Nano-economics & the
Wealth of Regions
Steven Klepper
Carnegie Mellon University
Overview
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Four extraordinary industry clusters
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Nano-economics
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Security in numbers
All firms benefit from clusters
New theory
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q 
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Dissect evolution of industries from start for clues
Conventional view
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How happen?
Involuntary organizational reproduction & inheritance
Conduit for key tacit knowledge
Novel policy implications
Silicon Valley Great Modern Cluster
California
•  Santa Clara County
•  Tiny part of CA and US
Numerous Great Firms
•  Intel
•  H-P
•  Google
•  Sun
Name from Semiconductor
Industry
Evolution of Silicon Valley
60
50
Silicon Valley Semiconductor Market
Share of U.S. Firms
128 Entrants in SV, 1957-1986
40
30
Santa Clara Population
1950 = .3 million
1980 = 1.3 million
20
10
0%
0
1950
1960
1970
1980
1990
2000
Two Earlier Great Industry Clusters—
Detroit, Michigan and Akron, Ohio
Detroit & Automobiles
Detroit Auto Share
90
80
70
113 MI Entrants w/in 100 miles
of Detroit, 1901-1924
60
50
40
30
20
10
0
1895
Wayne County Population
1900 = .3 million
1930 = 1.9 million
0%
1900
1905
1910
1915
1920
1925
1930
Akron & Tires
Ohio Rubber & Tire Share
80
70
102 Ohio Entrants w/in 100
miles of Akron, 1901-1924
60
50
40
Summit County Population
1900 = 70,000
1930 = 350,000
30
20
10
0
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
Intriguing Story of Development
Bangladesh History
•  Independence from Pakistan in 1971
•  Nationalization of industries
•  Densely populated
•  High illiteracy
•  One of the poorest nations
•  Rampant corruption
•  Political unrest
•  Natural disasters
•  Organized labor
…
Bangladesh Grows 5% annually from 80s!
The Miracle of
Cotton Garments
Bangladesh
1800
GDP PPP Per Capita
Export
GDP (PPP) Per Capita
1600
8000
6000
1400
1200
5000
1000
4000
800
3000
600
2000
400
1000
200
0
0
1959 1964 1969 1974 1979 1984 1989 1994 1999
Year
•  Before 1978 no industry
7000
Total Export ($ million)
2000
•  Now 78% of the country s exports
•  # 3 world exporter
•  4,500+ factories
•  80+% in Dhaka
What Do the 4 Clusters Share?
272
300
250
U.S. Automobile Industry
200
Exemplar of Shakeouts
150
100
9
50
0
1890
1900
1910
1920
1930
1940
1950
1960
1970
•  Traced evolution of autos & tires to study
shakeouts
•  Every entrant, entry & exit dates, base location
•  No new ideas about why their clusters formed
Seeds of a Theory
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First great firm: Olds Motor Works
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Ransom Olds the schoolmaster of
Motordom
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Headed by Ransom Olds
Many famous auto men worked for him
Firms involuntarily give birth to new firms
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Better firms more fertile, spinoffs better
Spinoffs don t venture far geographically
Buildup of firms around great early leaders
What to Expect & Look For
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Great early leader(s) in clusters
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Clusters capture growing share of industry output via
spinoffs
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Spinoffs are the key performers in clusters
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Clusters have high % spinoff entrants
Especially ones with right pedigree
Better firms have more & better spinoffs
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Inheritance of tacit knowledge
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Spinoffs in clusters are indigenous
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Spinoffs make the region, not the region make the
spinoffs
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Different from the outset
Empirical Challenge
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Track all firms
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Year of entry & exit
Base location
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Identify periodic leaders
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Track heritage of all firms
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Especially new ones
Identify organizers = founders
