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Is Silicon Valley Losing Its Edge?

Is Silicon Valley Losing Its Edge?

America holds some distinct advantages over many developing countries, since it is a stable place where it is relatively easy to start a business and, despite flaws, its immigration policy still welcomes risk-tolerant entrepreneurs. Indeed, immigrants are responsible for starting more than half of all new companies in Silicon Valley in the past decade.

By Sonia Arrison
03/02/11 5:00 AM PT

Many of the world's largest tech companies were started by Silicon Valley entrepreneurs, but that doesn't mean that the startup mecca of the world will remain dominant forever. Instead, some argue that Silicon Valley stands in danger of losing its competitive edge to entrepreneurs in other parts of the world.

Silicon Valley "has become pampered," argues technology journalist Sarah Lacy in her new book, Brilliant, Crazy, Cocky.

Its "entrepreneurial muscles are getting weaker" at the same time as those in the developing world are getting stronger. It's not just India and China that the Valley's technorati should worry about, she says. Places like Indonesia and Rwanda, among others, are full of folks willing to take the big risks that entrepreneurship requires.

Not All Censorship and Copycats

While it's unclear that Indonesia or Rwanda have the type of ecosystems that could build the next Google or Facebook, Lacy's book points out some surprising realities. For instance, while Indonesia has "the largest Foursquare audience, the second largest Facebook audience, and the most Web users per capita on Twitter of any country in the world," it is also a country where "only 3 percent of the population has credit cards."

Rwanda, once a war-torn country, is rebuilding and attempting to position itself as "a clean, well-lit place to do business." Even things that most Americans think they know about developing nations like China and India aren't completely accurate, says Lacy. While most people think of China as all censorship and copycats, it's not really that simple.

For example, Lacy explains how the Chinese company Tencent, which started its business by ripping off the ICQ instant messaging platform, later morphed into a tech giant by pioneering sales of virtual goods for a large market of only-children who were showered with gifts from their families. In the United States, "companies are only now marveling at the idea of selling virtual goods for real cash," Lacy says, "Tencent was doing that back in 2001."

Costly Constraints

Data from Mary Meeker's State of the Internet report reveals this reality in another way: Six of the top 15 global publicly traded Internet companies in November 2010 were in Asia. It's true that enterprising people range over the entire world, but does their existence mean that the Valley should be wary? Since economic growth is not a zero-sum game, it all depends on just how complacent those in Silicon Valley have become -- and also how government policy molds incentives going forward.

America holds some distinct advantages over many developing countries, since it is a stable place where it is relatively easy to start a business and, despite flaws, its immigration policy still welcomes risk-tolerant entrepreneurs. Indeed, as Vivek Wadhwa has pointed out, immigrants are responsible for starting more than half of all new companies in Silicon Valley in the past decade. Not everything is perfect, however, as Lacy notes.

Financial laws like Sarbanes-Oxley have been tough on the tech sector by increasing the costs of being a public company and instead sending dollars that would have been used to build products into the pockets of accountants, insurance salespeople and lawyers. And America is imposing these constraints at a time when other countries are even more eager to compete in global tech markets.

Investment, not Aid

One of the ways that American venture capitalists are reacting to globalization and increased restrictions at home is by investing in emerging markets. Consider that in the same quarter that Google pulled out of China due to censorship issues, Lacy reports that funding from U.S. venture capitalists in that country "increased 30 percent, and half a dozen Silicon Valley-based Web 2.0 companies opened offices there."

Clearly, anti-democratic governments do not seem to be an impediment to the capitalist impulse, and Lacy maintains that that's a good thing.

"Foreign investment needs to take the place of foreign aid," she argues.

She may be right. Teaching people to fish has always been a better strategy than simply giving them a fish. The growth of Internet businesses has given rise not only to entirely new markets, but also to entirely new providers. Silicon Valley -- and American policy makers -- would ignore these realities at their peril.


Sonia Arrison, a TechNewsWorld columnist, is senior fellow in technology studies at the California-based Pacific Research Institute. Follow her on Twitter @soniaarrison.


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