The Lessons of Silicon Valley: A World-Renowned Technology Hub

By: Gabrielle Athanasia

The world’s preeminent hub for technology, Silicon Valley is a byword for innovation. Today, it is home to the headquarters of many of the world’s largest high-tech corporations, including more than thirty businesses in the Fortune 1000 as well as thousands of promising startups. Further, Silicon Valley accounts for one-third of venture capital investment throughout the nation.

But Silicon Valley itself came into being through a curious series of events and happenstances. A key question for policymakers seeking to develop new technology dynamos is to consider whether and what elements of this experience can be replicated.
 
A Tradition of Entrepreneurship and Research

Located in Santa Clara Valley in California’s San Francisco Bay Area, Silicon Valley got its nickname from journalist Don Hoefler in a 1971 Electronics Magazine article that chronicled the region’s newfound preeminence in the business of semiconductors, for which silicon is a prominent ingredient. While the semiconductor industry arose in the 1950s, Silicon Valley’s success is rooted in the establishment of Stanford University in 1891. Leland Stanford, a leading entrepreneur of the 19^th century who made his fortune in railroads, bought an 8,000-acre property in Santa Clara Valley upon which he then built Stanford University.

By the time of Stanford University’s founding at the turn of the century, the San Francisco Bay Area had witnessed an influx of entrepreneurs and nouveaux riches who had profited off the California Gold Rush of the mid-1800s as well as the increased trade of goods with East Asia. New money and a steady flow of ideas from across the nation and the world soon gave San Francisco a unique culture that prided entrepreneurialism. Stanford University benefitted from this zeitgeist to become a significant nexus for the region’s innovation and entrepreneurship by the mid-1900s.
 
Frederick Terman’s Impact on Stanford University Industry

Leadership also mattered in the evolution of Silicon Valley. In 1946, Frederick Terman became Stanford’s Dean of Engineering. Dreaming of invigorating the West Coast’s electronics industry, Terman worked to strengthen the university’s electronics and innovation programs. Terman developed new administrative guidelines for Stanford’s research: all sponsored research was to benefit the educational mission of the university, would pertain to the specific interests of faculty members, and would be carried out by both students and faculty. Globally, this development coincided with the end of World War II- which left the manufacturing capacity of other advanced economies in tatters, but from which the U.S. emerged stronger than before.

During the Korean War of the early 1950s, the university began to receive significant funding from the Department of Defense for its work on traveling-wave tube (TWT) amplifiers and high-power klystron studies. Capitalizing on Stanford’s expertise, companies such as General Electric and Sylvania set up microwave tube divisions near the university campus, often hiring Stanford faculty and graduates to staff their facilities. By 1960, about a third of the country’s TWT business was located next to Stanford’s campus. While Terman’s tenure as Dean of Engineering ended in 1955, Stanford experienced unprecedented growth, reinforced by substantial federal investments in electronics starting in the 1950s related to the Cold War.  

The Downfall of Shockley Semiconductor and the Rise of Fairchild

Many historians credit Frederick Terman for introducing the nascent semiconductor industry to what would become Silicon Valley. Terman penned a letter to William Shockley, a pioneer in the creation of the first transistors, inviting him to participate in independent research and development activity in transistors near Stanford. Transistors, new “semiconductor” devices that can control or amplify electric signals, began to replace other signal processing technologies at the time and three of its inventors went on to win the Nobel Prize in Physics for the invention.

Today, however, many give credit to Shockley himself as a key figure in the rise of the semiconductor industry on the West Coast. Swayed by the promise of research and development activity in transistors near Stanford, Shockley left Bell Laboratories where he was working to start his own company, Shockley Semiconductor, in a small farming town outside of San Francisco. The company quickly dissolved when all eight of Shockley’s employees resigned on the same day due to Shockley’s incompetence as a manager.

This group of engineers, which included Gordon Moore, founded Fairchild Semiconductors in 1957 with funding from Sherman Fairchild, head of the prominent electronics firm, Fairchild Camera & Industry. Fairchild Semiconductor’s earliest customers were federal agencies, including the Department of Defense and NASA. The business was immensely successful: by the end of their third year, their annual revenues were over $20 million and reached $90 million annually by the mid-1960s.

While the success of Fairchild Semiconductors was impressive by itself, its greatest contributions were to the surrounding area. Over the years, many of its engineers and managers left the company to form new startups in the semiconductor industry. In 1980 alone, Fairchild Semiconductor gave birth to over fifty new companies throughout Silicon Valley. The legacy of this gradual exodus is what we know as Silicon Valley today. In 1970, semiconductor businesses in the Valley employed about 12,000 people. Today, about 70% of the over 130 Bay Area companies trading on the NASDAQ or NY Stock Exchange can be traced back to the founders and employees of Fairchild.
 
A Victim of its Own Success

Silicon Valley has been the preeminent worldwide hub for technological innovation of the last several decades. Beyond its role in the history of semiconductor chips and computers, the area has a remarkable concentration of talented individuals, high-tech research universities, corporate R&D laboratories, and the largest concentration of venture capital funding in the nation. Innovators from the region have not only commercialized new, groundbreaking products, but have pioneered entire new industries. The technological advances spawned by Silicon Valley’s brightest minds have played a significant role in furthering the United States’ status as a global technology leader.

Yet, while Silicon Valley has remained a synonym for innovation and tech-savviness for decades, will this remain so in the generations to come? Despite being the world’s consummate idea of a “tech hub,” its growth is unsustainable. The San Francisco Bay Area’s increasing unaffordability and declining quality of life means that the Silicon Valley tech industry’s growth has become detached from the development of the local community and workforce.

As the Bay Area struggles to find ways to counter its epidemic of homelessness, growing housing unaffordability, and traffic congestion, it is important to take stock of what Silicon Valley does right, but also what it does not. While some of the nation’s top minds still design the next smart phone or make plans for the “metaverse” in the region, it is time to consider whether the Silicon Valley model has run its course. The artificial intelligence (AI) revolution will likely deliver big changes, but it is unclear whether these will emerge mostly from Silicon Valley or other up-and-coming innovation clusters across the globe. 
 
The Silicon Valley Paradox

As its distinctive history shows, the much-desired Silicon Valley model cannot be artificially replicated. A haphazard combination of gold rush prospectors, shipping magnates, and railroad tycoons set on building a college in a quiet valley in central California created a focal point of microelectronics research and production, funded generously by the federal government. These organic developments are also the source of the region’s poor infrastructure and layout, and perhaps also the source of its inequality. As the global technological competition of the twenty-first century heats up, Silicon Valley will face the ultimate test as to whether it can sustain its reputation as the world’s most famous innovation hub.
 
Gabrielle Athanasia is a Program Coordinator and Research Assistant with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, DC.

The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).