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Weekly Economic Briefing

Global Overview

Innovate or die

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A recent New York Times' article stated “the rules of commerce are changing” as China races to innovate and challenge the global leaders in tech; further stating that “the result could be an overhaul of 20th-century trade rules for a 21st-century global economic order, in which money, ideas and influence could become as closely watched and tightly regulated as hard goods packed on a ship and sent abroad”. While this might border on hyperbole, it’s clear that innovation and the protection of intellectual property are increasingly crucial for companies and governments alike. Innovation protections are being weaved into more trade agreements, governments are doing more to prevent foreign acquisitions, and countries are launching ambitious programs to stimulate innovation on a scale rarely seen before. Examples include: the TPP trade agreement, which includes provisions for intellectual property protections; the US and Europe blocking Chinese tech acquisitions; and China’s ‘Made in China 2025’ plan, which explicitly aims to position China as a global leader in sectors such as artificial intelligence.

These trends reflect both a fundamental change in the economy as new technologies and products change how people do business and spend their leisure time, but it also reflects changes around innovation itself. For example, although innovative activity is now more dispersed, with emerging market countries among the fastest growing spenders on R&D and recipients of patents (see Chart 1), the gains to the inventor are also greater. According to the ECB, innovation at firms along the technological frontier is robust, but declining technological diffusion means those gains are captured by a smaller group. In other words, innovation is increasingly a winner-takes-all game. Secondly, the cost of discovering new ideas is rising. As a group of researchers from Stanford and MIT describe, “the innovation bang for the R&D buck has declined”, meaning firms must spend more for each incremental innovation. As advanced technologies like microchips, AI, and electric cars become important drivers of the global economy, increased efforts to develop a dominating position, and protect that position through IP protections and R&D, could represent a larger structural change than the innovation itself.

China stepping on the R&D pedal