A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  But is the winner-take-all argument really convincing? And is it really as powerful a critique of globalization as some people imagine? What makes a particular place or group of people into winners? Are the winners a permanent class, or is it possible for other people and places to join in? How imitable or fragile is their success? And does it really come at the cost of others? We p. 203 will examine these questions in some detail with reference to a narrow strip of land between San Francisco and San Jose that used to be known as the Valley of Heart’s Delights and now might be more appropriately rechristened the Valley of Money’s Delights.

  Do You Know the Way to San Jose?

  We have chosen Silicon Valley for a simple reason: Despite the bursting of the dot-com bubble, it has invented the world’s most successful and influential formula for manufacturing wealth. It interests us here not for its technology but its way of doing business and organizing (or not organizing) society. Indeed, Silicon Valley is in many ways an exaggerated version of the sort of society that globalization is helping to create everywhere else. Whether as a showpiece for the virtues of immigration and meritocracy, or as the home of the world’s most borderless industry, or even perhaps as the ugliest industrial center in history, Silicon Valley is something of a test tube for globalization. In the same way that California is famously “like America, only more so,” Silicon Valley is like the global world, only more so.

  That success has been tarnished by the dot-com bubble. But it still stands. One testament to it is the number of imitations Silicon Valley has spawned. America alone is home to Silicon Desert (Utah and Arizona), Silicon Alley (New York), Silicon Hills (Austin), and Silicon Forest (Seattle and Portland). The following pack includes such unlikely locations as the Côte d’Azur (“Europe’s California”) and Egypt’s Pyramid Technology Park. Mahathir bin Mohamad of Malaysia has set aside twenty billion dollars and a space roughly the size of Chicago for a new Multimedia Super Corridor that will include an information-technology city of one hundred thousand people, called Cyberjaya.

  And even this understates the Valley’s influence. Look around the developed world, and you will see the gradual Siliconization of many sorts of commerce, not just high-tech industries. By some counts, gazelle firms—ones that have grown by at least 20 percent in each of the past four years, a species particularly prevalent in Silicon Valley—have accounted for over three quarters of America’s new jobs in the past five years (and probably the same proportion in Europe and Japan). Everywhere, product cycles are speeding up: Even fairly humdrum companies are learning how to live with the same economics as Intel, where each new chip becomes obsolete within a matter of months. Everywhere, big firms are becoming looser organizations, breaking themselves into smaller units or devolving more power to p. 204 their frontline workers. And an increasing number of these workers are having to learn how to be portfolio workers—to juggle different careers—just as workers in Silicon Valley have.

  Interestingly, many of these fundamental changes in society are more often blamed on globalization than credited to Siliconization. Yet many of them reflect the Valley’s influence and the success of its six thousand high-tech firms. The Valley’s 2.2 million inhabitants control an economy about the size of Chile’s. Even after the bubble had burst in 2001, Silicon Valley still provided jobs for 1.35 million people, and its productivity and income levels were double the national averages.[2] For many workers, it remains a mecca, a place where jobs still pay well, where promotion can still be swift, where receptionists still tell you about their share options, and where the office canteen serves spring ginger-seared ahi tuna for less than five dollars.

  This would immediately seem to indicate that even if Silicon Valley is a winner-take-all society, there are an enormous number of winners. But before getting into that argument, it is worth trying to define exactly what Silicon Valley is and why it is so successful. To do this, imagine that you are one of the many foreign bureaucrats now charged with trying to build Silicon Valleys of their own—a courtier in one of Dr. Mahathir’s periodic delegations, say, or one of the scores of visitors from the Japan External Trade Organization. As you battle the traffic from the venture capitalists’ offices on Sand Hill Road to Stanford University, you are haunted by the great question, Why did it happen here?

