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Why does Silicon Valley replication fails?

A cluster theory and policy approach

Social and Economic Perspectives on Technology

Michalis Tolkas

December 9, 2011

Introduction
In this essay I will examine the endeavors for the replication of the extremely successful cluster model of Silicon Valley, through the prism of cluster theory, policy and economic geography. I will also present unsuccessful attempts of such replications, and evaluate what seem to be prerequisites for building the next Silicon Valley. The essay is structured as follows. First, definitions of cluster model found in the literature are being presented, and a critique is made to Porters very influential but fairly simplistic model, which although is the de facto theory supporting this kind of agglomeration, it includes various pitfalls for the effectiveness of the model. Then I examine the link between the success of Silicon Valley as hi-tech cluster and the policies that allowed the Californian cluster to emerge. I conclude by discussing why, although it may be possible to replicate these policies, this does not, by any means, ensure the successful replication of the cluster itself.

Clusters theory and criticism


Over the past twenty years, there has been an increasing interest in regional industrial agglomeration and specialization, not only by economic geographers but also by economists and by policy makers (Martin & Sunley, 2003). There are various reasons for spatial concentration of firms within similar sectors. Taking advantage of local infrastructure and knowledge, unique local products or regional innovation end economic policies, might be some of these reasons. Regarding the importance of this local character of industrial concentration in a globalized economy, Michael Porter (the Bishop William Lawrence University Professor at Harvard Business School) says: In a global economy which boasts rapid transportation, high speed communications and accessible markets one would expect location to diminish in importance. But the opposite is true. The enduring competitive advantages in a global economy are often heavily localised, arising from concentrations of highly specialised skills and knowledge, institutions, rivalry, related businesses, and sophisticated customers (Porter, 1998, p. 90). In this context, Porters cluster theory has become almost the de facto theory for describing such industrial agglomerations. As Martin & Sunley (2003) argue, policy-makers all over the world, from national and local governments to regional development agencies, have become eager to promote local business clusters. And given the emergence of new technology fields such as biotechnology and nanotechnology, it is safe to predict that Porters clusters will turn even more to a fashion-like policy-making trend. In academia, the success of Porters cluster theory had a major effect on economic geographers. Although they too have invented various neologisms to describe similar agglomeration activities, such as industrial districts, new industrial spaces, territorial production complexes, regional innovation milieux, network regions, and learning regions, they failed to have any significant impact

on policy-makers (Martin & Sunley, 2003), and furthermore some economic geographers ended up using Porters terminology instead of theirs. Despite its extreme popularity, Porters theory has received a lot of criticism. As Martin & Sunley (2003) put it, the mere popularity of a construct is by no means a guarantee of its profundity. This criticism is mainly due to the broad and wide meaning of cluster theory that does not allow a strict clarification of characteristics. Before continuing to further analysis of this argument, it is useful to see a few definitions of clusters found in the literature. Starting with Porter: A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities. (Porter, 2000, p. 199) Although this definition gives a general image of the concept in the very next line of the definition, the first weak point is being identified, which are the loosely (if at all) defined borders of the model: The geographic scope of clusters ranges from a region, a state, or even a single city to span nearby or neighboring countries (e.g., southern Germany and German-speaking Switzerland). The geographic scope of a cluster relates to the distance over which informational, transactional, incentive, and other efficiencies occur. (Porter, 2000, p. 16) In addition to Porters, other definitions also increase the confusion of this model: A 'cluster' is very simply used to represent concentrations of firms that are able to produce synergy because of their geographic proximity and interdependence, even though their scale of employment may not by pronounced or prominent. (Rosenfeld, 1997, p.4) The more general concept of cluster suggests something looser: a tendency for firms in similar types of business to locate close together, though without having a particularly important presence in an area. (Crouch 2001, p.163) Economic clusters are not just related and supporting industries and institutions, but rather related and supporting institutions that are more competitive by virtue of their relationships. (Feser, 1998, p.26) We define an innovative cluster as a large number of interconnected industrial and/or service companies having a high degree of collaboration, typically through a supply chain, and operating under the same market conditions. (Simmie & Sennett, 1999, p.51) The popular term cluster is mostly related to this local or regional dimension of networks. [] Most definitions share the notion of clusters as localised networks of specialised organisations, whose production processes are closely linked through the exchange of goods, services and/or knowledge. (van den Berg et al. 2001, p.187) Clusters can be characterised as networks of producers of strongly interdependent firms (including specialized suppliers) linked each other in a value-adding production chain. (Roelandt & Hertog 1999, p. 9) None of these definitions gives a robust and precise description of the cluster model and what this should include in terms of geographic proximity or industrial
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c l u s tfirms n d t h e n ew e c o n o m i c s o f butmdispersed and e r s a that are strongly linked, c o p e t i t i o n

