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Redefining Innovation: The Path to Shared Prosperity in a Fragmented World
When Dan Breznitz retreated to the former silver mining town of Cobalt, Ontario to write this book, he found himself surrounded by the ghosts of boom-and-bust economics. While Cobalt declined after its mining heyday, Toronto-which had developed sophisticated financial infrastructure to support the mining industry-continued to thrive as a global financial center. This stark contrast perfectly frames the central question of his work: how can communities achieve sustained prosperity through innovation-based growth rather than temporary economic bubbles?
"Innovation in Real Places" has become required reading in policy circles worldwide, with figures from Alexandria Ocasio-Cortez to economic development officials in the American Midwest citing its insights. The book's contrarian message-that becoming "the next Silicon Valley" is neither possible nor desirable for most regions-challenges decades of conventional wisdom while offering a more practical path forward. As The Economist noted in its glowing review, Breznitz provides "the most important reframing of innovation policy in years."
2장
The Jenga Tower of Global Innovation
Innovation isn't just inventing "shiny new things" but the complete process of implementing ideas into improved products and services. Using bicycles as an example, Breznitz shows how companies like Shimano (Japan) and Giant (Taiwan) revolutionized the industry through different innovation approaches-Shimano through component specialization and Giant through materials innovation with public research support. These examples demonstrate how the global fragmentation of production creates opportunities for innovation-based growth beyond traditional tech hubs.
The collapse of vertical integration, facilitated by digitization, transportation advances, and trade liberalization, has transformed manufacturing into a global network where production stages can be distributed worldwide. This "Jenga tower" of global fragmentation creates both challenges and opportunities for communities seeking economic growth through innovation.
Once digitization and transportation technologies enabled production to be separated into discrete components performed anywhere globally, companies began specializing in particular stages. This specialization allows firms to develop superior capabilities in specific production stages, as seen with Taiwan's pure-play foundries like TSMC that revolutionized the semiconductor industry by allowing companies to focus solely on chip design.
Just as production has fragmented, innovation has fragmented into four main stages, each requiring different capabilities and supporting ecosystems:
Stage 1: Novelty innovation transforms new-to-the-world inventions into useful innovations, embodied by Silicon Valley and Israel.
Stage 2: Design, prototype development, and production engineering turns vague product ideas into manufacturable designs, exemplified by Taiwan's electronics design houses and Italy's luxury goods designers.
Stage 3: Second-generation product and component innovation improves existing products, making them better, more reliable, and appealing to wider audiences-the approach that transformed internal combustion engines into modern cars.
Stage 4: Production and assembly innovation masters the physical creation of fully defined products, exemplified by China's Pearl River Delta's remarkable flexibility in manufacturing.
For regions seeking innovation-based growth, there's a critical choice to make: which innovation stage to specialize in based on regional strengths, resources, and the kind of society they want to build.
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The Silicon Peach Paradox
The global story of industrialization features bursts of innovative energy that transformed regions before eventually quieting or burning out. Cleveland exemplifies this pattern-rising from the mid-19th century to become America's innovation hub with networks of inventors and investors functioning like modern VCs across multiple sectors. By 1900, Cleveland had the highest rate of important patents per capita in America. Yet this success story ended rapidly after WWII, with plummeting productivity, population decline, and manufacturing collapse.
Today's regions have tried to avoid Cleveland's fate by embracing entrepreneurism, business clusters, and Silicon Valley emulation-hence the proliferation of "Silicon Hyphen" nicknames. Atlanta ("Silicon Peach") seemed particularly worthy of the comparison, sharing Silicon Valley's agricultural roots and defense industry origins. Georgia Tech, like Stanford, produced graduates who launched technology businesses, including Scientific Atlanta and MSA (once the world's largest software applications company). By the 1980s, Atlanta companies dominated data communications with products like DCA's IRMA, Hayes modems, and Microstuf's Crosstalk.
