Whatever Happened to Silicon Valley Innovation?

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Executives at companies whose investments in basic research appear to be slipping insist they're as committed as ever. Hewlett-Packard's research budget has flattened in recent years, and its rank for patents received fell from No. 5 in 2006 to No. 10 in 2007. But Shane V. Robison, HP's chief technology and strategy officer, says the company is getting more bang for its buck now because it's concentrating on software innovations—which are less expensive to produce than chip advances. "A lot of people think if you're not doing microprocessor design, you're not doing information technology innovation," he says. "That's a goofy way to think about it."

The Valley faithful point out that the region has always gone through cycles of innovation, with lulls before the next big breakthrough. Google looked like just another search engine in its early days; perhaps another startup just getting going has the same potential to change the world. "I'm a Silicon Valley optimist," says John Hagel III, co-chairman of the Deloitte Center for Edge Innovation. "I think there's an incredible amount of opportunity to be created out of the technologies that are already in play."

New technologies may also end up eclipsing the old. Semiconductors, for example, laid the foundation for technology improvements in the past, but there may be more important advancements elsewhere in the future. Ken Lawler, a Valley partner with the venture capital firm Battery Ventures, points to new developments in biotech, solar power, and other green technologies. "Innovation is still alive and well," he says. "It's in new areas."

One day during my journey, I stop into the offices of Numenta, above a bookstore in Menlo Park. The startup has one of the most ambitious goals imaginable: building computers that work like the brain. Numenta represents classic Silicon Valley game-changing ambition—no surprise, perhaps, considering that one of the founders is Jeff Hawkins. He's a serial inventor who produced the first tablet computer, GridPad; the first successful handheld computer, PalmPilot; and the first successful smartphone, Treo.

Hawkins and his Numenta programmers study the inner workings of the brain and then replicate them with some of the most complex mathematical algorithms ever devised. Yet it's not venture capitalists who are funding this effort: Hawkins, a sandy-haired 51-year-old, is financing Numenta largely with his own savings. "The work we're doing is technically very hard. It would be very difficult to get it funded in the typical Silicon Valley way," he tells me.

There's a minitrend emerging in the Valley: Some of yesterday's inventors are resurfacing with bold ideas, which, like Hawkins, they're funding themselves. But there's a limit to how much self-funded entrepreneurs can do.

So, after my journey through the Bay Area and dozens of interviews, I drew several conclusions: Breakthrough innovation is going on at a handful of large companies and a few small ones. But there are also legitimate concerns about the Valley's long-term prospects. IBM and Intel will keep producing important chip advances. Microsoft and Google will race each other to come out with cutting-edge Net technologies. And Apple seems likely to produce more hit products. But unless entrepreneurs and venture capitalists refocus on more ambitious tech projects—even though they take more time and money to incubate—the Valley's and the tech industry's contribution to the national economy is likely to wane.

The world economic meltdown might actually have some positive effects. In times of crisis people sometimes set off in bold new directions. This shock might prompt action on the tech front from the federal government. The America Competes Act, which was passed by Congress in 2007 but was never funded, called for increased money for university research, improvements in math and science education, and corporate R&D tax incentives. Tech leaders say now is the time to act. "We have chosen not to compete," says Intel Chairman Craig R. Barrett. "You cut off your future if you don't invest."

Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog.