Silicon Valley Can Still Beat China

July 15, 2019

 

In May 1980, Chinese leader Deng Xiaoping proclaimed coastal Shenzhen his nation’s first special economic zone, open to foreign investment and international trade. Halfway around the globe, Silicon Valley was just then becoming a household name. Apple IIs sprouted on desktops and American living rooms were filled with kids playing Space Invaders on their Atari 2600s. The biggest overseas threat to U.S. technological dominance was Japan.

 

Four decades, many more SEZs and trillions of dollars’ worth of investment later, China’s tech sector is a colossus. Chinese funds are buying large stakes in U.S. venture-backed companies despite intensified scrutiny, while Chinese tech giants have opened research centers in Silicon Valley itself. The Chinese government is directing massive subsidies to key industries from semiconductors to electric vehicles and artificial intelligence. Shenzhen is now home to globally renowned brands such as Huawei Technologies Co. and Tencent Holdings Ltd.

 

The question worrying many U.S. executives, policymakers and military leaders is whether U.S. companies can compete against such a massive, organized, government-backed effort to seize the commanding heights of technology. The answer is yes -- but only if the U.S. recognizes and reclaims the things that made Silicon Valley great in the first place.

 

Just as in China, the state played a central role in giving the U.S. tech industry its start. After World War II, propelled by the new dangers and demands of the nuclear age, the U.S. government for the first time made large peacetime investments in scientific research and advanced technology. Rather than centralizing all research in government agencies, however, the U.S. contracted with private industry and universities to perform the work.

 

This effort transformed a sleepy agricultural valley in northern California and the university at its center. Up until that point, Stanford had been better known for its football team than its research prowess. Now its leaders built out new programs and research centers to meet the government’s surging needs. Flush with federal contracts, aerospace giant Lockheed moved its new missiles-and-space division to nearby Sunnyvale. By the time the space race took off in the late 1950s, this patch of countryside had become the go-to destination for makers of small electronics and thousands of smart young engineers.

 

By becoming early Silicon Valley’s biggest customer, the U.S. government effectively acted as a very large, forward-thinking seed capital fund. But the companies and research institutes clustered there were far from the centers of political and financial power -- both geographically and psychologically. Given resources along with the flexibility to create and iterate and fail and try again, the men and women drawn to the Valley in those early years created an entrepreneurial Galapagos, home to new species of firms, distinctive strains of company culture and tolerance for a certain amount of weirdness.

 

Add in the countercultural generation coming out of Stanford and Berkeley in the late 1960s and early 1970s, and the Valley’s desire to think differently and to question authority only intensified. Time and again, technologists pushed back when government tried to intrude. When Ronald Reagan promoted the Strategic Defense Initiative, aka “Star Wars,” in the early 1980s, the Valley’s computer experts loudly decried the missile-defense program, even though it would have streamed millions of research dollars into their laboratories.  When the Clinton Administration floated the idea of the “Clipper Chip” -- a government backdoor into U.S.-made software -- tech firms protested with such vehemence that the measure was shelved.

 

What’s important is that government support for the tech industry preserved the free movement of people and capital, allowed space for political disagreement and let technologists commercialize the products of government-funded research. U.S. leaders played a long game -- investing in education and blue-sky technologies, opening the country’s doors to the best and brightest from around the world -- and the return on investment was extraordinary.

 

The risk isn’t that this model can’t compete against China’s top-down efforts, it’s that the U.S. appears to be abandoning it voluntarily. China now outpaces the U.S. in the rate of investment in such bedrock areas as education, advanced technology and infrastructure. Meanwhile, the U.S. is closing its doors to foreign students and researchers (and not just Chinese ones). Its most successful tech regions are struggling under the weight of their own success, with skyrocketing housing costs and snarled traffic making them increasingly inhospitable places to start a new company.

 

This is especially unwise since China, at least under its current leadership, cannot replicate the Silicon Valley model fully. The already tiny space for free-thinking and dissenting opinions on the mainland is shrinking further rather than expanding. Avenues for exchange globally are being cut off as Western countries screen Chinese investments and technology more rigorously. Government subsidies have led to waste and corruption.

 

China’s most high-profile companies have been able to innovate despite these obstacles. Whether they can continue to do so, however, and whether others can follow their lead, remains an open question. By contrast, we know from the history of Silicon Valley that the right combination of government support and entrepreneurial freedoms can produce miracles. The U.S. would be foolish to forget that.

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