Silicon Valley in Danger of Losing Competitive Edge

Business Week and others are reporting that Silicon Valley is in danger of losing its competitive edge

Silicon Valley, facing a slowdown in innovation and a shortage of funding, may lose its competitive advantage to emerging U.S. technology hotbeds such as Huntsville, Alabama, and Washington, D.C., a study found.

A decline in patents, venture capital investment and incomes, along with the loss of about 90,000 jobs between the second quarters of 2008 and 2009, could prevent the region from returning to its previous levels of economic growth, according to an annual survey by the nonprofit groups Joint Venture: Silicon Valley Network and Silicon Valley Community Foundation.

Silicon Valley received $6.7 billion in federal procurement spending in 2008, about 1.3 percent of the total, according to the report. In 1993, that figure was more than 2 percent.

“If you look at the history of Silicon Valley, we benefited in the past from defense spending and other spending,” Carson said. “It didn’t happen because of a garage — that’s a great mythology — but it happened because people took advantage of federal investments and what that meant for offshoots.”

In 2009, the amount of venture capital dollars invested across the country declined 37 percent to $17.7 billion, according to the National Venture Capital Association

Index of Silicon Valley 2010 (76 page pdf)

Silicon Valley’s economic and innovation engine has cooled off.

• The number of patents in Silicon Valley declined (though less than one percent from last year), while the total number of U.S.
patents decreased by 2.6 percent. Despite the decline, Silicon Valley’s percentage of patent registrations in California and the U.S.
increased between 2007 and 2008. (see page 23)
• Total venture capital investment was down in 2009 (though an uptick in activity was reported in the third quarter). Growing areas
of investment are in Industrial/Energy, Media & Entertainment, Biotechnology, and Medical Devices. (see page 25)
• Office vacancy rates are at an all-time high since 1998. The continued decrease in demand for commercial real estate combined
with the creation of 1.7 million square feet of new commercial space have driven commercial vacancies up 33 percent in 2009
over 2008. (see page 52)
• But the region continues to birth and attract new business establishments. Between January 2007 and 2008, the region witnessed
a net gain of approximately 9,500 establishments, twice the average annual net gain over the whole period.

Among key findings:

• Silicon Valley is increasingly connected to its global partners, and the region grows increasingly more dependent on foreign talent—particularly for filling science and engineering positions.
• Inflows from China and India continue to rise. Investment and collaboration between the Valley and those two nations is also on the rise, but India and China are experiencing rapid economic growth and as they do opportunities in those home countries will slow the flow of talent here.
• U.S. and California investment in higher education is declining at a time when talent becomes still more important to our region.
• Venture capital investment is shifting away from software and semiconductors and into biotechnology, energy, medical devices, and media. The level of investment continues to decline, and on the whole venture capitalists have not realized significant returns for the past decade.
• California state policy has become a hindrance to our innovation potential, not only because of our failure to invest, but also because our government is not addressing important problems.
• Patterns in federal procurement suggest Silicon Valley is losing ground to other states.