Despite its promising start, Atlanta's tech sector has consistently failed to maintain momentum. Leading companies like DCA, Hayes, and Microstuf went bankrupt or were acquired as Silicon Valley rose to prominence. The number of large technology companies in Georgia declined by more than half from 2000 to 2006. Since 2006, no Atlanta startup has reached NASDAQ listing.
The fundamental problem is that Atlanta has become a "feeder cluster" to Silicon Valley, Boston, and New York. Companies like Appcelerator start in Atlanta but relocate to established tech hubs, taking their growth potential elsewhere. This happens because Atlanta suffers from "poor social capital"-despite having talent, role models, and potential Fortune 500 customers, these elements don't form the cohesive networks needed to nurture startups.
With 75% of American venture capital concentrated in California, New York, and Massachusetts, and investors often requiring companies to relocate, 40% of Atlanta's top-funded startups leave within three years of their first funding round. The result is that Silicon-Hyphens become minor leagues that invest billions only to see their best talent and companies depart for the majors, yielding limited local economic benefits despite massive investment.
4장
The VC Model: Prosperity for Whom?
Despite the allure of becoming a successful Silicon-Hyphen, there's a fundamental problem with the VC-backed startup model: the benefits rarely flow to local communities. Even when regions succeed in creating tech hubs, the financial rewards typically enrich Wall Street rather than local economies.
The contrast between two Canadian companies illustrates this perfectly. Research in Motion (BlackBerry) refused venture capital funding and used local investors, resulting in its IPO profits flowing to Canadian investors and employees. Shopify, however, followed the typical startup route with multiple VC funding rounds, resulting in American investors owning over 42% of the company by IPO time. When Shopify went public, most financial gains flowed to American VCs and Wall Street insiders rather than benefiting Ottawa's local economy.
Israel represents the most impressive miracle of innovation-based growth in the past half-century. From having just 886 R&D workers with academic education in 1968 and suffering 109,187% inflation between 1978-1986, Israel transformed into a global innovation powerhouse. By the late 1990s, it led the world in business R&D investment intensity and had the second-highest number of NASDAQ-listed tech companies after the United States.
Yet this economic miracle came with a devastating side effect: the rest of Israel's economy experienced no positive spillovers. Productivity and wages in non-tech sectors declined or stagnated. With over 95% of VC capital being foreign, financial exits meant profits leaving Israel entirely. The country essentially became two economies sharing one physical space-a small slice of high-skilled workers with startup "lottery tickets" and the majority running "on a treadmill to nowhere."
The results are stark: Israel transformed from the second-most-egalitarian Western society to the second-most-unequal one, with every fifth household now below the poverty line. The main "gift" of this innovation-based growth has been inequality levels comparable to Mexico and Turkey.
The VC model's structure explains why it produces such unequal outcomes. VC funds operate as partnerships between general partners (GPs) who make investment decisions and limited partners (LPs) who provide capital. To attract future investment, VCs need investments that will achieve exits at valuations two orders of magnitude higher within 3-5 years. Even the best VCs follow the "one in ten" rule-needing at least one massive success to cover nine failures while still delivering attractive returns.
When played at full tilt, the VC model transforms communities into insider-versus-outsider war zones, creating extreme inequality where tech workers enjoy fabulous salaries while others struggle to afford housing. Despite its narrow success, VC remains just one solution to financing innovation, and regions should question whether investing millions in VC funds truly serves their communities' long-term interests.
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Beyond the Binary: Manufacturing vs. Tech Startups
Many economists and policymakers present communities with a false binary: either try to "bring back manufacturing" or chase venture capital-funded tech startups. When asked about revitalizing places like the shuttered Bethlehem Steel plant, economist Paul Krugman dismissed it as "fantasy," while Steve Jobs bluntly told President Obama that Apple's manufacturing jobs "aren't coming back." This oversimplified view has led many regions to make costly economic development mistakes by forcing them to choose between two imperfect options.
This narrow framing overlooks numerous innovation-based growth opportunities across the economic spectrum. Innovation isn't limited to creating the next tech unicorn-it includes any action that enables better products or services at current or lower costs. Growth can come from incremental changes anywhere along the value chain, from ideation to production to consumption. For example, a mid-sized manufacturer might innovate by implementing advanced robotics, while a local food producer could develop new preservation techniques that extend shelf life.
