In just about every corner of the country, policymakers and industry partners alike want to help develop their regional industries and economies so that they become an innovative and vibrant technology hub—a location seen as a global leader in developing and commercializing certain technologies and industries. But while many people might have an idea of what they want their region to be as a technology hub (or cluster, as they are also known), very few seem to know what combination of ingredients—research and development (R&D), tech innovation, manufacturing, education, workforce training, private and public investment, and so on—will get them there. With the federal government recently launching a major grant program seeking to jump-start technology hubs across the country, it’s important that regional policymakers, industry leaders, researchers, and educators all understand what it takes to create a successful technology hub.

In October 2023, the U.S. Department of Commerce’s Economic Development Administration (EDA) announced the first recipients of grants under the Regional Technology and Innovation Hubs (Tech Hubs Program) competition. The Tech Hubs Program, authorized by the CHIPS and Science Act of 2022 and funded at an initial level of $500 million, is intended to “advance the capacities of places to manufacture, commercialize, and deploy a region’s primary innovative industry to become a global leader” in a critical technology area (ten focus areas have been identified) “within a decade.” The initial grants designated thirty-one Tech Hubs located across thirty-two states and Puerto Rico, as well as twenty-nine Strategy Development Grants. In Phase 2, EDA will award five to ten consortia grants that EDA has designated as Tech Hubs funding in the range of $40–70 million across three to eight projects in the categories of workforce development, business and entrepreneur development, technology development and maturation, and infrastructure-related activities “to help propel the Hub’s chosen geography into self-sustaining global competitiveness.” The Tech Hubs Program is not alone in trying to address regional economic disparities and foster development through “place-based” policies; for example, in September 2022 the EDA’s Build Back Better Regional Challenge, a $1 billion program funded through the American Rescue Plan Act, announced awards made to twenty-one coalitions to fund 123 projects across twenty-four states.

What does it mean for a region to become a global leader in a technology or industry? What would success in “place-based” development look like? There is no single definition of a technology cluster. One way to define it, however, is by looking at a shining example: Silicon Valley, in the San Francisco Bay Area, is the quintessential cluster, leading in industries including computing, electronics, software, Internet start-ups, and biotechnology. Silicon Valley has also defined the self-sustaining tech hub, having been a leader in technologies since before the semiconductor that gave it its name in the 1970s. A half-century later, the region continues to be an economic force:

Commentators have been tempted to look at the success of Silicon Valley and try to reverse-engineer a formula: take a few good research universities in a pleasant environment, add some venture capital in a laissez-faire economic system, foster a culture of risk-taking and moving (and failing) fast, and voilà—you have a tech cluster. But many regions have failed in efforts to create similar technology clusters. Studying the history of Silicon Valley highlights the fact that many of the impacts on its development and ongoing success as a tech hub came from indirect policies or regional conditions.

1. Not everything can be planned or controlled.

Silicon Valley illustrates the role of a combination of serendipity and what is known as path dependency in cluster development: chance events that came about in unpredictable ways have had lasting effects. Perhaps most well-known is the decision by William Shockley in 1956 to locate his transistor company in the Bay Area, to be close to his ailing mother in Palo Alto (where he went to high school). Shockley brought a unique combination—the ability to spot raw talent (most of his recruits had no experience with transistors) and the ability to use his fame as the inventor of the transistor to convince others to leave steady jobs in the East to join a speculative venture. He was also a terrible manager who quickly drove those talented recruits to leave en masse and form Fairchild Semiconductor, which they did right down the street (most spin-off companies are located close to where the founders previously worked). In 1924, another fortuitous event happened. Fred Terman, the son of a Stanford University professor, had finished his Ph.D at MIT, where he had an offer to join the faculty, but on a visit to Stanford, he came down with tuberculosis; bedridden for months, he eased his way back to health by teaching a course at Stanford, ultimately spending the next fifty years teaching, mentoring, sitting on boards, and integrating Stanford into Silicon Valley. And even more obscured by time is the fact that vacuum tube and wireless (radio) inventor Lee de Forest happened to be in the Bay Area in 1920 when his New York business partners were arrested for stock fraud, leaving him without a company or resources. Seeing an opportunity, Federal Telegraph Company in Palo Alto offered de Forest a job, and even paid his bail. While at Federal Telegraph, de Forest expanded the application of his invention, the Audion, and thus Federal Telegraph retained “shop rights” (the ability to use the technology in its own systems) even though de Forest sold the patent rights to AT&T. The ability to use tubes in its equipment enabled Federal Telegraph to take a leading position in a new area, and the engineers working with the technology (among them Fred Terman and Charles Litton) led the development of the vacuum tube industry in the Bay Area.

