Where Are the Hubs?

One hundred years ago the hot new technology was the automobile, a seemingly miraculous new machine that promised to change the world. Initially thousands of small producers were scattered across the country. A few decades later the number dropped to three giant corporations, with most of the production near Detroit. Today car factories are again spread all over the world, from Brazil to Poland. When personal computers first appeared in the 1970s, a myriad of small independent producers were scattered all over America. Steve Jobs and Steve Wozniak made the first Apple computer in 1976 by buying components from a mail-order catalogue and assembling them in Jobs’s garage. Later the production of personal computers became a highly concentrated industry, with just a few key players, mostly in Silicon Valley. Right now the industry is maturing, and production is scattered among hundreds of low-cost locations. The same pattern has been documented in industries as diverse as iron founding, flour milling, and cigarette production.

Just like people, industries have life cycles. When they are infants, they tend to be dispersed among many small producers spread all over the map. During their formative years, when they are young and at the peak of their innovative potential, they tend to concentrate to harness the power of clusters. When they are old and their products become mature, they tend to disperse again and locate where costs are low. Thus it is not surprising that the innovation sector—the part of the economy that is now going through its formative years—is concentrated in a handful of cities.

One way to map innovation today is to look for the inventors. Every time an inventor files a new patent, he is required to report his residence. These data on patents are publicly available and provide some interesting statistics. Of course, not all new ideas are patented and not all patents are great innovations, but economists have long used the concentration of patents as a proxy for the creation of new products and ideas.5 The accompanying map (overleaf) shows the metropolitan areas that have been generating the most innovation relative to their size, as measured by the number of patents per resident.

 The first things you will notice are the large differences between different parts of the country. The map shows clusters of intense innovative activity (the dark areas) surrounded by an ocean with almost no innovation activity (the light gray and white areas). The states that generate the most patents are California, New York, Texas, and Washington, with California producing the lion’s share and New York a distant second. These four states alone generate almost half of all patents granted in the United States, up from a third in 1980.

Among metropolitan areas in the United States with at least a million residents, the most innovative one by far is the San Francisco–San Jose region, which includes Silicon Valley. Its lead over the runner-up, Austin, Texas, is enormous. The average resident in the San Francisco–San Jose region produces more than twice as many patents as the average resident of Austin and more than three hundred times the number of patents as the average resident in McAllen, Texas, the city with the lowest number of patents per capita. This difference between the most and least innovative metropolitan areas is truly staggering. New Orleans is near the bottom of the list, together with the Norfolk–Virginia Beach–Newport News area, Miami, Las Vegas, and Nashville. These differences are not limited to patents but extend to other measures of innovation, including venture capital and jobs. The San Francisco–San Jose region has more than four times as many high-tech jobs as Austin. Compared with cities at the other end of the spectrum, the divide in high-tech employment is immense.

 In the aftermath of the dot-com bust of 2001–2003, pessimism about the future of America’s high-tech clusters abounded. Observers predicted the end of the Valley’s global dominance. But the pessimists were by and large wrong. Silicon Valley has remained the innovation capital of the world, and it continues to lead all other metropolitan regions in the breadth and scope of its innovative activity. It accounts for more than a third of all venture capital investment, significantly more than twenty years ago. Every year hundreds of smart, ambitious innovators move their startups from Europe, Israel, and Asia to Silicon Valley. The Valley keeps its position as the world’s number-one innovation hub not because those who are born there are smarter than anyone else but because of its unparalleled power to attract great ideas and great talent from elsewhere.

After Silicon Valley, Austin stands out. It is a latecomer, but its rate of growth, spurred by computer and electronic products, has been spectacular over the past two decades. Dell is one of the key employers, and many other global high-tech companies have offices there, including IBM, 3M, Applied Materials, Advanced Micro Devices, and Freescale Semiconductor. Austin appears to complement rather than compete with Silicon Valley. The two are linked by a constant flow of college-educated high-tech professionals who shuttle between the two regions. Although they are not particularly close geographically, San Francisco–San Jose is the most popular destination for Austin residents with a college degree who relocate.

