Dan Breznitz Chair of Innovation Studies in the Munk School at the University of Toronto has a foolish article in the Boston Review. He describes successful Marshallian industrial districts with pre-existing acquired advantage and then, bizarrely, pretends that such districts came into existence to create equality. Marshall himself would take trains to such districts in mid Victorian England to look at the faces of the poor to try to understand the root cause of their misery. Back then the guy read Lasalle and Marx. Then he understood Marginal Analysis and wised up though his failure to embrace general equilibrium theory meant that he did not have anything with which to explain Pareto's Law which explains why most industrial districts will fail while only a few grow from strength to strength till suddenly they too go the way of the dinosaurs.
Breznitz occupies a niche such that it is in his interest to use modish terminology- e.g 'community led' or 'stakeholder'- while pretending not to understand basic Econ.
He writes-
Since the 1970s, local communities across the world, and in the United States in particular, have struggled to achieve innovation-based, inclusive prosperity.
This is nonsense. It is not the case that local communities across the world magically liberated themselves from Nation States and floated in the ether far beyond the trammels of real exchange rates and comparative advantage and trade policy. Why pretend such 'communities' were utterly focused on creating equality and fraternity and inclusivity and helping disabled lesbian goats achieve their dreams of gaining remunerative employment as Cost and Management Accountants?
One-time innovation hubs—Cleveland in the United States and Lyon in France—have fallen into a vicious cycle of decline.
Rockefeller came from Cleveland. He was well known for his concern for equality and inclusivity- thinks nobody at all. Lyon was the opposite of Cleveland. Labor laws kept design studios small and so scale and scope economies in the silk industry were not available. Tastes changed, low wage competition took its toll and so an atomized industry disappeared as its owner-managers aged out. But Lyon could develop in other directions thanks to French clout within the E.U. Cleveland had a different trajectory because of the Race issue in American inner city politics from the mid Sixties onwards. Here one might speak of an oligarchy recoiling from an assertive, but stupid, community politics. Nobody wanted to be included in that craziness.
Worse, our celebrated success stories, such as Silicon Valley in the early days of Apple, have proved fleeting as good local jobs for people with all skill levels give way to inequality, gentrification, and poverty.
Shocker! Hi tech firms don't create 'good local jobs' for meatheads. Who knew?
Now, in the wake COVID-19, the question of how to achieve local economic growth has taken on even greater urgency.
Everybody wants lots and lots of money from the Government so as to piss that money against their favorite wall. This is very urgent coz walls aint going to piss on themselves.
Many failed efforts at local growth have foundered on myths about innovation.
But myths about how Rockefeller was trying to create equality and inclusivity in Cleveland are fine and dandy.
First is the belief that cities can become the “next Silicon Valley” with the right combination of high-tech ideas and venture capital.
What's wrong with that? Some town or city will become the next Silicon Valley. But many others won't because, it will turn out, the local College aint Stanford. Also highly skilled migrants prefer to relocate to somewhere they won't get knifed by the locals or mugged by the tax-man.
Those who profit by selling the Silicon Valley dream to local policymakers around the world
are bottom feeders. The guys who get mega-rich don't bother. Amazon pulled out of its New York HQ2 project. Local policymakers may have dreams but they are a fucking nightmare for everybody else.
either do not know, or do not mention, that high-tech start-ups backed by venture capital (VC), and aiming at financial exit, now tend to widen rather than close the gulf between rich and poor.
The pursuit of excellence of any sort has the same effect. The nerd who studies hard and gets good grades is widening that gap just like the basic bitch who works out at the gym to get a rocking bod. Equally, people who spend all their time taking drugs or getting drunk are contributing to inequality.
A city can waste a lot of resources trying to improve its economic health by courting and investing in tech companies only to find that they made their founders and funders rich but left everyone else worse off.
but only in the sense that they are relatively, not absolutely, poorer than the new Rockefellers. But this is also true of families which waste a lot of resources feeding kids only of one whom works hard and goes up in the world while the rest spend their time taking drugs and knifing random dudes.
In today’s world of globally fragmented production and dominating high-tech clusters, these efforts don’t raise all boats.
Especially boats which don't exist coz its builders couldn't be arsed.
There is perhaps no better cautionary tale about the flaws of this overhyped innovation model than Israel’s experience with venture capital.
This cretin will immediately reveal that the opposite is the case.
In 1968 the country’s industrial sector had a paltry number of R&D workers—just shy of 900—while academic education and business-sector R&D investment stood at 1 percent of GDP, the lowest of OECD countries at the time.
