Innovation in Real Places

How can nations and cities prosper in a world where innovation and production are sliced across continents? In Innovation in Real Places, Dan Breznitz argues that every region must stop chasing Silicon Valley and instead understand the global fragmentation of production and how value accrues across its stages. Innovation, he explains, is not one process but a series of specialized stages—from discovery to design, component improvement, and large-scale production—each requiring different skills, institutions, and policies.

The book’s core claim is that innovation is not a single heroic act but an evolving chain of activities embedded in complex global networks. Because production has splintered (“the Jenga game”), every place now faces a choice: decide which piece of the global tower to hold and then build the ecosystem that supports it. Success depends on recognizing your realistic capabilities, setting social priorities (what kinds of jobs you want), and designing institutions that evolve as industries change.

The fragmentation revolution

Digital connectivity, cheaper transportation, and liberalized trade made it possible to carve production into globally distributed stages. Companies now design in one country, prototype in another, manufacture in a third, and assemble in a fourth. This fragmentation has two consequences: it democratizes innovation opportunities (because places can specialize in a single stage), but it also makes value capture fragile—profits can move elsewhere along the chain.

Breznitz uses the Jenga metaphor: the tower of vertically integrated production has fallen apart, replaced by mobile blocks that regions can compete to host. Shimano carved out success by dominating bicycle gears (stage 3), while Foxconn controls immense stage‑4 assembly capacity across the Pearl River Delta. Yet, if your region tries to replicate Silicon Valley’s stage‑1 discovery model without venture capital, top-tier labs, and tolerance for inequality, you are setting yourself up to fail.

Specialization and the four stages

Breznitz describes four key stages of innovation—novelty (stage 1), design and prototyping (stage 2), component improvement (stage 3), and production and assembly (stage 4). Each stage rewards a different set of institutional strengths. Stage‑1 hubs like Silicon Valley thrive on venture capital and fast exits; stage‑2 districts such as Riviera del Brenta flourish through design-for-manufacture skills; stage‑3 champions like Taiwan succeed via component mastery and public R&D consortia; stage‑4 dynamos like Shenzhen win through scale and supply-chain integration. The right choice depends on what your region already does well and what kind of society you want to build.

This perspective overturns the myth of a single innovation ladder. Instead of assuming every economy must climb from low-tech manufacturing to start-up heaven, Breznitz urges you to select the stages that match your resources and culture. You still innovate—you just innovate differently. (Compare this approach to Ha-Joon Chang’s “kicking away the ladder”: both argue for choosing context-specific industrial strategies rather than mimicking global leaders.)

Finance, institutions, and capture

Understanding how value flows through fragmented production also means reconsidering your financial and institutional architecture. Venture capital can fund breakthrough ideas, but it is a narrow tool designed for speculative exits, often exporting the gains to financial centers abroad. The book contrasts Shopify (whose surging valuation enriched mainly U.S. investors) with BlackBerry (which kept wealth and jobs in Waterloo). For most regions, the real opportunity lies in helping “tech teens”—profitable mid-stage firms that need patient capital, not speculative equity.

Similarly, local public goods—testing labs, design schools, prototyping centers, and trade consortia—often matter more than generic R&D spending. Canada’s experience shows that high public R&D and education do not guarantee innovation if you misalign with your agents of innovation (the firms and people actually making things). Successful cases like Taiwan’s ITRI or Italy’s Politecnico Calzaturiero show that public institutions succeed only when deeply embedded in evolving industry networks.

Power, politics, and moral choice

Finally, Breznitz reminds you that innovation policy is never neutral. Choosing a stage means choosing a distribution of income and types of jobs. Silicon Valley’s model produces extreme inequality and enclaves of wealth; Taiwan’s stage‑3 model created a broad middle class of engineers and suppliers; Shenzhen’s stage‑4 strategy generated mass employment and mobility but environmental and labor challenges. Every policy choice reflects moral priorities about who prospers and how.

The lesson is clear: in a fragmented global economy, you can no longer aspire to “catch up” by copying someone else’s innovation story. You must design your own sequence—a stage‑specific, institutionally grounded, and morally conscious path that transforms local skills into durable prosperity. That may mean supporting design networks over unicorns, conditional loans over venture equity, and local data governance over global platform dominance. In essence, innovation in real places means building ecosystems that match who you are, not pretending to be someone else’s stage of the global Jenga tower.

To make innovation actionable, Breznitz divides it into four interlocking stages, each representing a distinct phase of converting ideas into products. Recognizing where you fit along this chain can unlock realistic and inclusive strategies for growth.

Stage 1: Novelty

You see this model in Silicon Valley or Israel’s early R&D ecosystem—high-risk, venture-funded innovation that produces breakthrough inventions. These regions depend on elite universities, capital networks, and global investor connections. The trade-off is clear: immense wealth concentration alongside fragile local employment. (Note: Stage‑1 strategies work best when regions possess both deep research strength and tolerance for inequality.)

