Start-Ups Are Everywhere! (but the Growth Statistics)

“But,” some readers might say, “look at Israel, look at San Diego—it is still feasible to become a Silicon-Hyphen.” To which this chapter answers: “And would it be a good idea if it is?” The chapter opens the mind of the reader to new ways of thinking about innovation and growth. Providing a frontal attack on the start-up religion and its most important commandment: using venture capital (VC) as a basis for growth. VCs have attained the paradigmatic status of a “must-have,” institution, when in fact they are just one, not very successful, solution to solving the question of how to finance innovation. The chapter does it by explaining how VCs really work and make money (and for whom), where and when they are successful (rarely and only in ICT and biotech), what does that means to the companies they finance, who is allowed to be part of this party, and what are the impacts on communities in places where the VCs are successful (inequality levels last seen in the Gilded Age). It utilizes research on Israel and Silicon Valley to drive those points home. At the end of the chapter the reader should realize that, YES, they want innovation-based growth, but NO, even if they could make it happen, the last thing they want for their community is to become a Silicon-Valley/Israel look-alike.

Out with the Old, In with the New! But in What Ways?

The chapter, utilizing the tools and concepts developed in chapter 5, focuses on the trendiest (and for many people, wrongly, the only) stage of innovation—novel product and technologies innovation. It first analyzes one mode of success—the Silicon Valley model—utilizing the story of Israel and demonstrating both its allure and significant benefits, but also its considerable downsides and limitations, especially with regard to equality, equity, and long-term prosperity. The chapter then presents an alternative model for stage 1 innovation, one which is not built around massive financial exits and IPOs and utilizes different modes of innovation financing instead of the over-hyped venture capital model. The story of the ongoing transformation of Hamilton, Canada, serves to make those lessons concrete.

The Silicon Peaches

This chapter acknowledges that, for many regions, the idea of attracting cutting-edge tech start-ups is almost irresistible. Seemingly every community aspires to become the next Silicon Valley. But is that feasible? This chapter make these lessons concrete by elaborating on the rapid rise and, even faster and deeper, decline of America’s first Silicon Valley—Cleveland, Ohio. It then shows the near impossibility of trying to become the next Silicon Valley by analyzing the mysterious failure of Atlanta, Georgia—a city that diligently followed all the advice ever given to an aspiring new start-up hub, but somehow was always left only with the “potential.” We will see how at multiple time-points Atlanta’s companies were the leading innovators with the best products in the newest information and communication technologies (ICT), only to falter and be taken over by Silicon Valley companies without leaving any apparent impact on the region. It then brings in social-network research and the concept of embeddedness to explain why trying to recreate a Silicon Valley is a doomed (and expensive) enterprise.

The New Globalization of Innovation

This chapter demonstrates that not only has the production landscape changed, but that the entire innovation landscape has been transformed as well. Globalization means that innovation in goods and services is now fragmented into four stages, ranging from invention of novel gadgets and technologies to new ways to assemble finished products. Each of these stages necessitates a different local ecosystem of innovation-based growth, and success in each of these leads to very different social outcomes. The chapter introduces the basic thought concepts to be used throughout the book, organizing a narrative for the reader. This will allow readers to let go of their existing (and wrong) “taken-for-granted story” of how the world works, so they can develop a radically new understanding of innovation and local economic growth under globalization.

Sewing and Designing—Incrementally—Innovation-Based Growth

This chapter, utilizing the tools and concepts developed in chapter 5, presents the cases for stage 3 second-generation product and component innovation and for stage 2 design, prototype development, and production engineering. Analyzing these stages, we learn not only how to excel in them, but also their considerable advantages for long-term and equitable local growth compared to trying to copy the Silicon Valley model. A thorough and historical analysis of the growth of the Taiwanese ICT industry is used to make stage 3 lessons concrete. Similarly, for stage 2 we utilize the case of the transformation of the Riviera del Brenta in Northeastern Italy into the most important center in the world for luxury women shoes.

