The Next Silicon Valley

A dichotomy has emerged in conversations about the most effective approach to innovation. On one side is the “disruptive” approach, which focuses on local value extraction to scale new economies and attract and recruit global talent. On the other is the “integrative” approach, which targets local value creation, invests in local talent, and reinvents the nature and delivery of matured economies.

Dan Breznitz, a political scientist and chair of innovation studies at the University of Toronto’s Munk School of Global Affairs & Public Policy, offers a fresh perspective on this debate, underscoring the value and importance of the integrative approach in his new book, Innovation in Real Places: Strategies for Prosperity in an Unforgiving World. As an expert on rapid-innovation-based industries, such as information technology production networks and their globalization, Breznitz refreshes readers’ perspectives and argues for tapping into the power of innovation through public and private sector collaborations at the local level. The greatest strength of this book is how Breznitz draws on complex economic and social phenomena to reach a surprisingly simple conclusion: “human choices, creativity, and actions matter,” as micro-level behaviors are what cultivate local human ingenuity.

Calling himself a “cynical political economist,” Breznitz argues that the best way to optimize complex economic systems, which today involve both disruptive and integrative approaches to innovation, is to put the “best minds to work” to address them. Venture capitalists (VCs) should, for example, help foster viable and sustainable local business endeavors by gaining local knowledge and vertical expertise. VCs should also strive to connect local talent with other VCs and business experts. Local firms should gain social capital by embedding themselves in extensive social networks to source and employ creative local talent who have design and problem-solving skills. Local governments should also invest in opportunities for local start-ups to secure and sustain financial resources. Breznitz argues that these approaches will promote economic growth among local firms positioned to capitalize and thrive on their local knowledge, talent, and goodwill. They will also drive effective competition between large oligopolies and local innovators and help reverse growing economic inequalities in places experiencing disruptive innovation primarily through large-scale VC funding.  

Breznitz’s position to champion the local, integrative approach to innovation might seem familiar or even obvious to some commentators as well as to entrepreneurs who have managed to help create value for their local economies. Although Silicon Valley has managed to recruit and capitalize on the work of highly skilled graduates from top-ranking California institutions, we could learn a thing or two from local innovators and entrepreneurs operating outside of the Silicon Valley approach about how to successfully apply Breznitz’s concepts in practice (such as the local, yet scalable, vegan-vending approach that I described in my 2020 article in Stanford Social Innovation Review).

We see Breznitz’s perspective at work in places as far-flung as Singapore, Hong Kong, and Switzerland, as well as in Texas, Florida, and Washington in the United States, where politicians and business leaders are looking to brand themselves as the next Silicon Valley. He contends that places investing in this sort of transformation should realize the importance of forging their own innovation identities and leveraging their current strengths to improve local quality of life, put capital to work, retain local talent, and become or remain globally competitive.

An example of a city that has, for many years, striven to become the next Silicon Valley (or “Silicon Beach,” as it has been called) is Miami. In their March 2021 Miami Herald op-ed, Miami entrepreneurs Richard Lamondin, cofounder and CEO of the water and energy conservation firm EcoSystems, and Seth Cassel, president of the digital marketing company EveryMundo, express their opinions about how Miami’s start-up scene could be more successful if the city leveraged its current innovation identity: diversity in its people, culture, thought, industry, opportunity, and approach. Lamondin and Cassel’s opinions seem to align with Breznitz’s contention that local economies should forge their own innovation identities away from that of Silicon Valley. Specifically, Lamondin and Cassel argue that their local innovation success would be “a Miami that avoids the mistakes of other cities—because we built it our way.”

In Innovation in Real Places, Breznitz attempts to answer several fundamental questions: Why have localities struggled to embrace and apply the concept of forging one’s own innovation identity? Why do we frequently observe long-term and self-defeating economic inequality and wealth gaps across places that over-rely on venture capital (VC) models for local investment and economic growth? And why do places built on VC-backed models of economic growth struggle or even hesitate to foster and sustain regional-based, incremental economic growth? While reading Breznitz’s book, I also looked for clues to why cities like Miami continue to invest so much focus into becoming the next “Silicon Hyphens,” as Breznitz calls them, despite their inherent potential to inspire and cultivate local value creation.

Breznitz’s answers vary in complexity. His simple answer is rooted in the behavioral economics concept of present bias: The VC-backed Silicon Valley model of innovation-based growth is the latest, hottest phenomenon, offering stratospheric financial exits in the shortest possible time. But Breznitz argues that what often results from implementing the Silicon Valley model are severe social and structural inequities and other problems. Ultimately, individuals who are educated and adapted to the Silicon Valley model are better positioned to succeed in places that adopt that model.

