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To a point, there is no compelling reason under theories of international trade for IT companies to locate their production in Silicon Valley. Many major Valley firms have long since offshored their production, such Apple, Intel, Cisco and more. There is a strong case, however, under the theories of international trade, for IT firms to locate their intellectual hubs in the Silicon Valley. When the factors for building a successful global firm are considered, it is the competitive advantage that a firm in the Valley would have with respect to gaining access to talent and to capital that point to the Valley; with production the advantages are far less noticeable except in certain specialized cases.
The Silicon Valley can be said to have developed starting even as soon as the early 50s, when Stanford University saw the building of an industrial park that would house General Electric, Eastman Kodak, Lockheed, Hewlett-Packard and other technology companies (Gromov, 2011). The area was fuelled by talent from the University, forming the nucleus of an area with a strong technology industry. The area would eventually become a center for the development of computers and related technology. Over time, the number of leading technology companies grew and with that came financiers. That the Silicon Valley was a leading center for technological industries so early also contributed to its success, as did its relationship with nearby educational institutions that kept the talent pool growing over the course of several decades.
The most basic international trade theory is Ricardo's theory of comparative advantage (Investopedia, 2011), and this underlies much of the case for an IT firm locating its intellectual hub in the Silicon Valley (and indeed the case for locating production elsewhere). At the core of the theory is that nations with comparative advantages in the production of specific goods should produce those goods, and trade for others. With respect to IT, Silicon Valley has a number of absolute competitive advantages. The Valley is the global hub of the industry, with some of the largest and most innovative firms there. Venture capitalists specializing in the industry are also dense on the ground, allowing new firms access to capital advantages that they may not have elsewhere. Even if the Valley is the best place in the world to produce IT equipment, there are other places that are almost as good (and definitely cheaper). According to Ricardo's theory, the Silicon Valley should be the focal point of innovation and product development in the IT industry, while parts of the world with a comparative advantage in production should undertake that function.
The Solow Growth Model (Alexander, 2006) is an economic theory that argues that firms grow through the accumulation of capital and productivity. If a firm locates in an area where it has access to key resources and to capital, it is better situated to grow. This certainly makes the case for an IT firm to set up in the Silicon Valley, where resources and capital for IT firms are in abundance. Venture capitalists are more willing to finance operations because they are familiar with the industry and its players; there is access to better employees who already live in the area; and there is better access to markets because customers are already nearby.
Silicon Valley has a critical mass of talent and capital because it is an industry cluster. For a startup IT firm, operating in a cluster has a multitude of advantages, but access to the best resources is the most important one. Since the 1970s, and perhaps even before, the Silicon Valley has been home to major technology companies and they have brought with them some of the best talent in the industry. That for a large part of this industry's history it has been willing to import that best talent from around the world only strengthens the talent base of the Valley at the expense of other IT clusters. The cluster begins and is fostered when employees leave their firms to start companies of their own. This increases the density of industry firms in the area, allowing for the formation of a cluster (Porter, 1998). When enough of these startups become successful, the industry begins to attract not only other workers looking to break into the field or start up firms, but also capital. Silicon Valley remains the best source of venture capital for high-tech startups in the world. Once an area hits of critical mass of firms, workers and capital, it becomes a cluster.
Operating in a cluster has a number of advantages in the global marketplace. The address alone carries with it prestige -- you are more likely to be taken seriously if you are in the Valley than in some random town with no high-tech industry. The talent and capital will help the firm to grow. Firms in major clusters have ample access to ideas, and access to markets for their products. AB-to-B IT firm would benefit greatly from operating in the Valley as that is where many of its customers will be. Porter (1998) argues other benefits of operating in the cluster are that it helps increase the productivity of the company, it drives the direction and pace of innovation and it stimulates the formation of new businesses within the cluster -- potential new customers or partners may arise from within your own company. Competitors will force you to be at your best, and there are ample markets nearby for your products. This is consistent with the Solow Growth Model, which argues specifically that growth depends on access to resources and technology, both of which are advantages that clusters have over non-clusters.
All of these advantages work on the global scale. Globalization gives firms access to markets all over the world, which implies that the firm should set up shop in the best location, and trade from that location. Information -- critical to the concept of the intellectual hub -- can be created anywhere and transported instantly around the world. Therefore, a startup company should focus on locating in an area where there are specific strategic advantages, and this is what a cluster gives it. There are other IT clusters in the world, with different advantages such as lower costs or less stringent immigration policies, but the firm would need to weigh out these different factors in order to come to a final decision. Silicon Valley remains, however, the largest, most competitive and most attractive cluster in the IT business for a multitude of reasons.
Clusters are also attractive because they are able to gain political power through their economic might. This allows the cluster to have a greater say in the elements of government policy that impact their business, including trade policy, taxation policy and regulatory policy. The cluster's political power means that its firms might have a better political environment in which to operate than similar firms operating in other jurisdictions.
With respect to production, comparative advantage points to Silicon Valley as a poor choice for most firms. The exception would be small firms with highly-involved production processes. For most IT firms, however, the cost of doing business in the Valley is very high. Production facilities capable of producing hardware in particular can be found to a high standard all over the world, at a variety of costs. Because the Valley's historic strength is on the intellectual, innovative side, it is a good choice for that element of the firm's operations. It is highly likely, however, that the production function could be conducted to an equally high standard and at a lower cost elsewhere in the world, with the final product being shipped back to markets. Many firms in the Valley have recognized this, and shifted production overseas where absolute and comparative advantages can be gained.
Overall the Silicon Valley is very attractive to IT firms today because of the critical mass it enjoys with respect to talent, capital and ideas. There is ample evidence that clusters can become dominant in their field, and firms participating in that cluster ultimately have a better opportunity to become powerful, through the increased access to resources. While other IT clusters are emerging in nations around the world, Silicon Valley remains the dominant cluster on account of its first-mover advantage decades ago.
Part II. There are limitations in using international trade theories as the justification for a decision such as one as to where to locate the business. The most obvious limitation is that they are generalized, while a company's decision is firm-specific. Firms seeking to make a decision must do so on the basis of their own unique situations. For example, the IT firm in question may not have a particularly innovative product, in which case it might not need access to the innovative capabilities of Silicon Valley employees. It may seek out a different location for a different reason. A firm seeking to win big in the Chinese market, for example, may not find any benefit in operating in a…[continue]
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