Israel was only invited to join the OECD in 2007. Back in the Sixties and Seventies, it was a fucking basket case. That's why the Arabs thought it would go on conquering territory till it was annihilated. The place was simply not economically viable. Thankfully, the Reagan administration used tough love to get the Israelis to change their ways. Once that nation started to get rich, the Arabs became comfortable with it. It might trade Land for Peace coz who wants more olive trees when you could have more Lexuses?
Between 1978 and 1986, Israel suffered a severe economic crisis, with inflation raging at more than 100,000 percent.
But its economy had always been in the toilet. There was a Bank crisis in 1983 which revealed that the whole system was rotten. Inflation peaked at 450 percent.
By the end of the 1990s, however, the state had nourished a new high-tech sector. Led since the mid-1970s by an innovation agency formerly known as the Office of the Chief Scientist and now as the Israeli Innovation Authority, this effort worked to deeply embed the new tech industry within U.S. markets, specifically following the Silicon Valley VC-backed model and aiming for public listing on the New York Stock Exchange. Indeed, in 1972, within a year of NASDAQ’s establishment, Elsceint became the first Israeli firm to be listed on it.
This was with backing from Elron, founded by a guy whom the Israeli Navy had sent to study in the US. After finishing his stint in the military, he got into hi-tech venture capital. He had some backing from the State for military reasons but found commercial applications. It must be said, the Israelis had research oriented universities from the get go because...urm... how can I put this politely?... kikes be kray kray. They don't get that the whole point of going to University is to become a credentialized cretin who will write worthless shite for the Boston Review.
By following this strategy, Israel had moved to the top of the global league in business R&D investment intensity,
One reason for this is that Jews- though good at fighting for their country- are terrible at shutting the fuck up and taking orders. The Israeli Army had to adapt to the insubordinate nature of the sabra. This meant letting them do stuff helpful to the country rather than just march around the place. Thus the Army became an innovation hub.
Anyway, focusing on Israel is a mistake. Jews have a certain reputation when it comes to STEM subjects- not to mention Business Enterprise.
number of high-tech companies listed on NASDAQ, and level of VC dollars invested per capita. These factors certainly fueled Israel’s impressive economic growth over the last twenty years, yet during the years of extreme high-tech growth, the rest of the economy enjoyed no positive spillovers.
Living standards were stagnant between 1979 and 1989 but the Reagan supported liberalization program began paying dividends thereafter. There was substantial improvement for all Israelis in subsequent decades though that tailed off around the time of the sub-prime meltdown. After the 2013 reforms, living standards rose faster than the OECD average though this too tailed off more recently. Still, Israel is doing miles better than its neighbors. It has its own unique problems- e.g. unemployment among Haredi men, etc.
Productivity and wages in all other sectors of the economy declined or remained stagnant, and the high-tech boom focused almost exclusively on financial exits, offering extremely well-paid jobs with a chance of fabulous riches, but only to the geek elite. (More than 95 percent of the venture capital invested in Israeli firms has been foreign, hence, after financial exits, the money and the profits are channeled back to their foreign investors.)
Who then channel it back. Arabs are now 'foreign investors'. That's a good thing. The region will have an increasing stake in Israel's security.
The results, in terms of inequality, could not be more striking: Israel went from being the second most egalitarian society in the West
except it wasn't in the West at all. It was a garrison state surviving on handouts.
to one of the most unequal. Among OECD countries, Israel has the highest percentage of the population living in relative poverty, with nearly one in five households earning less than half of the median disposable income.
Haredis are about 12 percent of the population. Some of the poorest neighborhoods in the US are Haredi. However, the statistics don't reflect the utility gained by Haredis from their religious way of life. Also there is a 'positive externality' associated with the law-abiding nature of orthodox people. A lot of ordinary people around the world admire that type of religious commitment. They feel it creates a 'public good'.
Israel may have recreated Silicon Valley, but it hardly created local, inclusive prosperity.
It hasn't recreated Silicon Valley. It has created a place where Jews are safe and which can use both soft and hard power to protect Jews elsewhere. Also, that tiny country is producing a lot of useful knowledge- even in Indology. I am ashamed of having to quote an Israeli scholar to correct a mischievous availability cascade generated by one of our own super-star Professors.
A city can waste a lot of resources trying to improve its economic health by courting tech companies only to find that they made their founders and funders rich but left everyone else worse off.
A city can waste a lot of resources trying to improve equality and inclusivity but then finds it keeps getting burned down.
The second myth about innovation hampering efforts today is that Silicon Valley is the only growth model.
I suppose what this cretin means is that Cities now understand that having a first class University can generate growth provided the Professors at that University aren't all cretins who write rubbish for the Boston Review.
These myths derive from an even more prevalent misunderstanding—a kind of techno fetishism that equates innovation with high-tech industries, start-ups, and new products.
as opposed to equating innovation with low-tech occupations like shitting into your cupped hands and flinging your feces at passers by.
