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As a result of institutional, geopolitical, and technological developments that lowered barriers to international trade, global technology markets have achieved remarkable efficiencies through a powerful application of the division of labor principle. This is clearly seen in computing, communications, and semiconductor markets, in which design, equipment, manufacturing, assembly, and other functions are finely allocated in an intricate network across firms located around the world. Market forces allocate each function of the supply chain to the geographic clusters that can perform each function most efficiently, accelerating time to market, lowering costs, and ultimately reducing prices for consumers.
Yet it is now widely recognized that these economic gains came at a geopolitical price.
Market forces that maximize efficiency through the geographic disaggregation of technology supply chains have raised national-security risks by rendering the U.S., Europe, and other allies reliant on the People’s Republic of China as the principal source of production in strategically important technology industries. Following a development pattern observed in Japan, Korea, and other once-emerging markets, China has also moved up the technology supply chain to reach the innovation stage in certain sectors. Unlike those countries, however, China has deployed unilateralist polices on industrial trade, intellectual property, and competition policy (as I have shown previously in the context of wireless markets) that seek to transform the institutional “rules of the game” in global markets to promote mercantilist and broader geopolitical objectives.
Concerns over China’s technological ascendance and geopolitical ambitions have considerable merit. Yet the U.S.-aligned coalition enjoys a key advantage over China (and its autocratic partners, Russia, Iran, and others) in the effort to preserve the rules-based global order that has facilitated international supply chains for several decades. Aside from China, all countries that excel in standard metrics of innovative excellence fall within the largely U.S.-aligned coalition of nations. That broad coalition provides a valuable mechanism to maintain the technological, economic, and political leadership that is necessary to preserve the rule-bound institutions that ensure a level playing field in the global economy.
The Innovation Coalition
In prior research (here and here), I have used patent data and other R&D metrics to document how innovation activity has shifted globally over approximately the past half-century. Since 2008, slightly more than half of all patentees at the U.S. patent office have consistently been foreign residents on an annual basis. Moreover, innovation has clustered in a handful of regions in the world: the U.S. and Canada, certain countries in Western Europe, Israel, and certain countries in East Asia. Viewed globally, these multi-decade shifts in innovation capacity have produced a hub-and-spoke structure comprised by larger economies such as the U.S., Germany, Japan, and Korea, and medium to small-size economies that include several European countries (especially, Switzerland and Sweden), Israel, Singapore, and Taiwan.
The hubs supplied by the large economies and the spokes supplied by the smaller economies together form an “innovation chain” that encompasses critical junctures in the global technology ecosystem. Just as startups continuously supply new technologies to large platforms in digital markets, firms in these smaller innovation economies interface with the capital and labor-intensive production and distribution infrastructure, and deep consumer markets, offered by the larger hub economies. TSMC in Taiwan supplies chip-production services to chip-design firms located in the U.S. and Europe. Israel supplies a steady stream of early-stage and mid-stage cybersecurity firms that are most often acquired by large U.S-based tech platforms. Large U.S. technology firms also maintain research centers in innovation clusters in Asia, Europe, and Israel that offer rich aggregations of technical talent, which support a continuous flow of technological advances into the U.S. market.
In the aggregate, these countries constitute a broad coalition of innovation leaders that is well-positioned to sustain a competitive advantage over the narrow autocratic coalition, which is increasingly reliant on (and, in the case of China, now prioritizes) the use of domestic technology as global supply chains migrate toward various levels of “decoupling” in strategic markets. The Figure below provides a “broad brush” visual representation of the innovation capacities of 20 mostly liberal-democratic countries that fall within the innovation coalition and two countries that comprise the autocratic coalition. Countries are ranked by two measures of innovation capacity and performance: R&D intensity (R&D as a percentage of national GDP), an innovation input, and U.S. patents issued on a per capita basis, an innovation output. Three hubs (the U.S., Japan, and Korea) and two spokes (Israel and Taiwan) are most prominent on both measures.
Global Innovation Performance: Leaders, Laggards, and In-Between
Legend: AUS: Australia, AUT: Austria, BEL: Belgium, CAN: Canada: CHE: Switzerland, CHN: China, CZE: Czechia, DEU: Germany, DNK: Denmark, FIN: Finland, FRA: France; HUN: Hungary, ISR: Israel; JPN: Japan, KOR: Korea, NLD: Netherlands; NWY: Norway; RUS: Russia, SGP: Singapore, SWE: Sweden, TWN: Taiwan.