specialization. At one extreme, the term refers to national groups of industries over several different locations within operations, for At the other, modify cut- aretant enabling as local groupings of similar a country. example, had to clusters identified step. Geographically dispersed comLogging firms in related industries within a had to panies are less likely to recognize and capture such ting and sorting procedures, while sawmills highly spatially circumscribed area (Hospers et develop the capacity to process wood in more so- islinkages. al. 2008a, p. 287). Unfortunately, there no method in Porters theory defining phisticated ways. Coordination to develop standard Other complementarities arise in marketing. A what is a strong linkage or how to measure this strength, enhances there is a method neither the reputation of a lowood classications and measures was an imporcluster frequently measuring the similarity of firms and if this similarity qualifies for the definition of a cluster. In regard with geography in Porters theory, Martin & Sunley (2003) argue that although he emphasizes selected u.s. geographical proximity in the M apping in the critical role of clusters formation, performance and identification of a cluster, the term is not defined precisely. Indeed, it is used extremely and vaguely elastic, with Porter claiming ing share of its economic activity that is exported to Here are just some of the clusters in the United States. thatfew Hollywoods entertainment cluster and High other locations. Exporting clusters thoseAs we can A clusters can be found at almost any level of spatial aggregation. that export Point, the picture below, Porter himself (1998, p. investments to compete outside see in North Carolinas household-furniture cluster products or make82) provides examples of the local area source of an are well known. Others are less familiar, such as golf clusters throughout California, and optics in that differ are the primaryover the longareas eco- or in extreme geographical run. The equipment in Carlsbad, the United States nomic growth and prosperity Phoenix, Arizona. A relatively small number of another. for local industries is inherently limited by specialization levels between oneclus- demand From Hollywoods entertainment ters usually account for major cluster aand North aas well share of the economy the size of thecluster, to golf equipment in Carolinas household-furniture local market, but exporting clusters can grow far beyond that limit. within geographic area as for an overwhelmCarlsbad, California, and optics in Phoenix, Arizona:
Seattle
Aircraft equipment and design Boat and ship building Metal fabrication Electrical measuring equipment Woodworking equipment Logging and lumber supplies

Boston Wisconsin/ Iowa/Illinois


Agricultural equipment

Detroit

Oregon

Western Michigan
Office and institutional furniture

Auto equipment and parts

Mutual funds Biotechnology Software and networking Venture capital

Providence

Minneapolis

Jewelry Marine equipment

Boise

Cardiovascular equipment and services

Michigan
Clocks

Polymers

Western Massachusetts

Sawmills Farm machinery

Omaha

Rochester
Imaging equipment

Las Vegas

Telemarketing Hotel reservations Credit card processing

Amusements and casinos Small airlines

Hartford
Insurance

Witchita

Phoenix

Light aircraft Farm equipment

Warsaw, Indiana
devices

Helicopters Semiconductors Electronic testing labs Optics

Cleveland/ Orthopedic Louisville

New York City

Paints and coatings

Financial services Advertising Publishing Multimedia

Nashville/ Louisville Dallas

Hospital management Dalton, Carpets

Pennsylvania/ New Jersey


Pharmaceuticals

Carlsbad Los Angeles area

Golf equipment

Real estate development

Georgia Pittsburgh
Advanced materials Energy

North Carolina

Household furniture Synthetic fibers Hosiery

Defense and aerospace Entertainment

Silicon Valley

Colorado

Microelectronics Biotechnology Venture capital

Computer-integrated systems and programming Engineering services Mining and oil and gas exploration

Baton Rouge/ New Orleans


Specialty foods

Southern Florida
Health technology Computers

Southeastern Texas/ Louisiana


Chemicals

Mapping selected U.S. clusters (Porter 1998, p. 82)


