Published in 2021, Innovation in Real Places explores the fundamentals of innovation policy, the billions spent around the world to achieve innovation-based economic growth and key takeaways for policymakers.
The book is authored by Dan Breznitz, best known as the Chair of Innovation Studies at the Munk School of Global Affairs & Public Policy at the University of Toronto. He also is the Co-Director of the Innovation Policy Lab and a Fellow at CIFAR. More recently, Breznitz has been working at the Department of Finance, where he is tasked with injecting new thinking into the Canadian government’s innovation policy, working out of the Deputy Minister’s office. He is involved in the development of the new Canadian Innovation and Investment Agency but is also thinking more broadly about the modernization of the National Research Council and how best to increase productivity across all sectors and regions of Canada.
Innovation in Real Places is divided into three sections. The first introduces readers to innovation policy and where history has shown that innovation, when harnessed correctly, can lead to economic prosperity. It also provides examples of where industrial short-sightedness has led to a region’s economic failure. The second section describes what Breznitz refers to as the four stages of innovation. The final section considers aspects of the innovation ecosystem that cannot be controlled by public policy.
The Four Stages of Innovation
Regions seeking to benefit from innovation-based growth must consider where they have a natural ability to excel. In the same way that production is globally fragmented (e.g. an Apple laptop is designed in California, with parts from hundreds of unique manufacturers and assembled in China), so too is innovation activity. Excellence in one stage requires different capabilities than in another, with very different ecosystems to support them. Capacity is often overlooked by policymakers in favour of replicating Silicon Valley-like success.
Stage One: Novelty
This is the stage most beloved by policymakers and political leaders. Stage one innovation transforms new-to-the-world inventions into useful innovations, best embodied by Silicon Valley and Israel. Breznitz notes that the effort to recreate a Silicon Valley environment has resulted in billions of dollars of wasted investment, often leading to financial exits by firms and creating greater inequality in the local economy. A key takeaway is that unless the local ingredients are right, stage one innovation rarely leads to innovation-led prosperity.
Stage Two: Design, Prototype Development and Production Engineering
Stage two is best represented by regions with local economies that specialize in turning new ideas and concepts into products/reality. Regions that specialize in stage two are made up of companies that act as service providers. For example, Taiwanese companies excel at stage two innovation in information and communications technology, with firms that help customers design and produce the critical components for the latest laptops. In Italy, stage two innovators work in sectors like high-end luxury shoes, where global brand names work with specialized contractors who have the knowledge, skills and capability to support design, prototype and engineering related to the production of new footwear.
Stage Three: Second-Generation Product and Component Innovation
In this stage, firms improve, expand and redefine a product or its critical components, either by applying incremental and process innovation, or by recombining and expanding its use and utility. Breznitz argues this stage of innovation is the unsung hero of economic growth, pointing to the internal combustion engine as an example. Was invention itself responsible for changing our lives, or the millions of engineering hours spent constantly improving cars? Firms that specialize in this stage of innovation know how to make existing products and technologies better, more reliable and more appealing to wider groups of users.
Stage Four: Production and Assembly
Stage four involves innovation centered on manufacturing. This phase focuses on how to profitably produce ever-more complex products from thousands of components and systemize production using constantly changing materials. The Pearl River Delta region of China is an excellent example, with firms that can produce, within a short period of time, extremely sophisticated products. Production can be ramped up or ramped down without incurring significant financial losses. While many presume China’s manufacturing strength comes solely from cheap labour, their ability to excel at stage four innovation is world leading. Whereas Ford required hundreds of thousands of workers to produce just one product, Foxconn produces hundreds of different products for multiple brand-name companies with an employee base of just 250,000.
The Four Fundamentals of Innovation Policy
Breznitz argues that innovation policy is fundamentally different from industrial policy because innovation requires disruption. As a result, innovation policy should aim to:
- Equip the agents of innovation – companies and individuals – with the capacities they need to excel
- Develop, support and sustain the economic ecosystem that innovators need to thrive
- Find effective ways to stimulate agents to innovate and grow their businesses
Breznitz describes what he calls “the four fundamentals” – what it takes for firms in specific periods and regions to compete in markets, create value and generate jobs. These include:
Flows of Local-Global Knowledge, Demand and Input
In a world of globally fragmented production, innovation policy must ensure local firms have strong connections to global demand and, equally, that demands are effectively communicated. These lines of communication ensure local innovation agents act in a coordinated manner, offering complimentary services as opposed to inefficiently duplicating one another.
The Supply and Creation of Public and Semi-Public Goods
Innovation is a collective effort that requires both public and semi-public supports, be it the supply of specialized talent or shared assets (such as testing facilities).
A Local Ecosystem that Reinforces the Firm-Level Benefits
When a region is given the resources required to thrive, an ecosystem can be developed and nurtured. For example, venture capitalists are often critical for start-up-led stage one innovation-based growth.
Co-Evolution of the Previous Three Fundamentals
One of the classic mistakes of innovation policy is the assumption that what works in one place will work elsewhere. Innovation policy is always an evolutionary process. To stay effective, policy must evolve with industry cycles.
Implications for Polytechnics Canada Members
While aspects of the book are less relevant to polytechnics, key components encourage policy interventions complementary to applied research advocacy. Breznitz reinforces the notion that innovation is not invention, a foundational policy shortcoming in Canada. Far too often, innovation policy focuses on new inventions, with a particular focus on high-tech. When more broadly considered as including processes to improve upon and implement previously established ideas and principles, the alignment with polytechnic applied research is clear.
Innovation in Real Places demonstrates the distinct benefits of each of the four stages of innovation. While much of Canada’s innovation policy to date has focused on stage one innovation, Breznitz suggests that creating “Silicon hyphens” in Canada has not resulted in widespread economic prosperity.
If innovation policy is designed to equip the agents of innovation with the ingredients required to excel, polytechnic applied research is well positioned to deliver. Partners come to institutions with identified challenges and, through collaboration, polytechnics provide technical services and expertise. While polytechnics may not be agents of innovation in their own right, they facilitate and support innovation activity.
The second fundamental, the supply and creation of public and semi-public goods, is one particular area that demonstrates the value of polytechnic applied research. As described by Breznitz, public and semi-public goods include the supply of specialized skills, as well as shared assets such as testing facilities, trade shows, or specialized prototyping-to-production facilities. Collectively, he defines these as collaborative-public spaces.
Polytechnic institutions perfectly align in this space. They supply a pipeline of graduates with the specialized, industry-relevant skillsets needed to help companies thrive. Additionally, through applied research, they offer specialized labs, facilities and equipment that can help with a range of activities, including prototyping. Finally, they act as a convener of industry, bringing diverse ranges of firms into a shared space, where common challenges can be discussed, explored and overcome.
Over the last several months, Innovation in Real Places has been essential reading for officials at Innovation, Science and Economic Development and Finance Canada. By engaging Breznitz as an internal consultant, Ottawa appears to be signaling a readiness to think differently about innovation. For polytechnics, this is a good thing.