Business & Economics

Government Planning and Spending Won’t Replicate Silicon Valley

State and federal efforts to create new technology hubs in other parts of the country have largely failed

Aerial view of tech cluster in Silicon Valley. Image Credit: Patrick Nouhailler/Wikimedia Commons

This is the first of two essays on government efforts to promote the creation of technology hubs in other parts of the country. The second piece will look at better alternatives to the failed tech-promotion policies still favored by many politicians.

Politicians used to promise a chicken in every pot. Today, it’s a Silicon Valley in every state.

The computing and internet revolutions gave rise to prominent tech clusters in Silicon Valley, Seattle, Boston, Austin and elsewhere. This has left many pundits and policymakers wondering how America might spread the wealth, so to speak, by reproducing these successes in other parts of the country.

A major effort is afoot to do just that. While promoting “innovation hubs” and “science parks” has been a long-standing priority for many state and local officials, a more concerted effort is now underway that marries traditional state and local economic development efforts with a renewed bipartisan interest in comprehensive industrial policy planning at the federal level.

Earlier this summer, the Senate passed a 2,300-page industrial policy bill, the “United States Innovation and Competition Act of 2021,” that included almost $10 billion over four years for a Department of Commerce-led effort to fund 20 new regional technology hubs, “in a manner that ensures geographic diversity and representation from communities of differing populations.” A similar proposal that is moving in the House, the “Regional Innovation Act of 2021,” proposes almost $7 billion over five years for 10 regional tech hubs.

Meanwhile, the Biden administration also is pitching ideas for new high-tech hubs. In late July, the Commerce Department’s Economic Development Administration announced plans to allocate $1 billion in pandemic recovery funds to create or expand “regional industry clusters” as part of the administration’s new Build Back Better Regional Challenge. Among the possible ideas the agency said might win funding are an “artificial intelligence corridor,” an “agriculture-technology cluster” in rural coal counties, a “blue economy cluster” in coastal regions, and a “climate-friendly electric vehicle cluster.”

Efforts to geographically diversify tech clusters are rooted in an understandable desire to extend the benefits of technological innovation beyond major cities. It is hard to fault state and local policymakers for wanting government to do more to attract new investment, firms and jobs to their communities.

Unfortunately, the “if you build it, they will come” mentality surrounding tech clusters and regional innovation hubs doesn’t take into account many economic, political, cultural and geographic challenges. Indeed, the history of previous efforts proves that these things cannot simply be willed into existence through top-down industrial policies, big bureaucracies and a lot of new spending programs. Clusters tend to grow more organically, and efforts by the government to force them are unlikely to meet with any more success than past experiments.

Wishful Thinking About Economic Development Subsidies

“Economic theory offers little reason to think that targeted economic development subsidies benefit the broader communities that ultimately pay for them,” concluded a recent Mercatus Center study on “The Economics of a Targeted Economic Development Subsidy.” The authors highlighted the extensive economic literature that finds that “the net effect of targeted economic development subsidies is likely to be negative” because “the taxes funding the subsidies will discourage more economic activity than will be encouraged by the subsidies themselves.”

That points to the first problem with governments trying to pick winners: There is no free lunch. Economic development and industrial policy efforts always sound great in theory, but in the end they rely on government-granted privileges—discriminatory tax or regulatory relief, cash subsidies, loans and loan guarantees, in-kind donations and the provision of other valuable goods and services. The costs of these targeted privileges are passed along to those firms and economic sectors without the political clout to get the favors, or just borne by taxpayers more generally.

The second problem with policymakers trying to pick winners is that they’re just not very good at it. Forecasting future market trends and the evolution of technology has always been notoriously difficult, even in the private sector. Lacking a profit motive and business acumen, governments have a much worse track record than investors, regularly picking more losers than winners. This problem has grown more acute today due to “the pacing problem,” which refers to the inability of government policies and programs to keep up with the ever-quickening pace of modern technological innovation.

