Innovation in Real Places

Innovation in Real Places Plot Summary

Introduction

In the spring of 2019, a small Canadian town named Cobalt offered a profound economic lesson about innovation. Once a bustling silver mining center that attracted millions in the early 1900s, Cobalt now stands as a quiet reminder of how quickly prosperity vanishes when based solely on resource extraction. Meanwhile, Toronto—the financial hub that grew wealthy by financing Cobalt's mines—continues to thrive long after the silver deposits were depleted. This stark contrast illustrates a central truth: innovation-based growth creates sustainable prosperity, while resource bubbles inevitably burst. The journey through innovation landscapes reveals that prosperity isn't just about high-tech startups or new gadgets, but rather the complete process of transforming ideas into improved products and services. As global production has fragmented across borders, communities now have multiple paths to innovation-based growth—each creating different types of jobs and requiring different supporting ecosystems. For community leaders, policymakers, business owners, and anyone concerned about their region's economic future, understanding these dynamics offers a practical framework for building sustainable prosperity in a world where the Silicon Valley model is just one of many viable approaches.

Chapter 1: The Fragmentation of Global Production (1970s-2000s)

The global economy underwent a fundamental transformation beginning in the 1970s. Production that was once vertically integrated—where a single company controlled everything from raw materials to final assembly—gradually fragmented into discrete stages distributed across the world. This transformation accelerated through the 1990s and 2000s as advances in information technology, transportation, and trade liberalization made it feasible to coordinate complex production networks spanning multiple countries. The bicycle industry provides a compelling example of this fragmentation. Japanese company Shimano revolutionized bicycle components through relentless innovation in gear systems, while Taiwan's Giant Manufacturing transformed itself from a basic manufacturer into a global leader through innovations in carbon-fiber frames. Neither company needed to control the entire production process to dominate their respective niches and create thousands of good jobs in their communities. This fragmentation created a new innovation landscape with four distinct stages. Stage 1 focuses on novelty—creating entirely new products and industries. Stage 2 involves design and prototype development—translating concepts into manufacturable products. Stage 3 encompasses second-generation innovation—improving existing products and components. Stage 4 centers on production and assembly—figuring out how to efficiently manufacture complex products. Each stage requires different capabilities and ecosystem support. The COVID-19 pandemic dramatically illustrated the importance of understanding these stages. Taiwan and Japan, with their mastery of stage 3 innovation, could quickly produce their own medical protective equipment, while the United States, despite Silicon Valley's stage 1 prowess, struggled to manufacture even basic items like masks. This revealed that different innovation stages create different forms of resilience and economic security—a lesson with profound implications for communities seeking sustainable prosperity in an increasingly specialized global economy.

Chapter 2: Silicon Valley Dreams: The Startup Illusion

Since the 1990s, regions worldwide have pursued a seemingly obvious path to prosperity: becoming the "next Silicon Valley." They've adopted nicknames suggesting technological kinship—Silicon Beach (Los Angeles), Silicon Alley (New York), Silicon Wadi (Israel)—and invested billions in creating startup ecosystems. Atlanta exemplifies this approach, having developed a tech community from its post-WWII defense industry roots, similar to Silicon Valley's origins. Atlanta's story initially seemed promising. Companies like Scientific Atlanta grew from a small radar research startup into a multibillion-dollar satellite and cable communications giant. Digital Communications Associates dominated the PC-to-mainframe market, while Hayes led in modems. The region attracted research investment, developed a young educated workforce, and hosted numerous Fortune 500 headquarters. Entrepreneurial stars emerged, like Internet Security Systems, which went from university project to global cybersecurity leader with 1,200 employees across twenty countries. Yet Atlanta's apparent success masked a troubling pattern. Most promising startups eventually left the region or were acquired by outside companies. Scientific Atlanta was purchased by Cisco, Internet Security Systems by IBM, and countless others relocated to California or Boston. Research revealed that Atlanta had become a "feeder cluster" to established tech hubs, creating promising startups only to see them leave before generating substantial local economic benefits. The underlying problem lies in social networks. Tech firms need extensive connections to find employees, managers, ideas, and investment. In established hubs like Silicon Valley, these networks are dense and locally rooted. In aspiring tech regions, entrepreneurs must build connections to distant hubs, leaving little time or motivation to invest in local community building. This creates a self-reinforcing cycle of social fragmentation that undermines local ecosystem development. Venture capital dynamics worsen this problem. With three-quarters of American venture capital concentrated in California, New York, and Massachusetts, investors often move promising companies to their home turf. Of firms listed in Atlanta's "Top Venture Capital Deals" between 1999-2007, 40% left within three years of their first funding round. This pattern reveals a harsh reality: the tech landscape in developed economies consists of a few dominant clusters served by numerous subordinate feeder clusters—a lesson that communities must understand before investing billions in Silicon Valley dreams.

