How Geopolitics Is Changing the Economics of Innovation

This paper argues that the significant geopolitical shifts of the past decade require a new approach to studying the economics of innovation. We document that national governments increasingly seek to control critical technologies rather than encouraging diffusion globally. This dynamic is reshaping the pathways and production of innovation around the world—highlighting priorities for both innovation ecosystems and the industrial base. Furthermore, at each stage of the innovation process, the focus on control of innovation is shaping considerations for the geographic distribution of participation. To enable greater control, nations are creating new institutions to shape the innovation ecosystem, guided by the logic of economic security as opposed to the traditional metrics of efficiency and cost. We demonstrate the impact of this shift on the development of three technologies: quantum computers, advanced semiconductors, and fusion energy systems. We provide several implications for economists studying innovation as they develop new research questions and seek to explain the rate and direction of innovation in this new paradigm.