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Lessons from Silicon Valley: How Illinois can become a center for innovation and growth

by Jerry R. Mitchell

Living in the midst of one of the greatest economic expansions of all time, with technological innovations like cell phones, unlimited Internet access, and powerful computers available to growing numbers of people, it is natural to assume that Illinois has made the transition to the high-tech Information Age.

Recent studies, however, suggest such is not the case. Indeed, Illinois may be falling further behind other areas of the country, drifting into the wake of such “powerhouse” regions as Boise, Idaho, and Bismarck, North Dakota.

Technology is leading the economic growth in these regions, and thus it is no surprise that policy makers “from Jerusalem to China are trying to clone Silicon Valley." But exactly how regions have gone about this “cloning” to a large degree has determined their success.

Research comparing California’s Silicon Valley and Route 128 in Boston, which had received substantial local and state government subsidies and targeted tax cuts, show that “by the 1990’s, only thirteen of the Route 128 region’s start-ups surpassed $100 million in revenues, as opposed to forty-seven in Silicon Valley.”

Why did the California entrepreneurs succeed at a nearly four-to-one pace? One study suggests that the Silicon Valley entrepreneurs ignored lobbying for various tax breaks or government help, and instead of pursuing steady, predictable growth, they thrived on staying small, nimble, and flexible all of which are discouraged by involvement with government bureaucracies and its layers of forms, inspections, and regulations.

How does this comparison of Boston and Silicon Valley relate to Illinois? An analysis of the top 50 “metro high-tech growth” regions in the country provides the answer. Conspicuously absent is a single Illinois city. Texas leads the list with ten such metro areas; California, six; and Arkansas, Arizona, and Idaho all have two. Even Kentucky and Iowa have at least one. But not Illinois Measured a different way, namely, by looking at how much technology is concentrated in an area, Illinois is once again invisible. Whereas Silicon Valley has an index of technology concentration of 23.6, and Los Angeles a concentration of nearly 7 (with Route 128 coming in third, at 6.3), Illinois doesn’t have a single high tech concentration that would even put it on a par with Rochester, Minnesota, Denver, or Albuquerque.

By looking at “concentration,” or, as Harvard University economist Michael Porter labels it, a technological “cluster effect,” one of Illinois’s problems becomes clear. While a Motorola or Abbott Labs may stand out within a particular metro area, Illinois has not developed the entrepreneurial- support companies that provide these technology “clusters." The advantage of locating in metropolitan areas can be explained by the economic benefits gained from locating in proximity to other factors. First, metropolitan areas provide better air service, telecommunications infrastructure, and large and diverse labor markets. Second, there are distinct benefits to high-tech firms of locating in clusters. Clustering of high-tech firms in the same or similar industries allows companies to interact on a close basis with suppliers, customers, competitors, and other institutions (including universities and research institutes).

More importantly, clustering fosters innovation and high-tech firms are dependent on innovation. Firms in a region can share new ideas and process innovations, particularly between suppliers and customers. A local milieu that encourages and facilitates sharing of information between firms-even competitors-in a region, speeds the innovation process for all firms there. One way this inter-firm learning takes place is through the exchange of workers between firms. While companies may not like labor markets with high turnover, this process does transfer new knowledge and ways of doing things between firms in a cluster.

Most high-tech development emerges from other high-tech growth. Therefore, building clusters of high-tech firms is critical to developing a strong high-tech sector. If an initial group of companies can make it far enough, they begin to spin off additional firms and attract workers, suppliers, and other high-tech firms to the region. In this sense, high-tech growth begets even more high-tech growth. As these companies take the lead, the local business environment becomes more attractive for high-tech innovation. Legal firms, accounting firms, and banks and other financial institutions begin to be versed in what it takes to help high-tech grow. Universities and community colleges develop the curricula and technical capacities to support high-tech. And government creates the quality of life and civic institutions attractive to high-tech companies and knowledge workers.

Moreover, entrepreneurs are more likely to have higher levels of education, and as entrepreneurial start-ups become more important to a region’s economic success, having more knowledge workers increases the odds that an entrepreneurial startup will be successful and turn into a rapidly growing company.

However, as high-tech manufacturing firms mature, continuous innovation becomes less important to their survival and they are likely to place greater emphasis on cost reduction. The focus on lowering costs forces them to locate in lower cost regions.

Isn’t the state that gave us Paul V Galvin, Cyrus H. McCormick, William Deering, LaVerne Noyes, John Deere, Archibald Clybourne, Nelson Morris, Philip Armour, Gustavus Swift, Potter Palmer, Marshall Field, Levi E. Leiter, Marshall Field, Ferdinand Schumacher, George M. Pullman, General Anson Stager, Richard Robert Donnelley, Emil J. Brach, Louis J. Buffordi, Samuel Insull, Hugo Olson, and Sol and Henry Crown, capable of producing any more entrepreneurs? Of course it is . . . under the right circumstances.

Illinois taxes are unfriendly to entrepreneurs. Illinois also has been losing corporate headquarters at a very fast pace which does nothing for creating clusters of companies. Recent loses include Wards, Ameritech, Quaker Oats, Waste Management just to name a few.

Part of the “softness” in entrepreneurship is caused by expectations and attitudes. After all, California has fairly high taxes. But the Silicon Valley entrepreneurs, as the studies suggest, have not as of yet come to view the state capital of Sacramento as the source of their growth. On the contrary, they focus on frenetic competition, often stealing employees and technicians from each other, starting new companies at the drop of a hat, then merging or selling out to a former competitor. Then, they start over again. Research has identified a sharp difference in attitudes between the Silicon Valley entrepreneurs and the “political entrepreneurs” of Massachusetts.

