The San Francisco Bay Area (the nine counties bordering San Francisco Bay) can boast one of the world’s strongest economies, thanks in large measure to the technology companies based in Silicon Valley. Hoping to understand the roots of this success, McKinsey teamed up with two organizations that aim to promote economic growth, the Bay Area Economic Forum and the Bay Area Council, to learn how the region stacked up against eight other parts of the United States as measured by 35 economic indicators. These eight—Austin,¹ Boston, Charlotte, Houston, Los Angeles, New York, Phoenix, and Seattle—were chosen because they resembled the Bay Area in size, industry cluster composition, and international trade status, or because they enjoyed excellent reputations and high growth. The resulting study shows that despite problems of growing concern, the Bay Area has completed its transformation from an industrial and defense-heavy economy into a predominantly knowledge-based one that ranks among the most productive in the world.

Indeed, in the knowledge-intensive business clusters of bioscience, computers and electronics, environmental technology, multimedia, and telecommunications, the Bay Area is the global economy’s leader in productivity (output per employee), with an absolute advantage (Exhibit 1) and a faster rate of productivity...