Innovation may well be the only way to ensure sustained long-term economic and human welfare growth, but it does not simply mean the invention of new things.
Shit into your cupped hands- that's an innovative idea right there.
Invention is the act of coming up with a novel idea,
No it isn't. Shitting into each others' cupped hands is a novel idea I just had. This doesn't make me Thomas fucking Edison.
while innovation is the act of applying ideas to offer new or improved products and services in any stage of production—from the idea, design, development, production, sale, and usage of products and services to after-sale activities.
This cretin literally teaches shit. Sadly, even the Israelis were forced to provide degrees in this type of 'Management' bullshit for the stupider and more useless of their young people.
It is innovation, not invention, that is the engine of growth and welfare.
Fuck off. It is enterprise- risk taking, market discovery, competition, 'creative destruction'- which is the engine of not talking worthless shite incessantly.
Further, it is the less fleshy but much more important continuous innovation—making things better, more reliable and cheap enough so every human have access to them, from medicine and transportation to information and communication technology—that is the unsung hero of economic growth and improved welfare.
Unsung? Don't be silly. We sing the praises of Steve Jobs and Bill Gates and Elon Musk and so forth to the extent that our lives have been made better by their innovations.
For all these reasons, we must resist the easy but specious attractions of the Silicon Valley model if want to achieve inclusive local growth today.
Quite true. If you want to do stupid shit- e.g. 'inclusive local growth' based on getting crack-addicts to design quantum computers- then you must resist the easy but specious attractions of reality.
Globalization’s collapse of the conventional vertically integrated system—in which production goes from raw materials to final product in one location
England was exporting raw wool 800 years ago. But then England had been exporting tin in the Bronze Age. We've had 'Globalization' for 3000 years. Vertical integration may have existed before that. You pick up a rock and shape it into an adze then and there. But even stone age man had long distance trade networks.
—has subjected local communities to new forms of competition but also opened new entry points for innovation-based growth in both old and new industries. Looking at how innovation is now practiced globally across its range of possibilities will help us find the right path of local inclusive prosperity.
No it won't. Locally inclusive prosperity is about incentives to be productive and penalties for preventing other people being productive. It is also about excluding the fuck out of rapists and robbers and stupid gobshites.
Bikes offer a compelling example of the way innovation in a globalized market can achieve sustained inclusive local prosperity.
Nonsense! There is no locality which became prosperous by producing bikes. There are conglomerates with factories in low wage countries which have specialized in some aspect of bike manufacture.
The gears on your bike are probably made by Shimano, a Japanese company based in Sakai,
part of Osaka prefecture- a major port with numerous other industries. However, your bike gears were probably made in a lower cost country. It is not the case that traditional Japanese communities solder the things together in between doing kabuki.
and chances are that your frame is made by Giant Manufacturing Company, a Taiwanese company based in Taichung.
Taiwan's second biggest urban conglomeration home to all sorts of industries. Again your bike frame was probably made in some lower wage country. Giant became a giant only after a strike at Schwinn's American plant in 1980 caused the US company to outsource to what was then a low wage country ruled by a fiercely anti-Communist regime.
Neither city comes to mind as innovation superpower,
Unless you are in the business, in which case they are the first to come to mind. Everybody has heard of Osaka. We aren't surprised that innovation happens there. We've also heard about Taiwan and aren't surprised that its second biggest City- with a population of about 3 million- does industrial innovation. After all, Japan and Taiwan don't have oil or gold or vast prairies where wheat can be grown. If they didn't make and sell stuff, they'd be as poor as shit.
yet both companies innovated their way to global domination of the bicycles industry, entering the supply chain at different stages of production.
Because they had lower wages, less Union problems, and their Governments were committed to an 'export or perish' strategy.
Furthermore, both companies, focusing on different stages of innovation, utilize business models based on employing thousands of local workers with different skill levels.
No. They utilize business models based on lowering per unit labor cost by offshoring to lower wage, or higher productivity, localities.
Shimano was established in 1921 but found an opening in the global bicycle component market following the upsurge in bicycle sales after the oil crisis of the 1970s. Since then, its intense focus on incremental innovation in gear and power transmission systems has made it a dominant global supplier achieving impressive and sustained growth.
US based SRAM won a suit for unfair business practices against Shimano about 30 years ago. This led to the growth of an o.e.m market.
Taiwan’s Giant took a different path, relying instead on public leadership. Established in 1972, Giant had its first breakthrough in 1976 when Schwinn, the leading U.S. bicycle producer at the time, chose it as a supplier.
Why no mention of the 1980 Schwinn strike in the US?
