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Asia's Silicon Dreams

Asia Society Hong Kong Center & The Asian Wall Street Journal
Luncheon Panel Discussion with

Reginald Chua, Editor,The Asian Wall Street Journal
Daniel Mao, Chief Operating Officer, SINA.com
AnnaLee Saxenian, University of California at Berkeley
January 24, 2000

Reginald Chua: I'm Reginald Chua. I'm the editor of the Asian Wall Street Journal. I guess from the size of the crowd here today that I can leave out the part in my introduction about why technology matters. Everyone is obviously here because they know it does matter, because they know that technology is in some way changing the way the world works, the way business works, the way society works.

Of course, the real trick is to find out exactly how it's changing the way the world works and, because nobody really knows, it's a very exciting and a very terrifying time, I think, for most of us. The old rules are changing and the new rules aren't really clear.

For business people and governments in particular, a key issue is distilling what kinds of ingredients make for success in this new playing field. What has made Silicon Valley so successful and its imitators less so? What role will Asia play in an increasingly networked economy? Will it be an innovator? Will it be a contract manufacturer? Will it be a low-cost service center? Will it be an immense market? And who really knows at this point what industries, what companies, what countries will be winners and losers in this coming shake-out?

I confess that 20 years ago when I was in college I focused on mathematics and theoretical computer science. I learnt a programme in hexi-decimal, I was fascinated by artificial intelligence and that new-fangled Apple II computer that had just come out. In fact, my first real job was as a computer programmer. But pretty soon into this-in fact, about a month or so into this-I figured well, this was a field that just had no prospects so I got out and became a journalist. Now, if I'd just stuck to that, where I could be now!

I say this by way of pointing out that my own credentials in this field are less than stellar but luckily for all of you we have two people who do know much more about this business than I do: Professor AnnaLee Saxenian and Daniel Mao. Let me give you a little quick background on them and then I'll hand you over to them.

Daniel is the Chief Operating Officer of SINA.com and he brings a particular perspective to this because prior to that he was Vice President of Walden International Investment. So he brings both the investment side and the operating side of the equation here and we're looking forward to having his perspectives on these [subjects]. He received a Master of Science in Engineering Economic Systems from Stanford University and a Bachelor's Degree in Computer Science from Jiaotong University in Shanghai.

AnnaLee Saxenian is a professor of City and Regional Planning at the University of California at Berkeley. She's well known for her work on looking at the regional advantages that Silicon Valley brought to the table. She's the author of Regional Advantage, Culture and Competition in Silicon Valley and Route 128. She's written papers about the contributions of immigrants to Silicon Valley and their growing ties to regions in Asia. She holds a Doctorate in Political Science from MIT, a Masters in Regional Planning from UC Berkeley, and a Bachelor's Degree in Economics from Williams College, and some of you may know that she lived and worked in Hong Kong some time back.

So without further ado let me hand over to AnnaLee Saxenian.

AnnaLee Saxenian: Thanks, Reg. It's really a pleasure to be here. I actually arrived in Hong Kong on Saturday morning and spent the weekend exploring Hong Kong. I have to confess that I can't tell which has changed more in the last 20 years-I was here in the late 70s-whether Silicon Valley or Hong Kong has changed more since the late 1970s.

When I returned from Hong Kong I was a student at Berkeley and I was one of the first scholars to study Silicon Valley and I concluded my Master's Degree there by writing a thesis in which I confidently predicted that Silicon Valley would stop growing.

I argued that the costs of housing were too high, transportation-the freeways were too congested, and that labour was too pricey so all future growth in technology would occur outside of Silicon Valley in places like Austin, Texas or Seattle.

Of course, I was wrong and I really spent much of the next 10 or 15 years trying to understand why I had been so wrong when it seemed so obvious that the cost disadvantages in Silicon Valley would overwhelm anything else. What I learned in that process is what I believe is most distinctive about Silicon Valley.

Silicon Valley has a business model that is different from business models that we've traditionally understood and I think it's best understood at the regional level rather than at the level of individual companies. Maybe the best way to summarise what makes Silicon Valley distinctive is to draw the comparison that I used in my book, Regional Advantage.

I draw the comparison between Silicon Valley and the Route 128 area around Boston which at the time all of us-meaning all scholars, journalists, policy makers-looked at Silicon Valley and the Route 128 area basically as comparable technology regions just located on opposite coasts of the U.S. Both had world-class universities, both had ample skilled labour, both had a lot of venture capital, and both were nice places that engineers like to live.

If anything, if you were placing bets on the competition between Silicon Valley and Route 128, even as late as 1975 or 1980, you would have placed your bets on the East Coast. It had proximity to Bell Labs where the transistor was imitated. It had greater proximity to Washington, D.C. where all the defense contracts and a lot of the technology was originated.

