July 12, 2019

YOU DIDN'T BUILD THAT; WE ALL DID:

How the Department of Defense Bankrolled Silicon Valley: THE CODE: Silicon Valley and the Remaking of America By Margaret O'Mara (Stephen Mihm, July 9, 2019, NY Times)

Shockley turned out to be a boss from hell, and, in a legendary rupture, a handful of his most talented employees -- the "Traitorous Eight" -- parted ways from him and founded Fairchild Semiconductor. Fairchild became the Valley's ur-corporation: Its founders subsequently launched many more storied firms, from the chip maker Intel to the venture capital firm Kleiner Perkins.

O'Mara argues persuasively that Fairchild "established a blueprint that thousands followed in the decades to come: Find outside investors willing to put in capital, give employees stock ownership, disrupt existing markets and create new ones." But she makes clear that this formula wasn't just a matter of free markets working their magic; it took a whole lot of Defense Department dollars to transform the region. Conveniently, the Soviets launched Sputnik three days after Fairchild was incorporated, inaugurating a torrent of money into the tech sector that only increased with the space race.

Something similar happened again in the 1980s, when Ronald Reagan's Strategic Defense Initiative and Darpa's Strategic Computing Initiative -- aimed at threats posed by the Soviet Union and Japan, respectively -- funneled even more resources into the region's companies. Defense money, O'Mara observes, "remained the big-government engine hidden under the hood of the Valley's shiny new entrepreneurial sports car, flying largely under the radar screen of the saturation media coverage of hackers and capitalists."

But it was how these defense dollars got distributed -- via Stanford and a growing number of subcontractors in the region -- that mattered as much, if not more. O'Mara argues that the decentralized, privatized system of doling out public contracts fostered entrepreneurship. So, too, did Congress, which passed the Small Business Investment Act in 1958, offering generous tax breaks to the kinds of start-ups proliferating in the shadow of Stanford.

These same factors prevailed at other aspiring tech hubs, notably Route 128 outside Boston, which housed several iconic firms, including Wang and Polaroid. Yet California eventually bested Route 128, and not just because the state had a clear edge when it came to winter weather.

The sources of its success, O'Mara contends, had to do with a host of regulations and legal decisions that governed how firms in the Valley did business. Foremost among these was California's longstanding prohibition on noncompete clauses. This made it easy for employees to job-hop and share news of the latest innovations without fear of reprisal or recrimination. The turnover was staggering at Valley start-ups compared with established corporations such as I.B.M. on the other side of the country. But the creativity unleashed in the process left other regions far behind.

No less important was the passage of the Immigration and Naturalization Act of 1965, which unexpectedly led to an influx of newcomers, many of them skilled in the technical fields that are Silicon Valley's bread and butter. Between 1995 and 2005, more than half the founders of companies in the Valley were born outside the United States.


There's a hilarious EconTalk where the normally data-driven Russ Roberts simply can't process the determinative role government played in these tech businesses.

Posted by at July 12, 2019 6:49 AM

  

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