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. But most of these well-meaning schemes are missing an essential ingredient: demand.

Silicon Valley or Demand Mountain? (Part 1)

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 responded to a compelling need felt by a huge number of consumers. Government projects such as the United States’ 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, and 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 roadmap 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.

In my next post, I’ll discuss the merits of state-sponsored demand in more detail and explain how even small governments and cities can establish this kind of demand.   

 This article originally appeared in full in Project Syndicate’s exclusive series The Innovation Revolution, where the world’s leading experts in architecture, industrial design, medical research, economics, and other fields examine the causes and consequences of breakthrough innovations in communications, transport, energy (and energy storage), biotechnology, and similarly crucial sectors.


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