Why the Secret of Success Is Adaptation
By its very nature, the innovation sector is the
part of a market economy where creative destruction matters the most. The
Princeton economist Alan Blinder recently noted that in the 1950s, companies
making television sets were at the heart of America’s high-tech sector and
generating tens of thousands of high-paying jobs.
After a while TV sets became just another easy-to-make commodity, and today no
TV set is made in America. The computer manufacturing industry picked up where
the TV industry left off, and for a while it was responsible for 400,000
high-paying jobs. We saw earlier that most of these jobs have now moved
elsewhere. But this is not a sign of failure. Indeed, it is a sign of success.
To remain prosperous, a society needs to keep climbing the innovation ladder.
As Schumpeter argued, it is the dynamic that has been ensuring our prosperity
since the beginning of the industrial revolution.
The crucial question for America’s future is
therefore whether our innovation clusters can adapt and reinvent themselves to
maintain their edge. Clusters, unlike diamonds, are not forever. At some point
the industry that supports them matures, stops bringing prosperity, and turns
into a liability. The forces of attraction provide an important advantage, but
once-mighty clusters have collapsed in spectacular ways. In its heyday, the
Detroit auto industry was one of the country’s most important innovation hubs,
arguably the Silicon Valley of its time. Like Silicon Valley today, Detroit was
full of technologically superior companies that were the envy of the world. The
economist Steven Klepper has shown that to an astonishing degree, the rise of
Silicon Valley has been tracking the earlier rise of Detroit in terms of
population, employment, startup creation, and innovation.
Thus, Detroit’s remarkable trajectory holds important lessons for the future of
our current innovation hubs.
Just like Silicon Valley today, Detroit used to
think of its primacy as unassailable. In the 1940s and 1950s, its dominance of
the auto industry appeared so strong that everyone started wanting a piece of
it. Unions became increasingly aggressive in their demands for higher wages,
more generous benefits, and rigid work rules. Management became complacent and
began neglecting efficiency. Politicians thought that the auto industry could
not move anywhere else and ignored the growing threat posed by southern states
with right-to-work laws. More fundamentally, however, the city’s fatal flaw—the
one responsible for its ultimate demise—was its inability to adapt. Clusters
can’t afford to cling to a declining industry but need to leverage their unique
strengths to reinvent themselves before the tipping
point is reached and the local ecosystem enters a downward spiral. If they
fail, the downfall can be swift and painful. The same attractive forces that
fuel the rapid rise of clusters when things are good cause an accelerated
collapse when things turn bad. Detroit’s mistake was not the failure to stop
the demise of jobs in auto manufacturing. Different industrial relations,
management practices, and political decisions could have postponed the decline,
but it was just a matter of time until auto manufacturing stopped being an
engine of growth. Rather, Detroit’s mistake was its failure to redirect its
ecosystem into something new when it still had an ecosystem.
This may well be the defining difference
between Detroit and the San Francisco–Silicon Valley region. The area continues
to experiment and adapt to the ever-changing technological landscape. San
Francisco was once an industrial powerhouse, anchored by a major port. In the
1970s its ecosystem steered decisively toward professional services and finance
and later to high tech. This process of reincarnation keeps taking place today.
In 1990 the majority of high-tech jobs in the region were in hardware. Now more
than 70 percent of its jobs are in newer technologies, including Internet,
social media, cloud computing, clean tech, and digital entertainment. Life
science research has significantly expanded its footprint.
The secret of success in a changing world is
constant adaptation. As the definition of what is high technology evolves, so
does the Bay Area. Rather than clinging to one product or one way of doing
things, the region reshapes itself every year. The forces of attraction anchor
skilled labor and specialized services, but the exact kind of skills and
services evolve over time, following the changing terrain of the technological
frontier. This ensures that when good jobs turn into bad jobs, there is a wave of
new jobs to replace them. In a sense, this creative destruction is the true
hallmark of a successful cluster, one that leverages the forces of attraction
in a dynamic way.
