Posts Tagged ‘hierarchies’

Social Fragmentation and the Economic Stagnation of Atlanta’s IT Cluser: Q&A with Danny Breznitz

September 28, 2009

Georgia Tech’s Danny Breznitz and Mollie Taylor just completed a study of how communal roots and a rich complex of social networks can impact the health of high tech clusters and entrepreneurial activity.  Entitled The Communal Roots of Entrepreneurial-Technological Growth? Social Fragmentation and the Economic Stagnation of Atlanta’s IT Cluster, the preprint of their report has, as you might expect from the title, already attracted some attention in Atlanta.

One conclusion of the Breznitz-Taylor report is that the effects of social networks often dominate the availability of other, more quantifiable resources in determining the long-term health of  industries in a region.  Since I devoted my first post to exploring the impact of fluid social mixing on the Silicon Valley culture, I thought it would be interesting to sit down with Danny Breznitz to get his thoughts on why he thinks this is so.

A former Fellow at MIT’s Industrial Performance Center, Danny’s book Innovation and the State won the 2008 Donald K. Price award for the Best Book in Science and Technology Politics.

Danny started out by telling me he had already thought about it in terms of colliding worlds: local economic development and technology entrepreneurs.

Q: My premise in “Proposition 13” is that social mixing is evidence of many other social networks that come into play when new companies are hatched in Silicon Valley.  Do you think that’s true?

A: Yes, we argue in our paper that these kinds of networking relationships increase social capital in a region and that a cluster rich with social capital actually binds key companies and individuals to the cluster. That not only makes it harder for them to leave the region, it increases the supply of specialized talent that startups need,  as well as the ability of disparate players to meet and come together with novel ideas across domains of knowledge.

Q: Your paper has an intriguing title.  What does it mean?

A: We studied the IT industry in the Atlanta metropolitan area to find out why so many apparently successful Atlanta companies leave the region for California or other states.  This is true even for companies that came out of places like Georgia Tech or were founded by Atlanta natives so you would think that the ties to the region were strong.  This is what we mean by stagnation.  The answer seems to be that without a a rich multiplex of social networks cluster development will stagnate.

Q: You say that Atlanta’s High Tech cluster is stagnant.  In what way?

A: Stagnation is a way of describing what happens to a region when there are no local clusters with sustained growth.  Atlanta is still a global leader because of the many technology initiatives that attract entrepreneurs, but over the past ten years or so many of the most promising companies have decided to leave the area altogether.  What is especially problematic is that the most promising high tech startups — the source of future grown — are the ones that are most prone to move away.

Q: Can you give examples?

A: Every data set we looked at told the same story: technology startups with consequence tend to leave Atlanta.  If you look at the Atlanta Business Chronicle’s list of “Top Venture Capital Deals” from 1999 to 2007, for example 42% have left Georgia. In fact, 40% leave within the first three years of getting their first round of VC investment, and hence we become a feeder cluster if you will.  We are in real danger of becoming one big technology incubation center whose successes are raided by other regions.

Q: In the same way that MASPAR left Boston for Silicon Valley?

A: Exactly.  In the case of MASPAR it was the ready availability of all the people, talent, money, and other resources that would be needed to grow a successful company. In the case of Atlanta companies that leave the region, California and the New York/New Jersey areas are by far the most frequent destinations:  California because it is the leading technological cluster and New York because it is the leading financial center. These are also two major sources   of venture capital for the Atlanta technology industry.

Q:  Atlanta touts Georgia Tech, GRA, the proximity of universities, transportation and infrastructure as reasons high tech companies should locate here.  Do you disagree that these are important factors?

A:  This is called “factor availability”. The availability of factors like universities is definitely important for technological entrepreneurial growth. So not only do I agree that these are important but I think that Atlanta and Georgia have been doing a great job in this regard. However, our research indicates that societal variables are just as important and maybe are even more important. There is a growing body of thought among researchers that supports this view from a theoretical standpoint as well. Our findings suggest that if we do not come up with new ideas and policies to change the societal environment of the technology center in Atlanta, we will not enjoy the fruits of our own investments.

Q:  It’s been over a decade since Analee Saxenian noted that flattened hierarchies helped explain the economic disparities between Route 101 in California and Route 128 in Massachusetts.  How does your study add to her insight?

A: Saxenian’s study concentrated on the structure of the high tech industry in Silicon Valley and Boston’s Route 128 and we agree that hierarchical companies make it more difficult to share knowledge and talent. We wanted to understand the situation in Atlanta and to bring all the tools of modern social research to bear on the problem.  In fact, you can argue that Saxenian’s book was talking about social capital, although she did not use that term.

Q: Do you think Atlanta economic development planners have taken those effects into account?

A: We think that the planners have done a good job at emphasizing factor availability which is important in beginning new companies, but corresponding attention has not been given to the health of the local community. Although the factors are necessary, they are not sufficient.  Without a better supply of social capital it will be difficult to sustain cluster growth. On the positive side, the initiatives and leadership of The Enterprise Innovation Institute suggest that Georgia Tech leadership has reached the same conclusions.