But of course if you had bet that, you would have been wrong. Silicon Valley has continued to re-invent itself and to sort of lead technologically from strength to strength really, starting with silicon, with semi-conductors, moving into PCs and biotech, and most recently of course into the Internet revolution.

What I concluded from that research is that the Route 128 region is organized around individual companies. Take for an example Digital Equipment, DEC. DEC was a company that tried to do everything internally. Say, making mini-computers, it tried to make all of the hardware, define proprietary standards, it made every single component internally and then marketed it itself.

This vertically integrated model was a model that dominated in the post-war period in the U.S. in manufacturing industries but it proved to be unable to compete with the model that emerged in Silicon Valley. The other thing to say about the 128 models, if you have companies like DEC or Wang-for those of you that know Wang-these companies in the regional environment had nothing to do with one another. They were free-standing empires in the regional economy.

The Silicon Valley economy emerged as companies where firms specialized. They specialized in particular technologies or particular products and then they collaborated with one another in various ways. They also collaborated with local universities and local financial institutions and this decentralized system-what I call a network system in Silicon Valley-has given it a tremendous amount of flexibility and adaptability. It allows for continual experimentation. You can run many more experiments with new technologies or with new products in Silicon Valley than you ever could within the boundaries of one big integrated corporation.

So what defines the distinctive elements of the Silicon Valley model are a set of institutions-financial institutions, educational institutions, and labour market institutions-that allow skill and technology to be continually re-combined very, very quickly, that allow people to move between companies easily, that allow people to experiment and to fail, and then to pick up and start again. That's a region that learns very quickly.

Learning happens at the regional level because venture capitalists talk to companies, companies talk to one another, and they talk to people in the universities. They're always working across these social networks and a set of institutions that support them.

What does this mean for Asia?

Well, the biggest change that I've seen in Silicon Valley in the last decade or two has been the influx of a tremendous number of Asian engineers into Silicon Valley. Daniel Mao is a very good example. He came from Shanghai to study at Stanford and then became a part of the Silicon Valley network.

In the last 20 years you have seen literally tens of thousands of immigrants from Taiwan, from India, from mainland China, and then smaller numbers from other Asian countries flooding into the Silicon Valley economy. Of course, these are the best and brightest from these societies. These are people who have excelled at engineering at home and then were able to go abroad, go to the U.S. and study, often do graduate work.

Then they got sucked into the Silicon Valley labour market and they became part of these networks, these cross-cutting networks that allow them to learn very quickly about how to become entrepreneurs, how to finance, how companies are financed in Silicon Valley, how to move quickly, and how to build a management team-all the elements of entrepreneurship that exist within Silicon Valley.

I think the most interesting chapter for Asia now is the extent to which some of those people are returning or have returned to their home countries and therefore are expanding the Silicon Valley model into regions into Asia.

The case of Taiwan may or may not be well known. Large numbers of Taiwanese engineers returned to Taiwan in the late 1980s and early 1990s. Some people here were instrumental in that process. Those engineers have built a very dynamic economy, tremendously successful manufacturing of both semi-conductors and personal computers in Taiwan.

For me the most interesting question today is to what extent will you see more and more Indian engineers going back home, software programmers, and building technology firms there. To what extent will mainland Chinese go back and how will they expand the Silicon Valley model.

I'm going to wrap this up but let me just make two points about that. The first point is that this is a very different model of globalization than we normally have. We normally think about globalization as being a process of big multinational companies lumbering around the globe and setting up branch plants. That's how we think about the globalization process.

This is a process of globalization that's really a bottom-up process. It's people like Daniel. It's lots of individuals or networks of individuals going back and starting companies so it's a much more entrepreneurial bottom-up model of extending. It's these individuals, I think, that transfer the Silicon Valley model much more effectively than the multinational corporations.

The other point that I've forgotten-I'm sure I'll remember it-the other point I want to make is about replicating Silicon Valley. I think the evidence is very clear from the last two decades that any simple recipe of combining a university, venture capital, some skilled people in a nice place to grow a Silicon Valley doesn't work.

I went to Cambridge, England in the 1980s believing that it was the Silicon Valley of Europe because it had a lot of engineers coming out of Cambridge University, a lot of venture capital, a beautiful science park, and all the things that we think are part of the ingredients-but it didn't work. I think the problem with the recipe, the simplistic recipe that you can combine ingredients and grow Silicon Valley, is that it's simply a supply-side story. It only looks at the supply side-let's get a science park, let's get some talent, let's get some capital, and we'll grow it. It neglects the demand side. It neglects the fact that these companies-you need to have companies that can have a market to serve and they need to know about the market.

