Regional Advantage

Culture and Competition in Silicon Valley and Route 128, With a New Preface by the Author

AnnaLee Saxenian

• Publisher: Harvard University Press
• Year: 1996
• ISBN:
  9780674735163
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

Why is it that in the '90s, business in California's Silicon Valley flourished, while along Route 128 in Massachusetts it declined? The answer, Annalee Saxenian suggests, has to do with the fact that despite similar histories and technologies, Silicon Valley developed a decentralized but cooperative industrial system while Route 128 came to be dominated by independent, self-sufficient corporations. The result of more than one hundred interviews, this compelling analysis highlights the importance of local sources of competitive advantage in a volatile world economy.

1

GENESIS: UNIVERSITIES, MILITARY SPENDING, AND ENTREPRENEURS

Marching to war, M.I.T. and its myriad scientists and technicians helped bring closer the inevitable peace and became a catalyst for the renaissance of a Boston that had already begun to stir, to shake off more than a generation of fitful sleep.

—Russell B. Adams, Jr.

The Second World War and the ensuing Cold War recast the economic landscape of the United States. The federal government spurred the growth of new industries and regions by channeling resources to university labs to develop war-related technologies. Researchers at the Massachusetts Institute of Technology (MIT) and Stanford University, as leading beneficiaries of defense and aerospace contracts, spearheaded the economic transformation of Eastern Massachusetts and Northern California. Their pioneering research in radar, solid state electronics, and computing created localized pools of technical skill and suppliers that attracted established corporations and supported the formation of new enterprises. Fueled initially by federal funds, the process of entrepreneurship and technology advance became self-sustaining by the early 1970s and ensured the position of Route 128 and Silicon Valley as the nation’s leading centers of electronics innovation and production.

More than two centuries of industrialization laid the foundation for the postwar surge of activity in electronics in the Boston area. Several leading technology firms were formed in Massachusetts during the nineteenth century; by the 1940s the region was home to a sizeable group of electronics manufacturers. The Santa Clara Valley, by contrast, remained an agricultural region as late as the 1940s, famous primarily for its apricot and walnut orchards. Aside from a handful of small electrical firms, the only local industry was small-scale food processing and distribution.

While both regions were transformed by the war and the massive flows of military funds for electronics research and production during the 1950s and 1960s, these different starting points shaped their future trajectories. Silicon Valley’s pioneers sought to overcome the region’s status as an industrial latecomer by replicating Boston’s technology complex. But in attempting to imitate this model they unwittingly transformed it. Unhampered by the constraints imposed by preexisting industrial traditions, the region’s founders created a distinctive technological community.

Relations between universities and local industry during the war and postwar years offer early evidence of these differences. While both Stanford and MIT encouraged commercially oriented research and courted federal research contracts in the postwar years, MIT’s leadership focused on building relations with government agencies and seeking financial support from established electronics producers. In contrast, Stanford’s leaders, lacking corporate or government ties or even easy proximity to Washington, actively promoted the formation of new technology enterprises and forums for cooperation with local industry. This contrast—between MIT’s orientation toward Washington and large, established producers and Stanford’s promotion of collaborative relationships among small firms—would fundamentally shape the industrial systems emerging in the two regions.

ROUTE 128

Technological innovation was not new to Massachusetts in the postwar period. New England companies pioneered manufacturing techniques and equipment in the textile, armaments, and machine tool industries during the nineteenth century. As these industries declined or moved out of the region, Eastern Massachusetts became a center of automobile and electrical manufacturing.¹ The region experienced prolonged decline during the first half of the twentieth century, however, as it continued to lose traditional manufacturing industries to lower-wage regions and as financial services shifted from Boston to New York.

