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Silicon Valley Innovation Stalled

A loss of venture capital funding for technology companies and a dwindling stream of foreign talent threatens the region's economic recovery.

Economic recession in the U.S., coupled with more vibrant economies overseas and political gridlock in California, has stalled Silicon Valley innovation, leaving the nation's premiere high-tech region at risk of losing its edge, a study shows.

The findings of the 2010 Silicon Valley Index, released Thursday by the Joint Venture: Silicon Valley Network and Silicon Valley Community Foundation, pointed to a "new phase of uncertainty," in which a loss of venture capital funding and foreign talent threatens the region's economic recovery.

"Silicon Valley's innovation engine has driven the region's prosperity for 60 years, but at the moment we're stalled," Russell Hancock, chief executive of Joint Venture, said in a statement. "What's hard to say is whether we're stuck in neutral, which has happened before, or whether it's time now for a complete overhaul."

The study lists a number of factors that have clouded Silicon Valley's future.

Stricter immigration rules in the wake of 9/11 and rapid economic growth in China and India have made Silicon Valley less attractive to foreign talent, particularly to fill science and engineering positions. Talent still flows from China and India and investment and collaboration between the Valley and the two countries are rising, but the growing economic power of the two nations is expected to eventually slow the flow of talent to the Valley.

Venture capital, a major source of funding for much of the innovation in the Valley in the past, is shifting away from software and semiconductors and into biotechnology, energy, medical devices, and media. In addition, Silicon Valley entrepreneurs have not been attracting significant shares of federal funding for some time.

The current malaise in California's state government, brought on by a budget crisis and gridlock between the major political parties, has had a "debilitating effect" on the region's ability to prepare the workforce, provide crucial infrastructure, maintain quality of life and keep pace in the talent race with other regions. In addition, federal and state investment in higher education is declining.

Between the second quarter of 2008 and 2009, Silicon Valley lost 90,000 jobs, bringing total employment down to 2005 levels.

"While our region has enjoyed many advantages in the past, success in the future demands that we think beyond our prevailing assumptions, organize differently, draw upon still more ingenuity from our people, and forge new collaborations in order to compete globally," the study said. "Our vulnerabilities don't mean Silicon Valley's best days are behind it. But they do suggest we're a region at risk."

The Silicon Valley Index has been published annually since 1995. The Joint Venture: Silicon Valley Network is dedicated to bringing together business, government, academia and labor to tackle issues facing the region. The Silicon Valley Community Foundation serves as a regional center for philanthropy. The latest study can be downloaded here.

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