The failures of places like Sacramento and Colorado Springs stemmed from betting on specific companies rather than developing unique regional capabilities. Sacramento spent millions attempting to become "the next Silicon Valley" through tax incentives, while Colorado Springs focused exclusively on attracting semiconductor manufacturers. Both strategies failed because they ignored existing regional strengths and attempted to replicate others' success formulas. Communities need to make targeted investments in particular stages of innovation production, creating sustainable competitive advantages rather than chasing after the latest tech bubble or manufacturing trend.
Successful regions like Shenzhen and North Carolina's Research Triangle Park attract corporations not because they're cheapest or offer huge incentives, but because they've developed specialized innovation ecosystems. Shenzhen built expertise in rapid prototyping and electronics manufacturing, while North Carolina leveraged its universities to create a biotech hub. These regions demonstrate that "if you have what they need, they will come and build it." Companies seek the rarest resource: knowledge and the ability to transform it into useful products and services.
The most successful regional development strategies focus on building unique capabilities that span traditional sector boundaries. Pittsburgh, for instance, transformed from a steel town into a robotics and AI hub by building on its engineering heritage while embracing new technologies. Similarly, Greenville, South Carolina evolved from textile manufacturing to become a advanced manufacturing center by investing in workforce development and specialized infrastructure. These examples show how regions can transcend the manufacturing-versus-tech dichotomy by focusing on their distinctive strengths and gradually building new capabilities.
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Strategic Innovation Planning: The Four Fundamentals
Is it possible for regions to systematically develop context-specific innovation policies? Yes, but we must first understand the tragic paradox of Canada-a nation with everything academics claim is needed for innovation success (high education levels, substantial R&D investment, world-class universities) yet dismal innovation outcomes.
The problem? Canadian policymakers confuse innovation with invention. Innovation isn't research or R&D-it's any activity involved in taking new ideas and creating improved products and services for market. The agents of innovation are firms and individuals, not universities or research institutions.
For communities to foster innovation-based growth, they need to understand different models for success across the four stages of globally fragmented innovation. Each stage requires different capacities and ecosystems.
Growth models define what firms need to compete in markets, create value, and generate jobs at specific periods and innovation stages. This evolutionary concept focuses on both the growth tasks facing firms and locations, and the institutional and political capacities required to address them.
Successful innovation regions must develop four fundamental elements:
1. Flows of local-global knowledge, demand, and input-establishing bidirectional flows between local and global contexts through "strategic coupling" within global production networks.
2. Supply of public and semi-public goods-from specialized skills to shared testing facilities and collaborative spaces where industries become communities.
3. Local ecosystem reinforcing firm-level benefits-providing critical resources like appropriate financing that fit the local innovation specialization.
4. Co-evolution capability-allowing the previous fundamentals and public policy to adapt as the locale grows.
Shenzhen's innovation ecosystem demonstrates these fundamentals in action. The city has become the world's premier manufacturing location for novel ICT products-no equivalent pool of stage 4 innovation skills combined with production exists in North America, Europe, or elsewhere in Asia. This success comes from bidirectional flows of knowledge between local and global networks; government provision of public goods; and strategic approaches to human capital and finance.
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Sewing and Designing: Taiwan's Stage 3 Success Story
Stage 3 innovation-second-generation product and component innovation-is often dismissed as mere "fast following" but actually drives tremendous economic growth. Taiwan exemplifies this approach, having built an ecosystem since the 1960s that enables companies to excel at improving existing technologies across sectors from bicycles to chip design, making Taiwan truly prosperous.
Taiwan's success began when RCA transferred its obsolete 7-micron semiconductor technology to ITRI in 1976. By 1979, the Taiwanese team achieved better yields than RCA and began selling chips. This seemingly outdated technology became Taiwan's path to stage 3 innovation success, generating widely distributed economic growth while Silicon Valley's profits remained extremely unequally distributed.