The foundation of a regional recovery was laid before the decline itself had become fully apparent. The establishment of MIT in 1861 as a technical university had reflected the region’s long industrial tradition. Unlike neighboring Harvard University, which maintained a calculated distance from the industrial world, MIT encouraged research and consulting for private industry.² The chair of the electrical engineering department, Donald Jackson, wrote in 1910 that MIT stood “ready to undertake some of the more distinctively commercial investigations under the patronage or support of the great manufacturing or other commercial companies.” He appointed an advisory committee made up of top executives from major corporations such as General Electric (GE) and Westinghouse.³

In 1918, MIT established a Technology Plan to encourage large corporations like GE, Eastman Kodak, and Dupont to become continuing sources of financial support. The university also created a Division of Industrial Cooperation and Research during the 1920s to solicit corporate research contracts and keep companies apprised of MIT research findings. The Technology Plan was discontinued by 1930, but the Division of Industrial Cooperation and Research (later the Office of Sponsored Projects) maintained its capacity to solicit and manage corporate contracts.⁴

In addition to building ties with established corporations, MIT was at the center of a new wave of electronics activity in the first decades of the twentieth century. Electrical engineering professor Vannevar Bush helped start the American Appliance Company—later the Raytheon Manufacturing Company. Founded to make refrigerators, the firm changed its name to Raytheon in 1925 after acquiring the rights to a new kind of vacuum tube that would permit radios to run on household current rather than on bulky batteries. Raytheon was funded with investments from J. P. Morgan and an informal group of wealthy Bostonians. Other technology start-ups during this period such as Polaroid and the National Research Corporation also relied on local individuals for financing.⁵

This private investment was soon dwarfed by federal funding of research in electronics. MIT became the nation’s leading center of research during the war, performing more military research than any other U.S. university, largely due to the efforts of Vannevar Bush. Bush went to Washington in 1940 to serve Roosevelt in the national defense effort; in 1941 he was named director of the newly formed Office of Scientific Research and Development (OSRD), the first federal agency dedicated to science and research. In this role, Bush revolutionized the relationship between science and government by funding universities rather than government labs to pursue basic military research. He also cemented the ties between MIT and Washington by using his friends in the local industrial and research communities to ensure that MIT graduates dominated the OSRD’s committees.

MIT laboratories received one-third of the $330 million in contracts awarded by Bush’s OSRD during the 1940s and 1950s.⁶ Other universities in the Boston area, including Harvard and Tufts, also received millions of dollars for research in such emerging fields as radar, missile guidance and navigational systems, and submarine warfare. This massive government funding fueled the industrial revitalization of the New England economy.

MIT used its OSRD contracts to establish the Radiation Laboratory (Rad Lab), the first large-scale interdisciplinary and multifunctional R&D organization at a U.S. university, to perform crucial wartime research on radar and navigation systems. Harvard’s labs pioneered work on submarine warfare and anti-radar systems. These research units drew top physicists and electronics engineers from across the country, and many remained as university researchers and faculty, or as employees in local companies, after the war. When the Rad Lab was disbanded, for example, it had close to four thousand employees, of whom more than one thousand were scientists and engineers.⁷

Local industry benefited directly from the war effort as well. Raytheon was awarded a stream of government contracts to produce tubes and magnetrons for radar devices. The company, tiny among the ranks of its established competitors such as General Electric (GE), Westinghouse, RCA, and Bell Labs, grew dramatically through wartime military contracts. Sales grew from $3 million to $173 million (to equal those of GE) between 1940 and 1945, while employment jumped from 1,400 to 16,000. This wartime experience with high-volume production also allowed Raytheon to bid successfully for missile guidance systems contracts during the 1950s.⁸

As the war drew to a close, the greater Boston area’s so-called Research Row—composed of MIT, Harvard, and other local universities and a growing concentration of industrial laboratories—offered an intellectual and technological labor pool unsurpassed in the nation, if not in the world. Frederick Terman, Dean of Engineering at Stanford, would later recall his days as one of Vannevar Bush’s doctoral students at MIT: “There was always an industry around Cambridge and Boston and MIT was right in the middle of it. It was easy for a professor to find things to do in industry where his specialized knowledge was of value to them, and it would be kind of fun for him to apply some of his knowledge to real world activities. Every place you looked, you would find guys doing something with some company.”⁹

In an era of regional markets for corporate debt and equity, Boston also benefited from maturing industries that were generating more investable capital than they consumed. While wealthy individuals and families had occasionally invested in speculative technical enterprises before the war, most of Boston’s capital was tied up in insurance companies and investment trusts. This began to change in 1946, when a group of New England financiers and academics, including MIT President Karl T. Compton, organized the American Research and Development Corporation (ARD) to supply capital to research-based enterprises seeking to exploit the new technologies developed during the war.

