Nano-economics & the Wealth of Regions. Steven Klepper Carnegie Mellon University

Nano-economics & the Wealth of Regions Steven Klepper Carnegie Mellon University

Overview Four extraordinary industry clusters How happen? Nano-economics Dissect evolution of industries from start for clues Conventional view Security in numbers All firms benefit from clusters New theory Involuntary organizational reproduction & inheritance Conduit for key tacit knowledge Novel policy implications

Silicon Valley Great Modern Cluster California Santa Clara County Tiny part of CA and US Name from Semiconductor Industry

Evolution of Silicon Valley 60 50 Silicon Valley Semiconductor Market Share of U.S. Firms 128 Entrants in SV, 1957-1986 40 30 20 Santa Clara Population 1950 =.3 million 1980 = 1.3 million 10 0 0% 1950 1960 1970 1980 1990 2000

Two Earlier Great Industry Clusters Detroit, Michigan and Akron, Ohio

Detroit & Automobiles Detroit Auto Share 90 80 70 60 50 40 30 20 10 0 113 MI Entrants w/in 100 miles of Detroit, 1901-1924 0% Wayne County Population 1900 =.3 million 1930 = 1.9 million 1895 1900 1905 1910 1915 1920 1925 1930

Akron & Tires 80 70 60 50 40 30 20 10 0 Ohio Rubber & Tire Share 102 Ohio Entrants w/in 100 miles of Akron, 1901-1924 Summit County Population 1900 = 70,000 1930 = 350,000 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940

Intriguing Story of Development Bangladesh History Independence from Pakistan in 1971 Nationalization of industries Densely populated High illiteracy One of the poorest nations Rampant corruption Political unrest Natural disasters Organized labor

GDP (PPP) Per Capita Total Export ($ million) Bangladesh Grows 5% annually from 80s! 2000 1800 1600 1400 1200 1000 GDP PPP Per Capita Export Bangladesh 8000 7000 6000 5000 4000 The Miracle of Cotton Garments Before 1978 no industry Now 78% of the country s exports # 3 world exporter 800 600 400 200 0 1959 1964 1969 1974 1979 1984 1989 1994 1999 Year 3000 2000 1000 0 4,500+ factories 80+% in Dhaka

What Do the 4 Clusters Share? 300 272 250 200 150 100 50 U.S. Automobile Industry Exemplar of Shakeouts 9 0 1890 1900 1910 1920 1930 1940 1950 1960 1970 Traced evolution of autos & tires to study shakeouts Every entrant, entry & exit dates, base location No new ideas about why their clusters formed

Seeds of a Theory First great firm: Olds Motor Works Headed by Ransom Olds Ransom Olds the schoolmaster of Motordom Many famous auto men worked for him Firms involuntarily give birth to new firms Better firms more fertile, spinoffs better Spinoffs don t venture far geographically Buildup of firms around great early leaders

What to Expect & Look For Great early leader(s) in clusters Clusters capture growing share of industry output via spinoffs Clusters have high % spinoff entrants Spinoffs are the key performers in clusters Especially ones with right pedigree Better firms have more & better spinoffs Inheritance of tacit knowledge Spinoffs in clusters are indigenous Spinoffs make the region, not the region make the spinoffs Different from the outset

Track all firms Empirical Challenge Year of entry & exit Base location Identify periodic leaders Track heritage of all firms Especially new ones Identify organizers = founders Trace their work history

Making Nano-economics Work Autos first had all (700+) firms, annual leaders Standard Catalog of American Cars Tires next had all 600+ firms, not periodic leaders Restricted to 126 in Ohio, 1901-1930 Guido Buenstorf, Ohio fieldwork Semiconductors: great modern SV cluster Firms: Sales > threshold, 1974-2002 Silicon Valley Genealogy (through 1986) 99 core entrants through 86: backgrounds of 92 (59 in SV) Bangladesh (field work by Romel Mostafa) Determined backgrounds of 664 entrants, 78-88 Traced careers of126 workers of great initial success

Spinoffs in the U.S Clusters Great early firm Autos Olds Motor Works in Detroit Tires Goodrich in Akron Semiconductors Fairchild in Silicon Valley Spinoff driven growth 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Spinoffs as a Fraction of all Entrants Semic Leaders SV Semic Leaders Autos Detroit Elsewhere Autos Els ewhere Tires Akron Tires Elsewhere in Ohio

Changing of the Guard: Autos & Semiconductors Early Auto Leaders Pope, Locomobile Olds Motor Works/GM Cadillac/GM Jeffery/Nash Later Top 10 Ford Reo Buick/GM Maxwell-Briscoe/Chrysler Willys Studebaker Brush E.R. Thomas-Detroit/Chr. Hupp Hudson Dodge/Chrysler Chevrolet/GM Durant Motors Early Semiconductor Leaders GE, RCA, Raytheon, Sylvania, West.,Philco Motorola Texas Instruments Fairchild Later Top 10 Signetics Analog Devices AMI National Harris Intel AMD Mostek Micron Technology VLSI Technology LSI Logic

Autos & Detroit Firm Fertility Olds, Ford, Cadillac & Buick/GM 41 descendants: 62% of spinoffs in Detroit Ohio tire producers & Akron Goodrich, Goodyear & Firestone 3 of big 4 13 direct, 9 indirect descendants: 52% spinoffs w/in 100 miles of Akron Silicon Valley semiconductor producers Fairchild spawned Intel, National, AMD & 11 more 31 direct descendants: 55% of SV producers 14 indirect descendants: 25% of SV producers

