TD Economics: Beyond Silicon Valley

By Fotios Raptis, Senior Economist
Yasmine El Baba, Economic Research Analyst

When one thinks of global technology leaders, Silicon Valley is commonly viewed as the powerhouse innovation hub.

However, high tech innovative industries have spread beyond Silicon Valley and are rising in the United States, Canada, Europe, China and other emerging market economies, challenging this conventional thought. Although Silicon Valley continues to be the top destination for tech talent and financing, innovation hubs in other U.S. cities and internationally are offering competitive alternatives.

High tech industries are increasingly becoming a global discussion, and while often difficult to measure, this geographic diffusion of innovation is helping improve the productive capacity of economies and is enhancing our way of life.

Canadian cities in the spotlight

Canada is a very attractive place given its talent pool and cost competitiveness. Canadian cities are research leaders in fintech, artificial intelligence, robotics, and manufacturing. The innovation ecosystems in Toronto and Montreal are attracting global attention, and have become hotbeds for venture capital in recent years.

Canada’s largest urban centres are becoming more attractive to innovation industries. Tech employment remains highest in Ontario and Quebec, and is on the rise in Western Canada. The Greater Toronto Area continues to attract the most funding, but Montreal is not far behind. Canada’s largest cities have specialized in different fields and developed whole ecosystems designed to attract and sustain startups.

Montreal is widely recognized for having the largest concentration of AI research. As it fiercely competes with Toronto and Montreal, Vancouver has grown an identity of its own on the West Coast. Vancouver’s tech hub is buoyed by its connection to international hubs such as Seattle and Silicon Valley and the entrepreneurial drive of its people.

Last but not least is Canada’s most established and highest ranked tech hub, Toronto. Toronto forms the core of a provincial innovation corridor that extends from Kitchener-Waterloo through Cambridge and the GTA, and up to the Ottawa Valley. This corridor links tech firms to world-class academic institutions and research centres, talent pools, connective infrastructure, and venture financing. There lies a lot of diversity in the tech industry of the corridor, with emphasis on automotive tech, security, big data, and machine learning.

Historically, Canada’s strength has resided in the export of raw materials to the rest of the world. As a result, it has often lagged behind in its ability to commercialize its innovative end products. Despite an abundance of STEM talent, the Canadian tech industry still lacks experienced C-suite executives who are able to turn startups into global leaders.

This absence of “big enough” home grown companies with the expertise to foster and transform start-ups into globally competitive firms has left the Canadian STEM sector stuck in a “build and flip” cycle. Canadian start-ups tend to opt-out of the game through an acquisition by large global companies instead of growing to become global firms themselves.

Lastly, the aversion to change in Canadian industry slows the pace of adoption and implementation of technology. Both government and private businesses delay incorporating new technology into their organizations, as decision makers are hesitant to bring on new technology due to the burden of additional-cost. However, new technology often enhances the long-run competitiveness and productivity of the Canadian ecosystem.

Innovation beyond North America

The other big story has been the rise of technology hubs in the developing world. Lower costs, access to large talent pools, and a shorter window to the commercialization of new discoveries are the main drivers of the broadening out of innovation centres to cities in China, India, and other developing economies.

China’s government-driven innovation agenda, codified in its China 2025 plan, has accelerated its innovation drive such that its tech centres have become serious global competitors to Silicon Valley. However, China’s tech industry faces a number of challenges that are likely to hold future progress in check, such as the ongoing gap between efficiency and reputable quality, the lack of strong intellectual property laws, the failure to comply with WTO regulations, and a heavy reliance on government spending during an era of slowing economic growth, and thus slowing government revenue growth.

More innovation is often viewed as unambiguously positive for future economic growth. Trade is often a means of knowledge transfer that can help less developed regions of the world catch up, lifting all boats. However, there are a few challenges, namely potential for job losses and the exacerbation of existing income inequality, that have to be managed by policymakers in order to ensure that we reap the full benefits from new discoveries.

A continuation of this trend in the years ahead is likely to result in further economic gains globally,

particularly as China and other developing economies pursue an innovation agenda. But, there are also a number of acute challenges that have to be managed in order to harvest the full benefits of technology dissemination.

Quite often the monetary gains from innovation are realized by a handful of large corporations while workers in disrupted industries get the short end of the stick. Governments can play an important role in ensuring a more equal distribution of gains and mitigating disruptions.

Bottom line

Although Silicon Valley continues to be the top destination for tech talent and financing, innovation hubs in other U.S. cities and internationally are offering competitive alternatives. Investors are increasingly looking for the next big technological breakthrough, and Canada has a lot of potential given its talent pool and cost competitiveness. It is already home to a number of innovation ecosystems that excel in fintech, artificial intelligence, robotics, and manufacturing.

Perhaps the bigger story is the rise of technology hubs in the developing world. Low cost, large talent pools, and the ability for shorter windows to the commercialization of new discoveries make cities in India, and China in particular, very attractive places for both domestic and foreign technology startups.

The growth in China’s technology industry has been astounding and poses the greatest threat to unseating Silicon Valley from its throne as the global leader. However, China’s tech industry faces a number of challenges that are likely to hold future progress in check, most notably its lack of strong intellectual property laws, and failure to comply with WTO regulations.

The world has much to gain from this focus on innovation and its broadening out to new locales. New discoveries that enhance productivity and makes our lives better is viewed as unambiguously positive for future economic growth globally. But, the challenges posed by the labour market disruptions that typically accompanies technological progress suggests that policymakers have an important role to play in managing the process in order to reap the full benefits from new discoveries.

Click here to read the full TD Economics report, Beyond Silicon Valley: Technology Industries Now a Global Phenomenon.