So I saw in Cambridge a tremendous number of very smart scientists doing probably very smart things, but they were completely unconnected from the leading edge markets which were, at this case, mainly in the U.S., in Silicon Valley. If you don't have connection with markets and with very sophisticated markets, it's very hard to compete in this economy, especially in an economy where things are moving faster and faster and you have to act very, very quickly on everything. So that's really just a word of advice.

Just back to these immigrant entrepreneurs, one of the things that immigrants that return from Silicon Valley, say, to China or India bring is a connection at least to those markets, a knowledge of those markets and access back to the leading edge customers in particular technology industries.

So with that I'll stop and turn it over to Daniel.

Daniel Mao: I think first I would like to thank everybody here for such a huge turnout and I think as Reg talked to me about having this seminar, I don't think I'm really qualified to be here, given we're really talking about high-tech development and also the so-called future infusion of Silicon Valley models into Asia.

But being in Silicon Valley for the last 12 years and also being a venture capitalist for the last 7 years, particularly investing in China, I think one difference, the major difference I feel between Silicon Valley and Asia is the market size.

In Silicon Valley venture capitalists usually look at any market opportunity bigger than $1 billion, potential market opportunity. But with the same old question I asked some of the entrepreneurs in China, usually the market size will be somewhere around 20 million, maximum 100 million. So that's a major, major difference.

But having said that, I think in the Internet days being right now and operating an office in an Internet company, we need to actually compare the fast growing sort of market condition in greater China with maybe the U.S. condition four or five years ago. So let's do a little bit of comparison between Hong Kong and Singapore, Taiwan and South Korea, and China and India.

I think Singapore has had a head start in the infrastructure play than Hong Kong, and South Korea actually has a much higher Internet adoption than Taiwan, and India has a much more developed IT industry than in China.

But what will happen if we can put Hong Kong, Taiwan and China together in the Internet days, virtually. So given the market size of 1 to 1.25 million Internet users in Hong Kong, 4.5 to 5 million Internet users in Taiwan and almost 9 million Internet users in China, and going forward maybe to the end of the year 2000, we can reach somewhere around 20 to 30 million people in this region getting onto the Internet. I think there could be very huge economic development opportunities for a lot of industries. So I would like to raise that as a first question for maybe future discussion.

Secondly, it's about market size. In a venture capital environment the venture capitalist will look into three sorts of criteria in order. The first one is management team. Without a good management team, usually people don't want to consider this investment. Secondly, it's market size. Lastly, it's product or technology. Market size matters so wherever you have a huge market size, usually you can set your own standards and you can actually have your own rules to play.

The last point I would like to make is in Silicon Valley, although silicon is no longer maybe the main mainstream in Silicon Valley, but I see design and I see manufacturing is still a very important part of Silicon Valley. But they move further into software, telecom and now into Internet, into service models. However, in Silicon Valley, the semi-conductor side still plays a very critical role in the revolutionary development in the so-called high speed DSL and also cable modem areas.

But in Asia in the past, as everybody knows, in Taiwan, in Hong Kong, in China, it used to be that people traded stocks. In the mid-90s, there was stock market crash in Taiwan, then later on in Hong Kong. And now I think everybody tries to get into "dotcoms".

I even heard a joke; it's a true story, although I consider it a joke: Somebody wants to raise US$100 million buying out all the sugar inventory in China so they can form up a "sugardotcom" so that everybody buys sugar on-line, placing orders so they can become the biggest B to C e-commerce player. So I think people are doing a lot of things like that, but I don't think we should get into another wave of everybody getting into dotcoms. So I will pause here and pass back to Reg.

Reginald Chua: Thanks very much. Let's follow up on this point about the importance of markets for the moment. Let's grant for the moment that the Chinese language market centered in greater China is a real market, one that has a barrier to entry for American companies to come into, and leave that aside for the moment. Where does that leave the rest of the markets in Asia? The Indian market is a big one but it's an English language market to some extent, and with all the other Asian countries trying to build up their comparative advantage in Internet start-ups, where do they stand? Where does Malaysia stand? Where does Singapore stand in this area?

AnnaLee Saxenian: I don't think either Malaysia or Singapore can act independently. They're too small. Neither of them has the talent pool or the market to succeed independently so they need to team up. They need to build alliances. Just like Daniel's talking about greater China, Hong Kong, Taiwan, and the mainland. They need to also ally themselves maybe with India or whatever because they don't have the capability on their own. The Indian market is very big, potentially huge.