Trace their work history
Making Nano-economics Work
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Autos first—had all (700+) firms, annual leaders
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Tires next—had all 600+ firms, not periodic leaders
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Standard Catalog of American Cars
Restricted to 126 in Ohio, 1901-1930
Guido Buenstorf, Ohio fieldwork
Semiconductors: great modern SV cluster
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q 
Firms: Sales > threshold, 1974-2002
Silicon Valley Genealogy (through 1986)
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99 core entrants through 86: backgrounds of 92 (59 in SV)
Bangladesh (field work by Romel Mostafa)
q 
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Determined backgrounds of 664 entrants, 78-88
Traced careers of126 workers of great initial success
Spinoffs in the U.S Clusters
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Great early firm
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Autos—Olds Motor Works in Detroit
Tires—Goodrich in Akron
Semiconductors—Fairchild in Silicon Valley
Spinoff driven growth
Spinoffs as a Fraction of all Entrants
Sem ic
1 Leaders SV
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Sem ic
Leaders
Autos Detroit
Els ewhere
Tires Akron
Autos
Els ewhere
Tires
Els ewhere
in Ohio
Changing of the Guard: Autos & Semiconductors
Early Auto Leaders
Early Semiconductor Leaders
Pope, Locomobile
Olds Motor Works/GM
Cadillac/GM
Jeffery/Nash
GE, RCA, Raytheon, Sylvania, West.,Philco
Motorola
Texas Instruments
Fairchild
Later Top 10
Later Top 10
Ford
Reo
Buick/GM
Maxwell-Briscoe/Chrysler
Willys
Studebaker
Brush
E.R. Thomas-Detroit/Chr.
Hupp
Hudson
Dodge/Chrysler
Chevrolet/GM
Durant Motors
Signetics
Analog Devices
AMI
National
Harris
Intel
AMD
Mostek
Micron Technology
VLSI Technology
LSI Logic
Changing of the Guard: Autos & Semiconductors
Early Auto Leaders
Early Semiconductor Leaders
Pope, Locomobile
Olds Motor Works/GM
Cadillac/GM
Jeffery/Nash
GE, RCA, Raytheon, Sylvania, West.,Philco
Motorola
Texas Instruments
Fairchild
Later Top 10
Later Top 10
Ford
Reo
Buick/GM
Maxwell-Briscoe/Chrysler
Willys
Studebaker
Brush
E.R. Thomas-Detroit/Chr.
Hupp
Hudson
Dodge/Chrysler
Chevrolet/GM
Durant Motors
Signetics
Analog Devices
AMI
National
Harris
Intel
AMD
Mostek
Micron Technology
VLSI Technology
LSI Logic
Spinoffs Reign!
Changing of the Guard: Autos & Semiconductors
Early Auto Leaders
Early Semiconductor Leaders
Pope, Locomobile
Olds Motor Works/GM
Cadillac/GM
Jeffery/Nash
GE, RCA, Raytheon, Sylvania, West.,Philco
Motorola
Texas Instruments
Fairchild
Later Top 10
Later Top 10
Ford
Reo
Buick/GM
Maxwell-Briscoe/Chrysler
Willys
Studebaker
Brush
E.R. Thomas-Detroit/Chr.
Hupp
Hudson
Dodge/Chrysler
Chevrolet/GM
Durant Motors
Signetics
Analog Devices
AMI
National
Harris
Intel
AMD
Mostek
Micron Technology
VLSI Technology
LSI Logic
Spinoffs Reign in the Clusters!
Survival of Detroit Spinoffs Distinctive
1
0.1
Detroit Spinoffs
Non-Detroit Spinoffs
Detroit Startups
Non-Detroit Startups
0.01
0.001
0
20
40
60
80
Survival of Akron Spinoffs Distinctive
1.00
Akron Spinoffs
Non-Akron Spinoffs
0.10
Akron Startups
Non-Akron Startups
0.01
0
20
40
60
80
Firm Fertility
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Autos & Detroit
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Ohio tire producers & Akron
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Olds, Ford, Cadillac & Buick/GM
41 descendants: 62% of spinoffs in Detroit
Goodrich, Goodyear & Firestone—3 of big 4
13 direct, 9 indirect descendants: 52% of spinoffs w/in
100 miles of Akron
Silicon Valley semiconductor producers
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Fairchild spawned Intel, National, AMD & 11 more
31 direct descendants: 55% of SV producers
14 indirect descendants: 25% of SV producers
Spawning of Spinoffs
Firm fertility: Main Determinants
Top firm/market share
+
Detroit/Silicon Valley
+
Non-spinoff entry rate
+
Acquired by outside firm +
Acquired by competitor +
Age +
Age2 - } Max at middle age
Indigenous Spinoffs in U.S. Clusters
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Silicon Valley—53 of 56 spinoffs from SV
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Detroit area—50 of 54 from Detroit area
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Akron (Summit County)—13 of 14 from
Akron
Region Make the Firms or Firms Make the Region?
