ASIA
08 January 2026
Technology, Innovation, And The Fate Of Nations
The economic future of both China and the US look problematic.
How could the Soviet Union and Japan enjoy rapid spurts of catchup economic growth in the early postwar period, and seemingly challenge the dominance of the US, only to then descend into economic stagnation?
In his recent book, How Progress Ends : Technology, Innovation, And The Fate Of Nations, Carl Benedikt Frey proposes answers to these questions and many more, including speculations about the economic futures of China and the US.
Frey, a professor at the University of Oxford, offers an historical analysis of innovation and technology going back more than 2,000 years, which provides the framework for his argument. He distinguishes between “catchup growth” by which a backward economy can absorb the technology and knowhow of world leading economies, and “innovation-driven growth” which takes an economy beyond the global technological frontier.
The Soviet Union, Japan and even Europe were very effective at catch-up growth during the postwar period. They had centralised economic systems which were effective at mobilising resources. In the Soviet Union virtually every industry from railroads to steel was managed by line vertical ministries from Moscow. No place did “coordinated capitalism” more successfully than Japan. And with the benefit of the Marshall Plan, Europe recovered strongly from World War 2.
But all three struggled to do beyond catch up growth. The Soviet Union was not ready for the computer age. Japan missed the transition from hardware to software, while its economy was dominated by large conglomerates. Europe, despite being the cradle of the industrial revolution, now has very few advanced technology companies, and is failing to catch up in the digital space. Frey dismisses the role of geography and culture as factors determining the fate of nations – in all of these cases, countries had the same geography and culture during periods of high growth and stagnation.
To avoid economic stagnation requires economic decentralisation, both within firms and the economy more broadly. Researchers and others down the ladder who work directly with technology must be given the opportunity to develop new ideas and for those ideas to be taken seriously, something which is not the case in hidebound centralised systems. Decentralised organisations also do better during periods of rapid technological change.
But decentralised organisations are not sufficiently common. Frey recounts the painful and circuitous route that researchers had to take, and the resistance they encountered, in developing the mRNA molecule. And yet this ultimately provided the basis for many antiCovid vaccines. One of the reasons why US firms did better in terms of productivity during the computer revolution was that anti-trust policies improved the competitive environment. Further, the US system was more decentralised, with people at lower levels having more decision making autonomy.
According to Frey, there is a common misconception that much of China’s catchup was engineered from Beijing. In reality, there was a substantial degree of decentralisation as provinces and counties could experiment with different policies as China began to open up, and thereby compete with each other. Beijing did maintain control over personnel, rewarding successful officials.
Chinese industrial policy at the national level is actually a fairly recent phenomenon, which took off around 2006. Indeed, in recent years Beijing has been pivoting more towards centralisation notably through a clampdown on technology firms. The government has taken stakes in a wide range of technology companies, as a means of controlling them, and state-owned enterprises are once again becoming more prominent in the Chinese economy. All of this has been a drag on growth.
In sum, the Chinese model is beginning to run out of steam. Productivity and growth are stagnating at lower levels of development than occurred in the historical development of Japan, Korea and Taiwan. The economy has been dependent on the fragile real estate sector which accounts for one-third of GDP. Frey is worried about China’s system where political connections matter a lot, there is little accountability and great resource wastage.
The most inventive firms are those that fly under the radar. But even they must build up some political capital to have a seat um at the table when priorities change. To pursue innovation-driven growth, China must embrace the imperative of creative destruction, by allowing declining companies and sectors stand aside and enabling dynamism and innovation to lead the way.,
The US has been able to maintain its position of technology and innovation leadership thanks to its economic dynamism. The five largest US firms by market cap are on average 39 years old, while in other advanced economies like France and Germany, they are more than 100 years old. In France, they are mostly in the luxury goods sector, while in Germany they are mostly firms of the second industrial revolution (not the fourth industrial revolution of today).
But American dynamism cannot be taken for granted. Since the bursting of the dot-com bubble over 25 years ago, the US has also experienced a slowdown in dynamism and productivity growth. One reason is that incumbents have been lobbying for protective regulation and antitrust policy has been lax.
Incumbents have also been employing a relatively wide range of anti-competitive practices such as through a revolving door between incumbent firms and parts of the state bureaucracy, and killer acquisitions whereby incumbents buy up promising startups only to shut them down. And then there are the adverse effects of high levels of market concentration, as well as President Trump’s tariffs, restrictions on immigration and cuts to funding of scientific research.
Can AI reverse this trend? Frey believes that the impact of AI will likely be less than most imagine. He also says that it depends on how we use it and whether we can restore a competitive economic environment.
