Ga%202020%20mainwebsite_975x425 Case%20stories%20final%20screenshot Trade%20%26%20investment%20report%202019%20dp%20slider-%20post%20launch Presentation1

The Road to Silicon Valley: How Tech Companies Choose their Hometowns

By: Paula Fitzgerald, Senior Project Manager at OCO Global

Paula%20fitzgerald_oco

Since the 1970s, Silicon Valley has been widely viewed as the global center of the technology (tech) industry. Some of the largest and most innovative tech companies such as Apple, Google, and Facebook all call it home, as do thousands of startups.

A workforce of more than half a million tech workers between the San Francisco Bay Area and Silicon Valley, coupled with large pools of investment capital, and world-renowned higher education institutes, are some of the reasons why the region has had such success in growing and attracting tech companies.

However, “tech” is a broad term that does not capture the multitude of the tech sub-sectors that exist today, not all of which want or need to be centered in Silicon Valley.

Depending on the wider industry that a tech company serves, certain location amenities will be indispensable to some companies, while being a disadvantage to others.

As with the history of Silicon Valley, natural clusters tend to form. For instance, according to US Cluster Mapping, a website developed by Harvard University and the U.S. Government that tracks industry clusters across the country, there were 2,209 Information Technology (IT) establishments in the San Jose, California economic area at the end of 2016 compared to only five IT establishments in the Sioux Falls, Iowa economic area. Precedent is important as tech companies tend to gravitate to locations where other similar companies have moved and achieved success. To some extent, tech companies don’t so much choose their hometowns as their hometowns choose them.

Nevertheless, there are certain market conditions that all tech companies look for to flourish — namely the size of the market opportunity, the availability of skilled IT talent, the ease of doing business, and the culture that fosters innovation and embraces disruptive technologies. Below are some attributes tech companies tend to consider when deciding on a location:

1. Total Addressable Market

Tech companies, whether goods-producing or service-providing, are responsive to sales. Therefore, the size of the market opportunity in the location is key. Once a critical mass of customers is established, a tech company can justify investing in a headquarters to drive demand, new sales prospects, and grow their employee base. 

A Financial Technology (FinTech) startup might be born in an entrepreneur’s suburban home, but if it is ever going to scale, it will eventually have to relocate to where the growth is going to come from: a financial capital. London, New York, and Hong Kong are among the obvious choices for these companies because they are major commerce hubs that provide access to a high number of anchor clients.

Market forces also drive company location decisions. For example, Southeast Asia is the biggest and fastest-growing region for digital advertising, while the U.S. and European markets have slowed down.

Additionally, Australia currently has the highest CPMs (“Cost per Mile,” meaning the cost an advertiser pays for one thousand views or clicks of an advertisement) in the world. For Advertising Technology (AdTech) and Digital Media companies, Australia offers the greatest revenue opportunity, with which no other market can compete.

2. Language Barriers

While the scale of a particular market might be appealing, the language of business conducted in the market can be a significant barrier to market entry.

For example, South Korea is home to a tech-savvy population and the highest number of mobile phone users in the world. However, a software company would need to translate their software into the local language, costing both time and money. Language might also dictate the pool of talent a company is able to attract, which can act as a barrier for immediate relocation and market entry.

To overcome these language barriers, tech companies can seek out third-party vendors or channel partners who can help them bridge the language and cultural gap, making it easier for them to break into the market and service customers, before attempting other growth initiatives like setting up their own corporate office.

3. Friendliness of Regulators and Ease of Doing Business

Markets with a reputation as early adopters of new technologies stand a better chance of attracting cutting-edge tech companies.

For example, while several countries around the world have restrictive regulatory regimes on cryptofinance and blockchain, Switzerland embraced these new ideas early on, creating a cryptocurrency and blockchain development hub known as the “Crypto Valley” in the city of Zug. One of the goals is to educate regulators on the new technologies and their potential applications, promote supportive relationships with the authorities, and drive the development of a friendly regulatory environment so that its crypto community can innovate and thrive.

Having a transparent regulatory environment reduces the number of hoops a company must jump through to set up and begin its operations. Some Medical Tech (MedTech) companies, for instance, will only consider markets that have the capabilities to perform clinical trials, and can provide a clear regulatory pathway and timeline to commercialization.