Daniel Mao: Yes, I think really by integrating different markets together it will be done by people so I would say the liquidity of talent in these regions-for example, if Singapore wants to have a much more influential play in this market place, I think the interaction of people will be really the key.

AnnaLee Saxenian: Yes, it's worth saying. I think we're both saying the same thing. This is all about talent. It's not fundamentally about building an infrastructure. I actually think that the India case shows that if you get the right people, if you build up the right talent base, the infrastructure and government policy will follow. If you look at it objectively, India as an environment, both the physical infrastructure and the regulatory infrastructure is appalling. The power doesn't work; the roads don't work. The government is incredibly slow and corrupt and yet, things are happening in India because you have this tremendous surge of talent back from Silicon Valley.

Reginald Chua: Is that an argument then that governments need to do very little to foster this? Or what should governments do?

AnnaLee Saxenian: I think governments need to create an environment that will attract the right talent first and foremost. Then there are a lot of regulatory things that government needs to do and infrastructural things that government needs to do. I think the way that government needs to act though is to talk to the people in the industry, to learn from the industry rather than to think that they can come up with some policy independent of what local entrepreneurs or industrialists want.

Daniel Mao: Yes, I think government control has a lot of aspects, cultural aspects besides the political aspects. So my view, I think, is size matters. The worst case is you know, most of the governments may not really fully understand the implication of the Internet so they may provide a wrong policy against the Internet so that even though it's in the infant stage it may not grow as fast as it should be. So I would say, yes the government should come up with a lot of policies but at the infant stage maybe leave it alone for a while and let it grow. I think it's just like raising a kid-although I don't have a kid-but my thinking is that at least my parents left me alone for a while; it seems to be okay.

AnnaLee Saxenian: One more thing that is clear about government policy is that the model that emerged out of Japan and South Korea in the 80s of sort of state-led development, developmental state-that doesn't work in the Internet economy. So you need a government model where the government really serves as an enabler and supports what is emerging from industry-the government can't lead the industrial development in this environment.

Reginald Chua: Well, I guess the question comes because when we talk about how the state should help or what role the state can play in the development of this new economy in countries-some of it tends to be platitudes obviously-government should have rule of law and all that sort of thing.

There are some specific issues that people raise. Government should, for example, help in setting up a financing system that does cater well to entrepreneurs. They should have more physical infrastructure. They should have more educational opportunities and so on.

How different might these be from any other kind of state assistance or intervention in the development of economies anyway? I mean, is there anything specifically different that countries should try to do to develop this?

Daniel Mao: Well, I think in the Internet days people become more liquid so if you really think about if there is a pair of eyeballs in say Singaporebut if Singapore cannot provide proper content or proper connection and proper sort of community, cyber communities, what this pair of eyeballs will do is they will go to say, other places, or maybe even go to Yahoo! or go to other sites to get whatever they need to get.

A very good example actually is happening in Europe. Most European on-line book buyers come over to Amazon.com so basically I would say the European on-line book buyers are contributing to the US economy.

The other example would be the taxation issue. If you are a California resident, if you are on a business trip to New York and try to buy a book on Amazon but you have to pay tax it's California tax but New York City will not collect any tax money. So what will happen?

AnnaLee Saxenian: Also on education, it is different than the old industrial model. I mean, in the old industrial model if you wanted to build a steel mill you could actually have the government come in and invest and build a steel plant for you-basically give you the capital. The financial mechanisms for the Internet economy are not the same. The government can't simply plop the capital down.

The way that Internet companies, hi-tech companies, get financed is-at least in Silicon Valley and I think it will continue-is in a much more decentralized way and it often brings with it a lot of market knowledge, a lot of technological knowledge. Venture capital is not just capital. It's also know-how, experience and what-not, so they're adding value and they're contributing to relationship building. So the state can't provide that kind of financing and state bureaucrats can't necessarily pick-this is sort of commonplace-pick the winner so you have to have a financing system that's much more integrated into the fabric.

Then likewise education. I mean education is absolutely essential. It's the knowledge economy. It is a prerequisite. There's no substitute for it. Any country that doesn't invest in education of its people will be left behind, period.

Reginald Chua: Just to follow up on two points, I guess, that were raised. One is this whole question about whether the government can simply plop the money down. Not only are governments attempting to plop lots of money down but many old world companies are trying to plop a lot of money down. Property companies are buying into the Internet economy. What would you say about that kind of money and what they bring to the table?

The other point that I guess I'd like to raise with Daniel too is in raising the question of culture. If you look at today's Technology Journal the cover story is in fact about the culture of failure or an Asian predisposition to look down on failure. How much of an issue is that, do you think, in the development of a new economy here?