  What a Long, Strange Trip It’s Been

  The first depressing thing to note for our foreign bureaucrat is that the Valley has taken a long time to become what it is today. Fred Terman, a professor of electrical engineering at Stanford University, laid its foundations in 1938 when, irritated by the fact that his star students had to go east to further their careers, he persuaded two of them, Bill Hewlett and David Packard, to set up, in a garage, a company that would make electronic measurement equipment. The resulting company, Hewlett-Packard, took almost forty years to reach revenues of one billion dollars.

  Next, the Valley is the product of an unpredictable combination of circumstances rather than the result of official fiat. As Ed Zschau at the Harvard Business School puts it, the Valley is an “existential creation: nobody p. 205 said ‘let’s build an entrepreneurial, technological centre.’ ” This is not to say that the government played no role at all. By one count, the Pentagon paid for one billion dollars’ worth of semiconductor research in the formative period between 1958 and 1974. The Internet, too, began as a government project; several companies, including Netscape, have arisen, directly or indirectly, from state-funded research projects. But the government was nearly always a customer rather than an organizer. Certainly, unlike the governments of Europe, which relentlessly mollycoddled their technology industries, which are now nearly a decade behind America’s, Washington’s main contribution has been to stay clear.

  So what ingredients does such a place need? Until recently, economists and politicians tended to explain the Valley’s success in terms of some fairly tangible assets: the size of its labor pool, the breadth of its network of suppliers, its access to venture capital, and the excellence of its educational and research institutions—notably the universities at Stanford and Berkeley and the Xerox Palo Alto Research Center (PARC). All these things have indeed helped to put the Valley on the commercial map. One way or another, around one thousand companies have arisen out of Stanford University. But it is now clear that such physical factors tell only part of the story.

  AnnaLee Saxenian, a professor at Berkeley, has pointed out that Massachussetts’ Route 128 corridor was more than a match for Silicon Valley in terms of both venture capital and access to research.[3] Yet by the late 1970s, Silicon Valley had created more high-tech jobs than Route 128 had, and when both clusters slumped in the mid-1980s, the Valley proved far more resilient. This, according to Saxenian, had to do with the structure and culture of the organizations involved. Big East Coast firms such as Digital Equipment Corporation and Data General were self-contained empires that focused on one product: minicomputers. Silicon Valley was also overreliant on one product (semiconductors), but its companies were more decentralized and more likely to spawn other companies. This networked economy was able to adapt much more quickly.

  To an unusual degree, the resilience of Silicon Valley’s economy comes from that old cliché “creative destruction.”[4] This principle is as simple to spell out as it is difficult to imitate: Old companies die, and new ones emerge, allowing capital, ideas, and people to be reallocated. Essential to this process is the presence of entrepreneurs, as well as a culture that attracts them. Those seeking the secret of economic success have concentrated increasingly on clusters—places (such as Hollywood or Silicon Valley) or communities (such as Jews or overseas Chinese) where there is “something in the air” that enp. 206courages risk taking. This suggests that culture is more important to Silicon Valley’s success than economics or technology are.

  The Ten Habits of Highly Successful Clusters

  Attributing success to culture can be a convenient way of avoiding saying anything specific. However, we can enumerate ten cul
tural attributes—call them the ten habits of highly successful clusters—that have proved vital to the Valley’s success. It is interesting that, in terms of the “winner-take-all” debate, nearly all of them involve ways of spreading wealth rather than concentrating it.

  The first quality is a firm belief in meritocracy. Rather than ossifying into an oligarchy, Silicon Valley endlessly renews itself with new brains. Age and experience, which elsewhere get people promoted, are no help in the Valley; on the contrary, there is a distinct bias toward youth. Nowadays, the average software-engineering qualification becomes obsolete in around five years, so a student fresh out of college may be more valuable to a company than a forty-year-old dinosaur.

  Similarly, the Valley is one of the most immigrant-friendly places on earth. Cupertino’s fifteen thousand elementary-school students speak fifty-two languages among them. Around one in five of the Valley’s workers, including Andy Grove of Intel and Jerry Yang of Yahoo!, come from abroad. According to AnnaLee Saxenian, 27 percent of the four thousand companies started between 1990 and 1996 were run by Chinese or Indians (double the proportion in the previous decade). There are around seventy thousand Chinese-speaking engineers in the Valley. Down in Los Angeles, the Hollywood Cricket Club, once a lonely oasis of Anglocentric civilization, is now routinely trounced by visiting Indian teams from Santa Clara.

