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To what extent does the success of Silicon Valley and Route 128 region enable us to study industrial organisation. These two regions as industrial districts are the leaders in the electronics and computer industries since the post-war period. Sharing similarities in different aspects allow evaluation of their successes and to examine the causes of the divergence in performance between two regions in 1980s. The internal factors as well as the external institutional supports which were account for the superior performance of Silicon Valley over Route 128 during the 1980's and early 1990's will be discussed.
Marshall strongly believes there are trust and co-operative relationship between individual firms whereas conventional economists see this as species of collusion. Silicon Valley is considered as Marshall's industrial district where group of small individual firms are located within an area and specialised in different stages of production process. The environment not only encourages competitions between firms at the same stage of production process, as well as cooperation along the supply chain. Within industrial district, there is a pool of highly skilled labour are available, so the aptitude of industrial work could be generated and act as a medium to facilitate communication in the community. Public facilities within the district are places where people group together and share their ideas and thoughts in their leisure time, and this inter-individual relationship known as 'industrial atmosphere' according to Marshall. He suggested that tacit knowledge can be transmitted in the industrial atmosphere, which promotes innovation and this is essential for the growth of industrial district.
The case study of Silicon Valley and Route 128 are often being compared as they were expected to perform in a similar way. Firms in both regions are specialised in high-technology field, where Silicon Valley became the centre of semiconductor industry and Route 128 focused on the production of minicomputers. The geographic location of Silicon Valley and Route 128 are close to the world-class research universities, Stanford and MIT. During the 1950s and early 1960s these two regions were heavily relied upon the military spending, which assists the growth of electronics market and firms in the region. By the mid 1980s, reduction in defence spending and challenges from the Japanese competition causes the economic downturn of these two regions. Their performances have diverted significantly since then.
Saxenian, who is the main contributor to the study of Silicon Valley and Route 128, argues the following would be the reasons for the variation. Firstly, there are large number of talented technicians and engineers working and living in both regions as in industrial districts. However, Saxenian found that the behaviour and attitude taken by the labour market in these two regions are different. Employees in Route 128 tend to be more risk-averse and this relates to the industrial structure, where few large vertically-integrated firms dominated the region. As a result, people are locked into structured companies instead of start up own business, as there is lack of venture capital provided and so they concern about their pension and ability to get a new job if they fail. People in Silicon Valley are more willing to take risks and experiments than those in Route 128, as failures are widely accepted and seen as part of the learning process. At worst they could get a new job in another company since their loyalties are to the region and advance technology rather than to individual firms. As if an innovative project get abandoned, then it is not surprising the innovator will leave the company the other day and establish a start-up in the region with the support of venture capitalist, i.e. Fairchildren. This is an institution formed by Shockley's eight ex-employees and it plays a key role to the Valley's development. In the late 1950s, Fairchildren organised funds for investing in start-ups, the success of these start-ups including Intel and Apple created massive capital gain and so part of these gains were reinvested back into the venture capital funds. This self-reinforcing new firm formation process is then became one of the key elements for the success of Silicon Valley. Kenny and Burg's study found that Silicon Valley is path-dependence, as if Shockley located its business in Route 128 instead, then Fairchildren would be originated there and so the process could made the performance better than Silicon Valley.
Silicon Valley has a comparative strong social and professional network than Route 128. Local firms in Route 128 might find difficulties to cooperate with MIT because MIT orientated itself towards established corporations and Washington, whereas Stanford maintains their collaborative relationship with established firms as well as small, local start-ups. Stanford could identify the direction for future research through interacts with local businesses; the provision of industry-related courses could keep engineers up-to-date with advance technology and provide opportunities to build up social networks. Various forums, where vast amount of technical as well as market information and gossips are exchanged across boundaries, are organised in Silicon Valley. Angel (1991, cited in Powell) views the mobility of people and information exchange occurred within Valley as the 'innovative milieu', as personal contacts are the best way to spread out the tactic technology knowledge. People moved from Route 128 and start up a business in Silicon Valley found that one of the differences is the volume of information exchange outside a company is incomparable, and the social network in Route 128 is more formalised.
