October 2, 1992
"Valley Demise is Greatly Exaggerated"
San Jose Mercury News
By Timothy Taylor
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EVERY FEW weeks, it seems, you hear about a delegation from Silicon Prairie (in Austin) or Silicon Rain Forest (in Portland) or Silicon Somewhere (Anywhere Else) that has arrived here, in the original Silicon Valley, to steal away jobs.

This procession of beggars has been passing through town for years, making visions of lollipops dance in the heads of local business. As they boast of their smiling, compliant, low-wage workers and smiling, compliant government regulators, a sense of impending disaster seems to hover just beyond the hillsides.

The sad story goes like this:

Silicon Valley was once the leader in developing new electronics and computer technology, but the growth of industry led to traffic congestion, high housing prices and other urban problems. As a result, while companies may keep some administrative or research functions in this area, they will shift the bulk of their operations elsewhere. Eventually, with its manufacturing base hollowed out, Silicon Valley's economic balloon will deflate.

Economists call this the "product life cycle" theory -- when a once-new product becomes a standardized commodity, the industry migrates to wherever production costs are lowest. There's another name for the theory: the voice of doom.

Surprisingly, these raiders from other states have had a lot less success than the level of public concern might lead one to expect.

After all, the economic conditions for migrating away from San Jose were already ripe back in the late 1970s. Wages for production workers were already 12 percent higher in San Jose than in the rest of the country in 1977, and prices for housing were one-third higher.

But 10 years later, in the late 1980s, the proportion of U.S. employment in the electronic components industry that was based in the San Jose area had grown from 10.1 percent to 11.5 percent. San Jose's share of production jobs in this industry rose from 8.1 to 9.0 percent over this time, while its share of non-production jobs (research and development, sales, headquarters) grew from 14.4 percent to 15.4 percent.

These figures are from Carolyn Sherwood-Call, an economist at the Federal Reserve Bank of San Francisco, who writes about "Changing Geographical Patterns of Electronic Components Activity" in the most recent issue of the bank's Economic Review. And like many bits of interesting information, this one comes hedged with qualifications and additional thoughts:

• The "electronic components" industry, as defined by the government statistics that Sherwood-Call uses, does cover the heart of traditional Silicon Valley: semiconductors and related devices, printed circuit boards, electron tubes, transformers, resistors, coils and the rest. But it does not cover finished technology products such as scientific instruments or computers.
• Sherwood-Call's data is a few years old, because this particular economic data (from the Census of Manufacturers) always takes several years to be processed. Perhaps San Jose's relative position has declined in the last few years. But even if this turns out to be true, the decline would probably only be back to the levels of the late 1970s, levels that led nearly everyone to view Silicon Valley as an overwhelmingly dominant electronics producer.
• Evidence about the United States says nothing about the intensifying competition from the rest of the world. Growth rates of U.S. electronics production during the 1980s lagged behind growth in Japan and Europe. In addition, poor nations like India, Brazil, Taiwan, South Korea and Singapore all experienced double-digit growth in electronics production during the mid-1980s. So the lesson here is not that the local economy has nothing to fear. But in a world of potential terrors, it's important to know what fears deserve the most attention.

Those worried about the future of Silicon Valley should realize that the central problem isn't competition from Oregon or Idaho or Texas or North Carolina or Massachusetts. Electronics is an international battlefield, and the most threatening opposition is from other countries.

Moreover, Silicon Valley is facing two distinct types of competition. One is from poorer nations like India, South Korea and Brazil. Frankly, the Silicon Valley can't beat these countries at their low-wage game. If a job can be done thousands of miles away by a low-skilled worker who is paid only a fraction of the U.S. minimum wage, let them do it.

The second area of competition, with Japan and Europe, is where Silicon Valley has to focus. Despite the economic sluggishness of the past few years, Silicon Valley still has an unmatched combination of financial and human infrastructure to support high-technology industry. The challenge for this area, and for the nation, is to create a supportive environment for developing a steady stream -- or better still, a raging river -- of innovative new products.

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