Contents

Introduction. 1

Full Report 6

Endnotes 7

Introduction

Nations are in a race for global innovation advantage. Recognizing that advanced, innovation-based industries provide a host of critical advantages, including higher national incomes, a better trade balance, and reduced dependency on potential adversary nations, most advanced and emerging economies have put in place policies to grow their innovation economy.

A conventional view may suggest that innovation is something that just takes place mainly in Silicon Valley garages and research and development (R&D) laboratories of private enterprises in a rather independent and idiosyncratic manner. However, innovation, in fact, is embedded in a national innovation system (NIS). Just as innovation is more than science and technology, an innovation system is more than those elements directly related to the promotion of science and technology. That is, innovations are outcomes of a national system including all economic, political, and other social institutions, for example, the financial system, organization of private firms, the pre-university educational system, industry-university collaboration system, labor markets, culture, regulatory, and tax policies, as is illustrated in Figure 1.1. Indeed, Christopher Freeman defines a national innovation system as “the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies.”

Likewise, Stan Metcalfe defines an NIS as:

That set of distinct institutions jointly and individually contribute to the development and diffusion of new technologies and provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store, and transfer the knowledge, skills, and artifacts which define new technologies.[1]

A systematic understanding of innovation is an important approach because conventional economics, especially in Anglo-American economies, has proven limited in its ability to provide causal explanations for innovation outcomes. As Lundvall argued, the NIS way of thinking gained ground in part due to the fact that “mainstream macroeconomic theory and policy have failed to deliver an understanding and control of the factors behind international competitiveness and economic development.”[2]

Figure 1.1: National innovation systems[3]

Some people may speculate that the concept of NIS, which was developed in the 1980s and 1990s, is less relevant these days, in an era of deeply integrated globalization. We disagree with this perspective. First, even with the globalization of finance and goods and services, national systems still matter in terms of how successful a nation’s activities are. Second, in an era of rising competition for techno-economic dominance, e.g., between the U.S. and China, how the national or regional innovation systems are designed would bear critical significance for the scope of sustainable innovations.

The success of a nation’s innovation depends on its national innovation system working effectively with synergy, not just on a few isolated ingredients (such as R&D spending) being put in place. Thus, a better understanding of the origins, paths of development, and operation of a nation’s innovation system can help policymakers identify key strengths and weaknesses, and policy changes in order to enhance a nation’s innovation performance. Because there are a variety of socioeconomic factors affecting innovations, national innovation systems differ across nations. Thus, we need to understand each system’s unique strengths and weaknesses to gain insights for useful adaptation for each nation’s innovation system.

This report compares and contrasts the national innovation systems (NIS) of five economies: the United States, Korea, China, Japan, and Taiwan to determine how well they are positioned to support innovation in key foundational and emerging technologies, such as semiconductors, smart manufacturing, biopharmaceuticals, advanced computing, robotics, and AI, although we will take a general view on technology rather than a sectoral view of those particular technologies. The purpose of the report is several-fold. First, by comparing and contrasting these five economies’ national innovation systems, policymakers can better understand their own NIS weaknesses and challenges. Second, our comparative analysis enables policymakers to learn from other economies’ NIS best practices. Finally, understanding the history and current state of NISs of the five economies will be helpful in designing potential frameworks and formats of innovation alliances among nations facing various global challenges, including the Chinese pursuit of technology dominance relying on illegitimate means, including breaching intellectual property rights.

We start our discussion by comparing the performance of innovations of the five economies using the same metrics in Chapter 2. To better understand the NIS in each economy, the Chey Institute and the Information Technology and Innovation Foundation (ITIF) convened a number of panels of innovation and innovation policy experts to discuss the strengths and weaknesses of the NISs of the five economies in the order of United States, Korea, China, Japan, and Taiwan, respectively in Chapters 3 to 7. The report is concluded in Chapter 8.

This monograph is particularly timely because global NIS systems are at an inflection point, in part because of the rise of China’s advanced technology and innovation economy, and also because of the emergence of a new technology system grounded in advances in artificial intelligence and related technologies, coupled with an overarching focus on clean technology development.

