Silicon Valley or Demand Mountain? (Part 2)


Silicon Valley or Demand Mountain? (Part 2)

September 27, 2013

In my earlier post, Silicon Valley or Demand Mountain? (Part 1) I argued that hubs of innovation are not always borne out of some intrinsic idea or exceptional culture, but are built instead on demand: specifically, state-sponsored demand. Smart governments have backed some of the biggest and riskiest waves of innovation by guaranteeing demand not only for technical solutions themselves, but for the steps along the way.

Why is that so important? Because unlike market-driven demand, which too often results in a winner-takes-all dynamic, state-sponsored demand creates an environment in which multiple solutions to technical problems can proliferate and coexist. The pioneers of microelectronics tried many strategies to supplant vacuum tubes, and they delivered a host of semiconductors and chip designs: germanium, silicon, aluminum, gallium arsenide, PNP, NPN, CMOS, and so on. Some of these research efforts were never implemented, but many found their way into specialized devices. The diversity of options allowed widespread adoption, paving the way for the digital revolution.

As with the microelectronics program, government incentives don’t have to line the road all the way to commercial success. At some point, companies will be ready to sell products, and market demand can take over. The US Department of Defense was the only customer for integrated circuits in 1962, but by the end of the decade consumers were buying transistor radios and pocket calculators in droves.

Likewise, state-sponsored demand should not take the form of subsidies to specific technologies or companies; the government has no business gambling taxpayer money on particular ventures. Assuming that risk is the job of venture capitalists and others in finance, not public officials. But there is little risk in offering a contract for a job well done: there is no payout if the problem remains unsolved.

And those payouts are modest compared to the research and development efforts they stimulate. A program offering rewards of $1-5 billion in contracts or deployment commitments can generate many times that value in private-sector R&D. Innovators and their investors are willing to bet big on these opportunities, because they know that the eventual reward in revenue from a global customer base will far exceed the initial investment. That makes state-sponsored demand a very efficient mechanism for generating innovation.

Because of the multiplier effect, small governments and states, and even large cities, can successfully sponsor the kind of demand that fosters a world-class innovation epicenter. Certain Scandinavian countries, Chinese provinces, and the city-state of Singapore, for example, are ideally positioned to try this approach.

Some years ago, I calculated how many units of product need to be sold to launch a technology. The number is actually quite modest: If you can move between 100,000 and one million units of a disruptive product, you can establish the technology standards for that category and in time become the global leader of a new industry. Government sponsorship ensures that a certain number of people will adopt your product. At the start, it need not be that many.

The economic planners and policymakers who are chasing Silicon Valley’s taillights are learning that they cannot always replicate the entrepreneurial culture and finance mechanisms that flourish there now. But they have forgotten how it all started: guaranteed demand, which stimulates the most ambitious kind of innovation.

The lesson is a simple one: Don’t try to build another Silicon Valley. Instead, build a Demand Mountain, and the innovators will come.

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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