His more complex answer is one that he attributes to human survival instincts: Companies and governments may face circumstances that require them to accept operating within the Silicon Valley model of fast, value-extracting, innovation-based recovery or growth. Breznitz uses Israel as an example of a small nation that has become a research and development (R&D) hub and high-tech economy that thrives on VC investments and financial exits. Today a significant proportion of Israel’s population (one in five households, according to Breznitz’s research) lives below the poverty line. Breznitz describes how a French military embargo on Israel just before the Six-Day War in 1967 between Israel and its neighbors Jordan, Syria, and Egypt prompted Israeli policy makers to channel large investments into R&D for high-tech weapon systems. This military response penetrated Israeli civilian industrial policy.

A similar tale could be told about the United States during the Cold War. As countries or localities become pressured to adapt to sudden threats to national security or the economy, policy makers can be forced to make tough decisions with little time to predict and mitigate intergenerational and long-term structural, economic, and social consequences.

In such situations, the Silicon Valley innovation-based model can be an attractive option to local economic stakeholders, given its high potential for fast company exits and high dividend gains, although it can lead to severe economic inequalities in the long term. Therefore, the spirit of this model ultimately conflicts with Breznitz’s championed approach to sustainable economic innovation that is integrative and that naturally embodies the spirit of forging local identity and sustainable social innovation.

Champions of locally driven social innovation as well as critics of the “move fast and break things” Silicon Valley model will identify with Breznitz’s perspective. His book offers a refreshing take on the meaning of economic competition and the collective power of local innovation-based growth models. Far from dismissing or diminishing the value of the Silicon Valley innovation-based model, Breznitz seeks to counterbalance its ascendancy by highlighting how local economies can play to their strengths to drive sustainable and equitable growth and resilience.

Breznitz draws on case studies from around the world to illustrate what he calls “Stage 1” innovation (also referred to as the Silicon Valley approach) and then contrasts it with “Stage 2” innovation. In perhaps the most thought-provoking turn in Breznitz’s work, he explains why Stage 2 innovation is the most important for industrial resilience in our present and future global economy. Stage 2 innovation involves design, prototype development, and production engineering of things that already exist and that are used commonly. The redesigning of basic yet globally used physical goods of great utility—such as shopping carts, shoes, and other items made in manufacturing hubs like Shenzhen, China, or artisanal places like Milan, Italy—falls under Stage 2 innovation. Despite the bleak association between the novelty of these items and buzz terms like “tech innovation,” Breznitz argues that Stage 2 innovation, or designing products within mature industries, is precisely where local or regional innovation-based growth strategies can thrive.

What is required to foster and cultivate regional innovation-based growth within and outside of the Silicon Valley innovation-based growth model? To answer this question, Breznitz challenges us to think about four fundamentals that accompany multi-stage innovation: (1) flows of local-global knowledge, (2) the supply and creation of public and semi-public goods, (3) a local ecosystem that reinforces benefits to industry, and (4) co-evolution of the three fundamentals in late-stage production. And yet, Breznitz says, getting these fundamentals right is still not enough. In order to achieve sustained growth, he explains, “you need to be able to change your policies and ecosystem in step with the changing needs of the local industry and the ever-more-sophisticated demands from the global production networks.”

Breznitz’s vision ultimately enables us to imagine how economies can be adaptable, resilient, and scalable in order to overcome unforeseen challenges.

Many of Breznitz’s concepts on local or regional innovation-based growth strategies are challenging in practice. For example, the COVID-19 pandemic’s forced closures and social-distancing laws have disrupted and have even shuttered some local service-driven industries. Many local and regional economies that have matured to become largely service driven, like Miami, and nations, like the United States, have for the most part moved their product manufacturing operations offshore. For these reasons, I foresee significant difficulties ahead for economies seeking to implement Breznitz’s integrative, Stage 2, or regional innovation-based approach.

Also, thousands of local innovators in mature service-driven industries lost their businesses due to COVID-19 restrictions. Had these localities adopted a mixed approach of Stage 1 and Stage 2 innovation, and had local policy makers provided governance and incentives to sustain both stages of innovation in tandem, would economic outcomes have been different for these localities a year into the pandemic? Breznitz’s vision ultimately enables us to explore and imagine how economies can be adaptable, resilient, and scalable in order to overcome the unforeseen challenges of natural disasters and other disruptive events.

In his final chapter, “In Defense of Experiments, Mistakes, and the Right to Choose,” Breznitz offers one takeaway: “Believe in human ingenuity and the ability of communities to chart their own future even under the worst global headwinds.” I embrace this advice as a scholar, social innovator, and champion of local ingenuity. As our world slowly reopens and we gain opportunities to rebuild our economies, I encourage others to choose the same.