Innovation in the Governance of Product-System Innovation: The Silicon Valley Model

The subject of this paper is the Silicon Valley model as a new coordination-cum-governance mechanism of technological product-system innovation. The thrust of the arguments is: in order to understand the truly innovative nature of the Silicon Valley phenomena and its implications beyond Silicon Valley, it is necessary to grasp it as a coherent system composed of a cluster of entrepreneurial firms on the one hand, and various intermediaries, such as venture capitalists, leading firms in relevant niche markets, and other professional service providers, on the other. In the first section the information systemic aspect of the Silicon Valley model is discussed in a comparative systemic perspective. The second section then characterizes the mechanism of venture capital governance as a tournament game played among entrepreneurial firms. We will see, among other factors, that the entrepreneur's confidence in the venture capitalist's ability to judge the outcome of tournament precisely and fairly plays an essential role in eliciting their innovation efforts. The third section discusses the importance of the role of venture capitalists' reputations and norms in capital markets in eliciting their monitoring and governance efforts. The appendix provides stylized factual backgrounds for modeling. Those readers who are relatively unfamiliar with venture capital contracting and related facts are advised to read it first.