  The second habit is an extremely high tolerance for failure. In Europe, bankruptcy is seen as a stigma; in several countries, someone who has run a company into bankruptcy cannot start another one. The United States, which has never had a debtors’ prison, has always been more tolerant, but in the Valley bankruptcy is treated rather like a dueling scar was in a Prussian officers’ mess. If your pen-computing company crashed, that is no disadvantage in starting one that specializes in video streaming. It is hardly surprising that the Internet—the industry in which, as Doonesbury put it, “profitability is for wimps”—gravitated toward Silicon Valley.

  The third habit is tolerance of treachery. Secrets and staff are both damnably hard to keep in Silicon Valley. In 1957, the so-called traitorous eight walked out of one company, Shockley Laboratories, to found Fairchild p. 207 Semiconductor. One of them was Gordon Moore, subsequently of Intel fame. Fairchild Semiconductor itself eventually spawned thirty-seven different firms, including Intel. Just as tolerance of failure has a structural underpinning in America’s relatively kind bankruptcy law, tolerance of treachery is linked to the fact that in California, unlike in Massachussetts, the law regards postemployment noncompetition clauses as unenforceable: That means that it is much harder to tie down staff. But it is plainly more than just law. “I left a company myself,” says Scott McNealy, the boss of Sun Microsystems. “I don’t want to lose people, but I don’t want to employ people who don’t want to work here, when I have twenty thousand excellent people who do.” Far from feeling aggrieved by employees leaving to set up companies, he boasts about the number of CEOs that Sun has produced.

  One of those CEOs is Kim Polese. Until February 1995, she was in charge of marketing Sun’s Java project. Then, together with a couple of colleagues, she left Sun to set up Marimba, a company devoted to “push” software. That technology, which allows firms to reach consumers directly, rather than waiting for them to come to their websites, has not lived up to the enormous hype conferred on it in the mid-1990s. And Polese, a willowy blonde in an industry in which most executives are not noted for their appearances, has been accused of hogging the limelight (often by the same magazines that once rushed to take pictures of her). But Marimba went public successfully in 1999. Its success is partly because Polese (who is now the company’s chairman) found some practical uses for push technology; but she has also been helped by a fourth Silicon Valley habit: collaboration.

  Polese has been part of a large keiretsu of contacts. Marimba’s main backer was a hundred-million-dollar Java fund set up by Kleiner Perkins Caulfield & Byers, the Valley’s most powerful venture-capital firm. Amazon.com’s boss, Jeff Bezos, chose Kleiner Perkins to launch his company, even though it offered a worse price. Jeff Hawkins, the inventor of the Palm Pilot, also sought out John Doerr of Kleiner Perkins when he set up his new venture, Handspring, at the beginning of 1999, “even though we did not need any money.” In Silicon Valley, venture capitalists do not just give money, they also help find customers and employees.

  Nor is this collaboration just a case of different keiretsu looking after their own. Companies and individuals endlessly form short-term alliances, both formal and informal, with foes whom they would normally try to kill. Log on to any Silicon Valley chat site, and you will find a virtual version of the conversations in Silicon Valley bars, in which self-interested altruism sets the tone. Staff are borrowed, ideas shared, favors exchanged. Often, the motivation is time: It is not worth trying to develop something yourself (whether it p. 208 is a Java applet or a public-relations department) if somebody else can make it happen faster.

  The fifth habit is a penchant for risk: There are no problems, it seems, only opportunities. Ask Hawkins how he will make Handspring’s Visor even smaller or faster, and he replies, “We’ll do it—or somebody else will.” Elsewhere in Europe and America, investors are obsessed by the minutiae of business plans, however nebulous their end products. By contrast, Arthur Rock, a veteran Silicon Valley venture capitalist, says simply, “I have always backed people and opportunities.” Indeed, the whole idea behind the venture-capital industry that Rock helped to pioneer is to follow a winner-take-all approach: One winner pays for scores of losers.

