13th of October 2022
Prof. Dan Breznitz during his visit to Orkestra
Orkestra collaborates with a broad network of experts worldwide to highlight the Basque model of competitiveness for wellbeing and to identify best practices to be applied in the Basque Country. In September, Professor Dan Breznitz from the University of Toronto visited Orkestra and presented his latest book Innovation in Real Places: Strategies for Prosperity in an Unforgiving World to the team, which offers pragmatic advice while debunking dangerous myth on innovation, growth and prosperity.
Professor Breznitz is a recognized expert on rapid-innovation-based industries and their globalization, known for his pioneering research on the distributional impact of innovation policies. In this interview, he elaborates on some of the main ideas of the book and shares his views on innovation-based growth:
In the book you argue that innovation-based growth is the only way to achieve long-term sustained prosperity and human welfare. Why is that?
If you want to understand why innovation is important, first you have to remind yourself what innovation is, and innovation is not the same thing as invention. To put it very simply, invention is the act of coming up with a new idea, including, for example, an idea for a product. Innovation is the act of putting ideas into new or improved products or services all across the production chain.
Now, if you look at what stage innovation has the most impact on welfare, it is not at all clear that it's in the first stage of invention. Think about zoom, for example. Video conferencing is a very old technology, possibly 40 or 50 years old. But even ten years ago, I would have done everything in my power to prevent video conferencing because the quality and usability were awful. What changed? Millions, probably hundreds of millions of engineering hours to improve video compressing, data communication software, algorithms, CPU and GPU, to the level that when Covid happened, we just opened zoom and it worked perfectly. That’s when it changed our life, not when somebody invented two rooms to do video conferences that cost half a million dollars.
So, yes, I believe that the only way in which we can have sustained growth and improvement of welfare is through innovation, especially in mature industrial developed societies. And I mean innovation, not just invention.
Is that why you believe it is not worth trying to copy the Silicon Valley model?
Silicon Valley is a very particular model focusing solely on what in the book I call first stage innovation. We live in a world of global fragmented production where cities or regions don’t focus on a specific industry, they focus on a certain stage of production in a certain industry.
Right now, Silicon Valley focuses only on the cutting edge. They aim for new products and new ideas, what I call novelty, with a very specific business model, mostly Venture Capital based. Once VC is involved, you need to have a financial exit, so the VC can sell their share in the company withing five years. This coupled with the fragmentation of production, basically means that the only people that are employed in this really cool economy are the best R&D engineers, graduates of universities like Stanford and Berkeley. They get wages that will make them millionaires, and if they are lucky a financial exit to make them billionaires but the problem is that this model doesn’t create jobs for anyone else, it doesn't have a lot of local positive spillovers. Regular people are still stuck in bad jobs, but living in the area surrounding Silicon Valley is now so expensive that they cannot afford it. So, it is not clear to me why any place would like to spend public money to create this kind of a model in its own city or region.
You also claim that today, thanks to globalization, we have more opportunities for innovation-based growth than ever. How so?
That’s mainly because of rotation of production. In the past, if you wanted to compete in an industry, you had to actually develop the whole industry from scratch. Currently, if you develop innovation capacities in any stage of production, you can enter the global production networks, especially in the Western world.
After Covid there has been a restructuring of a global production networks, companies are building regional networks so they have redundancy in these times of uncertainty. That means that companies that otherwise wouldn't have looked for new places to set specific production activities are now willing to do so. They are looking for supplies, for people to work with, for ideas. In the next few years there will be many more opportunities to enter the production market than before.
What does that mean for a region like the Basque Country?
The Basque Country is one of the best places in Europe for what I call stage two and three innovation. Basically, you still know how to make stuff and how to improve stuff. That has a lot to do with your industrial background. You could stay in those stages of production and diversify into new industries, let's say by manufacturing. However, in terms of the future, I think there is an important question you need to ask yourselves: what kind of jobs do you offer for young people? Right now, you are keeping prosperity by generating very secure jobs, but you are creating very few new ones. That means that you’re starting to lose a lot of talent.
I think that you could easily develop a strategy of diversification in terms of new cool industries where you have new innovation in all stages of production, but still in a way that produces jobs for all people with all skills, not just for top R&D engineers. That would prevent the loss of talent to places like Madrid.
In many cities and regions, even prosperous ones, the real problem is that some of the models stay prosperous, but basically by keeping people in their jobs, not by creating new jobs for younger people.
Should public policies for innovation solely target growth or also be concerned with their distributional impacts?
Personally, I think they should be concerned with both because we can't have distributional impacts and a prosperous society without growth. However, sometimes growth leads to extreme inequality like in the cases of Israel, Silicon Valley or New York. It creates such social dislocation that the real question should be whether you should use taxpayer’s money to support certain innovations and to provide greater infrastructure that actually makes only the very few already wealthy even wealthier. So, we need some kind of balancing out.
We should be aware that our decisions about innovation policy, especially when we play them long term, are also decisions about distribution. Until very recently we thought that they were only about growth, and that if we secured growth, everything else would be fine. Now we know that's not true.
Do you have any examples of good practice here?
An interesting example I mention in the book is the region of Riviera del Brenta in Italy, which has a very innovative shoe manufacturing industry. They do design, prototype development, and production engineering of high-end luxury footwear for women, and work with brands from all over the world.
Two other places that have also done it very well playing on different stages of innovation and in different industries are Finland and Taiwan. I think that the Basque Country could learn a lot from them. When I talk about Finland, people often think about the rise and the fall of Nokia and the startup economy. However, they seem to forget that Finland is a huge country, very rich in resources. They have moved from having one of the most backward forestry pile and paper industries to having one of the most sophisticated ones, including the development of all the equipment required for it. This has led them to become one of the global leaders in biofuels. This shows that together with ICT and new industries, we can also figure out how to infuse innovation into the “old” industries that had to do with production and provided employment for all kinds of people, not just R&D engineers. And Finland is still very egalitarian, maybe even more than before.
How can public policy contribute to innovation-based growth?
Innovation has what's called positive spillovers. It creates a lot more growth than just profits for a company, it’s a highly collective, coordinated effort. But whether we like to admit it or not, innovation is an extremely high risk and uncertain activity for companies. We have to consider the global fragmentation of production, the dysfunctional intellectual property rights, copyright... So, without public policy we should expect less innovation than the social optimum. That’s a fact. Besides, as I said before, innovation policy should be at least partly acquitted with distribution and growth policy.
About Professor Breznitz
Dan Breznitz has been elected as a University Professor of the University of Toronto, and the holder of the Munk Chair of Innovation Studies at the Munk School of Global Affairs and Public Policy with a cross-appointment in the Department of Political Science of the University of Toronto, where he is also the Co-Director of the Innovation Policy Lab and a Senior Fellow of Messi College. In addition, he is a Fellow of the Canadian Institute for Advanced Research (CIFAR) where he co-founded and co-directs the program on Innovation, Equity and the Future of Prosperity. He currently serves as the Clifford Clarke Economist of the Canadian Department of Finance, where he is responsible for new economic thinking and the restructuring of the Canadian economy.