Our Anti-Intellectual Property Rights System

The chapter explains why, properly used, intellectual property rights (IPR) are an elegant solution to the real problems of the inappropriability and indivisibility of innovation. Under free market conditions, these factors lead to a situation in which it is just not worth it to innovate, since even if successful, the innovator will not be able to enjoy high enough profits to recoup the initial investment. The theory behind IPR is that by granting them we can diminish the problems of inappropriability and indivisibility, and thus stimulate innovation. However, the positive welfare outcomes of innovation happen only when it is widely diffused and produces a lot of spillovers, which by definition do not generate profits. Accordingly, solutions that give too strong and full property rights risk slowing down innovation. As such, those solutions can become a cure that is worse than the disease. Sadly, we have come to a point where our patent, copyrights, trademarks, and trade secrets systems favor the incumbent and the rich and stifle innovation. For locales, existing IPR act as a punitive restriction on their companies and entrepreneurs’ freedom to operate. Accordingly, communities that wish to enjoy sustained innovation-based growth must game the system to protect their innovators’ freedom to operate. The chapter concludes with a few promising venues by which communities can transform weaknesses into strength. These examples aim to highlight the many ways to go forward even under the current conditions of a broken and dysfunctional global IPR system.

Making America Great Again?

This chapter examines a different, but equally tantalizing, option of trying to “bring back” traditional manufacturing and the high-paying production-line jobs that disappeared from many areas decades ago. To analyze the practicality of this strategy, the chapter explores recent changes in the global production landscape that are the result of digitization and other trends. What happened to the vertical manufacturers of yesteryear? How does innovation translate to growth in a globalizing world? To make those changes less abstract and more concrete, the chapters utilizes a few historical case studies. First, it examines the history of the rise and fall of innovation manufacturing in Michigan and Pennsylvania; then it looks at the brief success (and long and bitter decline) of the “high-end manufacturing” stars of the 1990s: Elk Grove, California, and Colorado Springs, Colorado. After effectively killing the two current deadly street drugs of Silicon Valley and Make America Great Again, the chapter leads the reader to appreciate other (and better) choices by moving away from the binary framing of innovation/manufacturing and back to the world of fragmented production, but this time armed with a new point view.

Four Are Better Than One—But First, Let Us Plan It Strategically

This chapter starts the constructive journey of developing a strategy for local innovation-based growth in each stage of production. It does so by first making clear what is (and what is not) innovation policy. Reminding the reader that there are only two innovation actors in the economy (individuals and firms), and only three goals of innovation policy: (i) equipping the agents of innovation with the necessary capacities, (ii) building and sustaining the ecosystem in which they can flourish, and (iii) finding the most effective ways to stimulate said actors to innovate. It then introduces the concept of growth models to develop and build the ideas of the four fundamentals of local innovation-based growth policy: (1) Flows of local–global knowledge, demand, and input; (2) The supply and creation of public and semi-public goods; (3) A local ecosystem that reinforces the firm-level benefits of the previous two fundamentals; and (4) Managing the co-evolution of the previous three fundamentals and the changing role of public policy as the locale grows and excels. Using these tools, the chapter analyzes the case for stage 4 innovation specialization through the case of Shenzhen.

Looking for Better Options

But how should a community manage its efforts? Locales seeking to promote innovation-based growth must think carefully not only about the needed actions, but also about the public agencies chosen to lead them. Strikingly, there has been almost no research on how to design and develop innovation agencies. Further, anyone who wants to model innovation agencies on the example of successful organizations could be forgiven for ending in utter confusion. Effective innovation agencies include large, powerful, central organizations as well as small, lightly funded ones. Some innovation agencies have clear technological objectives and manage much of the research themselves, whereas others have delegated these decisions to private sector actors. In short, there is considerable variation, with no clear lessons. The chapter cuts through this fog by demonstrating that the different designs of innovation agencies are similar to the different innovation models needed to excel in different stages of production, and each of which necessitates different set of capabilities. Effective institutional design thus depends on an agency’s mission or the specific type of innovation it seeks to pursue. The chapter distinguishes among four different types of innovation agencies, illustrated by multiple case studies: “directed upgraders,” “productivity facilitators,” “state-led disruptors,” and “transformation enablers.” These categories reflect different choices concerning (i) the level of public sector R&D involvement, (ii) the positioning of the agencies within the public sector, and (iii) the degree of embedding within private industry. Building on these case studies, the chapter discusses the implications for communities as they plan their innovation-based future.

Conclusion

This chapter concludes the book, reminding the reader that the act of innovation is what makes humans unique, and urging for a strong belief in human ingenuity. It also briefly summarizes the main points of the book, namely innovation versus invention, innovation and local economic growth, global fragmentation of production, innovation stages, the only two innovation actors, the three goals of innovation policy, and how to adhere to the four fundamentals (flows of local-global knowledge, demand, and inputs; the supply and creation of public and semi-public goods; building a local ecosystem that reinforces the firm-level benefits of the previous two fundamentals; and the co-evolution of the previous three fundamentals).