% Entrants Initial Capitalization > $300K
20
18
16
14
12
10
8
6
4
2
0
45
40
35
30
25
20
15
10
5
0
Detroit Non-Detroit Detroit Non-Detroit
Spinoffs Spinoffs Startups Startups
Akron Non-Akron Akron Non-Akron
Spinoffs Spinoffs Startups Startups
Cotton Garments in Bangladesh
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Desh & Daewoo
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126 workers: 6 months in S. Korea
Learned about assembly line production
59 of the best entrepreneurs hired the best of
the workers
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Diversifiers .15 more likely to hire
College graduates .12 more likely to hire
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More than doubled size of firms by 1995
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Secondary diffusion: repeated on lesser
scale
What the 4 Clusters Have in Common
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All emanate from one or a few seeds
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Employee movement propagates the seed
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Spinoffs stay close to home
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Growing % industry activity for many years
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Cluster performance distinguished mainly by
spinoffs, especially of right pedigree
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Generate enormous regional growth
Promise of Clustering Not Realized
Evolution of NY, Chicago, and LA TV shares, 1946-1981
73% of TV entrants in NY, Chicago, LA, BUT….
60%
120
50%
100
40%
80
30%
%NY Firms
60
20%
40
10%
20
0%
1945
1955
1965
1975
1985
Number of TV Producers
0
1945
1955
1965
1975
1985
Promise of Clustering Not Realized
Evolution of NY, Chicago, and LA TV shares, 1946-1981
73% of TV entrants in NY, Chicago, LA, BUT….
60%
120
50%
100
40%
80
%NY Firms
30%
% LA Firms
60
20%
40
10%
20
0%
1945
Number of TV Producers
1955
1965
1975
1985
0
1945
1955
1965
1975
1985
Promise of Clustering Not Realized
Evolution of NY, Chicago, and LA TV shares, 1946-1981
73% of TV entrants in NY, Chicago, LA, BUT….
60%
120
50%
100
40%
%NY Firms
30%
% Chi Firms
% LA Firms
20%
10%
0%
1945
Number of TV Producers
80
60
40
20
1955
1965
1975
Why de-clustering?
1985
0
1945
1955
1965
1975
1985
Promise of Clustering Not Realized
Evolution of NY, Chicago, and LA TV shares, 1946-1981
73% of TV entrants in NY, Chicago, LA, BUT….
60%
120
50%
100
40%
%NY Firms
30%
% Chi Firms
% LA Firms
20%
10%
0%
1945
Number of TV Producers
80
60
40
20
1955
1965
1975
1985
0
1945
1955
1965
Why de-clustering?—No spinoffs among the leaders!
1975
1985
Questions Abound
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Why spinoffs occur?
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What do spinoffs inherit?
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Nature versus nurture
Why aren t all good firms equally fertile?
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Fairchild & SV vs. Texas Instruments & Dallas
More Questions
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How do spinoffs spur growth?
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Help society tap its entrepreneurial potential?
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Why spinoff rate higher in clusters?
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Why spinoffs not prominent in all industries?
q 
E.g., TV receivers
Policy (1)
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Most important educational institutions
are not schools but firms
But will naturally resist playing this role
q  Policing offenders
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n 
q 
In U.S., limiting trade secrets litigation
Creating culture where defections are
acceptable
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Maybe even celebrated
Policy (2)
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Mobility, mobility, mobility
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Not just of founders, but followers
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Third or more initial recruits from prior employer
Get rid of impediments
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Employee non-compete clauses in U.S.