Stage 2: Design and Prototype Engineering

Stage‑2 specialists turn ideas into manufacturable designs. Italian regions like Riviera del Brenta moved from mass production to boutique design-for-luxury, partnering with global brands while preserving local identity. Institutions such as Politecnico Calzaturiero supply technical training and prototype facilities. The result is sustainable, high-value, low-volume employment anchored in design craft rather than speculative tech finance.

Stage 3: Component and System Innovation

This stage centers on incremental improvement and component leadership. Taiwan built its power here, forming research consortia through ITRI, seeding pure-play foundries like TSMC and UMC, and enabling design houses such as MediaTek. The payoff is widespread technical employment, shared R&D costs, and resilient advantage. (In economic geography terms, stage‑3 economies often exhibit the highest regional multiplier effects.)

Stage 4: Production and Assembly

Stage‑4 mastery lies in orchestration—assembling and scaling enormous supplier networks. Shenzhen exemplifies it: within hours you can source nearly every smartphone component. The city’s governments relaxed migration rules, built factory housing, and promoted supplier co-location. Foxconn’s hyper-scalable system shows that innovation at this stage is logistical, not scientific. Jobs cut across skill levels, though margins remain thin.

Choosing your stage wisely

To find your fit, ask: What capabilities already exist? What jobs do we want to create? Where do our institutions excel? A design city may invest in stage‑2 testing labs; a manufacturing hub should bolster stage‑3 component R&D; an R&D cluster may remain at stage‑1 but mitigate inequality through social policy. The message: specialization, not imitation, creates resilience.

Core insight

Each stage defines a distinct innovation economy. Prosperity arises not from moving up a ladder but from mastering one stage deeply and building adaptive public goods around it.

The production of goods and services has splintered across borders more dramatically than ever before. This global fragmentation changes the logic of industrial growth: you no longer need to build entire products to secure wealth. You can—and must—choose a slice of the chain to dominate.

The Jenga metaphor and value flows

Breznitz depicts modern production as a Jenga tower. Each block—design, component, assembly—can move independently to wherever it finds a cost or skill advantage. Foxconn manufactures for Apple not because it owns the technology but because its region mastered “ultra‑mass‑flexible” assembly, pooling global demand across clients. In services, Indian firms like TCS, Wipro, and HCL did the same for digitized business functions, leveraging project-management scale and reusable code to fragment global IT work.

Winners, feeders, and hollow connections

This networked structure creates power imbalances. Dominant hubs—Silicon Valley, London, Shenzhen—act as magnets, pulling entrepreneurs and profits away from feeder regions. When start-ups relocate to these hubs for exits (Appcelerator leaving Atlanta, for example), local communities lose both the jobs and the reinvestment potential. That’s why Breznitz insists on mapping where profits and decision power actually reside, not simply celebrating the fact that “innovation occurs.”

Building resilient local nodes

Local prosperity depends on designing strong two-way flows—“local buzz and global pipelines.” Regions must cultivate supplier networks, shared facilities, and policy channels that help firms climb from subcontractors to strategic participants. Shenzhen built community-level testing labs and logistics infrastructure; Alto Livenza’s trade expos (SICAM) built buyer linkages for furniture makers; Taiwan’s consortia tied public labs to global customers. The formula is always similar: semi-public assets + global integration = durable growth.

Ultimately, fragmentation empowers smart localities to capture new value—but only if they master coordination. If your city spreads itself thin across all stages, you dissipate resources. Pick your block, build deep competence, and keep watching the tower. As global shifts occur, the most adaptive nodes—not the richest ones—survive and flourish.

One of Breznitz’s sharpest critiques targets our cultural obsession with venture capital. While VC fuels frontier innovation, it is a narrow system built for financial exits, not sustained local growth. To foster inclusive prosperity, you need new financial instruments designed for growth and stability rather than fast liquidity events.

The VC machine and its limits

Venture capital depends on asymmetric rewards: one big “home run” must offset nine failures. That shapes behavior—short timelines, preference for scalable software, and geographic concentration around financial hubs. The cost: communities lose ownership when successful firms go public or sell abroad. Shopify’s IPO enriched distant investors; RIM/BlackBerry, which avoided VC dependence, retained more local value. Israel’s Yozma program, despite its global acclaim, exported much of its returns to foreign LPs, widening income inequality.

Tech teens and patient finance

Between start-ups and large corporations lies a neglected middle: firms aged 5–15 years, cash-flow positive but capital-constrained. These “tech teens” employ locals, pay taxes, and produce reliable innovation. Yet they lack tailored credit because they fall between VC’s appetite for exits and banks’ aversion to risk. Breznitz recommends growth loans, revenue-linked debt, and conditional grants—financial tools that allow these firms to scale responsibly.

Growth-and-delay: keeping value local

Coupled with his “growth‑and‑delay” idea, the goal is to let firms embed locally and accumulate capabilities before facing financialization’s extraction pressures. Conditional grants (like Israel’s Innovation Authority model) convert to royalties only when projects succeed. Loan guarantees reduce perceived risk so banks lend. Taiwan’s SME programs pushed innovation-connected bank lending above 60% of all loans. These mechanisms don’t romanticize debt—they re‑align incentives toward steady expansion and retention of operations.

