Everyone wants to know how to build the next Silicon Valley: an innovation hub that draws talent and capital, and that creates jobs, companies, and whole new industries. Developed-country governments scramble to subsidize technology that could be the next big thing. Emerging-market policymakers hope that incentives like tax breaks and free land will induce innovators to settle and prosper there. Most of these well-meaning schemes are missing an essential ingredient: demand.
Demand for innovation in specific areas of technology has been the common force behind all high-tech hot spots, as well as the most important inventions. Technological breakthroughs such as antibiotics and cars were in response to a compelling need felt by a huge number of consumers. Government projects such as the US’ Apollo program — intended to put a man on the moon — drove demand for more basic technologies (which are simply inventions that no one has asked for yet).
Silicon Valley itself was built on demand. The US Department of Defense put up tens of billions of dollars in contracts for microelectronics, a commitment that both paid down innovators’ risk and created an infrastructure that would support the growth of start-ups.
All demand is not created equal though. It is instructive to examine the differences.
Consumer or market-driven demand — the kind most of us think of when we hear the word — is far less predictable, and therefore much riskier, than state-sponsored demand of the sort that landed a man on the moon. Companies that depend solely on their products’ commercial appeal are limited in the kinds of innovations that they can safely introduce because, if one of their products fails in the marketplace, they may not survive to build another one. This is especially true of start-ups and small companies — the very players that everyone hopes will show up in the next-wave of Silicon Valleys.
Fortunately, by sponsoring long-term, targeted initiatives, governments can stimulate more predictable demand. The Apollo program gave innovators clearly defined goals and a road map for getting there: first put animals in orbit, then put people there, then send probes to the moon, then send people there.
Equally important, the government offered rewards for interim progress, not just ultimate success. Putting a monkey in space may not have been the most exciting achievement, but the government was paying for it, so it happened. A smart government creates guaranteed demand not only for the solution itself, but for the steps along the way.
Coupling intermediate technical milestones with guaranteed incentives enables companies to focus on problems that might take ten years or more to solve. It also motivates innovators from a variety of industries to take on complex problems that must be addressed by more than one kind of invention. The US Defense Department’s microelectronics initiative required not only new materials and circuits, but also new methods of fabrication. Because of the reward structure, these efforts could be coordinated, rather than pursued in isolation.
Unlike market-driven demand, which too often results in a winner-takes-all dynamic, state-sponsored demand creates an environment in which multiple solutions to technical problems can proliferate and coexist. The pioneers of microelectronics tried many strategies to supplant vacuum tubes, and they delivered a host of semiconductors and chip designs: germanium, silicon, aluminum, gallium arsenide, PNP, NPN, CMOS, and so on. Some of these research efforts were never implemented, but many found their way into specialized devices. The diversity of options allowed widespread adoption, paving the way for the digital revolution.