82 harvard business review
NovemberDecember 1998

But why are there such variations in scale? According to Motoyama, (2008, p. 358), there is no grand theory to explain this issue in the entire field of economic geography, and he continues compassionately but after all, we do not have nor do we need to have a single definition of what a scale of a region is. The answer varies by context and purposes. Expecting the cluster theory to solve this puzzle may be overcriticizing or expecting too much. Regarding the borders of clusters, Porter writes: Cluster boundaries rarely conform to standard industrial classification systems, which fail to capture many important actors in competition as well as linkages across industries. [] They often involve (or potentially involve) both traditional and high-tech industries. [] Because parts of a cluster often fall within different traditional industrial or service categories, significant clusters may be obscured or even go unrecognized. (Porter, 1998b, p. 204) And also: Drawing cluster boundaries is often a matter of degree, and involves a creative process informed by understanding the most important linkages and complementarities across industries and institutions to competition. (Porter, 1998b, p. 202) Even though the elements of the model are already vague, Porter goes even further to add in the concept characteristics of additional, and quite different theories: Cluster theory also provides a way to connect theories of networks, social capital, and civic engagements more tightly to business competition and economic prosperity. (Porter, 1998b, p. 227) All these generic terms and definitions, allow an individual, to practically use the concept of cluster, however it best suits him or her. That said, even Porter himself cannot prove that anywhere or anything he asserts to be a cluster actually is one. (Cooke 2006, p. 8) So after all this criticism, all these pitfalls and controversy of the concept, why is it so popular? If the cluster concept is something of a chaotic one (Martin & Sunley, 2003, p. 18), why do academics, policy maker, investors, entrepreneurs and governments have become eager to adopt and diffuse it? Although in the following sections we will be discussing these issues, we should keep mind that perhaps we are trying to take cluster theory too seriously. Perhaps we should just use the term more casually and descriptively, with little regard for its theoretical consistency and coherence(Martin & Sunley, 2003, p. 27). The marketing of cluster idea to policy agencies was remarkably successful, as the thirty-five strong client list in Porter (1998) testifies (Cooke, 2006, p. 9). Porter, a renowned professor with a distinct market and business-oriented writing style, has targeted his cluster model, since its foundations, towards the decision and policy makers of the private and public sector. As Porter puts it, his goal
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Is to develop both rigorous and useful frameworks for understanding competition that effectively bridge the gap between theory and practice (Porter, 1998b, p. 2). And this market/business driven nature of his writing, focused more on the application and not the theory, is also one of the key differences between his work and that of economic geographers, whose work is more academic targeted with no obvious focus on firm performance or economic competitiveness. By giving broad and vague definitions in his theory, covering various concentration levels (such as firm, regional, nation-wide or even cross-nation) on one hand and wide options of specialties (from golf clubs and cloth industries to biotechnology and semiconductor clusters) on the other, he covered most of the market sectors that could be potential clients of such an economic model. Clients of this model are not necessarily only private companies. As he argues, cluster theory Is not only a tool for managers, but also a microeconomic-based approach to economic development for governments that is closely tied to actual competition (Porter 1998b, p. 7). Also, by being a consultant and board member in some of the most prestigious, large and important corporations of the world, he already had a ground for promoting his theory. His expertise in business strategy and competitiveness along with his huge reputation in the fields of business and economics, made it easier for him to convince his potential audiences. These audiences (including policy-makers of either private or public sector) easily adopted his words and lean towards the creation of a stereotype of elegance around his attractive theories. The result is that rather than being a model or theory to be rigorously tested and evaluated, the cluster idea has instead become accepted largely on faith as a valid and meaningful way of thinking about the national economy, as a template or procedure with which to decompose the economy into distinct industrialgeographic groupings for the purposes of understanding and promoting competitiveness and innovation (Martin & Sunley, 2003, p. 11). The very definitional incompleteness of the cluster concept has been an important reason for its popularity (Perry, 1999), or how Steiner (1998, p. 1) puts it, clusters have the discreet charm of obscure objects of desire.

