China is Silicon Valley's top threat: survey

A significant number of high-level technology executives appear to believe Silicon Valley’s days as the world’s innovation hub are numbered.

At least that’s the findings of a KPMG survey of 668 technology business executives at $1 billion-plus companies, start-ups and venture capital firms around the world.

Of those surveyed by the audit, tax and advisory firm, 44% believe it’s likely that the “technology innovation center of the world,” now in Silicon Valley, will shift to another country in the next four years.

The most likely choice among respondents is China.

Gary Matuszak, global chair and U.S. leader of KPMG’s technology, media and telecommunications practice, said he was surprised by the response to the question of whether Silicon Valley will retain its lead, but also pointed out that a big percentage of the respondents, 42%, were from the Asia-Pacific — and those executives were largely bullish on China.

KPMHG added that 34% of survey respondents were from the Americas and 23% from Europe, Middle East and Africa.

Matuszak said he also found it surprising that 28% of U.S. respondents believe that it’s likely that the world’s innovation hub would shift from Silicon Valley during the next four years.

A larger percentage, 39%, of U.S. respondents said they expect the U.S. will retain its technology leadership role, while 32% were “middle of the road” on the question, he said.

Among the survey’s China respondents, 60% felt the innovation center would change in the next four years. For those who believed a new Silicon Valley will emerge, the likely choice, not surprisingly, was China.

“Innovation is starting to happen in other parts of the world,” said Matuszak, and the Chinese respondents, in particular, “believe that they will be on par with Silicon Valley.”

Matuszak said the key takeaway from the survey isn’t that Silicon Valley is becoming less of a force, but that other areas of the world are putting more emphasis on innovation.

“I don’t believe that the center of innovation is going to change, certainly in the next four years,” said Matuszak. Other parts of the world “underestimate what it takes to create the environment we have in Silicon Valley.”

Matuszak said Silicon Valley is distinguished by an entire ecosystem that has been built up to support innovation activities. That ecosystem, he said, is the most difficult thing for another region to replicate.

China’s growing tech capabilities have become a major concern in Washington. The country’s innovation efforts were the subject of a hearing in May by the U.S.-China Economic and Security Review Commission.

At that hearing, Robert Atkinson, president of the Information Technology Innovation Foundation, told the commission that the Chinese “no longer want to dominate just cost-based commodity production and let us be the innovators. They also want win in innovation-based economic competition.”

While there is broad agreement on China’s innovation goals, Atkinson said that “there is considerably less consensus over whether China will be successful and whether the America should be concerned.”

Atkinson said that even if Chinese-owned firms don’t become leaders in innovation, the Chinese economy “may become an innovation leader if its policies result in foreign multinationals moving even more innovation-based activities to China.”

“China doesn’t want to make some things and buy others,” said Atkinson. “They want to make virtually everything, especially advanced technology products and services. This result could very well be the continuation of the trend of the last decade when the U.S. manufacturing output experienced an unprecedented decline of 11% at a time the overall economy grew by around 13%.”

In a separate hearing also held last month, Patrick Gallagher, an undersecretary at the U.S. Department of Commerce, told lawmakers that manufacturing is critical to research and development.

“Manufacturing makes a disproportionately large contribution to U.S. innovation, accounting for 70% of private sector research and development (R&D) and developing capabilities that support the next generation of products and processes,” said Gallagher.

Until recently, U.S. manufacturing has been losing ground. “China is edging closer to the United States in terms of total volume of manufacturing output,” Gallagher said.