Indigenous Spinoffs in U.S. Clusters Silicon Valley 53 of 56 spinoffs from SV Detroit area 50 of 54 from Detroit area Akron (Summit County) 13 of 14 from Akron

Region Make the Firms or Firms Make the Region? % Entrants Initial Capitalization > $300K 20 18 16 14 12 10 8 6 4 2 0 45 40 35 30 25 20 15 10 5 0 Detroit Spinoffs Non-Detroit Spinoffs Detroit Startups Non-Detroit Startups Akron Spinoffs Non-Akron Spinoffs Akron Startups Non-Akron Startups

Cotton Garments in Bangladesh Desh & Daewoo 126 workers: 6 months in S. Korea Learned about assembly line production 59 of the best entrepreneurs hired the best of the workers Diversifiers.15 more likely to hire College graduates.12 more likely to hire More than doubled size of firms by 1995 Secondary diffusion: repeated on lesser scale

What the 4 Clusters Have in Common All emanate from one or a few seeds Employee movement propagates the seed Spinoffs stay close to home Growing % industry activity for many years Cluster performance distinguished mainly by spinoffs, especially of right pedigree Generate enormous regional growth

Policy (1) Most important educational institutions are not schools but firms But will naturally resist playing this role Policing offenders In U.S., limiting trade secrets litigation Creating culture where defections are acceptable Maybe even celebrated

Policy (2) Mobility, mobility, mobility Not just of founders, but followers Third or more initial recruits from prior employer Get rid of impediments Employee non-compete clauses in U.S. Defined benefit pensions tied to years of service Favorable seniority rules Capital gains taxes

Policy (3) Artificial flowers of limited value Limited security in numbers Cluster benefits not prominent Bringing together firms in an industry cluster unlikely to work Need spinoffs to drive clusters

Plant a seed? Policy (4) Semiconductors & the U.S. military Taiwanese semiconductor industry

Making the Impossible Possible Mantra of Hans Rosling, Swedish professor of global health Growth of least developed countries occurring TED video: dramatizes by trick of swallowing a sword

Speeding up the Process Faaland and Parkinson (1976) Bangladesh represents the world s most difficult problem of economic development if the problem of Bangladesh can be solved, there can be reasonable confidence that less difficult problems of development can also be solved. Can we perform this magic trick again? My findings offer some hope answer is yes Just need a seed and mobility, mobility, mobility

Survival of Detroit Spinoffs Distinctive 1 0.1 0.01 Detroit Spinoffs Non-Detroit Spinoffs Detroit Startups Non-Detroit Startups 0.001 0 20 40 60 80

Survival of Akron Spinoffs Distinctive 1.00 0.10 Akron Spinoffs Non-Akron Spinoffs Akron Startups Non-Akron Startups 0.01 0 20 40 60 80

Leading Spinoffs & Disagreements Semiconductors Technology Shockley & silicon transistors--fairchild Fairchild & ICs Amelco & Signetics AMD & CMOS--Cypress Rewards/incentives Fairchild & National Union Carbide & Intersil Acquisitions, new CEOs Fairchild & AMD Synertek & VLSI Autos much the same story

Disagreement Theory of Spinoffs Spinoffs result from unrecognized good ideas Better firms have better employees w/better ideas So better firms have more & better spinoffs Spinoffs distinctive performers Firms are formed of like-minded people No chance of spinoffs initially Information accumulation eventually eliminates disagreements So spinoffs more likely at middle age Acquisitions influence of decision makers Larger disagreements after acquisitions Spinoffs provide outlets for dissidents w/ good ideas Financed by better judges of ideas/talent

Questions About Spinoff Process What do firms inherit especially spinoffs? Grandparents as well as parents important? Is a firm more than the quality of its staff? Better firms hire better workers (Denmark) Immediately based on founder quality & industry experience Why? Better firms better learning environments for would-be entrepreneurs? Do firms have (different) entrepreneurial cultures? Spinoffs--Fairchild vs. Texas Instruments Culture or dysfunction? Firm size matter? Why are firm spinoff rates higher in clusters Detroit & SV? Law on non-compete covenants Part of Fairchild vs. TI spinoff fertility difference? Peer effects?

Related Questions Spinoffs & agglomerations--more than zero-sum? Functional Fairchild have 50% market share? If not SV, elsewhere? Persistence vs. creation of agglomerations Same forces at work? Why Detroit, Akron die off vs. SV? Industries lose vitality when (spinoff) entry 0? Autos & tires? anything we can do? Why does spinoff clustering vary across industries? TV receivers 73% of entrants in NY, Chicago, LA Where radio producers concentrated Industry de-agglomerated over time Top radio diversifiers dominated industry forever More dispersed than entrants U.S. a distinctive spinoff factory? Key element of success?

Nano-economics & Growth of Regions-- Mobility, mobility, mobility Implications Employee non-compete covenants Trade secret law Free movement of employees Promote founding teams Limited responsibility of founders if fail Clusters on own may be of limited value Is there much strength in numbers? Don t need great universities e.g., Detroit & Akron Firms may be most important educational institutions Hierarchy, vertical integration not the enemy Detroit & Akron vs. Silicon Valley May be worth trying to plant (regional) seeds One exemplary firm can unleash an engine of growth