Clusters policies and practice


Despite all the ambiguities of the cluster model, its huge success imposes the evaluation of the different policies that have been developed and are applied. This success is unique among similar notions or theories. It is difficult to identify another equally obscure concept that appeals to such a broad spectrum of academic disciplines, professions and even lay people (Bergman 1998, p. 92). What we have discussed in the theory section, when translated to the policy field, also create a similarly vague environment, because as Feser (1998, p. 246) argues, the cluster concept is so broad that it is often difficult to infer specific policy meaning from the generalised cluster studies. Motoyama (2008) argues that the broadness of the model results to significant ambiguities at the policy-making level. For instance, being in Silicon Valley, should the cities of San Jose and South San Francisco create a strategic plan together or separately? Are they
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within the same cluster? Should they pursue the same specialization or differentiation? More importantly, how? At the current moment, it is hard for the cluster theory to generate answers for these practical applications (p. 358). Cluster policies need to focus on the potential, the possibilities and the special character of each region. This character might include current economic circumstances, local competitiveness or expertise, trading agreements or more general economic policies in the region. A simple decision of replicating a model that succeeds in a specific area is not enough. And this is a mistake that policy makers seem to do quite often. That is, the fact that they identify successful cases and then try to replicate the circumstances elsewhere. The most common example over the last years is the one where national-level policy makers identify and try to promote cluster models of hi-tech industries such as nanotechnology, IT and bioinformatics, due to the intense research and business activity in the field but also because of the numerous national or international funding schemes supporting such projects. Another aspect of this trend is the generalization of the economic concepts of a cluster in the economy as a whole, and is illustrated in Keeps and Mayhews (1999, p. 57) argument that: while it is relatively straightforward to aspire to the high performance vision when it is applied to some sectors of the economy, it becomes a very much greater challenge when the focus shifts to the economy as a whole. Policymakers need to guard against the dangerous tendency to seize upon leading edge practice located within a particular sector or competitive environment and then to assume that this can be, or indeed is being generalized across the entire range of economic activity. For the national-level policy making, Motoyama, (2008) argues that the decision of which cluster should be promoted, must be taken by the local government because local government knows better the dynamics of local economy and specialization. The selection requires caution because naively identifying what sounds the best for the local economy is hardly a panacea. Motoyama also argues that in addition to the specialty and potential of the local economy, policy makers have to consider what other regions are pursuing and what might be more feasible in comparison. Towards this direction but with a few considerations, Martin & Sunley (2003) argue that some national governments tend to embrace certain cluster policies when these policies seem to fit within the policy trend of decentralizing policy accountability in order to support regional development. Their considerations rely on the idea that the cluster model might create obstacles in the full accomplishment of the economic potential of a region. They argue: Which firms should be left out? How far upstream and down-stream of the core cluster activity should policies extend? There is a fundamental tension between the public policy desire to include as many firms as possible and the notion that policy interventions can be more cost effective and represent better value-for-money if they are targeted in some way (Martin & Sunley 2003, p. 40). Support for targeted cluster policies comes from Enright & Ffowcs-Williams (2001, p. 4) stating that: a policy on clusters should aim to provide services that all firms
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merit access to, whether they are clustered or not, but in a more targeted fashion. The procedure for this targeting, as argued by Hospers et al. (2008a), includes the clarification of which economic activities face a higher growth in an area and how governmental support can help their improvement. So far we have seen where cluster policies should focus and what to avoid. But what happens in practice? How do government officials understand and apply these concepts and in what studies or decision are they based on? According to Buss (1999, p. 343), targeted industry studies use poor or inappropriate data, deeply flawed social science methods, and simplistic mathematical models in producing targets. Targets themselves tend to be dubious. Policy makers often do not posses the required knowledge, the know-how and the experience of local economic dynamics in order to take efficient entrepreneurial decisions, and in more general terms the limits of governmental active policies are not so much in the nature of men, but in the knowledge that is required to implement these policies (Hospers et al. 2008a, p. 295). This is even more obvious in higher levels of authority, for example the national government, since the officials there, see things from a distance with no direct connection with regional economic circumstances. This lack of direct connection prevents the understanding of the tacit knowledge that each region might posses. As studied by Hayek (1996), there is a close relation between geographical agglomeration and the creation and transmission of tacit knowledge. In this context Sautet (2004) notes that in a cluster the most important knowledge is not the codified knowledge that is easy to transfer, but the one embodied in human capital, in the form of experience gained after a long time working in the field. National governments by their nature, cannot access the proper knowledge that the concept of clusters require. Furthermore, considering bureaucracy as another obstacle in the support for clusters, Hospers et al. (2008b, p. 437) note that Parliamentary democracy prevents the development of clusters that would be available in a stylized setting of benevolence, that is, majoritarian electoral systems cannot, by their nature, be expected to generate the results that one would expect if bureaucrats had access to perfect knowledge and were perfectly benevolent. [] In the end clustering is the result of profit-driven entrepreneurial activity in which government is by no means a conditio sine qua non. In the next section I will be discussing activities around clustering, based on probably the most famous example in this context, the one of Silicon Valley.

