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Entrepreneurship in Silicon Valley During the Boom and Bust

by Robert Fairlie, University of California, Santa Cruz, CA

The purpose of this study is to understand the impact of tight labor markets on the high-techindustry and its effect on entrepreneurship inSilicon Valley during the boom and bust. This report uses a new measure of entrepreneurial activity to study entrepreneurship from 1996 to 2005 in Silicon Valley known as “The KauffmanIndex of Entrepreneurial Activity” (KIEA). This new measure captures the rate of business creationat the individual owner level. Economic expansion in the late 1990s gener-ated many opportunities for business creation and productivity growth, which has been mostly linked with investment in information and communication technologies. Regions with large concentra-tion of high-tech industries in the San Francisco, San Jose, and especially the Silicon Valley area, placed emphasis on the role of startups and entre-preneurship. This period was set apart by swiftly rising stock prices, lucrative stock options, venture capital deals, initial public offerings, and tight labor markets. Consequently, it is unclear whether this was a period of heightened entrepreneurshipor one in which returns to working in firms discouraged entrepreneurship. This paper investigates the effects of tight labormarkets on entrepreneurship activity in the Silicon Valley compared to California and the United States.

Overall Findings
The study finds that entrepreneurship rates in Silicon Valley were higher than in the rest of the United States during the expansion period of the late 1990s. During this time period, entrepreneurship rates increased in the Silicon Valley while the national rate remained constant. The study points out that entrepreneurship was higher after the dot com bust in Silicon Valley than during the boom period. The findings indicate that demographic characteristics of the population and economic conditions are important at least in terms of potentially creating high rates of entrepreneurship. Silicon Valley entrepreneurship rates as a whole appear tohave been suppressed by the extremely tight labor markets during this period.

• High-tech industries appear to be importantin contributing to high rates of entrepreneurship in Silicon Valley, but entrepreneurship in other industries comprises the bulk of total entrepreneurship in the area.
• The rest of California and several large metropolitan statistical areas had higher rates of entrepreneurship than Silicon Valley during thelate 1990s.
• Controlling for differences in demographic characteristics, previous employment status, and industry concentrations, Silicon Valley had higherrates of entrepreneurship than the rest of the United States during the late 1990s.
• Residents of Silicon Valley are more likely to be immigrants and more highly educated than the rest of the United States, but are less likely toown homes and be unemployed, all of which areimportant determinants of business creation.
• Controlling for changes in demographic characteristics, unemployment, and industry composition, entrepreneurship rates in Silicon Valley increased by 0.034 percentage points from thelate 1990s to the post-boom period relative to the trend in the U.S. entrepreneurship rate

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