Chapter 3: Four Paths to Innovation-Based Growth

The global fragmentation of production has created multiple viable paths to innovation-based prosperity, each with distinct characteristics and requirements. Understanding these four innovation stages is crucial for regions seeking sustainable economic growth in today's specialized global economy. Stage 1 innovation—novelty—creates entirely new products and industries. While venture-backed tech startups represent the most visible form, they're just one part of a broader landscape that includes fundamental system innovations and established companies driving change. Israel exemplifies successful stage 1 specialization, transforming from a country with minimal R&D in the 1960s to a global leader in information technology. However, this success has come with significant downsides: extreme inequality, with benefits concentrated among a small slice of highly skilled workers while the broader economy stagnates. Stage 2 innovation focuses on design, prototype development, and production engineering. Italy's Riviera del Brenta demonstrates this approach in luxury footwear, where local firms translate sophisticated designer concepts into production-ready shoes. Their specialized capabilities in materials, prototyping, and manufacturing have made them indispensable partners for global fashion brands like Louis Vuitton and Prada. This specialization creates diverse employment opportunities across skill levels, from highly trained designers to skilled craftspeople. Stage 3 innovation involves improving existing products and components. Taiwan exemplifies this approach, developing specialized capabilities in semiconductor design and manufacturing. Companies like MediaTek transformed the mobile phone industry by creating standardized chipsets that allowed smaller manufacturers to compete with industry giants. Germany similarly excels in stage 3 innovation across industries from automobiles to kitchen appliances, creating products that command premium prices while supporting broad-based prosperity. Stage 4 innovation centers on production and assembly. China's Shenzhen region demonstrates how excellence in manufacturing itself requires significant innovation. Shenzhen companies have developed unique capabilities in ultra-mass-flexible production—the ability to produce diverse sophisticated products, rapidly scale production up or down, and constantly incorporate new materials and components. This innovation has created millions of jobs across skill levels and made Shenzhen indispensable to global technology companies. Each innovation path creates different types of jobs, requires different supporting ecosystems, and distributes economic benefits differently. The key for communities is identifying which path aligns with their existing capabilities and aspirations for the future—a choice that will determine what kind of society they can build and what types of jobs they will create.

Chapter 4: Building Effective Innovation Ecosystems

Effective innovation policy requires a fundamental shift in thinking. Rather than focusing on research, universities, or specific technologies, successful regions concentrate on supporting innovation's true agents—companies and individuals. This approach recognizes that innovation is not invention, nor is it R&D, but rather the complete process of taking ideas and transforming them into improved products and services. Canada's innovation paradox illustrates the consequences of misunderstanding this distinction. Despite world-class universities, high education levels, and substantial public R&D investment, Canada's business innovation performance remains dismal. The reason? Canadian policymakers have consistently confused innovation with invention, focusing on research inputs rather than building the capabilities that innovation agents need to succeed in the marketplace. Successful innovation policy achieves three critical objectives: equipping innovation agents with necessary capabilities, developing supportive ecosystems, and stimulating innovation activity. This requires understanding the specific "growth models" that apply to different innovation stages and regions. Four fundamental elements shape these models: flows of local-global knowledge, supply of public and semi-public goods, reinforcing local ecosystems, and co-evolution of policies as industries develop. Innovation agencies play a crucial role in implementing these policies, but their design must match a region's innovation stage and aspirations. Four distinct models have emerged: productivity facilitators (like Canada's Industrial Research Assistance Program), directed upgraders (like Singapore's A*STAR), state-led disruptors (like Taiwan's ITRI), and transformation enablers (like Israel's Innovation Authority). Each model has different strengths, limitations, and resource requirements. The most successful regions institutionalize continuous policy experimentation. Taiwan's ITRI evolved from transferring foreign semiconductor technology in the 1970s to creating research consortia that help local companies compete globally. Israel's Office of the Chief Scientist started with modest resources but developed innovative programs like Yozma (which kickstarted the Israeli venture capital industry) and technological incubators. In both cases, policies co-evolved with industry needs, addressing different challenges as companies grew and markets changed. This evolutionary approach contrasts sharply with the common practice of copying trendy policy tools without understanding their context. Science parks, venture capital funds, and university technology transfer offices all serve specific functions within innovation ecosystems—they're not universal solutions. Regions must develop policies that address their specific innovation challenges rather than implementing fashionable programs that worked elsewhere under different conditions.