2. A cluster does not need to “invent” a technology to capitalize on it.

An aspect of Silicon Valley that is not well understood is its history of adopting, rather than inventing, technologies. Radio, vacuum tubes, transistors, computers, and the Internet were invented and/or conceived elsewhere, but commercialized, improved, made into products and businesses, and sustained in Silicon Valley. This goes for business practices as well; Silicon Valley imported the concept of venture capital from American Research and Development (ARD) in Boston, and companies such as Litton and Hewlett-Packard based some of their employee benefits policies on those developed at General Radio starting in 1919. And just as with the technologies that Silicon Valley companies adopted, these business practices were also supercharged in the Bay Area.

3. Technologies change, and sustainable clusters adapt.

In looking at Silicon Valley, observers tend to point to their favorite entrepreneurial events as the foundational moment. Each of the popular choices suggest a different technology or industry: the founding of Apple by Jobs and Wozniak (plus a third who left before incorporation) in the Jobs’ family garage in 1976 (personal computing), the departure of the “Traitorous Eight” from Shockley Semiconductor Laboratory in 1957 and subsequent founding of Fairchild Semiconductor (semiconductors), or the start of Hewlett-Packard (test and measurement equipment) in the “original” garage behind the house newlyweds Dave and Lucile Packard were renting in 1939. Less well known, one of the oldest companies in the Bay Area, Federal Telegraph, was founded in 1909 by Australian Cyrus Elwell, a young engineer working in the growing electrical power industry in the Bay Area, who was asked by investors to look into a wireless (radio) transmitter. Fast forward, and Silicon Valley has played key roles in the commercial Internet, biotechnology, automation, robotics, and artificial intelligence. The early radio and vacuum tube companies gave engineers and entrepreneurs the experience they needed to start ventures to exploit newer technologies such as transistors and integrated circuits, setting a pattern in which Schumpeter’s “creative destruction” played out within the confines of the San Francisco Bay Area. Contrast this with another famous cluster—Detroit—which thrived in the first half of the twentieth century, but struggled to adapt to foreign competition, as well as to adopt new features (for example, telematics) and product types (electric and self-driving vehicles).

4. Government can have more impact through procurement than by trying to direct research.

Early in the twentieth century, the U.S. Navy recognized the power of radio for communicating with ships as well as far-flung bases in the Pacific during World War I, and was willing to purchase from “startups” such as Federal Telegraph that could demonstrate superior performance. Later on, while most of the foundational work in radar and other military technologies for World War II was carried out in Eastern laboratories, by the time of the Korean and Cold Wars, the industrial focus of defense spending was in microwave-related technologies, where Bay Area companies such as Varian and Eitel-McCullough took the lead. In semiconductors, the U.S. government (primarily the U.S. Department of Defense and then NASA) took on the early adopter role: one of Fairchild Semiconductor’s first orders was for transistors ($175 each) from IBM for defense systems; the “planar” transistor was created in response to reliability concerns identified by another defense contractor; and the vast majority of integrated circuits sold in the early 1960s were for defense and space systems purchased by the government. These purchases, more than directly funded research, drove the development of Silicon Valley, providing revenues for fledgling companies but also leading those companies to work with universities such as Stanford to develop new technologies and train technical staff.

5. Universities can help to orchestrate cluster development.

While the popular perception of Stanford University is as a generator of technologies and companies, for many years, the relationship went the other way: the university was focused on learning from companies. Starting in the 1930s, Stanford’s Terman arranged for industry experts to teach courses (and faculty) about the technologies they were developing, even “apprenticing” faculty to companies. The faculty members then used that knowledge to create laboratories and courses. Terman also helped companies, most famously by bringing Hewlett and Packard together and providing seed capital for their company. In the 1950s, Stanford’s Research Park (originally Industrial Park) opened, leasing office and research space—along with preferential access to faculty—to science and technology businesses. Related programs enabled companies to send employees for graduate training, and gain early access to results of military-sponsored research projects. These programs were all lucrative for the university, but more importantly, they supported local companies beyond the supply of graduates. In particular, the focus was on helping companies attract defense funding, for both research and production.