The government established critical infrastructure, including the Hsinchu Science-Based Industrial Park in 1980, which concentrated the complete semiconductor industry chain within a half-hour radius. The total government investment of only $35 million over less than a decade completely transformed Taiwan's economy-possibly the most cost-effective innovation policy ever.
Taiwan's success was built on the OEM and ODM business models that emerged during the formation of globally fragmented production systems in the late 1970s and early 1980s. ITRI quickly launched multi-client projects when IBM announced new PC systems, establishing a pattern for future research consortia. Over time, these consortia evolved to include extensive training of private firms' personnel and the transfer of engineers from ITRI to companies upon project completion.
Like Germany's Fraunhofer institutes, ITRI became not just an R&D actor but a critical human-capital and skills-supply mechanism for local industries. These consortia played crucial roles in Taiwan's emergence as a global leader in stage 3 innovation, helping industries adapt as they evolved from desktops to laptops to smartphones and related components.
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Alternative Models: Hamilton's Human-Centered Approach
Hamilton, Ontario presents a compelling alternative to Israel's Silicon Valley model. This midsized Canadian city successfully transformed from a declining steel manufacturing center into a vibrant hub of health-based stage 1 innovation through what experts call "user-engaged innovation." The transformation wasn't merely economic - it represented a fundamental shift in how innovation could be approached through direct engagement with end users and practitioners.
McMaster University's medical school emerged as a pivotal force in this transformation by pioneering problem-based learning and evidence-based medicine, approaches that eventually became the gold standard across North America. This revolutionary educational model moves beyond traditional lecture-based instruction to immerse students in real clinical scenarios. The approach empowers healthcare practitioners with sophisticated skills to critically evaluate medical research, interpret statistical data, and customize treatments based on both scientific evidence and individual patient contexts, preferences, and values. This methodology has trained generations of physicians who think differently about medical innovation.
Hamilton's healthcare companies exemplify this user-centered philosophy in action. Fusion Pharmaceuticals, which emerged from the Centre for Probe Development and Commercialization (CPDC) and successfully listed on NASDAQ in 2020, developed a groundbreaking platform for precisely delivering medical isotopes to targeted cells - a technology derived directly from observing clinical needs. Similarly, Adapsyn Bioscience revolutionized drug discovery by creating an AI-powered method to develop therapeutics from natural materials, leading to a landmark partnership with Pfizer potentially worth $162 million. These companies demonstrate how deep user understanding can drive technological innovation.
The city's robust medical device innovation ecosystem was uniquely fueled by comprehensive union health benefits from the steel companies, which provided both steady demand and crucial early revenue streams. This was particularly evident in the development of specialized trauma, burn, and dental products, where direct feedback from healthcare providers shaped product development. The Genesis Pain Relief Light serves as a perfect example of Hamilton's user-based innovation approach - it evolved from a simple suggestion by a chiropractor to an engineer about the need for effective home treatment options, leading to a successful commercial product.
While Hamilton's innovation ecosystem has matured significantly, with increasingly sophisticated networks and institutionalized processes for translating user needs into viable products, there's growing concern among observers. Many local policymakers continue to be seduced by the allure of "Silicon-Hyphens" - attempting to replicate Silicon Valley's venture capital-driven model. This risks undermining the region's distinctive user-centered approach by shifting focus from sustainable product development and organic sales growth to rapid scaling and financial exits. The tension between these competing models represents a crucial challenge for Hamilton's future development trajectory.
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Navigating the Three Dysfunctionals: IP, Finance, and Data
Communities seeking innovation-based growth must navigate three deeply dysfunctional domains: intellectual property rights, finance, and data. These systems are dysfunctional not because they don't work at all, but because they don't work properly for general human welfare or for communities trying to secure innovation-based prosperity.
The intellectual property rights system, originally designed to balance innovation incentives with knowledge diffusion, has transformed into what Breznitz calls "the most dysfunctional system of economic-freedom destruction humanity has seen since the beginning of the Industrial Revolution." Current IPR regimes emphasize "strong" property rights that block competition rather than facilitate innovation's positive spillover effects. Research shows patents actually slow innovation, particularly harming new companies working on follow-up innovations.