Notes: All patent data current as of 2020. All R&D intensity data current as of 2020 or, when not available, 2021. Twenty non-autocratic countries selected based on highest R&D intensity. Russia and China included as autocratic countries. Data for China includes data for Hong Kong.
Sources: U.S. Patent & Trademark Office (patents), U.S. Census Bureau (population), OECD (R&D intensity).
Based on at least the two measures of innovation reflected in the Figure, the two leading autocratic countries lag well behind almost all members of the innovation coalition. Russia performs poorly on both measures and China only performs moderately well on R&D intensity.
China’s weak performance on the patenting measure may seem surprising given its widely publicized patenting “records” (as reported for example by the World Intellectual Property Organization). However, as CSIS has previously observed, these headlines (which often reflect worldwide patenting activity) overlook important qualifying factors, such as the fact that China-based inventors favor patenting only domestically (which suggests low commercial value) and mostly are issued shorter-term “utility model” patents that do not undergo examination. Based on absolute numbers of the highest-value “triadic” patents (as defined under the Table below) and without adjustment for population size, OECD data as of 2020 show that China ranks third after Japan and the U.S., although the total number of triadic patents issued to China-resident inventors are less than half the number of such patents issued to U.S.-resident inventors. (Russia still ranks poorly on this measure.) This disparity in patent quality as reflected by triadic patent grants tracks each country’s “IP balance of trade” (receipts less payments for the use of IP): as of 2021, calculations based on World Bank data find that the U.S. and Japan exhibited IP trade surpluses of $78 billion and $18.6 billion, respectively, while China exhibited an IP trade deficit of -$35.1 billion.
To provide more granular insight into the innovation coalition, the Table below presents five innovation metrics for the four hub countries and six selected spoke countries. For each metric, the top five countries on a worldwide basis are identified by a specific ranking (in parentheses) and, when not appearing among the top five, the U.S.’s ranking is also provided as a benchmark. Both hub and spoke countries excel based on these metrics. Israel and Korea occupy the top five spots in four innovation metrics, and Sweden, Taiwan, and the U.S. do so in three innovation metrics. Information for China and Russia is included for purposes of comparison.
Innovation Metrics
Notes: Triadic patents refer to a “family” of patents for the same invention filed at the Europe, Japan, and U.S. patent offices, which are generally associated with the highest-value inventions. For R&D/GDP and researchers/1K employed, data for Switzerland is current as of 2021. For researchers/1K employed, Finland and Denmark are ranked second and fourth, respectively. For VC investment per capita, Estonia is ranked third.
Sources: U.S. Patent & Trademark Office (U.S. patents), U.S. Census Bureau (population), OECD (triadic patents, R&D/GDP, researchers/1K employed); Crunchbase (VC investment/per capita).
Securing and Defending Leadership in Strategic Technologies
The members of the hub-and-spoke coalition lead not only in innovation generally but in at least three strategically important dual-use technology sectors: semiconductors, artificial intelligence, and cybersecurity.
In the semiconductor sector, the supply chain encompasses various members of the innovation coalition, some of which are almost unique suppliers of certain critical inputs. Taiwan is home to TSMC, the world’s principal chip foundry and the only manufacturer of certain high-performance semiconductors. A UK-based firm (Arm) is the leading supplier of the most commonly used chip architecture in the smartphone market and a Netherlands-based firm (ASML) is the only supplier of the most advanced chip production equipment. Two Korea-based firms (Samsung and SK Hynix) are among the largest memory chip producers (including high-bandwidth memory chips for AI processors) and Israel plays a leading role in chip design (often through the research divisions of U.S. multinationals) and is home to a major Intel chip production plant.
In the artificial intelligence sector, both hub and spoke countries are prominent, including in particular the U.S., Israel, Singapore, Switzerland, and the UK. According to Stanford University’s AI Index Report, two spoke countries (Israel and Singapore) and one hub (Korea) occupy the first three spots in AI talent concentration as of 2023, followed by Germany and several smaller European countries. After the U.S. (the clear global leader), three spoke countries (Israel, Singapore, and Switzerland) and three hubs (Germany, Japan, and Korea) are among the leading locations for newly funded AI companies during 2013-2023. The 2023 Global AI Index (compiled by Tortoise Media) identifies two hubs (U.S. and Korea) and three spoke countries (Israel, Singapore, and Switzerland) as the top five leaders as measured by “intensity” (AI capacity relative to population or size of economy). Additionally, one hub (U.S.) and three spokes (Israel, Singapore, and the UK), in addition to China, are the top five leaders as measured by commercial investment when assessed using a combination of absolute and relative measures.