Under the leadership of General George Doriot, a Harvard Business School professor, ARD became the first publicly held venture capital company in the nation. The company actively pursued investment opportunities at MIT and its labs. The first recipients of ARD investments, High Voltage Engineering Co. and Tracerlab, were formed by the university’s faculty and alumni. ARD’s most successful investment, the Digital Equipment Corporation (DEC), was started in 1957 by a graduate of MIT, Ken Olsen.¹⁰

Despite its early pioneering role, however, MIT curtailed its financial support for ARD in 1955. Articulating the conservatism of New England universities and financial institutions of this era, MIT concluded that investing in start-up companies was too risky and not consistent with how “men of prudence, discretion, and intelligence manage their own affairs.”¹¹ This calculated distancing from the region’s new technology enterprises would typify MIT’s relationship to Route 128. In spite of the university’s commitment to commercially relevant research, it kept firms at arm’s length.

The early successes of ARD-funded enterprises did, however, encourage the region’s banks and insurance companies to invest in technology firms. Private investment also increased significantly after the war, with the First National Bank of Boston serving as an intermediary between aspiring entrepreneurs and wealthy families such as the Rockefellers, Whitneys, and Mellons. The First National Bank also formed its own investment company in 1957 and became the nation’s first Small Business Investment Corporation (SBIC) in 1958 after the passage of the Small Business Investment Act provided tax benefits for companies that invested in small businesses. Several new venture funds were in turn formed by departing employees of ARD and the First National Bank of Boston (now the Bank of Boston).¹²

The emergence of new sources of capital for technology enterprises supplemented the continued flow of government funds to local labs and universities. At the request of the Air Force, MIT established the Lincoln Laboratory in 1951 to develop long-range radar, air defense warning systems, and high-speed digital data processors. MIT’s Instrumentation Lab (now the independent Charles Stark Draper Lab), which had developed aircraft and missile navigational equipment, began devising missile guidance systems for the space race. The MITRE Corporation, a spin-off of MIT’s Lincoln Lab, was formed as a nonprofit corporation to work on air defense and missile warning systems. The Air Force Cambridge Research Laboratories, which grew out of the breakup of the Rad Lab, focused on radar and air defense. By the mid-1960s, these labs jointly employed some 5,000 scientists and engineers.

The completion in 1951 of the first twenty-seven-mile stretch of the Route 128 highway created space for this burgeoning research and industrial activity. The circumferential highway linked some twenty towns in the greater Boston area and provided a prestigious and attractive location for technology firms—one that was ideally situated within a short drive of MIT, Cambridge, and several desirable suburban communities.¹³

While early critics referred to Route 128 as “the road to nowhere.” local boosters soon renamed it “America’s Technology Highway.” Within a few years, Route 128 attracted a diverse mix of research labs, branches of established corporations, and start-ups—and the highway was so congested that it was widened from six to eight lanes. By 1961, there were 169 establishments employing 24,000 people located directly on the highway, and at least as many again nearby that considered themselves Route 128 firms. In 1965, MIT researchers counted 574 companies in the region, and the number more than doubled in the following eight years.¹⁴

The branches of national corporations such as Sylvania, RCA, Honeywell, Clevite, and Avco became a part of the area’s growing technology complex, as did numerous distributors and professional service providers. But technology start-ups were the most important new source of industrial activity in this period. MIT engineering departments and research labs spawned at least 175 new enterprises during the 1960s, including 50 from Lincoln Lab and another 30 from the Instrumentation Lab. Raytheon, whose defense contracts had made it the state’s largest employer, was the source of close to 150 start-ups, and the electronics division of Sylvania spawned another 39.¹⁵

These start-ups, like the region’s established electronics producers, were heavily supported by military and aerospace contracts.¹⁶ The Transitron Electrical Corporation, for example, was founded in 195...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface to the Paperback Edition
• Prologue
• Introduction: Local Industrial Systems
• 1 Genesis: Universities, Military Spending, and Entrepreneurs
• 2 Silicon Valley: Competition and Community
• 3 Route 128: Independence and Hierarchy
• 4 Betting on a Product
• 5 Running with Technology
• 6 Inside Out: Blurring Firms’ Boundaries
• Conclusion: Protean Places
• Notes
• Historical Data
• Definitions and Data Sources
• Acknowledgments
• Index