How Geopolitics Is Changing the Economics of Innovation

This paper argues that the significant geopolitical shifts of the last 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 direction of, participation in, and scale of innovation around the world. To enable greater control, nations are creating new institutions to shape the innovation ecosystem, guided by the logic of economic security as opposed to only 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.