Replicating Silicon Valley (and why it fails)


Very few people understand why what works here and in Boston works. It's very difficult to clone those environments. Too many people think that the criticality in the environment is the money. For me the criticality in the environment is the entrepreneurs. Donald Valentine (1988), venture capitalist and founder of Sequoia Capital Since their appearance in the second half of the twentieth century, Silicon Valley firms have developed some of the most important technologies that changed our
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lives and shaped the modern structure of the world. Silicon Valley attracts onethird of the worlds venture capital (Robert 2009) and turned the words Silicon and Valley into the biggest trend in the naming of hi-tech clusters. Policy maker all over the world, want to build a Silicon somewhere. A list of them provided by Hospers et al.(2008a) includes: Silicon Alley (ManhattanNew York), Silicon Snowbank (MinneapolisSt.Paul-Area), Silicon Desert (Phoenix), Silicon Mountain (Colorado Springs), Silicon Dominion (Virginia), Silicon Hills (Austin), Silicon Forest (Seattle), Silicon Fen (Cambridge), Silicon Glen (Glasgow), Bavaria Valley (Bayern), Silicon Polder (the Netherlands), Dommel Valley (Eindhoven), Silicon Kashba (Istanbul), Shalom Valley (Israel), Telecom Valley (Minas GeraisBrazil). A first step for understanding Silicon Valleys influence is to identify a few of its key ingredients. Kenney (2000), Ibrahim (2010), Robert (2009) and Hospers et al. (2008b) suggest that some of these elements include: Stanford University with its strong research capabilities and links to industry A technology park Unique support institutions such as law firms, investment banks and intellectual property liquidators Aggressive venture capital activities The pleasant climate of San Francisco Bay area The academic, entrepreneurial, innovation and learning cultures that attracts and keeps the best and brightest young scientists, entrepreneurs and venture capitalists Stable political and economic system First-mover advantage and raising of entry cost for competitors Its history (including military funding) Although someone could think that these are elements that can be replicated and thus produce a new Silicon Valley, reality seems to be far from that. In fact, Bostons Route 128 has most of the above-mentioned elements, but not the success of Silicon Valley. According to Saxenian (1996) Silicon Valley hosts unique sociological networks, entrepreneurial and sharing culture and a high degree of labor mobility. She also argues that a distinct advantage of the west coast cluster which Route 128 does not posses is the capacity to reset, repeat and regenerate and it is based on the labor mobility which in turn results in knowledge spillover. Bostons Puritan background, discourage of information sharing and lack of openness of communication and knowledge transfer are
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according to Saxenian additional reasons that Route 128 failed to compete Silicon Valley. The first attempt to create a Silicon Valley in Europe was the science park of Sophia Antipolis in France. Isaak (2009) notes that Sophia benefits from hosting diverse personnel from all over the world and an excellent location but is limited by the absence of support institutions and concentrations of expertise such as investment banks or venture capitalists. Without these concentrations its hard to create the sociological and social networks that Saxenian noted as crucial elements of hi-tech industrial hubs. Sophia Antipoliss success according to Isaak (2009), is also limited because of the reliance upon government subsidies and more important the lack of acceptance of failure, which is a general phenomenon in Europe, but a critical element in the success of Silicon Valley. Another major limitation of Sophias structure is the lack of entrepreneurial culture like the one in Silicon Valley. It is common for firms to lean towards governmental financial support rather than coping with the private sector. As Isaak (2009, p. 140) notices, Perhaps going back to the medieval concept of fair price, the very notion of profit is somewhat pejorative in French, casting the whole idea of entrepreneur in a skeptical light. According to Hospers et al. (2008a), in a successful cluster, when government did play a role, it wasnt while its creation, but only after its emergence. With these two examples, its clear that the analysis of Silicon Valleys success is all but an easy task. A history of extreme military funding, a flexible immigration policy, a first-mover advantage, a world class intellectual center such as Stanford University, a unique entrepreneurial culture followed by aggressive venture capital support, a pleasant and attractive climate and a basic-only relation with governmental support, suggest what venture capitalist and programmer Paul Graham said: You dont build a Silicon Valley, you let one grow.

Conclusion
This essay reviewed the theory behind cluster model and its criticism due to the unclear boundaries and definition. This vague description of the concept, does not allow its study to be concrete and create the appropriate knowledge base for its further development. It is further argued that cluster policies and practices should focus on the potential of each region and its competitive advantage, rather than uncritically trying to replicate models of other regions. Through two examples of a competitor and a replicate of Silicon Valley the essay presented the key characteristics that make the cluster of California unique and on the same time too difficult to reproduce. The influence of Michael Porters model with its marketing targeted to policy makers along with the greed of government official to develop their own version of the next extremely successful hi-tech cluster, will probably create many similar stories. The majority of them will most likely have the same luck of failure. It is only left to see if future scholars will be studying the success of the next Silicon Valley.

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References
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