High‐Technology Entrepreneurship in Silicon Valley

• Date: 01 June 2013
• Author: Aaron K. Chatterji,Robert W. Fairlie
• Published date: 01 June 2013
• DOI: http://doi.org/10.1111/jems.12015

High-Technology Entrepreneurship in Silicon Valley

ROBERT W. FAIRLIE

Department of Economics

Engineering 2 Bldg.

University of California

Santa Cruz, CA 95060

rfairlie@ucsc.edu

AARON K. CHATTERJI

Fuqua School of Business

Duke University

1, TowerviewDrive

Durham, NC 27708

ronnie@duke.edu

The economic expansion of the late 1990s created many opportunities for business creation in

Silicon Valley, but the opportunity cost of starting a business was also high during this period

because of the exceptionally tight labor market. A new measure of entrepreneurship derived from

matching files from the Current Population Survey (CPS) is used to provide the first test of the

hypothesis that business creation rates were high in Silicon Valley during the “Roaring 90s.”

Unlike previous measures of firm births based on large, nationally representative datasets, the

new measure captures business creation at the individual-owner level, includes both employer

and nonemployer business starts, and focuses on only hi-tech industries. Estimates indicate that

hi-tech entrepreneurship rates were lower in Silicon Valley than the rest of the United States

during the period from January 1996 to February 2000. Examining the post-boom period, we find

that entrepreneurship rates in Silicon Valley increased from the late 1990s to the early 2000s.

Although Silicon Valley may be an entrepreneuriallocation overall, we provide the first evidence

that the extremely tight labor market of the late 1990s, especially in hi-tech industries, may have

suppressed business creation during this period.

1. Introduction

The late 1990s were characterized by rapidly rising stock prices and lucrative stock

options, a spate of IPOs, an increase in venture capital deals, and exceptionally tight

labor markets. The NASDAQ rose from 1,059 on January 2, 1996 to 5,049 on March 10,

2000. Perhaps even more remarkably, the national unemployment rate dropped below

4% in April 2000. The late 1990s were also characterized by a marked increase in the

use of computers and the Internet by individuals and firms (International Telecommu-

nications Union, 2005). Silicon Valley, California played a major role in the expansion of

information and communications technologies (ICTs)in the 1990s, one of the “frequently

This research was funded by the U.S. Small Business Administration and Kauffman Foundation. The views

expressedhere are those of the authors and not necessarily those of the SBA or Kauffman Foundation. Wewould

like to thank the seminar participants at the Small Business Administration and WestCoast Entrepreneurship

ResearchSymposium at Stanford University for helpful comments and suggestions. Oded Gurantz and Aparna

Venkataramanprovided excellent research assistance.

C2013 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume22, Number 2, Summer 2013, 365–389

366 Journal of Economics & Management Strategy

cited miracles of industrialization in the information technology (IT) era” (Saxenian and

Hsu, 2001: 893). The large concentration of hi-tech industries in the corridor between

San Francisco and San Jose became well known, and much emphasis was placed on

the role of entrepreneurs and high technology startups in Silicon Valley in contribut-

ing to the amazing economic growth of the 1990s. The media dubbed it the “dot com”

boom. Conventional wisdom suggested that most people were interested in becoming

an entrepreneur or involved in some type of startup.1

Surprisingly,although the prevailing view is that entrepreneurship was extremely

high during the late 1990s in hi-tech locations such as Silicon Valley, there is no evidence

in the academic literature from large-scale nationally representativedata supporting this

claim. The economic expansion of the 1990s undoubtedly created many opportunities

for entrepreneurship and startups, but there also existed several factors that may have

actually suppressed business creation during this period. The late 1990s represented a

period in which the unemployment rate was falling rapidly, wage and salary earnings

were rising, stock options and signing bonuses were becoming increasingly common,

and investing in the stock market paid substantial returns. In short, the opportunity

costs to business creation may have been unusually high during this period. Therefore,

it is an open question as to whether this was a period of heightened entrepreneurship

or one in which the returns to working at firms were too great.

The limited evidence on the question appears to primarily be due to the lack of

large, nationally representative panel data with information on hi-tech entrepreneur-

ship. To address this limitation, we use a new measure of entrepreneurial activity to

study business creation from 1996 to 2005 in Silicon Valley. Microdata from matched

monthly files from the Current Population Survey (CPS) are used to estimate the rate

of entrepreneurship. Although the cross-sectional CPS data are commonly used to es-

timate static rates of business ownership, the matched data allow for the creation of a

dynamic measure of entrepreneurship that captures the rate of business formation at the

individual owner level. A major advantage of these data is that all new business owners

are captured, including those who own incorporated or unincorporated businesses, and

those who are employers or nonemployers. Recent measures of entrepreneurial activity

or firm formation typically include only larger,employer firm births, but these firms rep-

resent only 25% of all existing firms (U.S. Small Business Administration, 2001; Headd,

2005), and a significant number of new employer firms start as nonemployer firms

(Davis et al., 2006). An additional advantage is that unlike most business-level datasets

that include limited information on the owner and no information on nonowners, the

CPS includes detailed demographic information for the entire population allowing for

an empirical analysis of the determinants of entrepreneurship. Although the data allow

us to focus on hi-tech industries, we cannot examine separate patterns for venture-

capital backed startups and employer firms, and cannot capture entrepreneurs moving

to Silicon Valley with existing businesses or to immediately start businesses.

Using panel data from the matched CPS and drawing from the prior literature in

economics and management, several important hypotheses regarding entrepreneurship

in Silicon Valley are tested. First, was business creation higher in Silicon Valley than

the rest of the United States in the economic expansion of the late 1990s? The rapidly

growing economy may have created many opportunities for startups, but wage and

1. See “Understanding Silicon Valley: The Anatomy of an Entrepreneurial Region” Kenney, 2000. “The

Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship”Lee et al. 2000, and “The Soul of a New

Economy,”New York Times, December 29, 1997for a few examples.