Since the economic crisis in the late 1960s, the industrial organisation changed. Vertically integrated structure became a prevailing form rather than structures like industrial district. As a consequence, the management of dominant firms decided to adopt a highly vertically integrated structure and shift to mass production in order to stay competitive in the market. But according to Saxenian, due to the change in organisational structure, both regions suffered economic downturn in the mid-1980s (Kenny 1999). Firms in Silicon Valley were soon realised the vertically integrated structure has lead to the lost of close relationship with its customers and their flexible supplier networks. Hence, they switched back to the flexible, decentralised structure. However, firms in Route 128 were not able to recover from those losses as vertical integration was in place originally.
In Saxenian's work, the success of Silicon Valley has been attributed to the small firm networks. As those small specialised firms are linked together by their close collaborative relationship and form a decentralised system. Gary argues that Saxenian ignored the importance of large firm's leadership which also contributed to the success. Their research shows the structure of Silicon Valley is not dominated by clusters of small firm as Saxenian described, there is certain level of power relationship exists as in other regions. The formation of power relationship is because additional resources available allow large firms to dominate the market. Large firms would collaborate with small firms through various forms, such as subcontracting, in order to keep the flexibility of production process. Governance of the collaboration is based on trust between two parties, which is built by their loyalties to advance-technology and region. Although there are different prospective towards the success of Valley, Saxenian and Gary are both agreed the existence and importance of close collaborative relationship between firms in Silicon Valley.
The nature of product which these two regions are focused on relates to the divergence in performance. In between semiconductor and minicomputer, the potentiality of semiconductor is much greater than minicomputer. The semiconductor as a component evolved from transistor to integrated circuit, and the process increases its applications to the extent that semiconductor became a fundamental input to electronic function. The application of minicomputer as an assembled machine is comparatively more limited. The minicomputer market is stagnated in the early 1990s because of the competition from workstations. Firms in Route 128 including DEC were affected and many start-ups collapsed. Saxenian examined that the introduction of workstation during the 1980s lead to the decline of Route 128 economy, because firms was unable to foresee the future potential of workstation and take advantage from it, in addition, the institutional and culture rigidities constrained the ability to respond to the market change. Despite the economy of Silicon Valley was also affected by Japanese firms entering the electronics industry during the 1980s, the economy diversified its resources to the production of semiconductor, microprocessor and software development.
As mentioned earlier, both regions were the suppliers of US defence sector. Gary et al. (1999) claim that Saxenian neglected the role of defence sector in Silicon Valley. As they examined the regions were not merely benefits from military spending in the early stage of region's development, but Silicon Valley and Stanford together received a large portion of federal R&D funding for aerospace, computer and electronics industries even though the reduction in defence spending in late 1980s. The performance of Route 128 is hugely influenced by the cutback, since the region relied on the spending in a greater extent than Silicon Valley and this was happened at the time when Route 128 was suffering the crisis due to the introduction of personal computers. Another factor which has been underemphasised in the study of Valley's success is the significant flux of Foreign Direct Investment into the region since 1980s. To the prospective of foreign producers, setting up a branch in Silicon Valley could acquire up-to-date market information as Marshall said 'secrets of industry are in the air' and they could take immediate respond to market changes. Furthermore, these foreign producers can gain access to manufacturing facilities and distribution channels by acquiring a local firm, and also be able to recruit talented employees from the pool of highly skilled labour. But Gary's research showed that local firms are not able to build up a close relationship with these foreign firms, as most of the trades are done with their parent corporations instead.
In summary, there are many factors accounts for Valley's success over Route 128, even though they share similarities to some extent. The region's cultural and structural differences have an effect on the labour market in terms of mobility and attitude towards risk-taking. The decentralised structure of Silicon Valley creates an environment for collective learning through forums and networks of firm and local institution. Levels of collaboration between institutions is depends upon their willingness to cooperate, as in this case Stanford and MIT took different approaches. The potential of semiconductors and flexibility of Valley's firms enables them to overcome the crisis. The whole story would be different if Kenny's hypothesis is true and the development of Silicon Valley is path-dependent.