In Silicon Valley, an economic rebound

The innovation capital is prospering again, with more jobs and the nation’s highest wages.

There’s a place in the United States where factories are thriving under global free trade, pay is scaling record highs, and the housing market is sturdy as brick.

In Silicon Valley, the American Dream endures. The region has added thousands of jobs and recently overtaken Manhattan for the nation’s highest weekly wages – even as Californian cities just 80 miles east form the glowing core of the real estate meltdown.

It’s not that the tech hub is impervious to downturns: Just six years ago, its capital, San Jose, suffered the greatest loss of jobs of any major US city since the Great Depression. But as before, Silicon Valley has reinvented itself and rebounded.

The region’s resilience holds lessons for the United States as the country faces stiffer global competition, say experts. Specifically, there’s a future for high-tech manufacturing and exports in the US economy with the help of a weak dollar, strong education, and the embrace of immigration and change. Government can also help with the right incentives to speed up business deals.

“The Silicon Valley economy today is one of the healthiest that we’ve seen in a generation. The reason is that it’s a diversified portfolio,” says Russell Hancock, head of Joint Venture: Silicon Valley Network, a group that connects regional business and government leaders. “They call it Silicon Valley, but really that’s a misnomer. We really should be called Innovation Valley.”

The region grew 2.1 percent – not stratospheric, but easily outstripping the ailing US and California economies. San Jose added 11,700 jobs in the past year, a sign of reviving health after shedding 205,000 jobs between 2002 and 2004.

In the aftermath of that crash, dot-com companies hit upon social networking and christened it Web 2.0. Computer hardware firms pushed innovation to portable devices like iPhones, iPods, and GPS navigators. Internet services flourished, and the new fields of biotechnology and nanotechnology blossomed. So did “clean tech,” an industry focused on renewable energy, particularly in markets like Germany, Japan, and California where government subsidized its adoption.

A clean-tech success story
The story of one clean-tech firm, Nanosolar, exemplifies how Silicon Valley bounced back.

Two local Stanford PhD candidates formed the company in 2002. With help from the world’s epicenter of venture capital located in nearby Menlo Park, they solved some of the technological hurdles in “thin film” solar energy.

Then the founders picked a place to headquarter their factory. San Jose won out because of the local talent pool, availability of industrial space, and the city government’s help in moving things along quickly, says CEO Martin Roscheisen.

“It’s truly phenomenal the way the city has streamlined administratively. Several of the key permitting items are literally 24 hour [turnarounds],” says Mr. Roscheisen, who says the wait times in other locations would be three to six months. “It means everything – being in business or not. We cannot possibly be stalled by permits in building our factory.”

San Jose revamped its business outreach after the dot-com collapse. One key change, says Paul Krutko, the city’s chief development officer, was the formation of teams from across city government who travel to businesses to approve permits. Since 2002, the program has permitted 9 million square feet of commercial space, housing almost 15,000 jobs.

“It cost the city about $81 a job to make that happen,” says Mr. Krutko. “We think that’s a pretty good trade-off.”

The weak dollar has benefited Nanosolar and the rest of the export-based economy of Silicon Valley. Nanosolar manufactures solar cells in the United States, paying wages in cheap dollars, then sells to Europe, which pays in higher-value Euros.

Rising living standards for high-skilled workers in India and China are also improving American worker competitiveness.

“High-tech manufacturing can be done as cost effectively in San Jose as in Shanghai or New Delhi – it’s all based on skilled labor. The skilled people now cost about the same in either place. The gap has shrunk very rapidly,” says Roscheisen.

The concentration of top talent here remains unparalleled, thanks in part to the region’s welcoming of skilled immigrants. San Jose has the most diverse ethnic population of any US city, with only 39 percent of residents born in the US. Roughly two-thirds of innovative companies in San Jose have at least one foreign-born member of management, says Krutko.

Attracting innovators
The entrepreneurial ethos also draws talent. “It’s great minds accepting failure as a part of the journey,” says Saeed Amidi, president of the Plug and Play Tech Center in Sunnyvale. The center serves as a hotel for start-up companies, offering low-cost office space as well as introductions to Valley players.

“I was interviewing some startups yesterday. This guy says, ‘I’ve been in 10 start-ups: two of them were semisuccessful, eight of them failed, and I’m starting my 11th one myself.’ I personally think that is what allows Silicon Valley to come back,” says Mr. Amidi.

Silicon Valley competes with other “brainwave economies” in the US, particularly Boston; Austin, Texas; and Raleigh, N.C. The latter two are currently growing at a faster clip, says Richard Carlson, chairman of Spectrum Economics, and they both offer a lower cost of living and nimbler governments. Roscheisen of Nanosolar says the Valley also suffers competitively from state taxes on manufacturing property – which not every state, and few countries, tax.

And not everyone here is doing well. A recent Silicon Valley Network report says there has been significant job loss in the mid-wage category, or those earning between $30,000 to $480,000. As a percentage of total jobs, this shrunk from 52 percent to 46 percent between 2002 and 2006.

“We are becoming a Manhattan – this place where only the people on the very high end can afford to live,” says Mr. Hancock, adding that “we need to figure out how every sector of the community can thrive.”

How government can help
City governments here are trying to address some of the infrastructural weaknesses. San Jose has changed zoning regulations to quadruple the density of commercial development in order to free up land for housing. The changes have cleared the way for 32,000 housing units next to mass transit and job centers.

“Those housing decisions have allowed companies to continue to think they can expand here. It was getting to this point that you had to ask these highly paid people to either pay millions of dollars for a house or a long commute,” says Steven Levy, an economist with the Center for the Continuing Study of the California Economy.

The new housing is a good start, says Mr. Carlson, but more is needed. “The mayor of San Jose could put 5,000 more people to work in six months by changing some housing rules,” he says.

San Jose’s mayor, Chuck Reed, says development always faces resistance, so new housing must be done in a “politically palatable” fashion. He’s met with more than 90 CEOs and listens carefully for ways the city can help – or just stand back.

“We are in a unique place in the world in Silicon Valley where a lot of times we just need to get out of the way and facilitate the growth that will happen,” he says.