Daniel Mao: Well, I think I have had some opportunities communicating with quite a few real estate developers in Silicon Valley and it's very interesting. I think they have migrated nicely-most of them, at least the people I talked with-from the really so-called landlord type of mentality into really the Internet wiring, connecting type of mentality. One example is a very good company called Abovenet by a guy from Taiwan called Sherman Tuan. Although I did not invest in the company, I had a chance to really communicate with him and so give him some advice here and there.

I found out the seed investor in that company was a real estate developer owning the building the office was situated in-and in fact they turned that into a powerhouse called Data Center or they called it a co-location center. So I think really for Internet, just like some people claim, five years from now there won't be any Internet concept companies. Internet will be embedded into vertical industries like as if today. For example, if you have say semi-conducting industry, that's semi-conductors, then some of the industry will be reorganized. So I would say, you know, how to utilize Internet and how to play a new game by setting new rules like Yahoo! setting everything for free and like Amazon trying to build up its back-end and payment system.

So I would just touch on that very briefly but in terms of the culture of being a loser I think in Silicon Valley what I learned the most is not that they don't like to be a loser but they are not afraid to fail on some occasions. So what they do is, for example for a lot of venture capitalists in Silicon Valley, they prefer to invest in the companies who have some kind of losing record so that they know how precious the capital is and how precious some of the advice is.

AnnaLee Saxenian: You know, on that point what failure is is a way to learn. People learn through failure and so what Silicon Valley does is institutionalize learning across a lot of firms, a whole community in the regional economy.

When you talk about the culture I just want to add two elements. There's a saying-I don't know if this is in fact true-but there's a saying that William Hewlett, one of the founders of Hewlett Packard used to say to young entrepreneurs when they came to the Valley, "If you want to succeed in Silicon Valley there are three things you have to do. You have to be willing to change jobs often, you have to be willing to fail, and you have to be willing to share information."

That characterizes a lot about the model in Silicon Valley that is different than traditional management whether in the US or in Asia. The labour markets are very fluid-people move between companies very easily. They're willing to fail and start over and see that as an opportunity for learning. And they're willing to open up and share far more with even competitors than one would have done in old-line industry. That's what accounts for this regional basis-that it really is about a community. It's about a technical community in a place that learns collectively and again if the community moves then some of that know-how moves with the community.

About property, money, venture capital, I think if all the capital that goes into companies has no knowledge or no background in the industry it's less effective. I mean, what has been effective about the investors in Silicon Valley is that they know the industry, they know the community, and they can provide advice. A lot of venture capitalists sit on the boards of directors of the companies they invest in and spend a lot of time advising about how to build a management team, how to move to the market, and whatnot.

It's not to say that old-line money can't help. A lot of old-line money gets invested. For example, in Taiwan what you've seen is that a lot of the old-line industries are now investing very actively in the technology sector and very successfully.

Reginald Chua: We're happy to take questions from the floor if people would like to raise any questions.

AnnaLee Saxenian: One point that hasn't been raised-and I'd be interested to hear what Daniel thinks-is about the greater China model. There is a small issue of politics in joining Taiwan-economically it makes perfect sense to me. It makes perfect sense-that Silicon Valley Taiwan connections, Taiwan, mainland, Hong Kong-would unite as a market. I think there's a lot of question marks about it politically.

Daniel Mao: I think it will be a very lengthy answer but to be short there's a word called virtual reality. We have a reality but virtually we can work together.

AnnaLee Saxenian: That's a good answer.

Question: Given China's ambivalent attitude toward the Internet—wanting the benefits but also wanting to control it—is there a danger that China gets left behind? How do you compare China and India when it comes to Internet development?

AnnaLee Saxenian: I think in the short run, what I see from my research is that in the short run mainland Chinese are going to be less willing to go back if there's tremendous constraint on Internet freedom and that will hurt them relative to India where people are going to be more willing to go back to a more democratic, more open environment. I suspect that over the long run that will change.

Daniel Mao: Well, just giving an example. The class of 1997 Harvard Business School, the Chinese students all went back and joined Internet companies or started Internet companies. So I think to look at this situation we need to look at two phases. One is the people who start up. When they are small they really don't care what kind of policies they can get. They just focus on operation, focus on growing, so we see actually tons of start-up companies in China.

Just giving an example: last year although I left temporarily the VC community but I still get about 100 business plans through Emails from friends or friends of friends. Every deal is related to China or is situated in China. But then there's another aspect of that-that it will be the sort of ambiguity of the policy and that is something I think we are also expecting to see, hopefully very soon there will be a new set of policies.

But Internet is new and the Internet is something nobody has managed before given the sort of networking effect. So I think there will be learning by doing-a lot of trial by error type of process going on there.

