Editor's Choice Spinoffs and the ascension of Silicon Valley

This article analyzes firm entry and performance in the semiconductor industry from the introduction of the integrated circuit (IC) in 1965 until 1987. During this period the industry, which was initially concentrated on the east coast of the United States, became increasingly clustered in Silicon Valley (SV), California. This location shift was accompanied by a change in the technology used to produce semiconductor devices. By studying how diversifiers and new firms enter into IC production, and the technology they choose to produce ICs, we document the process of growth of SV. In particular, we analyze how agglomeration economies, as well as the heritage of new firms’ founders affect the opportunities pursued by entrants and their long-term likelihood of success. We find that IC entrants in SV were more likely to enter at the technological frontier than IC entrants in other clusters. However, we find no evidence suggesting that being located in a cluster helped existing IC producers that were not initially at the technological frontier to catch up with the rest of the industry. Examining long-term performance, we find that firms that become top producers are disproportionately spinoffs of leading firms or diversifiers with a transistor background. While most of these firms were located in SV, after controlling for heritage and background, location has no significance on the likelihood of becoming a top producer.