Q:  Why the gulf between Entrepreneurs and Economic Development Offices?

A:  I am not sure it’s a gulf. It’s a difficult question because policy planners can only do so much to help.  Economic Developers can influence variables through programs like GRA.  At some point, for example, the personal involvement of top executives from Atlanta’s leading companies needs to be promoted. We should also remember that companies are for profit organizations – if companies believe that they have better chances of maximizing profits or returns for their investors somewhere else they will be under immense pressure to leave. We must realize that and tailor our policies to ensure the these pressures are mitigated and that the perceived advantages of other regions do so not seem to be so high in the eyes of  the people who made relocation decisions: the founders, boards, investors and customers.

Q:  What are the three things that could be most helpful in reinvigorating Atlanta’s high tech cluster?

A: We have to look in the mirror.  It’s easy to reflect on how well we’re doing, but it’s more difficult so say:  “Well, we need to add more attention in these other areas too because what we’re doing now is just not enough.” First, I think a new set initiatives anchored around Georgia Tech should be developed to focus on how current and future large Atlanta companies can maintain closer connections with Atlanta’s high tech industry.  Second, I would like to see renewed attention to stimulating a more local VC industry. VC’s are critical to shaping the social network of the companies in their portfolio and as long as those networks are located somewhere else, local companies will always be at risk for relocating closer to the networks.  Third, I would like to see Atlanta executives more involved at all levels of entrepreneurial activity.  Executives who have “made it” invest their own money in Atlanta, which is important, but that is not same as the many different kinds of social involvement that it would take to embed startups in the region. A leadership group that took on this challenge would be a very good thing for Atlanta.

Q: What should Atlanta business leaders be doing to take advantage of the city’s strengths?

A: In addition to the leadership group?  I think promoting the kind of social mixing that you were talking about in “Proposition 13” and has been so important in other healthy clusters would be a good first step.  The Enterprise Innovation Institute at Georgia Tech has funded us to continue this research, expand and update our databases, and provide more focused policy recommendations.  I hope Atlanta business leaders will also help as our study goes forward.

Q: Are there lessons learned from the situation in Atlanta that can be applied  in other cities?

A: Our findings are based on social networking theory and an approach to data analysis that synthesizes information from many sources.  We think there are lessons from studying the relationship between business-social structure and entrepreneurial growth.  Comparing the findings for Atlanta with other regions would help us understand, for example, whether there are geographic factors that come into play or whether the international environment is important.  I think the main lesson, not only for Atlanta, is that you have to go beyond the traditional view of what is crucial for  high tech growth and take a hard look at the health of your community.

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Proposition 13 and Innovation

September 2, 2009

Innovation works best not when worlds collide, but when they are shared. Sometimes sharing takes place because there are no good alternatives.

At one time the public schools in California were among the best in the nation. No more. In 1978 two-thirds of the voters, in what has become a chaotic practice of bypassing normal legislative channels to amend the state constitution, approved a tax reform referendum known as Proposition 13. Championed by a politician named Howard Jarvis, Proposition 13 or “The People’s Initiative to Limit Property Taxation,” capped property tax rates and required a 2/3 supermajority in both houses of legislature for any future tax increases.  The immediate effect of Prop 13 was a 57% decline in property tax revenues. Despite strong evidence that it is a root cause of the current fiscal crisis in California, Proposition 13 remains a wildly popular measure among Californians.

Less controversial is the impact that Proposition 13 had on the state’s public schools, which on the average lost half of their tax revenue. Before Proposition 13 and a ballot initiative known as Proposition 98 (which had the unintended effect of capping overall school expenditures) California’s per-student annual expenditures were about $400 above the national average.  By 2000, per-student spending had dropped to $600 below the national average. That trend continues, and today a declining percentage of personal income in California is directed to K-12 education.  A 2005 study by the Rand Corporation concluded: “As recently as the 1970s, California’s public schools were considered to be among the nation’s best. Today, however, there is widespread recognition that the schools are no longer top performers. As a consequence, many Californians share a growing sense of alarm about the ineffectiveness of their public education system and the generation of children whose educational needs are not being met.”[1]

This is a dismal assessment. As a former California resident who experienced firsthand the inadequacies of K-12 education in the state I don’t want to appear to be endorsing the gutting of public schools, but the 30-year decline in quality of California’s K-12 public school system had one positive effect on innovation in Silicon Valley, because there was a consequence of Prop 13 that no one could have foreseen.  It helped to flatten what could have easily become an exceedingly hierarchical technology community into a more or less free-flowing social network.