In the cybersecurity sector, the prominence of U.S., UK, and Israel-based companies is widely recognized. A Tel Aviv University report found that the three largest cybersecurity clusters (as of 2019) are located in the San Francisco area, Israel (principally, Tel Aviv area), and Washington DC, followed by London, New York, Austin, and Boston. As of early 2024, Dealroom, a provider of financial information on private companies, reports that the cities with the largest number of cybersecurity “unicorns” (private companies with a valuation in excess of $1 billion) are San Francisco (over 250), New York (over 150), Boston (over 50), London (over 50), and Tel Aviv (over 50). If considered nationally (as of 2023), the top 15 country-level recipients of VC funding for cybersecurity companies all fall within the innovation coalition, with the exception of China (which is among the top five, including the U.S., the UK, India, and France).
It is noteworthy that three spoke countries—Israel, Korea, and Taiwan—that are consistently key technology contributors in these strategically important sectors are located in geopolitically sensitive regions in which the autocratic coalition is seeking to challenge U.S. influence, whether directly or indirectly. In the case of Taiwan and Korea, China continues to take actions that signal an intent to extend its zone of influence and challenge the U.S.-led security umbrella that protects largely U.S.-aligned countries in Asia. In the case of Israel, Iran-backed proxies, and Iran itself, have targeted the country since October 2023 with a multi-front campaign to which neither China nor Russia has expressed opposition. These three spoke countries’ critical contributions to strategic technology sectors indicate the vital importance of preserving the U.S.-led security umbrella in these regions, which in turn supports a rich network of business, governmental, and academic relationships that ultimately benefit the U.S. innovation economy and its global partners.
Technological Innovation Requires Individual Freedom
It is not accidental that almost all members of the innovation coalition generally exhibit high rankings not only on measures of R&D excellence but also on measures of political and economic freedom. Innovation thrives in open societies that prioritize free inquiry and market-based economies that principally allocate resources through competitive forces that reward innovation excellence based on the objective judgment of the marketplace, rather than government mandates that inevitably suffer from misallocation, regulatory capture, and politicization.
China’s one-party state requires fealty to ideological dogma and has reverted to industrial policies that deploy command-and-control directives to guide capital allocation and business decisions in accordance with the Chinese Communist Party’s ideological mandates and geopolitical objectives. The Cold War showed that five-year plans and ideological conformity are incompatible with the creative disruption that characterizes the most robust innovation ecosystems, even if an authoritarian regime may produce impressive one-off Sputnik-like successes from time to time. The critical intellectual posture that is inherent to a creatively disruptive innovation economy is incompatible with authoritarianism.
All of this supports the optimistic thesis that the innovation coalition is likely to retain technological leadership so long as its members maintain a robust commitment to the foundational principles of free inquiry and largely market-driven economies. This core set of values and associated institutions are ultimately the basis on which the U.S. and its allies prevailed in the Cold War against the Soviet Union and remain the “crown jewel” asset of the largely U.S.-aligned coalition in meeting the current autocratic challenge. It is therefore imperative to maintain research environments that are undistorted by ideological mandates and economic environments that rely substantially on competitive forces to support and reward investments in innovation.
Today an autocratic coalition poses a once-in-a-generation challenge to the liberal democratic values and rule-of-law principles that have delivered the highest levels of individual freedom and material well-being the world has ever enjoyed. To meet that challenge, it is vital to recognize, cultivate and, when necessary, defend the worldwide coalition of innovation leaders that have thrived under the principles of free inquiry and competitive markets.
The author is the Torrey H. Webb Professor of Law at the University of Southern California Gould School of Law. This contribution is based in part on research previously published by the author, including “Antitrust Mercantilism: The Strategic Devaluation of Intellectual Property Rights in Wireless Markets,” Berkeley Technology Law Journal (2023), “Patent Tigers and Global Innovation,” Regulation (2020), and “Patent Tigers: The New Geography of Global Innovation,” Criterion Journal of Innovation (2017).