When Schwinn moved production to China in 1985, Giant embarked on a series of joint projects with Taiwan’s premier public research organization, the Industrial Technology Research Institute, through its newly established Materials Research Laboratories. Through this collaboration Giant became the global leader in carbon fiber bicycle frames, which were both stronger and lighter than their predecessors.
I think Kestrel, which is American, made the first such bike. Trek, also American, profited greatly when Lance Armstrong won the Tour de France on their carbon fiber bike. Compared to Giant or Shimano- which are typical conglomerates- Kestrel, AEGIS, Trek etc are 'local boys made good'.
By offering stronger, safer, lighter, and less bulkier bikes, Giant expanded the appeal of bikes to more segments of the population—first in making speciality bikes, such as mountain bikes, less unwieldy to all but semi-professional athletes, and then following this strategy into road bikes of all kinds, selling under its own brand as well as supplying frames to others.
But it is Trek which is associated with mountain bikes. Like other Taiwanese companies, Giant has failed to build a global brand.
These unique innovational capacities
aren't unique at all. This business model is centuries old.
are based on a rich ecosystem of public institutions and private firms, with tens of thousands local jobs created at multiple skill levels.
That may have been the case at one time. It is no longer true. Even where 'local jobs' at low skill levels are created, those jobs are taken by immigrants. But looking a little closer we find that was always the case- it's just that immigrants now come from farther afield.
At the same time, Schwinn, the leading U.S. maker, decided to outsource and offshore more and more of its production.
Schwinn was imitating the styling of European bikes but was too heavy. By the early Seventies they were rebranding Japanese bikes from Panasonic etc.
Along the way it lost all its production and manufacturing knowledge, eventually losing its ability to innovate altogether;
what 'innovation' had it done? Its bikes were inferior to British and European bikes but it benefited from quite high tariffs as well as a lock on domestic distribution.
it went bankrupt by 1992.
Because it provoked Giant into directly competing with it. Also, it had set up company shops which pissed off distributors. It should have simply concentrated on marketing while off shoring manufacturing.
By contrast, the kind of public-private-led R&D system behind Giant’s success
Schwinn gave it technology. Giant was imitating US startups. It simply isn't the case that tiny little Taiwan did anything pathbreaking in the cycling field.
is the backbone of an innovation model that has enabled multiple Taiwanese industries to achieve and sustain its inclusive local prosperity for the last four decades, by becoming a leading hub for second- and third-stage innovation.
Taiwan did well in export oriented manufacturing because it was under martial law till the mid Eighties. Workers were cowed. Unionism failed to take hold. Furthermore, it could outsource lower value adding tasks to mainland China and other countries. What Taiwan has failed to do is to create any big brand 'house hold' names or to come up with any new concept or consumer fad.
These unique innovational capacities are based on a rich ecosystem of public institutions and private firms where the innovation of thousands of high-end R&D engineers feeds the creation of tens of thousands local jobs at multiple skill levels.
But it also creates even more jobs in lower wage or better located countries without giving rise to any R&D at the new location.
This workforce in turn incentivizes both established companies and startups to enter this rich ecosystem and further develop innovation capabilities. Those unique capabilities are the basis for sustained innovation based on competitive advantage.
So 'competitive advantage' remains key. However, if wages or compliance costs rise too much the R&D as well as the manufacturing may be outsourced.
Making the Right Choices
This example illustrates that
low wage countries where Trade Unionists are killed or jailed can, in turn, move up the value chain. On the other hand, start ups in rich countries can succeed if they concentrate on the top end of the market- e.g. surf boards or mountain bikes for the top athletes or for wealthy hobbyists. But the amount of employment this can generate will be limited by the size of the market.
there are many opportunities for innovation-based growth beyond early-stage invention of a new product. Indeed, each of the four stages of global production offers unique opportunities for innovation. At the same time, however, choosing to pursue these strategies has profound consequences on a community’s economic well-being and whether inclusive prosperity is possible.
The problem here is that the community can't itself decide to back this rather than that technology because it simply does not have the entrepreneurial nous.
In order to excel in specific innovation stages, particular capacities must be perfected—and not others. To succeed, this process must be attuned to global demands and opportunities, and public and private leaders need to understand and react to them.
Success in innovation is like success in the entertainment industry. Many will try but few will be able to make a living in it.
Stage 1: Novelty
The first stage of production is the one in which new inventions are transformed into novel products and services. We tend to associate stage one development with the high-tech arena of Silicon Valley,
Stanford attracted super smart students. It was likely that a super-smart technology would be based in a place where the smartest people would want to live. However most innovation isn't in fields we would think of as involving super-smartness.
but there is far more to novelty than VC-backed tech start-ups or globally dominant tech behemoths.
Because most industries make boring but necessary stuff.
There are many opportunities for innovation-based growth beyond early-stage invention of a new product.