A well-performing, stable economy with business structures that reduce the amount of time, effort, and risk a company needs to take, allows businesses to successfully operate, plan, and forecast future growth.

4. Access to and Availability of IT Talent in the Workforce

How easy or cumbersome a government makes it to hire great IT talent also has an impact on how tech companies choose their hometowns.

In the U.S., many of the largest tech companies such as Microsoft, Amazon, and IBM rely on the H1B visa system for hiring skilled foreign workers and have expressed concern about current immigration policy moves that are trying to restrict the program further. The process, which already takes six months, can cost up to $10,000 in legal and filing fees, and is not even guaranteed because the number of H1B visas granted every year is capped at 65,000.

Canada, on the other hand, recently introduced a new immigration strategy that enables highly-skilled international IT talent to be easily recruited by Canadian tech companies within a two-week timeframe. Under the government’s Global Skills Strategy, highly skilled, in-demand experts in areas such as Artificial Intelligence (AI) and machine learning, can move to Canada (with their families) and start working in under a month. The spouse can also receive a work permit. After two years, they can apply for permanent residency and after another two years they can apply for Canadian citizenship. 

5. Collaboration with Academia and Intellectual Property

Tech companies developing their own proprietary algorithms and technologies will seek out markets with robust intellectual property regimes to ensure that their discoveries cannot be ripped off. Agriculture Technology (AgTech) companies, which have exploded since Monsanto acquired The Climate Corporation in 2013 for US$1 billion, inevitably find the need to collaborate with researchers and plant scientists. The state of Missouri has been successful at drawing AgTech companies thanks to the world-renowned Donald Danforth Plant Science Center in St. Louis. A region with a high concentration of experts in a particular area can carve out a niche market for itself by supporting local institutes, making any given city an attractive destination for companies in research-intensive tech fields.

6. Tax Regime and Financial Incentives

The practice of cities using tax incentives to lure tech companies is controversial. Ireland has been successful at attracting some of Silicon Valley’s largest tech companies to set up their European corporate headquarters in Dublin by offering the lowest corporate tax rates in the European Union. However, as we saw during the Amazon HQ2 Request For Proposal (RFP) process (in which 238 regions in the U.S. and Canada submitted proposals to lure Amazon to their markets, some of which offered billions of dollars in tax credits), incentives are never the sole motivator for choosing a new headquarters.

Amazon, who was planning to create 25,000 jobs over the course of 10 years, whittled the contenders down to the 20 most densely-populated metropolitan areas including Los Angeles, Chicago, and Dallas, before finally settling on New York and Crystal City, Virginia. New York’s proposal to Amazon included US$4 billion in tax credits while the neighboring city of Newark, New Jersey offered almost double. Amazon’s subsequent cancelation of its plans for New York, due to the vocal hostility from some sections of the community, show just how controversial tax credits can be for cities.

What the recent HQ2 selection process also shows is that lucrative tax breaks on their own are not enough — the ability to culturally relate and gain access to a significant talent and customer base, coupled with low operational risk are further up the list of considerations. Specifically, having a large, diverse and technically-competent talent pool builds the stronger business case for large tech job creators like Amazon. Additionally, markets with high living costs are less of a concern for the industry, which is well-funded, highly-profitable, and willing to pay high salaries to recruit tech workers with the required skillsets. These candidates tend to favor living in urban, cosmopolitan environments.

Conclusion

Cities and Investment Promotion Agencies (IPAs) looking to grow and attract more tech companies to their regions should understand that companies do not tend to relocate or set up in a new town overnight. It can take months or even years of working with a client or strategic partner to get to know the market, its full potential, and the tech talent community there. 

That is why it is important for cities and IPAs to coordinate both public and private resources to create a business culture that removes barriers to market entry; ensures the availability of early-stage funding to encourage startups and entrepreneurship; invests in workforce development to ensure there is a pipeline of skilled IT talent coming into the market; and keeps regulators engaged, removing barriers to innovation. While there is no official roadmap to create the next Silicon Valley, following these steps can help cities build a brand that shows tech companies they are welcome, that they embrace disruptive technology, and that they will see a return on their investment should they choose to set up in their region. 

The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the opinions or positions of the World Trade Centers Association or its Members. 

This article was made possible with the support of the European American Chamber of Commerce in New York (EACCNY).