These realities have not stopped policymakers from repeatedly trying to use both direct and indirect subsidies to attract high-tech sectors and talent to specific destinations. But there is no precise recipe for growing tech clusters. And as economists William R. Kerr and Frédéric Robert-Nicoud note, “developing even a semi-formal definition is tricky.” Typically, however, a tech cluster includes “an important overall scale of local activity, complemented by spatial density and linkages amongst local firms.”

This is not easily replicated. Indeed, in the U.S. a huge amount of the nation’s high-tech startup activity and venture capital funding is concentrated only in Silicon Valley and eight other big-city areas: New York City, Boston, Los Angeles, Seattle, Washington, D.C., San Diego, Austin and Chicago. Of course, large cities have long possessed many advantages for attracting skilled labor and investors, and they often tend to have a high concentration of universities and research labs, making it far easier for tech clusters to develop in these large urban centers than in rural areas. Fine. But much of the nation is dotted with other large cities. Why can’t they become thriving tech clusters?

This kind of thinking is driving the latest push to create the next great innovation hub. “With federal support, the U.S. can recreate Silicon Valley success nationwide,” says Steve Case, former head of America Online. Others argue regional tech hubs can help advance economic inclusion and racial equity.

Good Intentions Only Get You So Far

While these are noble goals, similar reasoning motivated earlier efforts to spawn innovation hubs, research parks and the like. Setting good intentions aside, however, the government’s past track record has been disappointing. “Despite several attempts, Silicon Valley has not been successfully copied elsewhere,” notes Mark Zachary Taylor, author of “The Politics of Innovation: Why Some Countries Are Better Than Others at Science and Technology.” Judge Glock, a senior policy adviser with the Cicero Institute, offers a more blistering assessment of such efforts: “Almost every American state has tried to fund the creation of biotech clusters, projects that almost inevitably end with weeds growing through the parking-lot pavement and a trail of corrupt bargains.”

Glock’s assessment is backed by economic studies of efforts to incubate various types of high-tech hubs or science parks that stretch back over several decades. Twenty years ago, for instance, economist Scott Wallsten surveyed government programs through 1997 aimed at promoting regional science and technology parks. He also reviewed the effectiveness of Small Business Innovation Research (SBIR) program efforts to boost capital investment in this regard. Wallsten found that “neither SBIR funds nor research parks have significant impacts on regional technology indicators. Indeed, the results seem to suggest that SBIR funds chase success, rather than vice versa, while research parks chase failure (regions experiencing reduced economic growth) and do not generally reverse it.”

A decade later, Harvard Business School economist Josh Lerner evaluated dozens of similar targeted development efforts from around the globe in his 2009 book “Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do About It.” He concluded that “for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.”

A major culprit for these failures, Lerner argues, is “outright distortions by special interests” and a vocal “subsidy lobby,” including trade associations and other groups and lobbyists who “are benefiting far more from the subsidies than the entrepreneurs the programs are designed to help.” For example, he found that the Small Business Investment Companies (SBICs)—federally backed risk capital programs sponsored by the Small Business Administration that started in the late 1950s—have included “hundreds of funds whose managers were incompetent or crooked.” Another study he highlights showed that “nine out of ten SBICs violated federal regulations in some way.”

Another major survey of efforts to create tech clusters was conducted by Aaron Chatterji, Edward Glaeser and William Kerr in 2014. They collected all the research conducted on the topic and concluded that existing evidence “suggests that the regional foundation for growth-enabling innovation is complex and that we should be cautious of single policy solutions that claim to fit all needs.” Furthermore, “even if clusters of entrepreneurship are good for local growth, it is less clear that cities or states have the ability to generate those clusters.” The more targeted the efforts, the more likely failures become, they concluded.