In the case of the three other Asian economies, particularly Korea and Taiwan, there is a need to move their NIS from being focused on catchup and being a fast follower to being a global innovation leader. In addition, all three economies, especially Korea and Japan, need to spur entrepreneurial development, as both economies overly rely on large multinationals for innovation advantage. These economies also need to focus more on overall productivity growth, including in all sectors, not just export-driven ones. This is particularly important because all three face the demographic challenges of declining birth rates.

For China, the challenge looks different. China is following the path of prior “Asian Tigers” to develop its innovation and advanced industry economy, but if history is any guide, it will soon need to pivot away from its current top-down, directive approach. Korea and Japan utilized a more or less top-down approach through the 1980s, and Taiwan through the early 2000s, but all three economies have shifted to a less interventionist approach and a more supportive approach for the role of government: less focused on picking narrow winners, and more on enabling more robust innovations from the private sector. To be sure, China can continue to grow, especially its advanced export sectors, through its current “brute force” policies of subsidies, closed markets, and forced technology transfer. But at some point, in order to catch up to the global frontier of innovation, China will need to make a shift from a centralized command-and-control NIS to a decentralized supportive NIS, although it may well face political conflicts for sure. Whether it can do that under the control of the Chinese Communist Party remains to be seen, as such a step will require more domestic freedom.

The United States is in a different position. As the current leader of global innovation, its challenges when it comes to innovation systems are both easier and harder. They are easier in the sense that the leader can build upon existing strengths, especially in private enterprises and research universities. It is harder at the same time because forging new paths is often riskier and more expensive than following the trend, which is exactly because of the vintage capital from previous investments and also because of the forces of inertia. In addition, leaders can get lazy, both in terms of companies and the nation overall. As Clayton Christensen has written about the “innovator’s dilemma”:

“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others.[4] Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more demanding segments, tend not to respond vigorously. Entrants then move up markets, delivering the performance that incumbents’ mainstream customers require while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption occurs.[5]

We have seen this in the loss of global leadership in once dominant companies, including Lucent, General Electric, the “Big 3” automakers, Intel, and others. In part, this was due to an inability or unwillingness of the leaders to both invest in the next-generation technologies at the pace of their competitors and to attack challengers coming up from below.

This conservativism applies not just to the company level but also to the country level. As we find in this report, the level of national “hunger” for innovation leadership is much higher in China, Korea, and Taiwan than in the United States and Japan. In the United States, in particular, a post-capitalist ethos is gaining, rejecting growth, and seeing innovation as problematic, not as manna from heaven. Although, as Korea and Taiwan continue to boost their innovation capabilities, they face this risk as well.

The United States faces another challenge that the four Asian economies do not: a commitment to Anglo-American neo-classical economics. In this view of economics, innovation is exogenous (“manna from heaven”) that the government can do little or nothing to promote, and so they do not. All industries are the same (“potato chips, computer chips: what’s the difference?”), so there are no sectorally-based policies to support particular industries. With the passage of the Chips and Science Act and the Inflation Reduction Act, both are beginning to change in the United States, but much less than many believe. Market fundamentalism still plays a very strong role in shaping the U.S. NIS. Indeed, there is little understanding that the United States even has an NIS that needs to be reshaped by government policy. Unlike the other four nations, there is very little government-driven analysis for innovation and industry promotion to assess the associated risks and opportunities.

The national innovation systems under the new global order are to be different from the past. The features of competition among global powers have changed. The competition between the U.S. and the Soviet Union was about security challenges based on ideology. The competition between the U.S. and Japan in the 1980s was about economic challenges, but they shared a similar value system. Upon the rise of China as a global economic power since the late 1990s, China has continued to pursue global hegemony by expanding its technology frontier in order to eventually expand its political as well as military frontiers. This created a new phenomenon of competition based on the so-called “economic security” among global powers and their alliance. The fundamental channel of global competition is now technology, neither the economy nor the politics alone. Thus, the coordination of national innovation systems, which are behind the realized technology development, has now become the key dimension of international cooperation, and forming the right coalition among the concerned nations is critical. We should understand and design a national innovation system from this perspective to adapt to this new global order.

Finally, the potential of a host of important technological innovations, including those based on genomics and related biotechnologies, AI, autonomous systems, and new materials, opens important opportunities for progress, including faster global productivity growth. It is critical to coordinate national innovation systems among nations sharing similar value systems and security stakeholders to take advantage of these opportunities and to expand the scope of potential innovations.

Full Report

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Endnotes