closing the gap on the US and Silicon Valley, particularly in areas outside of technology. In a recent article in the Financial Times, Marten Mickos, a prominent Nordic business executive in Silicon Valley [CEO of HackerOne, and previously SVP at HP, Board Member at Nokia, and CEO of Eucalyptus Systems] noted that “Entrepreneurial opportunities are moving out of just ‘software’ or ‘tech’ and into all aspects of life. In these new areas, I believe the EU can perform strongly compared to Silicon Valley.” Whether this will be enough to diminish Silicon Valley’s overall ranking as a leading innovation ecosystem, is unclear

Finally, let me briefly mention that a book I am reading ‘[The New Education, by the eminent US educator, Cathy Davidson, the City University of New York] has led me to wonder whether our secondary and post-secondary educational institutions are keeping up with innovations happening in other parts of the US. This is also what Professor Kirst implied in his recent presentation at the workshop I attended at Stanford. Professor Davidson refers to many of the leading innovators in US Higher Education that are blazing new paths outside the old silos of traditional academic fields to prepare students for careers that draw on the best of STEM (Science, Technology, Engineering and Math) PLUS humanities and Arts, so students can become versatile and can adapt quickly to changing career opportunities and work environments. If Silicon Valley schools—starting in elementary schools, and in secondary or post-secondary levels—indeed are not among the leading innovators in the US and the world, this could threaten Silicon Valley’s prominence in the long term. This is especially true if people from outside Silicon Valley (either in the US or from foreign countries) decide that they are not wanted or that access to Silicon Valley is too difficult, or costly. In this scenario, Silicon Valley’s innovation ecosystem will take a significant hit.
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NOTE: If you want to take a “deeper dive” into competitiveness issues of Silicon Valley, I highly recommend the reports from the Silicon Valley Competitiveness and Innovation Project (SVCIP): A Dashboard and Policy Scorecard for a Shared Agenda of Prosperity and Opportunity. Figure 4 shows the SVCIP Indicator Dashboard from the 2017 report, summarizing its findings.