  Once again, this entrepreneurial attitude runs deep. In Europe, large companies are famous for bullying small ones into paying bills early. Californian giants such as Hewlett-Packard, however, have always viewed young firms as potential investments rather than potential bad debts. “Most of the firms here were start-ups themselves fairly recently, and they know how to help,” argues Michael Skok. A slightly stocky Englishman, who in his pinstriped suit might be confused for a merchant banker, Skok is an example of that rare breed: a European who can’t stop starting companies. When he came to Silicon Valley for three days in 1996, he had already run one successful software company in the Thames valley and was on the point of signing a lease for another one, to be called AlphaBlox, in Boston. His three days in Palo Alto were a revelation. Not only did he run into most of his potential customers and employees at his hotel or in restaurants, but he also found a small squadron of people prepared to take a bet on him. Silicon Valley Bank arranged a line of credit for him to lease equipment within a week. Specialized accountants, lawyers, and headhunters all offered to work at reduced rates; real-estate agents accepted equity in Skok’s company instead of a fee. Within a month, an old warehouse was converted into a suitably with-it office, covered in pink and yellow dots, and he was off.

  One reason why it is fairly easy for people such as Skok and Polese to get off the ground is that Silicon Valley’s sixth habit, reinvestment back into the cluster, seems to come naturally to successful technologists. Howard Stevenson, a professor at Harvard Business School, points out that many clusters die because their founders or their founders’ children invest their fortunes elsewhere. Sometimes this is because they despise the muck that made their brass: Victorian coal barons from Barnsley ploughed their money into estates in Shropshire. More often, it is because it makes financial sense for a family business to diversify. So far in Silicon Valley, most of the money made p. 209 in the technology industry has gone straight back in, either via people starting their own companies or via “business angel” investors.

  The seventh habit is enthusiasm for change. Even venerable Hewlett-Packard has metamorphosed countless times, producing, among other things, oscillators, medical equipment, calculators, and laser-jet printers. The new generation of small Internet companies changes its spots even more frequently, with “strategic” decisions sometimes being made on a monthly basis. This nimbleness is born of fear. Any company that gets stuck in a rut ends up d
ead.

  The eighth habit is obsession with the product. Silicon Valley was founded by engineers who were fascinated by technology, not just by making money. It remains a place where somebody at Sun can tell you in all seriousness: “If you don’t understand the modestly parallel scalable multiprocessing environment, then you might as well leave.” It is full of consumers known as “digital upscale believers” who will buy new products just because they look interesting. John Seely Brown, a former director of Xerox PARC, points out that much of Silicon Valley’s value lies in what he calls “the conversations on the periphery”: the chat in restaurants, the buzz in the bars. Just as every waiter in Hollywood has a script hidden behind his menu, plumbers in Silicon Valley will entertain their customers with disquisitions on the relative merits of Microsoft’s Internet Explorer and Netscape’s Navigator.

  This obsession with product helps explain why the best one wins. This might seem an obvious point, but in both economics and Silicon Valley it is something of a controversial one. Winning products do tend to get enormous market shares: There is a network effect, as people tend to move toward a common standard, but there is precious little hard evidence to support the fashionable assertion that a bad product can thus triumph over a good one. It now seems pretty clear that neither the Dvorak keyboard nor the Sony Betamax videocassette were superior to their alternatives.[5] In 1999, the two economists responsible for demolishing those myths, Stan Liebowitz and Stephen Margolis, turned their attention to Microsoft’s products, charting their market shares against independent product reviews.[6] From word processing to spreadsheets to browsers, Microsoft products moved into winner categories only after they outperformed the market leaders; in areas such as personal-finance software and Internet service, where Microsoft lagged behind Quicken and AOL, it failed to make headway. Prices tended to fall faster after Microsoft took the lead as well.