But there also many 'innovations' which will kill the company.
Stage one development can also mean fundamental system innovation, a complete overhaul of a society’s technological infrastructure—as with the development of railroads and electricity, say, or decarbonization efforts today. These forms of innovation are vastly complicated and require the development, commercialization, and diffusion of many suites of complementary technologies throughout society. Typically, they require the government stepping in as the innovative agent forcing significant changes in multiple sectors.
The problem here is that we can point to many governments which 'stepped in' with a wholly negative effect.
Some of the current policy actions by the Biden administration suggest that the United States is now stepping into this role, but it remains to be seen whether those aspirations will be realized amidst the political deadlock of Washington.
Democratic countries face a more difficult problem in that entrepreneurs can't be sure that Government support will still be available under a new administration.
Beyond radical, system-wide transformations, there are also opportunities for stage one innovation within companies that are well beyond the start-up stage but still need support to scale up. I call these companies tech teens: typically (if not exclusively) five- to fifteen-year-old enterprises, with five to a hundred people, a good understanding of the markets they operate in and multiple innovative ideas, but in need of further resources to make them happen.
In other words, these are teens at high risk of crashing and burning. But their exist strategy would involve getting acquired and relocating.
Tech teens are at the blind spot of private markets, public policies, and media reporting. The focus is usually on the hot new thing (the latest app company, say) or the very big firms (yet another Amazon, Cisco, or Huawei facility), but tech teens are the backbone of every local technology industry. Deeply embedded in the community,
Till they get bought out or go under
they do not leave as soon as they secure more investment;
This may indeed be the case- if they are located in a place where people want to live- i.e. they are embedded in nice communities.
they aim at sustained growth, not financial exit; they hire local people for all functions of the firm (not just R&D);
In communities where the school system is good and the average resident is smart and sober, sure you can hire locally and train up your staff. What's more, as salaries go up, people upgrade their current houses rather than flee to more salubrious areas.
they pay taxes (in contrast to the gigantic tax breaks and incentives offered to large corporations); and they are often active citizens of the community by being the leaders of the local industry associations or funders of local community activities. Research by Dan Isenberg and his coauthors shows that certain tech teens, if given the opportunity, are capable of growing at annual rates of 20 to 60 percent for a decade.
Just as certain teens are capable of becoming rock musicians or super-star athletes earning hundreds of millions.
The focus is usually on the hot new thing (the latest app company, say) or the very big firms (yet another Amazon or Huawei facility), but tech teens are the backbone of every local technology industry.
Indeed, but they are also the backbone of local technology industries which don't exist.
The U.S. government’s public-private partnership program Operation Warp Speed gives us a glimpse of what can be accomplished with policies that foster growth via tech teens. As David Adler has documented, one success story is SiO2 Materials Science, which was awarded a $143 million Warp Speed contract last year to develop and manufacture vaccine vials.
But SiO2 was part of the Abrams family group. It started in 1910. By the Fifties, when Bobby Abrams took the helm, it was one of the largest dairy companies in the US pioneering new types of milk cartons etc. Bobby got into the pharma business in 2012 after being approached by the Children's hospital at Stanford. Over 500 million in research spending was required to get them to where they are today. This is not a story about 'tech-teens' or local communities. It is a story about a giant conglomerate founded a century ago.
This contract, which also included significant assistance and oversight from the Army Corp of Engineers and a clause requiring production within the United States, “effectively brought the production of medical-grade pharmaceutical packaging back to the United States,” Adler writes. It also allowed SiO2 to hire people across all skill levels to its production site and brought good-paying jobs to rural Alabama.
Why were they in Alabama in the first place? Was it because wages are lower? Alabama became a 'right to work' state in 1953. Why pretend SiO2 is a community initiative run by local hayseeds?
As Adler notes, this arrangement does not eliminate the risk of offshoring or foreign competition. But thanks to the public-private partnership,
There was no 'public-private partnership for 100 years of the company's history. Then it got a Government contract because of its previous investment of 500 million.
SiO2 now has more advanced technology, years ahead of basic pharmaceuticals glass vials, and the capital resources and the inhouse skills to continue to innovate in its field.
But it had taken a leadership position in Dairy manufacturing over sixty years ago. This is a story of good old fashioned private entrepreneurship. The father sets up the company. The son takes it to new heights.
Stage 2: Design, prototype development, and production engineering
When today’s corporations come up with new product ideas, they often hire other companies—specializing in design, prototype development, or production engineering—to make them a reality.
Novartis- the Swiss pharma giant- made a strategic investment in SiO2 in 2019. I guess that paid off big time. But it would have paid off in any case- just over a longer time frame.
