Report Warns Silicon Valley Could Lose Its Edge (NYT)


SAN FRANCISCO — Silicon Valley’s economy is sputtering and risks permanently stalling, according to an annual report by a group of researchers in the region.

Part of the toll on Silicon Valley has resulted from the recession. The
region, the center of the global technology industry, lost 90,000 jobs from
the second quarter of 2008 to the second quarter of 2009. Unemployment is
higher than national levels and the worst in the region since 2005, when
technology companies were still recovering from the dot-com implosion.

The drop in the number of midlevel jobs — the engineers who drive much of
the Valley’s growth — has been sharpest. And when companies do hire, they
are cautiously hiring independent contractors instead of regular employees,
and are hiring abroad, according to the “2010 Index of Silicon Valley”
report, which was produced by the Joint Venture: Silicon Valley Network and
the Silicon Valley Community Foundation, two local nonprofit groups.

Other economic indicators are also gloomy, the report found.

“We show no evidence that the recovery has arrived,” said Russell Hancock,
chief executive of Joint Venture.

One of the Valley’s measures of success — akin to the size of bonuses on
Wall Street or box-office sales in Hollywood — has been the number of
patents received and the number of initial public offerings of stock in
technology companies. Patent registrations dipped slightly in 2008, and
initial public offerings have dropped to the lowest levels since the 1970s.

Venture capital financing of start-ups sank 37 percent from 2008 to 2009.
And vacancies in commercial real estate jumped 33 percent.

The report’s pessimism is by no means the prevailing view in the San
Francisco Bay Area, where stalwarts like Apple and start-ups like Twitter
continue to pump out new products and new ideas.

“Innovation continues unabated,” even though venture financing is difficult
to raise right now, said Timothy Draper, founder of Draper Fisher Jurvetson,
a Menlo Park venture capital firm. “Moore’s Law persists, as $1,000 worth of
computer power doubles every 15 months or so, and innovators continue to
march along.”

Still, if Silicon Valley’s traditional advantages weaken, residents may no
longer be willing to put up with its ultra-expensive homes and poor public
schools, said John Kao, chairman of the Institute for Large Scale Innovation
in San Francisco.

“It’s like SoHo, which started out as a low-key, cheap place to do art, and
now it’s expensive and an artist wouldn’t go to SoHo,” he said. “It’s the
same threat here. So far people have stayed, but entrepreneurs have many
other options today.”

Even when the trauma of the financial crisis subsides, Silicon Valley will
still be at risk because of deeper, long-term challenges, the report said.

Sixty percent of the region’s scientists and engineers are foreign-born, but
foreign immigration to the region dropped 34 percent over the last year. The
home countries of foreigners are increasingly luring them back, while the
United States government’s policies have made it harder for them to stay,
the report said.

To combat the brain drain, California must do a better job educating local
students, said Stephen Levy, director and senior economist of the Center for
Continuing Study of the California Economy, who also serves as an adviser to
the annual study. “We’re not going to be able to live on global talent
forever,” Mr. Levy said.

However, 5 percent fewer high school graduates are meeting requirements for
entrance to state universities, the number of science and engineering
degrees has leveled off and state general fund spending on higher education
dropped 17 percent last year, according to the report.

The report’s authors said that green technology could be the way out of the
region’s, and perhaps the nation’s, downturn. From 2006 to 2008, patent
registrations in green technology in Silicon Valley increased 7 percent.
From 2004 to 2008, green jobs increased 24 percent.

A green Silicon Valley would be a very different place than the current one,
which was built on semiconductors and software and is now home to Web
innovators like Google and Facebook.

Factories that once made chips would have to be revamped to make solar
panels, and venture capital firms are unlikely to be able to provide enough
money to build such capital-intensive companies, Mr. Hancock said. Venture
financing of green technology companies slid 37 percent last year.

With green technology, “it’s not whiz-bang software guys in garages, but
utility-scale projects you must do with a federal partner,” Mr. Hancock

Yet Silicon Valley is failing to compete as intensely as other communities
for federal stimulus grants and loans, said Emmett D. Carson, chief of the
Silicon Valley Community Foundation.

Silicon Valley’s poor economic health will affect the nation as a whole,
said Judy Estrin, former chief technology officer of Cisco Systems and
author of the book “Closing the Innovation Gap.”

“Silicon Valley is both a barometer of the rest of the country and a spark
for the rest of the country, and if we don’t protect that innovation culture
here, it’s going to be hard to sustain an innovation culture in the
country,” she said.

February 11, 2010
Copyright 2010 The New York Times Company

Report says Silicon Valley economy sputtering

By BROOKE DONALD, Associated Press Writer

Wednesday, February 10, 2010