The quickest way to change those attitudes is to reduce taxes and eliminate regulatory burdens so that entrepreneurs’ first thoughts are not about “working” the government system, but out-performing the competition. And it requires hundreds, if not thousands, of small, entrepreneurial firms to generate the dynamics now seen in the high-tech growth areas.

For all their market clout, Motorola, Telabs, Abbot Labs and a few others cannot support high-tech clusters by themselves. If Illinois is to move into the Information Age, it must get serious about reducing regulation, lowering taxes, and ending the “dependency mentality” that many regional entrepreneurs have about government support for their endeavors. During the great tech boom in the late 1990s, every two-bit town wanted to be a high-tech two-bit town. Fairfield, Iowa, christened itself “Silicorn Valley.” Perry, Fla., took the moniker “Silicon Swamp.”

It seems rather quaint now, but each one wanted just a little of the dot-com pixie dust that made the real Silicon Valley, outside San Francisco, one of the wealthiest stretches of land on earth. So did Illinois, aka Silicon Prairie.

Chicago had high-tech flash, and the economic development types considered getting a piece of that flash as the way the city could get beyond the slow-growth, high-unemployment economy that characterized it for decades.

It seemed logical at the time. After all, high-tech firms appeared to be the best way to explosive economic growth. Of course, the technology economy has turned out to be not quite so golden. All of which leaves one big question: How important is digital technology in the development of Illinois? The answer: Maybe not so much in the near future, but quite a lot in the long term.

Venture capital investment data is perhaps the best indicator of high-tech employment; the companies that start small with a few million dollars in investment cash, a handful of employees and a big idea could one day become big companies that employ hundreds. Illinois does not rank very high in providing funding for our entrepreneurs. For there is little or no seed funding for entrepreneurs in Illinois. Our state treasure recently stated in public that the venture money she was responsible for would be measured not on the economic growth it created in Illinois but on its returns in dollars. This means that the funds can be sent out of Illinois by the Venture Capital firms as long as the return back to the state is great.

It’s pretty clear that the high-tech industries are very important in terms of being engines of economic growth for the areas in which they are most prominent. I think they are going to produce a lot of prosperity and high-paying jobs that will be kind of a cycle. High-paying jobs will attract more of this kind of industry. It’s a reinforcing cycle.

High-tech is not one industry, it is many, and each has different requirements and locational patterns. For example, biotech is different from pre-packaged software, which is itself different from telecommunications equipment. As a result, it would be inappropriate to have a “high-tech policy.” Illinois strategy should grow out of its unique industrial structure, economic assets and limitations, and business culture. Therefore, Illinois should develop an in-depth and ongoing understanding of its economy, including how the major economic sectors work and what Illinois economic strengths and weaknesses are. Too often, decision makers think that they already know what’s going on and skip this critical stage in the exuberance to “get on with it.” But this is a critical mistake. Illinois goal should be to “get prosperous.” Getting prosperous means creating higher wage and better jobs, improving quality of life, reducing poverty, and expanding economic opportunities for all of the states citizens.

It is no fluke that Silicon Valley and Boston’s Route 128 are located close to world-class research universities. Good research universities are the fountainhead of the New Economy. But this is especially true if those universities have good science, engineering, and computer science programs and have an entrepreneurial-as opposed to purely ivory tower-orientation. Illinois needs to work to build that.

Business cultures are embedded in larger civic cultures. These civic cultures vary significantly between different parts of the country. People talk about the open and friendly Midwesterners; the entrepreneurial Yankees; the “open-to-anything” Californians. I believe that cultures that do best in the new economy have the following characteristics: people feel they are in it together; risk-taking is accepted and even encouraged; people are encouraged to cross institutional borders; and business, government, and labor trust one another.

While it is hard to quantify and, in some places, even to identify a regional culture that does not mean that they aren’t real. For example, when Joint Venture Silicon Valley formed (a public-private civic economic development organization), one of its stated missions was to overcome a culture of blame. It is hard for governments to change a region’s business or corporate culture. But they can help the region identify its cultural strengths and weaknesses. Government can also recognize and celebrate public and private innovation and support the formation of high-tech business councils to encourage networking and learning.

Illinois can and should pursue high-tech growth. Succeeding in growing, expanding, or attracting high-tech employment will raise standards of living in the region and expand economic opportunity for residents. But doing so will require difficult political choices to be made: governments need to commit to an aggressive path of K-12 school reform; work to reengineer government to lower its costs and improve its quality; enter into real partnerships with the private sector and others to make and implement policy; and focus resources and efforts on improving quality of life to make regions attractive to knowledge workers. The payoffs in the form of more and better jobs I think make such a course worthwhile.

Jerry R. Mitchell

This Entrepreneurship article was written by Jerry R. Mitchell on 2/11/2005

Ryan P. Allis, 20, is the author of Zero to One Million, a guide to building a company to $1 million in sales, and the founder of Ryan is also the CEO of Broadwick Corp., a provider of the permission-based email marketing software and CEO of Virante, Inc., a web marketing and search engine optimization firm. Ryan is an economics major at the University of North Carolina at Chapel Hill, where he is a Blanchard Scholar. [learn more.