Thank you for subscribing. Occasional forwarding is okay. If you are not a member, please sign up here.
A country does not rise to the level of its innovation. It falls to the level of its industrial commons.
Let the Industrial Commons Erode or Start a Flywheel Effect
My nerdy side takes pleasure in finding original source material. This time I’ve found the paper that coined the term “industrial commons.” The name fits—it instantly made sense to me the first time I heard it. (Perhaps living and working for 15 years in China, where industrial commons are taken seriously, helped.)
Published in 2009, Gary Pisano and Willy Shih’s article “Restoring American Competitiveness,” describes the erosion of the industrial commons—the collective R&D, skilled labor, and supplier networks that sustain innovation. Their argument is straightforward: outsourcing has hollowed out America’s ability to make the very products it invents.
Defining the Industrial Commons
Just as "the commons" once referred to shared grazing land that benefited all farmers, industries also have commons—a shared foundation of capabilities critical to innovation and competitiveness:
“Industries also have commons. A foundation for innovation and competitiveness, a commons can include R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology. — Pisano and Shih (2009)
These commons often supports multiple industrial sectors:
"technological know-how, operational capabilities, and specialized skills that are embedded in the workforce, competitors, suppliers, customers, cooperatives R&D ventures, and universities and often support multiple industrial sectors.” — Pisano and Shih (2009)
And importantly, the industrial commons is “geographically rooted”:
The geographic character of industrial commons helps to explain why companies in certain industries tend to cluster in particular regions—a phenomenon noted by Michael Porter and other scholars. Being geographically close to the commons is a source of competitive advantage. — Pisano and Shih (2009)
In 2009, The World is Flat by Thomas Friedman was making waves. But Pisano and Shih push back on the idea that technology alone makes geography irrelevant. For manufacturing and R&D, proximity still matters.
“Detailed empirical work on knowledge flows among inventors by our HBS colleague Lee Fleming shows that proximity is crucial. An engineer in Silicon Valley, for instance, is more likely to exchange ideas with other engineers in Silicon Valley than with engineers in Boston. When you think about it, this is not surprising, given that much technical knowledge, even in hard sciences, is highly tacit and therefore far more effectively transmitted face-to-face.” — Pisano and Shih (2009)
How does knowledge spread throughout an economy or industrial ecosystem?
People switching jobs. A robust industrial commons can help diffuse knowhow and technology too.1
“Other studies show that the main way knowledge spreads from company to company is when people switch jobs. And even in America’s relatively mobile society, it turns out that the vast majority of job hopping is local.” — Pisano and Shih (2009)
Erosion of the Industrial Commons
Think of the commons as the soil that supports an ecosystem. If it degrades, the plants (companies) struggle to grow.
In my view, several factors have weakened America’s industrial commons:
📉 Outsourcing
📉 Lack of industrial policy to bridge the “valley of death” between invention and commercialization
📉 Unfair international trade as explored in my last post
📉 Regulatory burdens that make it harder to build anything
📉 Short-termism in markets and business
📉 Investor preference for capital light business models
📉 Lack of government support compared to industrial strategies used by competitors
But in 2009, the dominant issue was outsourcing.
Companies operating in the U.S. were steadily outsourcing development and manufacturing work to specialists abroad and cutting their spending on basic research. — Pisano and Shih (2009)
As my readers know, China and other Asian nations didn’t just passively receive outsourced production. They offered significant incentives—subsidies, tax breaks, free land, and market access—to attract foreign direct investment (FDI). These were deliberate tools of industrial policy. (I’ll write a future piece on what’s in that toolbox.)
The theory behind outsourcing is that companies can off-load low-value-added work and reinvest the savings in higher-value innovation. But that wasn’t the reality. The U.S. offshored far more than just assembly work:
But in reality, the outsourcing has not stopped with low-value tasks like simple assembly or circuit-board stuffing. Sophisticated engineering and manufacturing capabilities that underpin innovation in a wide range of products have been rapidly leaving too. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented. — Pisano and Shih (2009)
🚨Suggestions Please!🚨
I’m collecting a list of American inventions that America can no longer produce on X/Twitter. Send your suggestions—bonus points for sources.
The Industrial Commons Flywheel
In business strategy, the flywheel concept refers to a self-reinforcing loop that builds momentum over time, leading to sustained growth and success. Applied to a country, the idea is that instead of relying on a single transformative action or innovation, nations should focus on a series of small, consistent improvements that compound to create lasting momentum.
Once an industrial commons erodes, it spirals downward—but it can also be built up. This is where the flywheel effect comes in.
Once an industrial commons has taken root in a region, a powerful virtuous cycle feeds its growth. Experts flock there because that’s where the jobs and knowledge networks are. Firms do the same to tap the talent pool, stay abreast of advances, and be near suppliers and potential partners. — Pisano and Shih (2009)
This is first principles thinking and should be common knowledge.
❓ Want to work in tech? Move to Silicon Valley.
❓ Want to work in finance? Move to New York City.
❓ Want to see the future of food delivery? Go to Shanghai.
❓ Want to see the future of EVs? Go to China.
Andy Grove famously warned about losing "commodity" industries because it can lock you out of tomorrow’s emerging sectors. Pisano and Shih confirm this:
“innovation in one business can spawn whole new industries.”2 — Pisano and Shih (2009)
Starting the Flywheel: Lessons from China
Asian nations, particularly China, understood the flywheel effect of nurturing an industrial commons. Their strategy was straightforward:
Subsidize foreign firms to set up operations in China
Encourage3 firms to onshore higher-value production over time
Require technology transfers and local training
Let foreign-trained engineers spread knowledge to domestic firms
This wasn’t an accident. China used foreign firms to seed and later upgrade its industrial ecosystem. As Kyle Chan previously wrote:
“Over time, China pushes these foreign firms to share more technology and use more Chinese suppliers. Foreign companies end up training a whole cohort of Chinese engineers and managers who can later help Chinese companies or even launch new startups.” - High Capacity
Where Do We Go From Here?
This brings us to the big question: Do we let America’s industrial commons erode further, or do we actively rebuild it?
Here are some ways to start the flywheel:
✅ Identify key industries where commons still exist and expand them
✅ Invest in bridging the “valley of death” between invention and production
✅ Continue investing in basic research and innovation
✅ Encourage more public-private partnerships in infrastructure
✅ Reduce regulatory burdens that discourage domestic production
✅ Rebuild domestic supplier networks to prevent over-reliance on imports
✅ Change tax code to allow American exporters to recoup some taxes (like how VAT helps non-US exporters)
Pisano and Shih’s insights remain just as relevant today as in 2009. But we can’t wait another 16 years to take action.
What Do You Think?
What policies do you think would help rebuild America’s industrial commons? Drop me a reply—I’d love to hear your thoughts.
Please consider hitting the like button, it helps others discover us, or consider subscribing to a paid tier to support my work.
Our last post covered Jeff Ding’s ‘diffusion deficit’ concept.
"Diffusion deficit", Cheap goods & Reshoring
Thank you for subscribing. About 50% of this post is available as a free preview. Occasional forwarding is okay. If you are not a member, please sign up here.
Here’s the full quote:
Our research on the semiconductor, electronics, pharmaceutical, and biotech industries has found that commons are even more important to countries’ and companies’ prosperity than is generally believed. That’s because innovation in one business can spawn whole new industries.
"Encourage” took the form of coercion and enticements.
Coercion tools (the sticks) included limiting market access, starting investigations, blocking M&A transactions, favoring a competitor and so on.
Enticement tools (the carrots) included offering more subsidies, tax breaks, more market access, cheaper financing, free land—the usual stuff.