6. Government actions can set the stage for industry development.

Some government policies that had nothing to do with Silicon Valley in their conceptualization were nonetheless impactful. As part of the 1956 consent decree between the U.S. Department of Justice and AT&T, the company agreed to license all technologies developed by Bell Labs not directly related to telephone systems; this enabled Shockley, one of the inventors of the transistor, to access a broad set of intellectual property for the new technology. IBM’s decision in 1969 to unbundle software and hardware in its mainframe sales, partly in response to a federal antitrust investigation, led to the creation of a third-party software industry. Federal investments in research laboratories in the Bay Area, including aerospace (NASA’s Ames Research Center) and energy (the U.S. Department of Energy’s National Laboratories at Berkeley and Livermore and linear accelerator at Stanford) drew in scientists and engineers, and in some cases led to spinoffs and partnerships. And the privatization of what started as DARPAnet and evolved into NSFnet enabled Silicon Valley companies to commercialize what had been a network for the military and scientists into the Internet of today.

7. Government policies outside of technology can enable and sustain tech clusters.

State and federal policies in two areas outside of technology had significant impacts. Labor and business codes are generally the province of states, and due to an accident of history, California (which in the 1860s adopted a constitution modeled on one written for, but not fully adopted by, New York State), has throughout its history been one of a few states that prohibits the enforcement of noncompete agreements. Natural experiments examining changes in state policies have demonstrated the role of the lack of enforcement of noncompetes in encouraging high rates of startup formation, and further research points to the role of spinoffs in sustainment of tech clusters. At the federal level, liberalization of immigration in the 1960s led to the growth of foreign-born residents in the Bay Area, a trend that has continued to the present (in 2021, more than a third of residents are foreign-born, compared to less than a sixth in the country as a whole); these immigrants, in particular East Asian and South Asian immigrants have played an outsized role in startup formation, in particular for unicorn startups (valued at over $1 billion).

8. Government policies need to evolve as well.

While there are no legal barriers preventing the formation of the types of startup or spinoff companies that are essential to the rise of robust tech hubs, aspects of the industry and technology landscape may create structural impediments to the success of new companies that are pursuing innovations that could impact incumbents. Over the past two decades, for example, a few technology platforms have come to dominate commerce (Amazon), Internet search (Google/Alphabet), social media (Facebook/Meta), and smartphone applications (Apple and Google/Alphabet), among other areas, and there are indications that these companies have used acquisitions and market power to hinder the development of new products and technologies. In 2023, the U.S. Department of Justice and Federal Trade Commission (FTC) released draft guidelines on mergers focusing on these risks. Other policy adaptations will also be needed at the federal and state level.

Recommendations at the federal, state and local levels.

A key challenge in formulating federal policies for tech clusters is that each region and industry will have specific needs. But the history of Silicon Valley indicates that there is a role for federal policies in increasing the supply of skilled individuals and in driving demand for advanced technologies. In that light, the federal government should:

  • Encourage immigration and ease the citizenship process, particularly for skilled individuals. The process for skilled foreign workers to obtain permanent residency status via green cards has become impossibly long, with wait times extending into decades, leading to other countries to craft policies to attract skilled immigrants away from the United States. Increasing participation in the Optional Practical Training (OPT) program and extending the duration of the OPT work permits could increase the number of foreign students who attain employment in the region of their university after graduation; a recent study found that only 23 percent of international master’s graduates and only 8 percent of bachelor’s graduates transition in the short run to a within-state job.
  • Use government procurement and incentives to drive demand. As the history of Silicon Valley shows, the federal government can be a critical customer for advanced technology products. During the decades of Silicon Valley’s ascent, however, there was little foreign competition, while today advanced technology is procured in a global market. Policies to incentivize domestic provision of critical goods should be enacted to correct for the impact that this globalization has had on government purchasing. In addition to government procurement, federal policy can impose domestic content requirements in order to qualify for federal purchase incentives or manufacturing tax credits.

There are implications for regional policy as well. Leaders should look for ways to develop collaborative relationships between educational institutions, local companies, and the federal government, moving beyond traditional goals of securing research and workforce development projects through congressional earmarking. In order for regions to accommodate growth from thriving technology hubs, regional development agencies should also examine and reduce any barriers to commercial and residential development. Finally, states that continue to allow enforcement of noncompete agreements will be at a disadvantage (though changes at the federal level may also address this issue).

Looking ahead.

Learning from Silicon Valley does not provide a formula for sustainable tech cluster formation; each region has its own set of capabilities, endowments, history, and strengths, and each technology or industry will be at a different stage of development and have its own path of evolution. But examining factors behind the development of the world’s most enduring technology cluster can help policymakers to look beyond simplistic formulations. It also points to the role of indirect policies that can increase the chances of success for all Tech Hub Program investments.