Cities and Start-Ups

Amid the darkening economic gloom, perhaps we ought to step back for a moment and examine one of the underlying trends shaping our future: cities.

For a variety of reasons, cities (and, more broadly, regions) have been a hot topic over the last several years. Most obviously, the world is now officially urban, with half of Earth's citizens residing in urban areas. The last half century has also seen the rise of mega-ginormous cities-- the United Nations simply uses the term "urban agglomeration" now to describe urban areas. And, particularly in the United States, East Asia, and Europe, it became increasingly obvious over the past ten or twenty years that certain economic activities were concentrated in specific regions. In fact, one of the major developments in economics since the mid-1970s has been economists' "discovery" of geography (this, along with trade, is Paul Krugman's Nobel-worthy contribution). Robert Lucas, another Nobel laureate, went so far as to say that according to orthodox economic theory, cities shouldn't exist!

So it's by now banal to say that cities are central to humanity's future (although some forecasts are less optimistic-sounding than others), and people have turned their attention to the question of cities and economic growth. How do cities grow? Why do some decline? How can we achieve faster rates of innovation and growth in cities and urban regions?

It seems to be well-established that entrepreneurship is the key to urban economic growth. Indeed, it often seems as if entrepreneurship is coterminous with cities. (This is certainly the case with innovation and creativity: one of my favorite ironies is when economists ask how this or that city can be "made" creative or innovative. For all of civilized history, of course, cities have been synonymous with creativity--economic research today often amounts to telling cities to be more, well, city-like.)

So then the question becomes, how can cities and regions generate greater amounts of entrepreneurship? The stadium strategy is (or should be) discredited as an avenue to growth. Likewise, I've heard evidence that public venture funds have done little to stimulate growth. The idea that research universities are the sine qua non has a little more support, but we can all think of cities that are home to fantastic research universities yet fail to sustain dynamic economies.

For any city hoping to spur entrepreneurship, the obvious example that leaps to mind is Silicon Valley--it seems to be the paragon of a region with positive feedback loops and an amorphous entrepreneurial culture. Paul Graham's February essay even posed the question, "Can You Buy a Silicon Valley? Maybe." It's conceivable, says Paul, that a city could lay out a few hundred million dollars to make start-ups stick around, and it would end up with "a self-sustaining chain reaction like the one that drives the Valley."

Start-ups are a crucial element for any city looking to alter its economic trajectory; it's clear that Silicon Valley has a remarkable ecosystem of start-up churn. It's far from clear, however, that the Valley's success can be achieved simply by copying it's model as it now appears. The roots of Silicon Valley's entrepreneurial churn are not found in generations and generations of start-ups. That's how it is now, of course (with many large companies as well), but it's highly likely that Silicon Valley wouldn't exist as it does today if not for its seemingly un-entrepreneurial beginnings.

At the beginning of the twentieth century (not long after Stanford University had been established), with the economic and military ascendance of Japan, the U.S. Navy and Air Force established strategically important bases in the area. These bases, and World War One, played an important role in pioneering radio electronics, making the region a bastion of incipient electronic expertise. Amateur radio clubs were a local craze for a while. The Pentagon poured money into the region in the 1930s, with electronics at the heart, and talent increasingly migrated there. Frederick Terman, the "father of Silicon Valley," was so important in part because he was a magnet for Pentagon contracts.

Through mid-century, the "innovation ecosystem" consisted of Stanford, the military, and satellite operations of large companies like IBM and Lockheed that populated Stanford Industrial Park. By the 1950s, in fact, this tradition of military funding, big-firm innovation, and university research had generated a critical mass of talent and knowledge. Companies like Litton, Hewlett-Packard, and Varian were also important. The event that really launched the Valley's start-up trajectory was William Shockley's move from Boston to Palo Alto to establish Shockley Labs inside Beckman Instruments. Why Santa Clara County? Two reasons: the growing energy of innovation; and his mother lived there.

Shockley Labs was home to cutting edge research, and in the late 1950s, the watershed entrepreneurship event was the breakaway of eight members of Shockley's research team to found Fairchild Semiconductor, the company that would eventually spawn numerous spinoffs, including Intel. The rest you know.

Start-ups are important--there is no doubting that. But it's not clear that without the research and innovation tradition cultivated by large companies the Valley would have become a hotbed of start-ups. (Cultural shifts also played a role, a subject I won't explore here.) Research universities like Stanford are important, but even in cities without them, large innovative firms play the role of what Heike Mayer calls "surrogate universities," throwing off large numbers of new firms. 

Several of us at the Foundation were chatting earlier today with a professor in Atlanta who told us that Atlanta meets all of the en vogue criteria for entrepreneurial growth: excellent research universities, lots of R&D funding, ample numbers of the "creative class," and new firm starts. Yet the region, this professor has found, utterly fails to hold onto its start-ups and, as a result, will soon face a shortage of innovation. Why?

This post has now run on too long to adequately answer that question, but the Silicon Valley and Atlanta examples, along with the myriad regions that have sought to copy the Valley, illustrate that urban economic growth is much more like a cake recipe than an architectural blueprint.

Comments

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I'm curious. What do you think of Jane Jacobs work on the life of cities?

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Mikko--I'm a huge fan of Jane Jacobs' work. She understood the underlying economic and social dynamics in a way that few others have. And I know it sounds crazy, but it strikes me that there is some overlap in philosophical orientation between she and Hayek.

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