Such companies operate in all industries and at all levels. You can find them in high-end, novel product design; the U.S.-based company IDEO helps businesses develop first-to-the-world-products, for example most of the world’s first personal digital assistants (PDAs).
It is an international company- not a community based enterprise- with offices around the world. It employs 700 very smart people.
You can find them as well in very traditional industries, such as luxury women’s shoes, where the top global brand names go to the tiny region of Riviera del Brenta in northeast Italy to work with contractors who specialize in footwear design, prototypes, and production engineering.
Apparently a luxury footwear industry has existed there since the 13th century. This is a case of 'acquired advantage' of an ancient type. However, they are likely to have a problem with an ageing workforce.
Those contractors may in turn rely on various suppliers, sub-suppliers, prototype makers, and assemblers to turn concept into finished product. A similar dynamic holds in the electronics industry, where design and production engineering companies are also crucial for making components work and fit together in the increasingly miniaturized products on the market today.
In Italy, where multiple industries have declined in multiple regions, the few locales that have managed to thrive transformed themselves into global stage two hubs in their particular industries. This process has been driven by private and public sector leaders working together. Until the 1980s, companies in Brenta mostly focused on manufacturing for low-end German brands. Then several company owners realized that the global industry was changing, and they worked together with public leaders in the region to develop skills in design, prototype, and production stages for the world’s most demanding customers—the French and Italian haute fashion brands. As a result of those efforts, Brenta has a unique set companies, educational and financial institutions, and institutionalized connections with the global industry that have made it the leading locale where the top luxury women’s shoe brands turn their ideas into reality. Built on specific sets of innovational capacities and deep knowledge, Brenta now enjoys a sustained competitive advantage, as long as it can reproduce the knowledge and skills that underpin its success. A similar transformation has taken place in Alto Livenza, north of Venice, which features companies that design, prototype, and produce exquisitely crafted furniture as well as rooms for high-end boutique hotels. In that process, multiple jobs have been created and sustained for people with different set of skills, from the shopfloor workers to modelers and craftspeople. In this way, stage two innovation is more likely to create and sustain inclusive prosperity than stage one innovation.
Which global footwear brand do we associate with the Veneto region? I would say- Geox, the shoe that breathes. Its inventor, Mario Polegato came from a very wealthy business family which had no previous connection to footwear. He himself was an expert in the wine industry. One day, walking in the Nevada desert he decided to cut holes in the soles of his shoes so as to get relief from the heat. Then he returned to Italy and hired some smart people to find a novel solution to the problem of sweaty feet In the last 20 years, Geox has grown into a multi-billion dollar enterprise employing 30,000 people around the world. This did not involve any 'community support' or 'public private' partnership.
It is likely that, as happened to the silk designers in Lyon, a community of small niche producers won't be able to withstand exogenous shocks- e.g. COVID- and will be bought out by the big Luxury brands.
Stage 3: Second-generation product and component innovation
A third stage of production, decried by some as “incremental” innovation, is the true hero of economic growth. Firms working at this stage specialize in making existing products and technologies better, more reliable, and more appealing to wider groups of users. Classic examples are the German and Japanese automobile industries,
which are horizontally integrated though there is 'dis-integration' for some components and ancillary services. Some 'dis-integrated' companies may themselves grow and become behemoths. But if real wages rise too much, they too have to outsource.
the undisputed leaders of second-generation innovation. This stage also includes innovation in the components of products in integrating technological advances—for example, screen technology, microprocessor design, semiconductor-production technology, car engine technology, material science, or the machine tools that are needed to produce them.
But these feature global, not local, supply chains. Moreover, a Marshallian industrial district can always be wiped out by an exogenous shock.
This is exactly where Giant rose to world dominance in the bicycles industry.
It rose when the US outsourced to it- because it was low wage and under martial law- but continued to rise when it in turn outsourced to cheaper locations.
Likewise, it is where firms such as India’s Wipro, Infosys, and Tata Consultancy Services reshaped and rule the global market of software services—by constantly innovating in software project development techniques and developing ever-expanding libraries of software components that can be quickly tailored to their customers’ needs.
India was very very low wage. Furthermore, employment opportunities for smart people were so limited that being a code-monkey was considered an exciting profession. It is noteworthy that Wipro and Tata diversified into Software. On the other hand, the expansion of this sector is considered to have greatly increased inequality. Locals in Bangalore or Noida resent the young 'outsiders'- many of whom prefer to speak in English- whose living standards are so visibly different from their own.
This focus on stage three innovation boosted Taiwan’s economy while keeping inequality low at the same time that the United States was narrowly focusing on stage one innovation.
Inequality increased during the Eighties and in every subsequent decade. There are some 'crazy rich Asians' who started off living as modestly as skilled manufacturing workers. This is not surprising because most of the manufacturing in their enterprises is being done in much lower wage countries.
