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Panel Detail:
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Best Places: Where Are the New Silicon Valleys?
Wednesday, April 2, 2003
11:45 AM - 1:05 PM


Concurrent Session

California State Controller Steve Westly, right, talks about his state's attributes for locating a business. Other panelists are, from left, Ross DeVol of the Milken Institute, Ram Gupta of PeopleSoft, Bruce Karatz of KB Home, and Navi Radjou of Forrester Research.

Speakers:

Ross DeVol, Director, Regional Economics, Milken Institute

Ram Gupta, Executive Vice President, Products and Technology, PeopleSoft

Bruce Karatz, Chairman & CEO, KB Home

Navi Radjou, Senior Analyst, Business Applications and Services, Forrester Research, Inc.

Steve Westly, Controller, State of California


Moderator:

Rich Karlgaard, Publisher, Forbes

Summary:

The overarching difference between the major economic centers of the industrial age and those of the 21st century is that geographical location is not of crucial importance now as it was then. While during the industrial age economic success was directly tied to ports and natural resources, success in today′s economy is most directly tied to the region′s ability to grow, retain, and attract human capital. While Los Angeles, New York, Washington D.C., and Silicon Valley have been the major hotbeds in the post-industrial age, they — especially Silicon Valley — have had the misfortune to experience the first ever "services-led" recession. Silicon Valley particularly, is plagued by high rates of unemployment, currently hovering around 7 percent, though most troubling is the hidden 20 percent unemployment rate among the Valley′s executives. Furthermore, vacancy rates among the Valley′s office sector are in the millions of square feet, an aggregate square footage larger than the entire stock of office real estate in Toronto, Canada. In spite of such sobering realities, this is not the first time Silicon Valley has been through a down cycle; though perhaps the lessons learned will prove beneficial not only to Silicon Valley but also to other regions that aspire to imitate its success.

Ross DeVol advanced the discussion by introducing the Institute′s annual release of the Best Places to Do Business Index. With it, DeVol made a case in stating that future Silicon Valleys must include sustainability in its economic practices in order to be successful. While joint investment in research and development has proven to be necessary, it is hardly sufficient. Investment in R&D must be coupled with investment in human capital and entrepreneurial capacity. Of most importance, according to DeVol, is a region′s ability to grow, retain and attract the creative talent that fuels economic growth in a knowledge-based region. The leading global regions to keep an eye on in coming years are San Diego, California; Austin, Texas; Cambridge, England; Bangalore, India; and Shenzhen, China, he said.

Bringing the discussion back to Silicon Valley, Ram Gupta described the region as "a magical place where dreams can come true." Consistent with DeVol′s argument, Gupta acknowledged that the heartbeat of Silicon Valley lies not in its research parks or world-class universities, but in the people that walk the halls of these places. Due to the two major trends affecting Silicon Valley — globalization and the economic downturn — Gupta was quick to point out that people need not be in Silicon Valley to take advantage of its research and innovation. As a result, American leaders must be very careful not to "fall asleep at the wheel" given current and potential international competition for the products, services and human capital flocking to and from Silicon Valley. According to Gupta, special attention must be paid to countries like Russia, Israel, China, India, and Brazil that are "full of talented, hard-working, bright people ready to rock n′ roll."

Bruce Karatz raised the constraints and challenges posed by a real estate industry in California that has not been able to build enough homes to sustain its population. According to Karatz, in the mid-1980s, the industry as a whole built an average of 160,000 homes per year. Currently, the industry is building roughly 30-40 percent less homes per year. Karatz doubts the industry will be successful in catching up to its mid- 1980s performance. According to Karatz, this phenomenon, coupled with high incomes, is what has driven real estate prices through the roof in major California markets. A theory posed by Karatz is that continuous population growth will force the real estate industry to turn to building homes in the inner regions of the state. Such action, said Karatz, must then lead us to break ground on major and multi-million-dollar mass public transportation projects throughout the state.

Given Karatz′s proposition of inland real estate development and a mass transportation system, Navi Radjou responded positively to the technological possibility of a remote office. With increasingly faster and more sophisticated technologies, it is only a matter of time before the American employee splits the work week between office and home. With that said, Radjou stood in full agreement with the notion that geography matters less and less than in previous times. On a global perspective, Radjou reminds us to keep an eye on South Korea, China, and Southern India as possible "next technological frontiers."

With all the talk about international possibilities, Steve Westly made a strong case for Silicon Valley. Perhaps the most important success factors for Silicon Valley are its research universities, a culture of accepting and embracing risk, local heroes and publications that promote them, the ability to make lots of money, and its international intellectual/capital migration from all corners of the world. Risking failure is a key element of Silicon Valley′s fabric. According to Westly, it is much like moving to Detroit if you want to be the best car manufacturer. If one wants to be the best stock broker, he moves to Wall Street. If one wants to be the best actor, he moves to Hollywood and if one wants to be the best entrepreneur, he moves to Silicon Valley. A cause for concern, according to Westly, is the possibility of a slow transition by Silicon Valley should the technology industry undergo a structural shift where another region achieves critical mass and resources re-allocate accordingly.

Rich Karlgaard, panel moderator and publisher of Forbes magazine challenged the panel by stating that in spite of it superb technological and engineering superiority, Silicon Valley remains a phenomenon of capital markets. Silicon Valley is, by far, the quickest region to launch an initial public offering (IPO). But what if there are no more IPOs? What if the notion of profitability was required by those holding the purse strings before lending money?

Gupta strongly agreed that once the dust of this economic downturn settles, profitability will be the key dealmaker. In addition, according to Gupta, Americans in general must not make the grave mistake of ignoring the fact that there are people offshore whose governments are spending billions of dollars to create knowledge-based economies. These people are not only hard-working, talented, and highly educated, but they are also willing to work for one-tenth the salary their American counterparts demand.

In closing, panel members provided regional development insight that may not be so easily identified. Ross DeVol and Rich Karlgaard urged the audience to pay special mind to smaller, college towns like Madison, Wisconsin, whose creative talent and existing resources have arguably not been channeled most efficiently as of today. Ram Gupta urged us to pay special attention to the lessons taught by the history of development and human capital. Bruce Karatz pointed to regions with high densities of Hispanic populations such as the cities and towns of the Rio Grande Valley in Texas. Navi Radjou advised us that recreating Silicon Valley would be nearly impossible. And Steve Westly ended by saying that what makes Silicon Valley successful is the fact that it welcomes talent from all over the world; that the day Bangor and Shenzhen learn how to imitate this practice is the day they will become extraordinary.

Background Info:
2002 Forbes-Milken Institute Best Places Ranking
Milken Institute Review - Book Excerpt - Clusters of Creativity
State Technology and Science Index: Comparing and Contrasting California
2001 Knowledge-based Economy Index
Blueprint for a High-Tech Cluster: The Case of the Microsystems Industry in the Southwest
Knowledge-Value Cities in the Digital Age
America's High-Tech Economy: Growth, Development and Risks for Metropolitan Areas
The Impact of September 11 on U.S. Metropolitan Economies
Manufacturing Matters: California’s Performance and Prospects
The Economic Contributions of Health Care to New England



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