On comparative advantage, and companies taking Silicon Valley funding

Was setting out to write a post about how startups outside Silicon Valley could model the process of moving to the Valley as an outcome of comparative advantage, and was thoroughly sidetracked into reading Paul Krugman on how non economists don't, and usually don't want to, understand what economists mean by comparative advantage.

Anyway, "take Ricardo’s original comparative-advantage example, in which unit labor requirements look like this:

-----------Cloth Wine
Britain 100 110
Portugal 90 80

Ricardo famously argued that in this case there can be mutual gains from trade. Suppose, for example, that cloth and wine exchange at a relative price of 1. Then Britain can get its wine more cheaply — 100 units of labor rather than 110 by producing cloth and trading, while Portugal can similarly get its cloth more cheaply by producing wine."

The same model can be applied to businesses - one shouldn't do for oneself what one can buy in, if the price at which one can buy it is less than the cost of doing it internally (including opportunity cost). Silicon Valley has a very clear comparative advantage in funding and developing businesses to sell into a global market. It makes sense for a business which has to compete globally (and almost every business does, once it gets beyond a certain size) to take advantage of the money and the skills associated with that money available in the Valley. This does not mean that you have to move the whole company here; it does mean that some of the people making up the company have to move, for a while. Some of the people who move will want to stay, but some of them will want to move back - when they do that, they bring with them a knowledge base and network of contacts which can be applied to another startup.

Kurgman describing Ricardo's original example http://krugman.blogs.nytimes.com/2010/02/21/a-globalization-puzzle/
'Ricardo's difficult idea' http://web.mit.edu/krugman/www/ricardo.htm
Comparative funding statistics http://www.nvca.org/
Flybridge Capital on 2Q2012 funding trends http://ontheflyingbridge.wordpress.com/2012/09/02/funky-times/

I'm currently mentoring for the Alchemist accelerator. If you'd like to discuss an idea, contact me at info@cunningsystems.com