Smartphones provide another example. The rise of the Chinese smartphone industry is based around the second-generation innovation of a Taiwanese company called MediaTek, which specializes in developing competing reliable and cheap core chipsets for sophisticated electronic products, undercutting the dominance of big global brand names such as Qualcomm.
I think Mainland China has Kirin. MediaTek has benefited from what is seen as price gouging by Qualcomm- which is American. Furthermore MediaTek has focused on emerging markets like India which are more price sensitive. This created a situation where there was grey market import into wealthy countries as budget conscious customers found they could get superior performance for a lower price.
In mobile telephony MediaTek has been developing integrated circuits, acting as the main brain around which smaller and less technical sophisticated companies build their own phones. In the case of smartphones, MediaTek’s products, together with its extensive technical assistance, allow start-ups, many of them Chinese, to quickly offer their own smartphones.
One Plus- which focused on Western markets- made MediaTek respectable.
These firms focus on design, user interface, and other features and now offer smartphones that are as slick and as sophisticated as those offered by Apple and Samsung. In the process of completely transforming those industries, MediaTek has also become one of the world’s most successful integrated circuit design companies, shipping to the tune of 2 billion units a year.
This is a story about global supply chains. It has nothing to do with local communities. A lot MediaTek's R&D is done in India. However, Singapore is its regional hub because the quality of life for ex-pats is better in that English speaking country.
Those units are fabricated in Taiwan by Taiwanese “pure play” foundries—
they are fabricated by TMSC- a 50 billion dollar enterprise. Trump forced them to set up a plant in America. The author is pretending that many Taiwanese families- in between reading Confucius and doing Kung Fu- fabricate silicon chips in their back-yard foundry.
semiconductors companies specialized solely in the production of semiconductors another Taiwanese stage three innovation—and their network of local suppliers. In the process, tens of thousands of Taiwanese are employed from the shopfloor to production engineers, sales and marketing, to design and R&D engineers.
TMSC was founded by Morris Chang who attended Harvard, MIT and got his Doctorate from Stanford. He worked for leading companies like Texas Instruments. The Taiwanese premier recruited him to head up the State's Technology Institute. He then founded TMSC which gained from American outsourcing. However, Taiwan was better placed to benefit from mainland China's economic rise. I believe that Taiwan saw that playing a vital role in a crucial global supply chain would increase American commitment to defending it from the mainland.
This focus on stage three innovation boosted Taiwan’s economy while keeping inequality low at the same time that the United States was narrowly focusing on stage one innovation, leading to ever growing levels of inequality. Only belatedly has the United States realized its mistake. In its last days Trump’s White House asked a Taiwanese company, TSMC, to open semiconductor fabrication facilities in the United States.
He put a gun to Taiwan's head. Still, it seems the author approves of Trump who, after all, rose up as a community organizer. Older people will remember his Afro hairstyle and penchant for Che Guevara T shirts.
We have lost our abilities to innovate in those stages, along with the hundreds of thousands of good jobs that can be sustained by knowing how to innovate in stage three of the semiconductors industry.
America outsourced things which could be done more cheaply elsewhere. Now, for strategic reasons, it will repatriate crucial supply chains. Or maybe it won't bother and concentrate on just eating a lot of burgers in between firing off a shotgun at the neighbor's cat.
Stage 4: Production and assembly
A final stage involves innovation around the creation of a physical product that has already been fully defined and designed. Innovation expertise at this stage includes efficiency in the production of ever-more complex products from hundreds of thousands of components developed by multiple companies around the world, along with systemizing production with constantly changing materials.
This is better done by the Globalized market on a just-in-time basis. It is foolish to source everything locally in a high tech field because this increases the risk of cascading failure.
China’s Pearl River Delta region, near Hong Kong, is the leading hub of stage four innovation around the globe.
Why? Because labor was as cheap as chips and then infrastructure became state of the art because Edwin Lim, of the World Bank, persuaded China to import the best infrastructure technology. Twenty years later, it itself became the leader in this field.
In fact, almost all the Chinese companies that have become global competitors—Huawei, Tencent, Oppo, and ZTE in information and communications technology, or BYD in batteries and electric cars—are from the greater Shenzhen area, and their growth is intimately tied to their stage four innovation strengths.
But those strengths only arose from cheap labor and quality infrastructure provision under an authoritarian regime.
Pearl River Delta companies are able to quickly produce multiple extremely sophisticated products, as well as ramp up production to millions of units or abort it at moment’s notice, all while working on razor-thin profit margins.
'Guanxi' networks enable entrepreneurs to get cheap credit from State controlled banks. However, there has been a lot of capital flight. It remains to be seen whether Chairman Xi can reverse this.