Regions should generate and own as much high-quality IPR as possible, making it available to local companies through patent pooling. Communities should develop strategic "jokers"-weapons to prevent others from stifling local freedom to operate. Firms should be encouraged and supported to participate in international standards bodies like ITU and IEEE, as embedding local firms' IPR in technology standards secures reliable income, jobs, and opportunities to shape global technology trajectories.
Since finance cannot be fixed, Breznitz recommends a "growth and delay" strategy for localities. This approach aims to help local companies grow substantially before facing inevitable financial exits, increasing the likelihood they'll maintain local operations even after acquisition. Israel's Innovation Authority exemplifies this strategy by developing debt financing options for tech companies to reduce pressure for quick exits and encourage revenue growth.
Data has become the new commodity being mined from communities worldwide, with multinational corporations racing to exploit it while local policymakers remain unenlightened about its value. Unlike physical commodities, data can be copied and transported worldwide at virtually zero marginal cost. It's also a nonrival good-the same data can be used simultaneously by multiple users for different purposes without being depleted.
Communities must develop comprehensive data strategies that account for data's unique qualities and societal impacts. A proper system would require accurate records of all data requests, individual ability to verify and challenge collected data, and transparent tracking of all transactions and licensing agreements. The most elegant solution would grant individuals full property rights to their personal data while establishing transparency for publicly gathered data.
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Innovation as Hope: Charting Your Own Path
If there's one lesson to take from this book, it's to believe in human ingenuity and communities' ability to chart their own future despite global headwinds. Innovation demonstrates that human choices, creativity, and actions matter, and social structures remain malleable to human agency despite claims that market forces, technology, and globalization limit our choices. This is evidenced by success stories like Pittsburgh's transformation from a steel town to a robotics hub, or Eindhoven's evolution from a declining industrial center to a high-tech ecosystem.
Smart communities develop their own innovation-based growth models, especially as the VC-to-financial-exits model loses steam and globally fragmented production limits local spillovers from stage 1 innovation. These communities focus on building unique competitive advantages based on their existing strengths, whether in manufacturing expertise, educational institutions, or cultural assets. For example, Boulder, Colorado leveraged its quality of life and university presence to become a startup hub, while Chattanooga, Tennessee transformed itself through municipal broadband and smart city initiatives.
COVID-19 has demonstrated the value of focusing on stages 2-4 innovation for distributed growth and resilience. Communities that invested in local manufacturing capabilities, digital infrastructure, and workforce development proved more resilient during the pandemic. Cities like Boston and Munich showed how strong innovation ecosystems could quickly pivot to address crisis needs, from developing testing solutions to reconfiguring supply chains.
Innovation policy should focus on changing the behavior of individuals and firms-the only economic actors that innovate-by equipping them with needed capacities, supporting their ecosystem, and stimulating them to innovate while staying locally embedded. This means investing in education and skills training, creating networking opportunities, and providing targeted support for emerging industries. Successful examples include Toronto's MaRS Discovery District and Barcelona's 22@ Innovation District, which combine physical infrastructure with programmatic support for innovators.
Despite critical dysfunctional policy domains like finance, IP rights, and data that local leaders can't control, regions can develop strategies to mitigate or leverage these systemic issues. This might involve creating local investment funds, establishing innovation zones with special regulatory frameworks, or building public-private partnerships to address market gaps. The Research Triangle Park in North Carolina demonstrates how long-term planning and institutional cooperation can overcome structural barriers.
Innovation represents hope-hope in humanity's ability to bring change toward a better world. When old models achieve declining growth rates and focus on financial engineering and monopolization, communities that devise their own unique paths forward will achieve prosperity. This is particularly evident in places like Israel's "Start-Up Nation" ecosystem and Estonia's digital society initiative, which created entirely new development models suited to their specific contexts and aspirations. The future belongs to those communities willing to experiment, adapt, and build innovation systems that reflect their unique circumstances and values.