Reginald Chua: But you seem to be saying that it's not having any significant drag right now. I mean, do you foresee a time in the reasonably near future that if a policy isn't cleared up that there might be more of a drag on the sector?

Daniel Mao: At this moment actually I think given the current pace-for example, at the end of 98 the Internet user was about 2.1 million and at the end of 99 it's about 8.9-we expect to see that kind of growth for the next two or three years. So definitely we are a little bit maybe on the positive side by communicating closely with the related organizations there.

Question: Can you maybe comment on how you see the Internet affecting the development models, especially software? I mean, when you think of the open source type of applications, people actually don't really need to be anywhere. I understand that in Linux, for example, people don't even know where the source code comes fromand sort of tie that in to some of the development models that we're seeing in Asia and Hong Kong, for example, where governments are still trying to build bricks and mortar cyber parks, or whatever it is.

AnnaLee Saxenian: There are two parts to that. I'm very sceptical of science parks, you know, bricks and mortar, stuff like that. In general the evidence around the world is that they tend to be sort of physical infrastructure that doesn't affect the elements that are the most key to developing technology.

But that said, places still matter. It's not the case that things can be developed anywhere. Places matter because this is developed by people who do live in and work in particular places and they need-you need face-to-face contact at least for some of these relationships. So places matter and so it makes sense that technology development does happen in some places and not in other places, but building a science park may not be the way to trigger that.

Daniel Mao: Yes, in the field of software development I think we also need to look into the change of business models from a product type of company to a more service based sort of business model. So when you try to develop something you have to actually look into the service side of the infrastructure, for example, payment; for example, the use behavior. Giving you some examples, like Intuit, it came up with this so-called personal accounting software and this is very actually locally affiliated. If you want to globalize that into India, into China, into Hong Kong, that could take a lot of effort. So I would say really we need to look into the service oriented model and then also we need to look into so-called ASP-what nowadays people call application service providers. Then you may go through partnerships and you can globalize your services.

Question: There has been a lot of talk about how Jerry Levin and Ted Turner basically outsmarted AOL and how AOL became-from a new economy company it changed itself into an old economy company. What's your personal opinion on who got the better of the deal?

AnnaLee Saxenian: It's funny because the way I heard it was that this was the triumph of the Internet economy over the old economy; that this small Internet start-up got to buy out this big old lumbering Time-Warner. I think it was a pretty good deal for both of them frankly. I think they need each other. I don't think there's a clear winner or loser in that.

Daniel Mao: I think the better person to answer that would be Raymond Ch'ien here, but my view is-and I talked internally with my colleagues last week-if they really recall one year ago AOL bought Netscape. That was sort of the death of one of the very few sort of legendary companies in Silicon Valley, Netscape. And one year later they bought Time-Warner. Then it gives us really a very good sort of implication-that is, everything is possible in Internet days. But is it good or bad? It's really hard to tell at this time. But there's one phrase in Chinese called "heroes come out of chaotic days-luan shi chu ying xiong". So you will see whether they are heroes or they are not-I think it's another issue-but I think it gives really the young entrepreneurs the feel, the confidence that everything is possible.

Question: My question follows with Daniel Mao's-about whether there's going to be an Internet industry in five years. I mean, the way you say it's going to be embedded in industries, do you mean to imply that it is going to be just another distribution channel or do you mean something else, and if so what do you mean and how would that be embedded?

The follow on to that question is, what would be the characteristics of the industries that are most prone to that? One of the things I'm looking at is consumer banking. In banking, for instance, Internet banking might be another channel versus the replacement of bricks and mortar. The question is, will bricks and mortar ever be replaced? I think the Wall Street Journal ran a story what two, three weeks ago where Internet companies are renting trucks driving around with signs to give consumers more of a feeling of what they are. So this feedback, this loop feedback, I'd be interested in hearing your comment on what the role -- what effect on each other is.

Daniel Mao: I think Internet will be beyond just a simple distribution channel. Actually it serves as -- it's not a pure distribution channel. It does not sort of come with the logistics behind it. So Internet actually gives you a tool to interact not only with your purchasing decisions but also interacting with your friends and everything else. So I would say Internet will change your daily life. You know, if you really think about the time allocation of everyday life you have right now, I think five years from now it will be changed. It will be changed in such a way that Internet will be like the air, the water, and be part of your life. That's what I feel from that end.