This form of innovation does not inspire awestruck media coverage, but it produced sustainable economic growth and jobs to millions of people, many of them immigrants from other parts of China.
One reason China could have this massive type of internal mobility was the 'hukou', internal passport system. This meant that residents had superior entitlements to immigrants. Chairman Xi wants to rebalance the Chinese economy so that people from the poorer regions don't have to migrate. Again, we can't be sure he will succeed.
Why is the author pretending we can learn anything from Taiwan- which began its ascent under martial law- or Communist China?
Choice and Action
These examples show that there are more paths open for innovation-based local prosperity than ever before.
Provided immigrants have lower entitlements and agitators get a bullet to the back of the head.
Rather than continue to invest billions in tech accelerators, VCs, or science parks, communities ought to embrace a wider range of innovation strategies to promote local economic well-being and foster inclusive prosperity.
Like what? Declare Martial Law and shoot dissidents and 'capitalist roaders' as well as 'left deviationists'? How about having a Cultural Revolution? Better still, inaugurate a 'Great Leap forward' predicated on everybody fabricating silicon chips in back-yard foundries.
We have many more choices than the Silicon Valley evangelists would lead us to believe.
But those choices lead to immediate financial collapse. On the other hand, my own plan to 'up-cycle' dog turds into Quantum Super Computers is bound to work. It can create thousands of local jobs for drug addicts and the mentally ill. All I need is a measly grant of 200,000 dollars to get started. What's that? You can only afford to give me 50 dollars? Send it by Paypal. I'll see what I can manage.
At the same time, in today’s world of diffuse competition and rapidly changing innovation, there is no magic bullet to ensure permanent growth.
There is a magic bullet to ensure economic collapse. It involves following the Gandhian path of trusting local communities to produce everything they need- thus creating thousands of jobs for cats and dogs.
In order to excel in specific innovation stages, communities must foster particular capacities—to the exclusion of others—
Sadly, democracies under the rule of law aren't able to 'exclude' the capacity of Social Justice warriors to destroy the economy.
all while keeping this process attuned to shifting global demands and opportunities. It is thus essential that public and private leaders understand and react to changing circumstances, rather than follow an inflexible template.
It is even more essential that public officials not piss tax-payer money against the wall. That's the inflexible template we need.
Along with that dynamic responsiveness must come investment in a local innovation ecosystem.
Very true! I need just 200,000 dollars to start up my Quantum Super Computer business.
Innovation policy for inclusive local prosperity only works if the agents of innovation
are good at innovating. If they are, then they get head-hunted and move to where doing the innovation is most profitable.
are equipped with the capacities they need in order to excel, are embedded in an economic ecosystem that helps them thrive,
like Silicon Valley. Sadly, economic ecosystems have to push out the unproductive to make room for the innovators. People like me have to be priced out of the market for everything from rental property to just getting an affordable cup of coffee.
and are encouraged to innovate and grow their businesses while staying locally embedded.
So California should have given Musk all the tax-breaks he wanted to stop him moving to Texas.
Above all, innovation is a collective endeavor that requires an array of public and semi-public goods: an education system supplying needed specialized skills,
But that education system may find that its smartest alumni are creamed off by MNCs operating on the other side of the globe. Japan has a system whereby high paid employees can elect to send a portion of their taxes back to the prefecture where they were educated. But Japan has a very different ethical system focused on 'obligation' and so what works for them may not work for the rest of us. Why should a 'flyover' State invest in educating its young people if the smartest leave? They aren't able to capture the productivity gain through taxation.
shared assets such as specialized production facilities utilized by multiple small firms (which alone could never afford them),
But it may be cheaper to do the 'specialized production' ten thousand miles away.
and collaborative public spaces—places where an industry moves from sharing knowledge to becoming a community—
arguably the internet has created such a 'community'. If you are working from home, what difference does it make whether you are collaborating with a guy in Korea rather than a Korean guy who has migrated to your City?
such as institutionalized active networks in which stakeholders from all parts of the industry and local government partakes.
The problem here is that 'local government' has a non-economic agenda. They may want local firms to hire drug addled young thugs whereas those firms may prefer to deal with people who won't knife them if they think they are being 'dissed'. Obviously, there is a larger problem of municipal corruption. You may be required to hire useless people who help turn out the vote for the ruling party.
To achieve sustained success, communities need to continuously ensure the supply and creation of such collective goods even as they take advantage of the array of opportunities for innovation I have outlined here.
Communities need to keep costs down for innovative firms which have the potential to generate good jobs. The trouble is nobody knows which firms will do so. Thus, the safer thing to do is just remove restrictions leading to factor elasticity. However this affects rents accruing to some stakeholders. 'Creative destruction' requires large scale 'shakeouts' such that rents cease to be defensible.
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