 Two other top performers are Raleigh-Durham and Boston-Cambridge. Anchored by excellent research universities and world-class medical facilities, they boast impressive concentrations of scientific R&D services and life science innovation. Their success is driven by the ability of local entrepreneurs to turn the academic life sciences research done at Harvard, MIT, and Tufts in the Boston area and at Duke and the University of North Carolina in the Raleigh–Durham–Chapel Hill area into commercial ventures. In addition, Boston has maintained a strong presence in the design of precision instruments and has developed a software cluster. When Microsoft opened its first East Coast research lab in Cambridge in 2008, the company remarked that the main reason was the “large community of scientists in New England, notably the faculty and students at the many premier academic institutions in the vicinity.”

San Diego is an interesting example of a city that has evolved over the past thirty years from a small community of retirees and surfers to one of the world’s most geographically concentrated biotech clusters, revolving around the Scripps Research Institute, the Salk Institute, and the University of California at San Diego. It includes biotech giants such as Amylin Pharmaceuticals as well as dozens of midsized biotech firms with promising portfolios of new drugs. It also includes a number of jobs in electronic hardware for telecommunications. Although the Middlesex-Somerset-Hunterdon area in New Jersey also generates a large number of patents in the life sciences, it has a completely different feel from San Diego. With an unsurpassed concentration of established pharmaceutical and medical companies, including Bristol-Myers Squibb and Johnson & Johnson, its corporate landscape is dominated more by powerful incumbents than by up-and-coming startups.

 In this respect, New York City and Washington, D.C., are anomalies. Like all real estate in New York, lab space is scarce, which limits the amount of scientific R&D performed in the city. Thus New York is not among the metropolitan areas with a large number of patents per capita. But with about 300,000 technical jobs, New York remains one of the key world-class innovation hubs and is getting stronger over time. During the past two decades, its Silicon Alley has become a magnet for creative entrepreneurs and well-educated young workers. It is now a premier location for Internet portals and information services, and along with Los Angeles it accounts for a large number of digital entertainment jobs. In 2011, Google undertook a major expansion of its New York office, paying $2 billion to buy a large building near the meatpacking district. The New York region also remains the undisputed world leader in financial innovation.

Historically, the Washington, D.C., area never had many high-tech jobs apart from a sizable cluster of defense contractors. But in the past twenty years the region has been remarkably successful at attracting a wide array of innovative companies to the high-tech Dulles corridor and to the downtown area. It is not on the list of the top ten metropolitan areas for patents because its industry mix is focused on IT and generates relatively fewer patents than other places. But there are almost 300,000 high-tech workers in D.C., double the average concentration in the United States. Life science companies increasingly flock to the area, attracted by proximity to high-profile public institutions such as the National Institutes of Health.

Although not many people realize it, Dallas has been rising in high-tech rankings because of a major concentration of telecommunications jobs, a solid semiconductor presence anchored by Texas Instruments, and a growing data-processing cluster. Smaller but emerging high-tech clusters can be found in Minneapolis, Denver, Atlanta, and Boise. While few regions excel in many areas of high technology, America is dotted by clusters that specialize in one or two. For example, Rochester, New York, home to Kodak and Xerox, focuses on optical technology, while Rochester, Minnesota, home to the Mayo Clinic, focuses on medical research. Dayton, Ohio, has become a center for radio frequency identification; Salt Lake City, Bloomington, and Orange County specialize in medical devices, Albany in nanotech, Portland in semiconductors and wafers, and Richmond, Kansas City, and Provo in information technology.

America’s innovation hubs are a very diverse group. On the surface, it is not immediately obvious what they might have in common. The lifestyle in San Diego is quite unlike the one in New York City or Boston. Salt Lake City and San Francisco have very different cultures and almost opposite political values. Seattle and Dallas share little in terms of amenities. But if we dig a little deeper, it becomes clear that all these cities have one thing in common: they have a very skilled labor force and therefore a remarkably productive traded sector. As we are about to discover, this means more and better-paying jobs for everyone who lives there.