“All politics is local,” as the former Speaker
of the House Tip O’Neill said. For all its glamour, the world of innovation is
even more local than politics. Different communities differ in their values and
expertise, and this inevitably shapes the new ideas they generate, ultimately
resulting in something unique and hard to reproduce elsewhere. The innovative
process is largely about the unexpected cross-fertilization that results when
different parts of a community connect. In this respect, Silicon Valley’s move
toward diversification is extremely important, because it deepens the complementarities
and fosters the constant exchange of ideas and talent between different parts
of the high-tech ecosystem. For example, the region’s unique strength in both
medical research and gaming has caused these two seemingly unrelated sectors to
become intertwined in the form of “serious games,” products that apply
cutting-edge gaming technologies to cure diseases. A local company called Posit
Science already produces gamelike software intended to improve memory and
attention and possibly even help treat such disorders as autism and
schizophrenia. Another example is Stellar Solutions, an aerospace company
specializing in infrared missile warning systems and capsules to carry
astronauts to Mars. Lately the company has been leveraging the expertise that makes
it a leader in technologies of the heavens to develop technologies of the
earth: its engineers are using electromagnetic waves to forecast earthquakes.
The company’s CEO predicts that one day you will “turn on your TV and see not
just hurricane warnings, but earthquake warnings.”
Not all of America’s innovation hubs are
equally successful at adapting. The landscape is dotted with cities that were
once powerful engines of innovation and have failed to reinvent themselves. In
the 1980s, for example, Rochester, New York, was an important cluster for
innovation in optical technologies and imaging. Xerox was founded there in 1906
and retains a presence in the city to this day. Kodak is based there too, and
until the 1980s it employed 62,000 workers. Back then Kodak was the Google or
the Apple of its period and Rochester was one of the top producers of patents
among U.S. cities. (Recall that until the mid-1990s, makers of photographic
equipment and films dominated the list of patent producers.) Local wages vastly
exceeded those in the state and in the nation. But with the advent of digital
photography, people stopped buying Kodak films. The company never fully
adjusted to the new digital landscape, and today it employs only 7,000 workers.
This was a serious blow, but it did not have to
be fatal. Companies come and go, but communities don’t. The fundamental problem
with Rochester was that the local high-tech cluster was not able to move to
something new. As in the case of Detroit, local entrepreneurs never branched
out into different parts of high tech in significant numbers and the community
as a whole failed to make the transition to a new productive landscape. The
University of Rochester remains a major research engine, there are some new
high-tech companies in town, and patent creation is still happening, but it is
clear that the city’s most dynamic years are in the past. Wages have fallen
significantly below the state average and population is declining. Vacancies
are so common in some neighborhoods that municipal workers paint murals with
images of the city’s glory days along vast stretches of empty storefronts to
hide the eyesores, according to the Wall Street Journal. The area surrounding Kodak’s headquarters, once
bustling with activity and commerce, today looks like a ghost town.
Looking forward, the forces of attraction
raise two key questions for the United States. The first is what we should do
to retain, foster, and strengthen our innovation hubs. How can we, as a nation,
maximize the chances that our innovation hubs follow the path of the San
Francisco–Silicon Valley cluster and not that of Detroit and Rochester? The
second question is how to help the many remaining cities that do not have a
concentration of good jobs and skilled workers and are lagging behind.
Before turning to these questions, however, we
need to understand more fully how vast economic differences between cities can
persist over time. As we have seen, the differences in wages and salaries among
American communities are enormous, and now we know why: they reflect equally
large differences in the productivity of workers, meaning that it makes sense
for innovative companies to locate in innovation hubs, even if the costs of
doing business are much higher. But what about the workers themselves? If the
difference in salary and living conditions is so large, what prevents them from
moving en masse from weak labor markets to stronger ones? Shouldn’t we all live
in Seattle or Austin? We now turn to the issue of mobility and what it implies
for communities across the country.
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