National Efforts Have Not Fared Much Better

These studies focused primarily on state and local governments’ attempts to incentivize the formation of clusters or hubs. There have also been many federal efforts to promote the geographic spread of high-tech sectors and jobs since 2000. In 2008, the Brookings Institution reviewed federal initiatives aimed at stimulating regional innovation and entrepreneurialism and found that during fiscal year 2006, the government had spent almost $77 billion across 14 different federal agencies and departments on 250 separate programs. The authors noted that with so many different efforts in play, “a lack of coordination is understandable” and that the programs “have evolved in a wildly ad hoc, idiosyncratic, and uncoordinated fashion.”

But that did not stop such programs from proliferating. In 2012, the Obama administration launched the multiagency Rural Jobs and Innovation Accelerator Challenge and Advanced Manufacturing Jobs and Innovation Accelerator Challenge. This occurred at roughly the same time President Obama was launching his Startup America initiative. He also signed the JOBS Act (Jump-start Our Business Startups) in 2012. All these efforts included various measures to support the spread of advanced manufacturing and high-tech startups across the U.S. But none of these efforts have borne much fruit so far.

When Donald Trump took office, regional tech development became part of a broader agenda of revitalizing domestic manufacturing and countering China on various technology fronts. This led to a major 2017 effort to attract Taiwan-based Foxconn Technology Group to create a liquid crystal display factory in southeast Wisconsin. The state offered Foxconn up to $3.6 billion in direct payments, tax incentives and other subsidies in the hope that the company would construct a $10 billion, 13,000-employee facility.

Proponents of the Foxconn deal also hoped to create “a virtual village, with housing, stores and service businesses spread over at least 1,000 acres.” Republican Gov. Scott Walker and President Trump both touted the deal as one of the biggest economic development efforts ever and insisted it would help bring manufacturing jobs to the state. Policymakers were willing to turn a blind eye both to the fact that the deal would cost the state $231,000 per job created and to the fact that Foxconn had already reneged on a previous 2013 promise to invest $30 million in a Pennsylvania-based high-end technology manufacturing facility with 500 jobs.

The Foxconn deal went off the rails almost immediately and has become the latest example of regional tech promotion failing to live up to lofty expectations. Frustrated with the company not following through on its promises, in late April 2021 Wisconsin announced it was scaling back the tax credits it was offering the firm and that overall state investment was dropping to $672 million, instead of the $10 billion promised, while the number of new jobs associated with the investment would fall from 13,000 to just 1,454. At this point it remains unclear what Wisconsin will get out of the deal at all—except, of course, the ongoing bill associated with the failure.

Casino Economics Is Bad Economics

Despite failures such as these, government efforts to spawn new high-tech facilities and clusters will continue because policymakers are never going to give up the dream of devising Silicon Valley-like success stories of their own. This is particularly true for regions that have lost their old anchor tenant—an industry or even a single company that drove growth and employment in earlier years.

Unfortunately, “there are precious few examples of a government successfully reviving a community suffering from industrial decline,” said Adam S. Posen, president of the Peterson Institute for International Economics, in a recent Foreign Affairs essay on the dangers of nostalgic thinking about reviving past modes of industrial organization. “There simply is no reliable method of saving local communities when they lose their dominant employer or industry, even with a massive amount of resources devoted to the effort,” he said. “Any promises made to revive particular communities through government action are likely to lead to disappointment, frustration, and outright anger when they fail.”

But the forms of economic nostalgia that Posen describes help explain why policymakers at all levels will insist a proverbial big plan is needed to help return depressed regions or cities to past glories. The new federal industrial policy push makes it clear that both parties are willing to double down on the same model that has failed them so many times before.

Like gambling addicts in a casino, lawmakers desiring winning tech hubs will always ignore the odds and look to roll the dice again in the hope that their next bet will finally hit the jackpot. Of course, it is easier for politicians to support their gambling habits because they can just keep passing the bill on to taxpayers. But instead of doubling down on failed policies, political leaders should be asking themselves whether there might be a better way to encourage high-tech innovation and new startups.

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