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Press Release · July 17, 2003

Déjà Vu All Over Again? Start-Ups Key To Silicon Valley Renewal

Dynamic Region Retains Long-Term Competitive Edge; Study Recommends Policies to Support Valley in Tough Times

SAN FRANCISCO, California, July 17, 2003 — Just a few short years ago, Silicon Valley was largely responsible for the state’s $12.3 billion budget surplus. Today, it is regarded as the epicenter of California’s recession. Can the region rise again? Silicon Valley’s unique ability to reinvent itself – especially through the formation and nurturing of new firms – is reason for great expectations, according to a new study released by the Public Policy Institute of California (PPIC).

The report, High-Tech Start-Ups and Industry Dynamics in Silicon Valley, examines Silicon Valley’s high-tech economy using two unique longitudinal databases. It finds that technology companies formed after 1990 were responsible for creating nearly all of the region’s job growth between 1990 and 2001. The importance of new firms, with their capacity for creativity and innovation – rather than larger, established companies – alters the usual downturn-inspired debate about business climate, according to author Junfu Zhang, a PPIC research fellow. “Births of new firms in Silicon Valley, and the waves of innovation they bring, are the biggest factors affecting job growth,” says Zhang. “We do find that more businesses move out of Silicon Valley than move in, but this relocation has a fairly small effect on the labor market.”

Why does the momentum surrounding new firms remain strong in Silicon Valley? A high tolerance for risk. Start-ups continue to attract large amounts of venture capital – and they raise funds more quickly than their counterparts in the rest of the country. “On average, new firms in the region complete their first round of venture financing five months faster than the national average, a key advantage in an industry famous for its warp-speed pace,” says Zhang. The report also finds the first empirical evidence that Silicon Valley employees are more likely than those elsewhere to leave firms and start their own venture-capital-backed companies.

Facing growing competition from other high-tech regions and a deep economic recession, public policies that support Silicon Valley’s growth are critical. The study suggests resisting large budget cuts at California’s research universities (which feed the high-tech sector), creating a favorable atmosphere for new companies through tax breaks and other incentives, and considering the vital importance of foreign talent when developing new immigration policies.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett.