The dynamics of Silicon Valley: Creative destruction and the evolution of the innovation habitat

Abstract

Understanding the dynamics of Silicon Valley requires a deep appreciation of the impact of creative destruction on a resilient innovation habitat: a complex ecosystem of relationships among entrepreneurs, researchers, venture capitalists, service providers, lawyers, accountants and marketing professionals that is constantly shape-shifting. As a modern Proteus, Silicon Valley has initiated and weathered successive boom–bust cycles by constantly adapting its social and institutional infrastructure to new technologies and market forces, and leveraging these foundations in the next wave. Joseph Schumpeter, who is credited with the notion of ‘creative destruction’, saw capitalism as a ‘process of industrial mutation … that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one’ (Schumpeter, 1942: 83). For over half a century, Silicon Valley has been a model for continual creative destruction. Carlota Perez has taken Schumpeter’s theory to the next level by demonstrating how technological revolutions driven by creative destruction result in not only redefined industries but also redefined industrial infrastructures and economic institutions (Perez, 2002). This article provides a framework for analyzing the dynamics of Silicon Valley based on the perspectives of both Schumpeter and Perez, and describes how the region continues to evolve as a social innovation habitat that supports the diversity of changing technologies and converging industry clusters. Whether this can be replicated by other economic regions is discussed, with key lessons learned from the Silicon Valley experience and how they might be applied to other places. We argue that regions must accept creative destruction as a natural process of boom and bust, and adapt and apply technologies during these cycles that are important and vital to the specific region. Each region does not have to strive to be Silicon Valley, but instead should build on its strengths and invest in innovation infrastructure and human capital in order to become its own Silicon Valley.