The shifting global geography of innovation

By Riccardo Crescenzi, Simona Iammarino, Carolin Ioramashvili, Andrés Rodríguez-Pose and Michael Storper, London School of Economics & Political Science, Department of Geography & Environment

The geography of technological innovation around the globe has changed over the last three decades, and with it the geography of wealth creation. Innovation has become simultaneously more globally spread across different parts of the world, and more intensely localised in strongly interconnected global hotspots, generating positive and negative effects and new kinds of inequality.

Since the 1st Industrial Revolution, innovation has not only been a motor of economic growth; it has also strongly shaped (un)equal geographical patterns of development and income distribution. Each successive major industrial revolution has had its own distinctive geography. The 2nd Industrial Revolution – broadly based on electro-mechanical general-purpose technologies – witnessed the entry of North America into the high-income club of the world, while broadening the industrialised regions of Europe. The benefits spread widely through the territories of innovative countries, down their urban hierarchies, generating a tendency of inter-regional income convergence in the mid-20th century.

More recently, a 3rd Industrial Revolution – involving information and communication technologies, life science and bio-technologies, financial engineering, and breakthroughs in transport and logistics – began around 1980; and a 4th Industrial Revolution is possibly here or on its way. The geography of innovation has shown two only apparently contrasting trends, labelled concentrated dispersion. In other words, the global spread of technology development across countries has been associated with a strong concentration of a hub-to-hub systems of globally connected locations.

“The global spread of innovation has occurred also through national innovation policies, that have succeeded in building world-class innovation systems in a set of formerly middle-income economies.” #DevMatters

The geography of economic development during this period has also undergone some significant changes. Development has spread on a global scale, starting with a set of rapidly developing Asian economies that are now in the high-income group, including South Korea, Taiwan and Singapore. Subsequently, a set of large emerging economies has risen into the global middle-income core, with China being the largest among them. This clearly signals the spreading out of global development, although, with the exception of China, the hierarchy of world per capita income has not converged over the past few decades, as high-income countries have succeeded in reproducing their wealth position through sustained innovation.

Despite the global spread of economic development, many countries – including the rich at the top of the global wealth hierarchy – are witnessing increasing inter-regional polarisation of income and opportunity, manifested in the rise of superstar cities and left-behind regions, spatial concentration of skilled workers, and a rise in urban wage premiums for those workers. This is a different geography of income distribution from before the 1980s, when in most advanced countries inter-regional convergence had been occurring since the 1940s, evening out the landscape of wages, skills, opportunities and amenities. As such, the current situation is known as “the great inversion”.

The dispersion of innovation

In the 1st and 2nd industrial revolutions, knowledge and hardware circulated extensively across national borders. The difference today is that knowledge does not just diffuse but is created in collaboration, often involving the co-development of technologies across space, both within and between firms. Among the drivers of the dispersion of innovation activity worldwide are multinational enterprises (MNEs), based in developed economies and, increasingly, in some emerging countries. Moreover, the global spread of innovation has not only occurred via global production and innovation networks, but also through national innovation policies that have succeeded in building world-class innovation systems in a set of formerly middle-income economies. These include South Korea, Taiwan, Singapore, Israel and – more recently – China and India.

To document the shifting global geography of innovation, we use patent records from the OECD REGPAT database for the period 1980-2016. The integration of East Asian economies into the world innovation landscape is evident in Figure 1, starting with Japan in the 1990s. In the early 2000s, patenting activity in South Korea took off, albeit on a flatter trajectory than Japan’s. From the mid-2000s, China entered the picture, with subsequent exponential growth. Despite the rapid growth in patenting in these countries, North America and Europe continue to hold their dominant position. Germany is plotted on a separate line to the rest of Europe, bringing the total European contribution to a similar level as North America. What is also clear from Figure 1 is that patenting activity in other emerging economies is still lagging far behind the incumbents and the new East Asian stars.

Figure 1

The concentration of innovation

While innovation activity is growing outside the traditional centres of the US and western Europe, this dispersion is uneven. It is principally confined to some urban areas and industrial clusters in some countries. Innovation, like any leading edge of the economy, has always had geographical concentrations or hotspots: Manchester was to the 1st Industrial Revolution what San Francisco is to the 3rd. Yet, in the decades around 1940-1980, such geographical concentrations diminished, and innovation spread within the advanced economies.

“The geography of innovation must engage debates about firm strategies, market power, efficiency, rent-seeking, and income and opportunity distribution within and between countries.” #DevMatters

Currently, despite global dispersion, there are strong agglomeration forces at play that result in clustering of innovative firms and institutions. This spatial concentration is mirrored in that of R&D, university graduates and science, engineering and technology workers. Superstar cities are often key nodes in worldwide production, technology and trade networks. They are the primary homes and hosts of major MNEs and the true beneficiaries of globalisation, being centres of political influence, corporate monopoly, technology generation and exchange, skills and jobs. But their prosperity is accompanied by high levels of income inequality, spatial segregation within them, and a growing split with the left-behind regions.

Figure 2 shows the massive shifts in the global geography of patenting in the 1990s and 2010s. Even if the regions included in the REGPAT database are of different sizes, population counts and economic functions, the chart shows that between 1990 and 1994 California was by far the most important hotspot in the world as measured by the total Patent Cooperation Treaty (PCT) patent count. Beyond that, there were many North American and European regions – as well as Southern Kanto in Japan – with relatively similar levels of patenting, at around a third of that of California. Many traditional manufacturing regions, such as North Rhine Westphalia, Pennsylvania and Ohio were among the top innovating regions. This changed dramatically within twenty years. The lower panel of Figure 2 shows the top patenting regions in 2012 to 2016. California was overtaken by Southern Kanto and Guangdong. The top three are followed with a small gap by the capital region of Korea, Kansai, Toukai (both Japan) and Beijing. Only then do the next North American and European regions appear, including Bavaria, Baden-Wurttemberg, Texas and Massachusetts. This illustrates both the global spread of innovation to emerging East Asian hotspots, and the relative decline of innovation hotspots that were also manufacturing clusters.

Figure 2

Understanding inequality

Concentrating innovation in a smaller number of bigger and more specialised regions at both national and international scales can possibly raise the overall economy-wide rate of innovation. But if innovation activity concentrates, it can make it difficult for other regions to become innovative in the future. The geography of innovation is ultimately not just about spatial distributions of technological advances, but must engage debates about firm strategies, market power, efficiency, rent-seeking, and income and opportunity distribution within and between countries. We still know too little about the geography of positive and negative effects of new kinds of inequalities, and how they unfold over generations.

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