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4. Silicon Valley66Knowledge creation is not limited to a single organization. Sometimes, knowledge creation can span organizations. Silicon Valley in California, USA, widely considered to be the world’s leading high tech cluster is a good example. Silicon Valley’s origins go back to Hewlett Packard (HP) which was founded in 1937 by William Hewlett and David Packard with the encouragement of their professor, Frederick Terman. HP took off during World War II. A small cluster of technology firms grew up alongside HP and laid the foundation for the electronics industry in the region. A visionary in every sense of the word, Terman did a lot to strengthen ties between Stanford where he became the dean in 1946 and the local industry. He set up Stanford Research Institute to conduct defense-related research and to assist west coast businesses and opened the university’s classrooms to local companies through the Honors Cooperative Program. Terman also promoted the Stanford Industrial Park which further strengthened the linkages between the university and local industry. Several companies were attached to the Valley. Shockley Transistor was set up in Palo Alto in 1955. By 1970, it was the largest and most dynamic company in the region. A group of people broke off from Shockley and set up Fairchild semiconductor. Fairchild itself spawned 10 spin-offs in its first eight years, the most celebrated one being Intel set up by Robert Noyce, Gordon Moore and Andy Grove. By 1975, Silicon Valley’s technology enterprises employed well over 1,00,000 workers. Even as the number of tech companies in the Valley increased, a network of suppliers also emerged. By the early 1970s, venture capital replaced the military as the main source of financing for start ups in the valley. Successful entrepreneurs chose to invest their earnings in promising new companies. The Valley’s relatively young companies and the distance from Washington facilitated experimentation with technology and business models. The culture of Silicon Valley encouraged risk taking and accepted failure. Entrepreneurs created firms that were organized as loosely linked configurations of engineering teams. The result was a flexible industrial system organized around professional and technical networks rather than around the individual firm. Informal collaboration became common in the Valley. Informal conversations kept people informed about competitors, customers, markets and technologies. Competitors consulted one another, with a frequency unheard of in other parts of the US. Mobility across firms not only became acceptable but also quickly turned into a norm. Headhunters arrived in the 1970s, as the war for talent hotted up. Signing bonuses, stock options, high salaries and interesting projects, were used to attract smart people. As the firms were located geographically close to one another, people could change jobs with minimal dislocation. Loyalty to one’s craft superseded loyalty to one’s company. When engineers moved from one company to another, they took with them the knowledge, skills and experience acquired in their previous jobs. A distinct technical language evolved in the region. By the early 1970s, Silicon Valley had developed a solid reputation for the speed with which technical skills and know-how diffused within the local industrial community. The region’s social and professional networks effectively functioned as a kind of large extended organization. The region and its networks, rather than individual firms, became the focus of economic activity. Service providers like lawyers, market research firms, consulting companies, public relations companies and electronic distributors facilitated the growth of the region. Berkley, California State University and various community colleges supplemented Stanford in supporting Silicon Valley’s technical infrastructure. The proliferation of firms did not lead to destructive competition. Instead, the Valley’s supportive social structures, institutions and collaborative practices encouraged mutual learning and adjustment. Firms cooperated in various ways — cross-licensing, second sourcing arrangements, technology agreements and joint ventures. Competition demanded innovation, which in turn called for inter-firm cooperation. The Valley’s companies played a significant role in fostering and reinforcing the region’s culture. Firms downplayed hierarchy and gave individuals considerable autonomy and responsibility. Intel set an example by encouraging openness and confrontation. HP used a decentralized structure that attempted to eliminate hierarchy and status and emphasized teamwork. Essentially, the Valley’s industrial system blurred the boundaries between social life and work, between firms, between firms and local institutions, and between managers and workers. In a few decades, the Valley became one of the most prosperous regions in the world, creating wealth at a rate few could have imagined in their wildest dreams a few decades earlier. Looking back it is clear that inter-organizational knowledge creation has played a key role in the emergence of Silicon Valley as the world’s best known industrial cluster. San Jose, located in the heart of California’s Silicon Valley topped the WKCI (World Knowledge Competitiveness Index) 2005 list. The WKCI is an integrated and overall benchmark of the knowledge capacity, capability and sustainability of 125 regions across the globe, and the extent to which this knowledge is translated into economic value, and wealth. WKCI is based on 19 knowledge economy benchmarks, including employment levels in the knowledge economy, patent registrations, R&D investment by the private and public sector, education expenditure, information and communication technology infrastructure, and access to private equity. San Jose is followed by Boston, San Francisco, Hartford and Seattle. The highest ranked non-US region was Stockholm in Sweden. Tokyo was the highest ranked region outside North America and Europe. Incidentally, the 2005 WKCI rankings highlight the gap in competitiveness between the US, which has 41 of the top 50 regions in the index, and the rest of the world. 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