To be specific on your retail banking question, I think you need to sort of separate it into two parts. One is the human interaction. Internet will never in the short run-I would say never is not like 100 years from now, I just cannot imagine-but say five years from now, Internet will not really replace that kind of human interaction; but it will replace the other parts. I still remember my first experience here in Hong Kong with some banks, like Standard Chartered, Hongkong Bank. I had to wait for-I don't know-two or three hours to open my bank account. So I'm a little bit confused on that-of course Hong Kong is a world financial center-but is it needed to have that kind of waiting experience?

You know, this part could be easily replaced, and the payment, same thing. I noticed, for example, that around December 28th, 29th, there were long queues in these bank branches because they want to get money to avoid Y2K bugs, and is it needed? I don't know. I think you can do a lot of things to avoid that through Internet. Yes, so that's sort of one side.

But the other side I think Internet also gives people a lot of room to be more creative, to come up from...

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...could be actually a little bit less. Compared with Silicon Valley it's phase by phase so you're moving ahead. But really the phase like in the mainframe computer what become the victims of that kind of migration. But hey, life is like a cycle, right? Right now, given the Internet days, mainframe expertise becomes actually really precious. So nowadays if you have mainframe experience you become hot property and hot sort of talent to be chased after. So I would say really it's the accumulation of your experience and also your specialization that will be the key to this kind of re-integration of the end product.

Question: It has been said by persons much smarter than I that this has been the first time in history that the business community and the financial community have been prepared to invest in start-ups and in business plans and concepts to the huge degree that we've seen it. Of course, those investors and venture capitalists are predicating those investments on the values they're seeing in the public markets.

I'd like to ask the three of you who don't appear to have a vested interest, not being stock analysts or investment bankers, if you think that the public markets are in general-and we know there are exceptions in both directions-but whether the public markets are in general fairly valuing the Internet opportunity.

Daniel Mao: I guess I'm a brave man, you know, so don't shoot me if my answer is not satisfying. I would say, giving you sort of a three-tiered answer. The first tier is, Yahoo! right now is about a $120 billion company. If the stock market crashes by 90 per cent what does it mean? That means that that's still a $12 billion company. You know, building a $12 billion company in six years, I think it's a huge success.

So I would say there are some fundamental supporting this type of above economy but is it overheated, I think I would sort of try to use a very similar example. In 96 when I was still a venture capitalist here, I noticed in Hong Kong-very interesting, if a company was talking or if some rumors were talking about asset injection from China-the company went up, shot through the roof. But what happened in 97 around the third quarter was, things went wrong a little bit here and there. So I would say, yes I think we should look into the fundamentals. Again it's management team and market size and then it's products and technologies.

So I try to-not quote, but try to use the sentences by Jerry Yang for the success of Yahoo! He actually gave three points. One is branding. The first one's branding, very important for Yahoo! The first is branding. The second is products and services and the last one is sustainable business model. So I would say for anyone to look into a public company we may also look into these fundamentals.

AnnaLee Saxenian: I agree with Daniel. Everybody in Silicon Valley is starting a dotcom. Everybody who goes to business school wants to. Everybody at Stanford wants to, right? And that's in response to what's going on in the markets. I think that will have to correct at some point in line with some business fundamentals.

It's not that different than what's happened in the past except in scale. We've seen these kinds of booms in technology where tons of entrepreneurs go into one sector or another. Everybody started a disk drive company at one point. A whole bunch failed and then they recycled their capital and their skills into new things. So this is just on a bigger scale and there will have to be some shake-out at some point, and that will be an opportunity for learning for all involved.

Reginald Chua: I think we have time for a few more questions.

Question: In your Masters project you concluded that Silicon Valley was doomed because of the high cost structure. A lot of people make the same argument about Hong Kong. I wonder if you think they might be making the same mistake and is there anything from your model of regional development in which you see Hong Kong has a competitive advantage?

AnnaLee Saxenian: What is true is that in this economy costs don't drive it. In Silicon Valley there were things that overcame the high costs. In particular there was a talent pool and a set of relationships, an accumulated base of knowledge, of know-how that became so valuable, continues to be so valuable today, that people will continue to come to the Valley for it.

I don't see that accumulated base of talent and know-how here in Hong Kong to a very great extent so that's what would compensate, it seems to me, for high costs, is some kind of accumulated skill base, talent, know-how. Hong Kong, by the way, has a future in this economy. I think that Hong Kong, like any place that I would advise, needs to build on its strengths. So Hong Kong has strengths in financial services. So I mean there are lots of opportunities in financial services or in trading for adapting the Internet to those particular industries.

Daniel Mao: I think just like I mentioned in the so-called virtual reality of greater China, I think Hong Kong should have very good play by specializing in certain areas but try to really achieve to Silicon Valley level. We cannot forget it took Silicon Valley 50 years starting with Hewlett Packard and Terman, which was the engineering school of Stanford. You know, really 50 years to achieve to that level so sometimes you just cannot skip.

