Many people and policymakers look at regions such as Silicon Valley and San Diego with large numbers of biotechnology firms and presume that this concentration confers benefits to both the region and the firms located there. The empirical evidence does not, however, support such a view. In terms of firm performance, San Diego and Silicon Valley are the two worst possible locations for a biotechnology firm in the United States (Stuart and Sorenson 2003b). Yes, these regions have large numbers of biotechnology firms, but with those numbers come intense competition.
If firms do not profit from locating near their rivals, why do they not move elsewhere? Entrepreneurs require social connections to information and resource holders to identify opportunities and build firms to exploit them. Because these relationships remain largely bounded within regions, they bind entrepreneurs to the communities in which they live and work. In this sense, each entrepreneur maximizes his own expected outcomes; he would do even worse in a region where he could not draw on his social network. However, because entrepreneurs come primarily from the ranks of existing employees in the industry, the geographic pattern of entry tends to mimic that of incumbents, resulting in local overcrowding (and potentially a socially inefficient distribution of production). One would therefore expect industries to concentrate geographically even in the absence of performance benefits or policies designed to encourage clustering.
Although we do not have sufficient evidence to argue that policymakers should actively discourage the formation of clusters, the theory and evidence described here raise serious questions about many of the attempts that have been made to replicate the success of Silicon Valley and Route 128. Those tempted to pursue these paths should study history. Compare Chicago and Los Angeles to Akron (tires), Detroit (automobiles), and Pittsburgh (steel). Chicago and Los Angeles never enjoyed the booming success of these smaller cities at the dawn of the twentieth century; however, Chicago and Los Angeles also did not fall into steep decline in the later half of the century in the face of competition from imports.
With concentration comes a price of fragility.
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Pier Paolo Saviotti1 and David Catherine2
1 UMR GAEL, Universitè Pierre Mendès – France, B.P. 47, 38040 Grenoble Cedex 9, and GREDEG CNRS, I2C, 250 rue Albert Einstein, 06560 Valbonne, France
2 Grenoble Ecole de Management, 12 rue Pierre Sémard, B.P. 127, 38003 Grenoble Cedex 01, France