Engineers of all stripes who want quality education for their kids have only two alternatives. They can either fork over a lot of money to a private school or move into a more affluent community where parent associations can raise extra dollars to supplement inadequate public funding.  In both cases, engineers find themselves elbow-to-elbow with industry executives, entrepreneurs, venture capitalists, and professors.  This is one way worlds are prevented from colliding in Silicon Valley.  It’s hard to maintain a strict hierarchy when – as they were in our local elementary school — CFO’s and programmers are working together on the PTA’s next silent auction.  Technologists and business leaders attend the same football games and school plays.  They mingle at holiday programs and parties and first-day-of-school orientations.

Of course, it’s not just schools that flatten the hierarchies of the Northern California technology community.  A young VLSI designer with a newly minted degree from Michigan might find himself seated behind former Sun CEO Scott McNealy at a San Jose Sharks hockey game because McNealy’s seats are in the stands, not a glassed-in corporate box. Sand Hill Road runs for four miles behind the Stanford University campus, so it is not unusual to see a partner in a legendary venture firm wandering the halls of the Gates Building and striking up a discussion with whatever graduate student happens by.  Technology innovators and business leaders serve together on boards of the Tech Museum and the Computer History Museum and the Exploratorium.  The excellent cafeteria at Google’s main Mountain View campus is a virtual soup of corporate leaders, academic celebrities, and undergraduate interns.  There are legendary meeting places.  Il Fornaio in Palo Alto serves breakfast, and sometimes a chance meeting at 9AM can turn into scribbles on napkin that in turn catch the attention of a retired Intel executive at the next table who is happy to spend a few minutes coaching the founders of a new startup.

The definitive answer to why this open culture is a competitive advantage can be found in Annalee Saxenian’s 1995 study of innovation Regional Advantage.[2] Everyone who is serious about building a culture of success should read it, and I am constantly amazed at the number of people leading strategic regional initiatives who are unaware of its existence.  In comparing the economic performance of Silicon Valley on the one hand and Boston’s Route 128 corridor on the other hand, Saxenian notes that social mixing is just one part of an open system of exchange that has not been successfully duplicated in business cultures where vertical integration and clear boundaries are common.  Decade after decade, the blurring of boundaries in Silicon Valley has given it an advantage in the rate of new start-ups and the speed with which new products can be brought to market.

Bill Hewlett and Dave Packard were to some extent responsible for an open corporate culture that welcomed startups even from within the company’s ranks.  While rummaging through some files one day at HP, I came across a series of memos from Apple co-founder Steve Wozniak.  On April 28, 1976, Wozniak wrote: ”I am seeking a written release from HP to market a product based on circuits I designed over the last year.  The circuits were originally designed on my personal time for personal use (hobby)…I “lobbied” for a similar product idea within HP management…without success…I have no objection to licensing the circuits to HP if necessary for any reason.”

A few days later, HP’s General Counsel, replied: “We are happy to release this invention to you subject to a worldwide royalty-free license to Hewlett-Packard Company and its present licensees…”

Wozniak and Steve Jobs set up camp nearby and became part of an innovative explosion that benefited HP and the entire industry.

Digital Equipment Corporation was the closest thing to HP that existed on Route 128, but like many other local businesses its corporate culture was far less open to sharing intellectual property, information, and skills. When Jeffrey Kalb left Digital in 1987 to found a new computer company called MasPar, it was a blow to DEC.  Kalb moved from Boston to Silicon Valley and by implication away from Digital.

Even at this late date, it is still a subject of considerable interest in northern New Jersey, Atlanta, Austin, Raleigh, and Minneapolis how to recreate the innovative environment of California’s Route 101. These are all regions with great universities, access to capital and a track record of building successful businesses.  Atlanta leads in many of the traditional measures of innovation but today lacks even one major source of venture capital. New Jersey was the intellectual center of the telecommunications industry, but there is a wide social gulf between the remaining scientists at the central research labs and the gated mansions of Bedminster.  Like Route 128, Austin, Raleigh and Minneapolis grew around companies with hierarchical cultures. A lesson of looking at things through the WWC lens is that innovation works better when worlds are shared.  Easy social mixing – whether spurred by a common concern for local schools or simply blurred horizontal and vertical boundaries – builds trust and collaborative networks.

In case you think all this talk about culture is some sort of gauzy way to paint contrasts where none really exist, Jeffrey Kalb pointed out one of the enduring business advantages of shared worlds: “There are a large number of experienced people [in Silicon Valley] who have retired but are still active in the industry and are available as consultants, members of boards or directors or venture capitalists…There’s just about anything you want in this infrastructure.”

To the extent that large corporations mimic entire societies, there are sociological reasons why sharing worlds is important for innovation.  Open innovation helps, too.  More about these ideas in later posts.

[1] California’s K–12 Public Schools: How Are They Doing? By Stephen J. Carroll, Cathy Krop, Jeremy Arkes, Peter A. Morrison, Ann Flanagan, RAND Corporation, 2005.

[2] Regional Advantage by Analee Saxenian, Harvard University Press, 1994 (Revised 1995)

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