Question: Being from the University of Science and Technology I think I'm free to talk about another subject, the role of the government I think some of you have touched on earlier.

When you talk about Silicon Valley usually we think about all the successful factors and the entrepreneurialistic spirit and everything that both of you have been talking about. But I think we should not lose sight of the fact that when you are the leaders in the field or the first in the field you are free to set the rules of the game. You have a lot of freedom to do things. However, when you're in a latecomer situation then you have to do things differently.

So I think in the situation of Singapore, Korea, Taiwan, and now Hong Kong, I think this is in the latecomers' category so the government has to play a certain role in this process. I'm not saying that the government should go out like certain countries and do everything-nationalize all the activities-but to setting up the infrastructure to point out the direction, to create education, to bring out some technology base, I think this is very much needed. So this is the point I want to make, you're looking at Silicon Valley. I think it's up to the 50 years effort-the government builds UC Berkeley, your University, builds Stanford, builds a lot of the laboratories and the roads and everything else. So I think this is a point that should not be missed.

AnnaLee Saxenian: An extremely important point, extremely important. In fact, the government provided the initial market for Silicon Valley. The Department of Defense was the initial market for all these chip makers; that's huge. You know, you needed an initial market to get started. So I mean everything you mentioned from the physical infrastructure, education-and not just Berkeley-but a whole range of institutions for training.

It's unknown but the community colleges play a very active role in training people for Silicon Valley. The San Jose State University trains more Ph.D. engineers than Stanford and Berkeley combined. So the California state and the national government have played a tremendously important but less visible role in supporting the growth. I hope it didn't sound like we meant the government has no role. I think government has a role. It's different than the role that the latecomers in the old bricks and mortar economy played but it is absolutely important.

Daniel Mao: For industries like more hi-tech orientated industries, there should be two invisible hands. One is the market and the other should be the government. If it's too much visible I think that will cause more issues.

Reginald Chua: I think we just have time for one more question and you're fast so you get it.

Question: I'm wondering actually what your feeling is-when they're actually going to start coming out here-is America looking towards Asia right now and when they do are the people that have already started up companies here doomed or is there a chance for us?

AnnaLee Saxenian: Is America coming to Asia? I mean, American companies, of course.

Question: Are Asian companies going to be doomed when the American companies come?

AnnaLee Saxenian: Well, Asian companies have an advantage. You know, they're right near the market so if you can develop capabilities that serve the local market and you can create first mover advantages and barriers to entry then you've got the game.

Question: [Inaudible]

AnnaLee Saxenian: I think that there's a lot about local market knowledge that American companies don't have and that's what the advantage of people who are in Asia have-language, culture. American engineers don't understand local languages, local cultures.

Daniel Mao: Yes, I think most of the American companies, the successful ones, are based upon the American infrastructure and American sort of way-the density of population, the user behaviour, everything else. But being more knowledgeable about the local market conditions and the user behaviour I think the local players can still play a very significant role. On the other hand you can also move, sort of expand to North America, to Europe.

AnnaLee Saxenian: You know, in India, they're starting to develop products for the Indian market. That means technology products at a much lower cost. The reliable say, Internet, infrastructure. Pagers even. Pagers the way they're designed now are very expensive for the Indian public. You can develop them much cheaper. American companies just don't do it because they're serving a higher end market. So you can sell those all over the world. I mean, there's tremendous opportunities for growth if you know a market and can serve it well.

Ronnie Chan: Thank you, Reg. The Asia Society is very pleased that we can have a little part in helping Hong Kong develop in the technology field. Without the help of Dow Jones and The Asian Wall Street Journal we could not have had today's luncheon so I want to give them a vote of thanks. Of course, we are very pleased that Professor Saxenian and Daniel Mao can be with us here today.

Before I present to them a small memento I just want to remind all of you of two things: No. 1, this is only one in a series of lectures and programmes on technology. The next one will be on February 14. For those of you who don't know, Kevin Kelly is one of the co-founders of Wired magazine. For anybody who wants to know anything about hi-tech you have to read that magazine. So Kevin Kelly is one of the co-founders and he became the Chief Editor until the company was sold and he took on the position of Editor-at-large. For those of you who have heard Kevin speak you will know that he's a very enlightening and entertaining speaker. So for those of you who are not signed up yet, February 14th, Monday, right here in this place. He will be speaking on the long boom of the new economy.

Then of course, as you all know, I always say a word about the Asia Society. For those of you who are not members here there are membership forms on the desk, sign up, we would love to have you.

Anyway, let's finally give another round of applause to our speakers while I present to them a memento.

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