The new geography of innovation

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I’m going to step away from Ukraine, deglobalisation, and the crisis of the old order that we are so obviously in the midst of, and use my Swamp Note this week to look at some interesting new research from the Brookings Institution on the geography of the US tech sector. I’m doing this in part because my partner in the Swamp this week is our west coast editor and technology columnist, Richard Waters, who will have plenty to say about this topic.

The upshot is that rather than the decentralisation of tech wealth that many of us had hoped for, we are actually seeing the power of the largest superstar cities — San Francisco, Seattle, Austin and New York — becoming stronger. While there are a few burgeoning sunbelt spots where tech companies are putting jobs and money — places like Miami, St Louis, Dallas, and Denver — the “rise of the rest” has yet to really take off.

There are a few caveats to this; during the pandemic, Google and Apple launched major satellite offices in North Carolina, and Intel has the big semiconductor plant that it’s building in Columbus, Ohio. But in general, the network effect seems to make it tough to pull money away from the coasts and towards the heartland.

Part of this is about the way in which the data is being tallied. If you are looking at local economic growth and job creation, you need to assume that efforts began a couple of years ago. One study by PitchBook and Steve Case’s investment firm Revolution (which has a focus on the rise of the rest in smaller cities), notes that the share of early stage venture money moving from Bay Area start-ups to those outside Silicon Valley has risen 10 per cent since 2014. It will take a bit longer for early money to translate into measurable economic growth.

Another part of it is that the pandemic actually dispersed work not so much to an extra handful of discrete Midwestern or southern cities, but rather to everywhere — people are moving to ski towns, hometowns, any town outside of the big cities where they didn’t want to be cooped up, and taking that remote work with them. But that shift in the geography of work is too dispersed to really show up in the national statistics.

Finally, the pandemic accelerated the power of the largest tech platforms for obvious reasons (we were all working digitally more often) and so that favours the cities that they are already in, mostly in coastal areas. The big have just gotten bigger. But I wonder if we are at a pivot point there. There have been a couple of blows to the power of Big Tech recently such as the Washington state Senate and House passing a gig worker bill that would force companies like Uber, Lyft and DoorDash to treat their labour more like permanent workers with minimum hours, sick leave, and other benefits.

Meanwhile, I suspect that the Department of Justice is gearing up to challenge Apple and Google now that Congress has set aside $8mn in new DoJ funding for 2022. This follows on the heels of Democratic calls for investigation of how the pandemic has favoured the largest companies in tech and other areas (like commodities), which will probably give Lina Khan at the Federal Trade Commission more fuel for her various investigations.

Richard, my question to you is this — what do you see happening on the ground in SF? We know a lot of tech money moved recently to Miami and Texas for tax reasons. But are we at any kind of a larger pivot point away from the Bay Area? And what about the Nasdaq? Is this 1999 all over? How much further does tech have to fall?

Recommended reading

• An important piece on the growing dedollarisation alliance, led by China.

• My colleagues Andrew Edgecliffe-Johnson and Matthew Rocco have been writing great stuff on how iconic American brands are pulling out of Russia, which really captures the importance and soft power of American corporations throughout the world in recent decades. If only capitalism hadn’t become the soul of our foreign policy.

•  I’ve just started reading American Dirt, an absolute page turner about a mother and son trying to make it across the Mexican-US border after a drug cartel has killed their family. It’s that rare book that blends big ideas and empathy with the sensibility and style of a best-seller. Some people have called it “trauma porn.” I disagree. There’s nothing wrong with pulling 2mn average readers into a thriller and having them come away with a better understanding of the violence of the narcotics trade, and our utter failure with the war on drugs, which has been underplayed in recent years. I really wish the culture police would just let people write, readers read, and everyone make up their own minds about things.

Richard Waters responds

The pandemic certainly sent a lot of tech talent flying from San Francisco. But like you, I’m disappointed it hasn’t had a bigger impact on the emergence of other tech centres. The combination of remote work and tax flight has spread some of the massive wealth from this tech boom across the west, driving home prices up across the region (and making migrating techies a much-hated species just about everywhere). But the software developer sitting in a cabin in the Rockies is still part of a network centred on Silicon Valley — even if they are putting more cash into the local economy.

As you say, a small number of second-tier tech cities are booming, so there’s some hope. But it’s slow going. Venture capital flowing into these newer centres doubled last year — but the far bigger amount going into Silicon Valley also doubled, so in relative terms things aren’t changing that much.

Maybe the story of the next decade or two will be a small handful of winner-take-all tech centres, each acting as the hub for a network of remote workers and satellite offices that stretches deeper into the hinterland. That might spread employment and wealth more widely, but it would still leave power in the digital economy highly concentrated.

You asked about San Francisco. After plenty of hand-wringing about tech flight at the start of the pandemic, the pendulum has definitely swung back. In just the last week, the city has started to buzz again. Many tech companies clung on to scarce talent during the crisis by fully embracing the idea of remote work, but now it feels like they’re trying to find ways to coax people back to the office — like Google, which will require workers to spend three days a week in the office from next month. I suspect the Bay Area will remain both echo chamber and accelerant, producing far too many copy cat start-ups while also seeding a small number of truly significant businesses. But we’ll see.

As for the air going out of tech stocks: What’s remarkable to me is that, even after so much notional wealth has been vaporised, it doesn’t seem to be inflicting real damage or choking off the flow of capital in private markets.

As always when markets go south, the big questions that lie ahead are about liquidity and leverage. If cash dries up, and if excessive leverage forces some investors to start dumping illiquid shares, then things will get ugly. But we’re not there yet, and so far this still feels to me like an overdue (and hence oversized) tech correction. The next few months will be interesting.

Your feedback

And now a word from our Swampians . . .

In response to ‘Big Tech’s role in Putin’s war’:
“The problem, in one word, is censorship. It is toxic to democracy . . . The excuse of ‘misinformation’ or ‘disinformation’ is unsatisfactory, because the definition of those terms quickly becomes ‘information the censor doesn’t like.’ And sometimes it can be ‘information the government that regulates us and can shut us down doesn’t like.’ The recent call by the Biden administration for certain social media to deal with ‘misinformation’ is an ominous portent of things to come. Imagine such a call coming from, say, a Trump administration and I think you will begin to understand my point. The answer: When such a platform reaches a point where it is a significant stage for public debate and discussion it must function as ‘common carriers’ like phone companies, and only bar comment that is already illegal, like libel, child porn, death threats, and so forth.” — Harold Seneker, Fair Lawn, New Jersey

In response to ‘A grand bargain on energy?’:
“We are already two years into what scientists have told us is the last decade we have to meet the 1.5C climate goal. We need to cut global carbon pollution at least in half by 2030 . . . Advocating increased fossil fuel production in the US for five years — on any basis — is wrong-headed. We are all (not just Germany) facing a real emergency that threatens our security and our way of life. We are all very close to the climate’s front line. We have all got to make sacrifices. The question is, what will it take for us to accept and act on this? If not now, when?” — Beth Neustadt