Strategic takeaway

Diversify finance. Build instruments that reward revenue, permanence, and embeddedness, not speculative exits. Prosperity follows patient capital.

Innovation policy too often confuses inputs with outcomes—assuming more R&D spending or university partnerships automatically stimulate innovation. Breznitz provides a practical framework to fix this: focus on the agents of innovation (the people and firms doing the work) and build the four fundamentals that sustain them.

Agents and fundamentals

The agents you must design for include entrepreneurs, engineers, technicians, suppliers, and mid-stage firms. Enablers such as universities matter only insofar as they serve these doers. Around them, construct four essentials: (1) global–local flows of information and demand, (2) public and semi‑public goods like labs and trade shows, (3) reinforcing ecosystems of finance and legal support tailored to the chosen stage, and (4) co‑evolution, meaning your policies must adapt as markets and technologies shift.

Policy co‑evolution in action

Shenzhen’s regional governments adjusted housing, migration, and supplier policies as its manufacturing base matured. Taiwan’s ITRI re‑oriented from state labs to public–private consortia. Italy’s design districts evolved training institutions as luxury markets changed. Canada’s failure to direct its R&D spending toward industrial agents serves as a negative case study: high public science didn’t translate to private innovation because institutions were misaligned.

Innovation agencies that learn

The right agency design depends on mission and context, not fashion. Productivity‑facilitators like Canada’s IRAP help incremental upgrades; mission agencies like DARPA or Taiwan’s ITRI pioneer new sectors; transformation enablers like Finland’s Sitra seed future paradigms through experimentation. What unites the successful ones is adaptive learning. They pilot projects, adjust instruments, and embed themselves between firms, universities, and government. Israel’s OCS evolved into the Innovation Authority precisely by iterating on its political and distributional challenges.

Principle

Design policy around learning loops, not static blueprints. Institutions should evolve alongside industries rather than attempt to predict them.

Intellectual property started as a public bargain—temporary exclusivity in exchange for disclosure—but has morphed into a global monopoly machine. Breznitz traces how excessive patenting, trademark overreach, and standards‑essential patents (SEPs) turned IPR from a diffusion engine into a rent-extraction system.

From balance to monopoly

Patent thickets and algorithmic replication have made legal strategy as important as technical creativity. Patent trolls buy old IP to extract settlements, while multinational tax games (e.g., Apple’s Double Irish arrangement) shift value offshore. The result: innovation’s public purpose erodes. Yet regions can still respond strategically rather than surrender.

Local strategies for IPR strength

First, join the game: encourage high‑quality patents and participation in standards bodies (ISO, IEEE, ITU). Embed your region’s technology into global standards to earn recurring licensing income, as Huawei and ZTE did in 5G. Second, be smarter: educate entrepreneurs and officials in IPR management. China now mandates IPR courses for students, giving its engineers a legal edge. Third, adopt zero tolerance for bullying incumbents and trolls—provide community legal defense and mount prior‑art campaigns to neutralize threats.

Standards as strategic leverage

Getting your technologies into standards is one of the most powerful levers for long-term influence. Standards concentrate market power; SEPs generate stable revenue. Regions can fund travel and time for local engineers to join international consortia, support patent-pooling, and teach SMEs how FRAND licensing works. (Parenthetical note: embedding patents in standards means surrendering exclusivity for influence—an often wise trade.)

Key idea

Don’t treat IPR as a tax gimmick or defensive checkbox. Use it as an offensive and defensive strategic asset to embed your firms in the next global platform.

At the heart of Breznitz’s vision lies a simple but radical notion: innovation is a moral and political choice. The jobs it creates, the people it enriches, and the data it extracts all reflect deliberate design. Regions must articulate what kind of innovation economy they actually want before copying flashy trends.

Data as a local asset

Data behaves differently from traditional goods—nonrival, low-cost to copy, and more valuable the more of it you gather. Thus, when your city hosts pilot programs or “smart” projects, you are generating an asset that others might monetize. Toronto’s Sidewalk Labs and Arizona’s autonomous-vehicle tests illustrate how localities can provide free data while receiving minimal benefit. Breznitz urges you to make these terms explicit: require data-sharing, audit access, and impose fair licensing. Estonia’s e-Government model proves that privacy, transparency, and innovation can coexist.

Equity and local choice

Different innovation paths yield different societies. Israel’s stage‑1 focus bred global prestige but also deep inequality. Taiwan’s stage‑3 system distributed opportunity more evenly. Cleveland’s decline after deindustrialization contrasts with Hamilton’s emerging health-tech cluster, built through union–university partnerships. These examples make innovation tangible: it’s the outcome of social decisions, not market destiny.

Building a local vision

The final assignment Breznitz gives every policymaker is philosophical: decide on purpose. Draft local vision statements specifying job goals, wage expectations, and distributional priorities. Measure success by robust employment, wage growth, and resilience rather than by unicorns or headlines. Align finance, institutions, and data governance with that vision, and adjust as conditions evolve.

Enduring message

Innovation is not about copying winners but nurturing places where prosperity is shared, learning is constant, and power—whether of data, patents, or capital—is harnessed for public good.