Defined benefit pensions tied to years of
service
Favorable seniority rules
Capital gains taxes
Policy (3)
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Artificial flowers of limited value
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Limited security in numbers
n 
q 
Cluster benefits not prominent
Bringing together firms in an industry
cluster unlikely to work
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Need spinoffs to drive clusters
Policy (4)
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Plant a seed?
Semiconductors & the U.S. military
q  Taiwanese semiconductor industry
q 
Making the Impossible Possible
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Mantra of Hans Rosling, Swedish
professor of global health
q 
n 
Growth of least developed countries
occurring
TED video: dramatizes by trick of
swallowing a sword
Speeding up the Process
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Faaland and Parkinson (1976)
q 
q 
n 
Bangladesh represents the world s most difficult
problem of economic development
if the problem of Bangladesh can be solved,
there can be reasonable confidence that less
difficult problems of development can also be
solved.
Can we perform this magic trick again?
q 
q 
My findings offer some hope answer is yes
Just need a seed and mobility, mobility, mobility
Leading Spinoffs & Disagreements
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Semiconductors
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Technology
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n 
q 
Rewards/incentives
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n 
q 
Fairchild & National
Union Carbide & Intersil
Acquisitions, new CEOs
n 
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n 
Shockley & silicon transistors--Fairchild
Fairchild & ICs—Amelco & Signetics
AMD & CMOS--Cypress
Fairchild & AMD
Synertek & VLSI
Autos—much the same story
Disagreement Theory of Spinoffs
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Spinoffs result from unrecognized good ideas
q 
q 
q 
n 
Firms are formed of like-minded people
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q 
q 
n 
No chance of spinoffs initially
Information accumulation eventually eliminates
disagreements
So spinoffs more likely at middle age
Acquisitions ↓influence of decision makers
q 
n 
Better firms have better employees w/better ideas
So better firms have more & better spinoffs
Spinoffs distinctive performers
Larger disagreements after acquisitions
Spinoffs provide outlets for dissidents w/ good ideas
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Financed by better judges of ideas/talent
Questions About Spinoff Process
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What do firms inherit—especially spinoffs?
q 
n 
Grandparents as well as parents important?
Is a firm more than the quality of its staff?
q 
Better firms hire better workers (Denmark)
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q 
n 
Better firms better learning environments for would-be
entrepreneurs?
Do firms have (different) entrepreneurial cultures?
q 
Spinoffs--Fairchild vs. Texas Instruments
n 
q 
n 
Immediately—based on founder quality & industry experience
Why?
Culture or dysfunction?
Firm size matter?
Why are firm spinoff rates higher in clusters—Detroit &
SV?
q 
Law on non-compete covenants
n 
q 
Part of Fairchild vs. TI spinoff fertility difference?
Peer effects?
Related Questions
n 
Spinoffs & agglomerations--more than zero-sum?
q 
q 
n 
Persistence vs. creation of agglomerations
q 
q 
n 
Same forces at work?
Why Detroit, Akron die off vs. SV?
Industries lose vitality when (spinoff) entry → 0?
q 
n 
Functional Fairchild have 50% market share?
If not SV, elsewhere?
Autos & tires?—anything we can do?
Why does spinoff clustering vary across industries?—TV
receivers
q 
73% of entrants in NY, Chicago, LA
n 
q 
Industry de-agglomerated over time
n 
n 
n 
Where radio producers concentrated
Top radio diversifiers dominated industry forever
More dispersed than entrants
U.S. a distinctive spinoff factory?
q 
Key element of success?
n 
Nano-economics & Growth of Regions-Implications
Mobility, mobility, mobility
q 
q 
q 
Employee non-compete covenants
Trade secret law
Free movement of employees
n 
q 
n 
Firms may be most important educational institutions
Hierarchy, vertical integration not the enemy
q 
n 
Is there much strength in numbers?
Don t need great universities—e.g., Detroit & Akron
q 
n 
Limited responsibility of founders if fail
Clusters on own may be of limited value
q 
n 
Promote founding teams
Detroit & Akron vs. Silicon Valley
May be worth trying to plant (regional) seeds
q 
One exemplary firm can unleash an engine of growth