Report Warns Silicon Valley Could Lose Its Edge

Claire Cain Miller|The New York Times

Silicon Valley’s economy is sputtering and risks permanently stalling, according to an annual report by a group of researchers in the region.

Part of the toll on Silicon Valley has resulted from the recession. The region, the center of the global technology industry, lost 90,000 jobs from the second quarter of 2008 to the second quarter of 2009. Unemployment is higher than national levels and the worst in the region since 2005, when technology companies were still recovering from the dot-com implosion.

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The drop in the number of midlevel jobs — the engineers who drive much of the Valley’s growth — has been sharpest. And when companies do hire, they are cautiously hiring independent contractors instead of regular employees, and are hiring abroad, according to the “2010 Index of Silicon Valley” report, which was produced by the Joint Venture: Silicon Valley Network and the Silicon Valley Community Foundation, two local nonprofit groups.

Other economic indicators are also gloomy, the report found.

“We show no evidence that the recovery has arrived,” said Russell Hancock, chief executive of Joint Venture.

One of the Valley’s measures of success — akin to the size of bonuses on Wall Street or box-office sales in Hollywood — has been the number of patents received and the number of initial public offerings of stock in technology companies. Patent registrations dipped slightly in 2008, and initial public offerings have dropped to the lowest levels since the 1970s.

Venture capital financing of start-ups sank 37 percent from 2008 to 2009. And vacancies in commercial real estate jumped 33 percent.

The report’s pessimism is by no means the prevailing view in the San Francisco Bay Area, where stalwarts like Apple and start-ups like Twitter continue to pump out new products and new ideas.

“Innovation continues unabated,” even though venture financing is difficult to raise right now, said Timothy Draper, founder of Draper Fisher Jurvetson, a Menlo Park venture capital firm. “Moore’s Law persists, as $1,000 worth of computer power doubles every 15 months or so, and innovators continue to march along.”

Still, if Silicon Valley’s traditional advantages weaken, residents may no longer be willing to put up with its ultra-expensive homes and poor public schools, said John Kao, chairman of the Institute for Large Scale Innovation in San Francisco.

“It’s like SoHo, which started out as a low-key, cheap place to do art, and now it’s expensive and an artist wouldn’t go to SoHo,” he said. “It’s the same threat here. So far people have stayed, but entrepreneurs have many other options today.”

Even when the trauma of the financial crisis subsides, Silicon Valley will still be at risk because of deeper, long-term challenges, the report said.

Sixty percent of the region’s scientists and engineers are foreign-born, but foreign immigration to the region dropped 34 percent over the last year. The home countries of foreigners are increasingly luring them back, while the United States government’s policies have made it harder for them to stay, the report said.

To combat the brain drain, California must do a better job educating local students, said Stephen Levy, director and senior economist of the Center for Continuing Study of the California Economy, who also serves as an adviser to the annual study. “We’re not going to be able to live on global talent forever,” Mr. Levy said.

However, 5 percent fewer high school graduates are meeting requirements for entrance to state universities, the number of science and engineering degrees has leveled off and state general fund spending on higher education dropped 17 percent last year, according to the report.

The report’s authors said that green technology could be the way out of the region’s, and perhaps the nation’s, downturn. From 2006 to 2008, patent registrations in green technology in Silicon Valley increased 7 percent. From 2004 to 2008, green jobs increased 24 percent.

A green Silicon Valley would be a very different place than the current one, which was built on semiconductors and software and is now home to Web innovators like Google and Facebook.

Factories that once made chips would have to be revamped to make solar panels, and venture capital firms are unlikely to be able to provide enough money to build such capital-intensive companies, Mr. Hancock said. Venture financing of green technology companies slid 37 percent last year.

With green technology, “it’s not whiz-bang software guys in garages, but utility-scale projects you must do with a federal partner,” Mr. Hancock said.

Yet Silicon Valley is failing to compete as intensely as other communities for federal stimulus grants and loans, said Emmett D. Carson, chief of the Silicon Valley Community Foundation.

Silicon Valley’s poor economic health will affect the nation as a whole, said Judy Estrin, former chief technology officer of Cisco Systems and author of the book “Closing the Innovation Gap.”

“Silicon Valley is both a barometer of the rest of the country and a spark for the rest of the country, and if we don’t protect that innovation culture here, it’s going to be hard to sustain an innovation culture in the country,” she said.