In conclusion, Frey is not predicting the decline of the United States or even China. Both economies have in the past demonstrated a capacity for reinvention. But he reminds us that history shows that nothing lasts forever. Moreover, with economic strength being the basis for political power, this issue has potentially major geopolitical implications.
In his recent book, How Progress Ends : Technology, Innovation, And The Fate Of Nations, Carl Benedikt Frey proposes answers to these questions and many more, including speculations about the economic futures of China and the US.
Frey, a professor at the University of Oxford, offers an historical analysis of innovation and technology going back more than 2,000 years, which provides the framework for his argument. He distinguishes between “catchup growth” by which a backward economy can absorb the technology and knowhow of world leading economies, and “innovation-driven growth” which takes an economy beyond the global technological frontier.
The Soviet Union, Japan and even Europe were very effective at catch-up growth during the postwar period. They had centralised economic systems which were effective at mobilising resources. In the Soviet Union virtually every industry from railroads to steel was managed by line vertical ministries from Moscow. No place did “coordinated capitalism” more successfully than Japan. And with the benefit of the Marshall Plan, Europe recovered strongly from World War 2.
But all three struggled to do beyond catch up growth. The Soviet Union was not ready for the computer age. Japan missed the transition from hardware to software, while its economy was dominated by large conglomerates. Europe, despite being the cradle of the industrial revolution, now has very few advanced technology companies, and is failing to catch up in the digital space. Frey dismisses the role of geography and culture as factors determining the fate of nations – in all of these cases, countries had the same geography and culture during periods of high growth and stagnation.
To avoid economic stagnation requires economic decentralisation, both within firms and the economy more broadly. Researchers and others down the ladder who work directly with technology must be given the opportunity to develop new ideas and for those ideas to be taken seriously, something which is not the case in hidebound centralised systems. Decentralised organisations also do better during periods of rapid technological change.
But decentralised organisations are not sufficiently common. Frey recounts the painful and circuitous route that researchers had to take, and the resistance they encountered, in developing the mRNA molecule. And yet this ultimately provided the basis for many antiCovid vaccines. One of the reasons why US firms did better in terms of productivity during the computer revolution was that anti-trust policies improved the competitive environment. Further, the US system was more decentralised, with people at lower levels having more decision making autonomy.
According to Frey, there is a common misconception that much of China’s catchup was engineered from Beijing. In reality, there was a substantial degree of decentralisation as provinces and counties could experiment with different policies as China began to open up, and thereby compete with each other. Beijing did maintain control over personnel, rewarding successful officials.
Chinese industrial policy at the national level is actually a fairly recent phenomenon, which took off around 2006. Indeed, in recent years Beijing has been pivoting more towards centralisation notably through a clampdown on technology firms. The government has taken stakes in a wide range of technology companies, as a means of controlling them, and state-owned enterprises are once again becoming more prominent in the Chinese economy. All of this has been a drag on growth.
In sum, the Chinese model is beginning to run out of steam. Productivity and growth are stagnating at lower levels of development than occurred in the historical development of Japan, Korea and Taiwan. The economy has been dependent on the fragile real estate sector which accounts for one-third of GDP. Frey is worried about China’s system where political connections matter a lot, there is little accountability and great resource wastage.
The most inventive firms are those that fly under the radar. But even they must build up some political capital to have a seat um at the table when priorities change. To pursue innovation-driven growth, China must embrace the imperative of creative destruction, by allowing declining companies and sectors stand aside and enabling dynamism and innovation to lead the way.,
The US has been able to maintain its position of technology and innovation leadership thanks to its economic dynamism. The five largest US firms by market cap are on average 39 years old, while in other advanced economies like France and Germany, they are more than 100 years old. In France, they are mostly in the luxury goods sector, while in Germany they are mostly firms of the second industrial revolution (not the fourth industrial revolution of today).
But American dynamism cannot be taken for granted. Since the bursting of the dot-com bubble over 25 years ago, the US has also experienced a slowdown in dynamism and productivity growth. One reason is that incumbents have been lobbying for protective regulation and antitrust policy has been lax.
Incumbents have also been employing a relatively wide range of anti-competitive practices such as through a revolving door between incumbent firms and parts of the state bureaucracy, and killer acquisitions whereby incumbents buy up promising startups only to shut them down. And then there are the adverse effects of high levels of market concentration, as well as President Trump’s tariffs, restrictions on immigration and cuts to funding of scientific research.
Can AI reverse this trend? Frey believes that the impact of AI will likely be less than most imagine. He also says that it depends on how we use it and whether we can restore a competitive economic environment.
In conclusion, Frey is not predicting the decline of the United States or even China. Both economies have in the past demonstrated a capacity for reinvention. But he reminds us that history shows that nothing lasts forever. Moreover, with economic strength being the basis for political power, this issue has potentially major geopolitical implications.