Chapter 5: Balancing Technology with Human Needs

The pursuit of innovation-based growth ultimately raises profound questions about what kind of society we want to build. While technological advancement creates tremendous opportunities, it also generates winners and losers. Communities that ensure innovation's benefits are widely distributed while containing its negative impacts continue to innovate and grow. Those that fail to do this often fall into cycles of stagnation, inequality, and social division. Hamilton, Ontario offers an instructive example of human-centered innovation. This former steel town has transformed itself into a center for healthcare innovation by building on its unique institutional and social assets. Rather than pursuing cutting-edge scientific research disconnected from local needs, Hamilton developed what could be called "user-engaged innovation"—solving real problems identified by clinicians and patients. McMaster University pioneered problem-based learning and evidence-based medicine approaches that focused on practical healthcare improvements rather than abstract scientific questions. This approach has created companies like Fusion Pharmaceuticals (developing targeted cancer treatments) and Genesis Pain Relief Light (creating affordable medical devices based on practitioner insights). Unlike typical Silicon Valley startups that focus on rapid financial exits, many Hamilton companies prioritize sustainable growth and local employment. The region's innovation ecosystem includes alternative financing mechanisms, specialized educational institutions, and collaborative networks that connect healthcare providers, researchers, and entrepreneurs. Israel's experience with stage 1 innovation highlights the importance of balancing growth with equity. While Israel achieved remarkable success transforming from a low-R&D economy in the 1960s to a global technology leader, this growth created a dual economy where high-tech workers prospered while the broader population stagnated. Recognizing this problem, the Israeli Innovation Authority has evolved its mission to address social challenges, support traditional industries, and help companies grow beyond the R&D stage to create more diverse employment opportunities. These examples illustrate that innovation policy isn't just about technology—it's about people. Communities must develop visions of innovation-based growth that reflect their values and aspirations. Do they want to create a few high-paying jobs for elite workers, or broader prosperity across skill levels? Do they want to build globally competitive companies that might leave, or locally rooted enterprises that might grow more slowly? These choices shape not just economic outcomes but social cohesion and quality of life.

Chapter 6: Navigating Economic Dysfunctions in IPR and Finance

The global economy suffers from three profound dysfunctions that significantly impact innovation-based growth: intellectual property rights (IPR), finance, and data. These systems, while essential to modern economies, have evolved in ways that often hinder rather than support innovation, particularly for communities seeking to build sustainable prosperity. The intellectual property system has transformed from a balanced mechanism for encouraging innovation into what Milton Friedman might have called "the biggest government-run machine of monopolies and rent creation the world has ever seen." Patents were originally designed as a social contract—inventors received limited monopolies in exchange for disclosing their inventions, promoting both innovation and knowledge diffusion. Today, however, the system has become weaponized. Patent trolls extract billions through litigation threats, technology standards lock in monopoly positions, and trademarks restrict even basic language usage. Finance has similarly become dysfunctional through the process of financialization—treating companies as financial assets rather than productive enterprises. The pressure to maximize shareholder value leads to short-term thinking, stock buybacks instead of productive investment, and the dismantling of companies that don't fit narrow definitions of "core competencies." The Timken Company of Canton, Ohio provides a sobering example—a century-old manufacturing firm that was broken apart by shareholders seeking higher stock prices, despite its crucial role in the local innovation ecosystem. Data represents perhaps the most concerning dysfunction. As our lives become increasingly digitized, personal information has become a valuable commodity that corporations extract without compensation or accountability. Communities often give away locally generated data to multinational companies in exchange for vague promises of economic benefits that rarely materialize. Unlike physical commodities, data can be reproduced infinitely at near-zero cost, increases in value over time, and enables countless unforeseen applications—making control over data access a critical factor in future innovation potential. These dysfunctions share a common pattern: they concentrate power and wealth while limiting the diffusion of innovation. For communities seeking innovation-based growth, the challenge isn't to fix these global systems—that's likely beyond their reach—but to develop pragmatic strategies for navigating them. This might include creating patent pools that ensure freedom to operate for local companies, developing alternative financing mechanisms that support long-term growth, and establishing data governance frameworks that preserve access for local innovators. The most successful regions don't waste energy fighting these dysfunctions directly. Instead, they become sophisticated players who understand the rules of the game and develop strategies to ensure their innovation agents can thrive despite systemic challenges. By focusing on what they can control—building local capabilities, creating supportive ecosystems, and developing pragmatic workarounds—communities can achieve innovation-based growth even in an imperfect global system.

Summary

The fragmentation of global production into distinct innovation stages represents both the greatest challenge and opportunity for communities seeking sustainable prosperity. Throughout history, regions have thrived not by chasing the latest technological fad, but by developing specialized innovation capabilities that create unique competitive advantages. Whether it's Taiwan's excellence in semiconductor design, Germany's mastery of industrial improvement, or Shenzhen's innovations in manufacturing, successful regions identify which innovation stage aligns with their existing strengths and aspirations, then build ecosystems that support those specific capabilities. The lessons for communities are clear but demanding. First, focus on innovation's true agents—companies and individuals—rather than research inputs or trendy policy tools. Second, develop a clear vision of what success looks like, including what kinds of jobs you want to create and how benefits should be distributed. Third, build institutions capable of continuous policy experimentation, adapting approaches as industries evolve and global conditions change. Finally, develop pragmatic strategies for navigating systemic dysfunctions in intellectual property, finance, and data that might otherwise limit innovation potential. By taking this approach, even regions far from established innovation hubs can develop distinctive capabilities that create sustainable prosperity in an increasingly specialized global economy.

About Author

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Dan Breznitz

Dan Breznitz is an associate professor at the Sam Nunn School of International Affairs and the College of Management, and an associate professor by courtesy at the School of Public Policy at Georgia Institute of Technology. He is author of the award-winning book Innovation and the State, published by Yale University Press, and a Sloan Foundation Industry Studies Fellow. He lives in Atlanta.

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