Despite their lavish spending in recent years, Neville believes that the club needs to look closer to home when bringing in new talent.
"I don't know why they've not created a player in the last five years when Manchester City have won the [FA] Youth Cup and been in the latter stages of that competition," he told The Independent.
"I've seen players in their youth team when they've beaten United. You've got to create the pathway and at the moment I don't see that pathway at City, whether the players are good enough or not."
City's previous success in the FA Youth Cup came back in 2008.