The new geography of innovation and the role of Europe

On September 10, after devoting the first intense part of her State of the Union address to Ukraine and Gaza, European Commission President Ursula von der Leyen switched topics and began speaking about competitiveness. This prompted murmurs of disapproval in the Strasbourg chamber, particularly from the left benches—as if moving from an unresolved tragedy to the “same old soup,” with little respect for the former.

In reality, however, Europe’s impotence—evident in Gaza but also in Kyiv, where, despite massive EU financial contributions, much of Ukraine’s present and future destiny is tied to the United States—owes much to the lack of past investment in critical technologies. This deficit has simultaneously weakened Europe’s competitiveness and increased its dependency on other countries, starting with the U.S. and China (but also Russia, in the case of energy supplies for certain member states). If European are unable even to recognize this, it will be impossible for them to find the right solutions.

Von der Leyen’s speech contained several proposals, including the Scaleup Europe Fund, envisioned with several billion euros to invest in fast-growing companies in critical technology sectors; the creation of an industrial accelerator for strategic sectors; and other measures already announced, such as AI gigafactories, a so-called “28th regime” for innovative startups, European preference in public procurement, and omnibus simplification measures that in the coming months will cover, alongside military mobility, also digital initiatives.

Yet, as Mehran Gul writes in his recent book The New Geography of Innovation, the competition among countries to become the next technological superpower is not so much between different models as between different intensities of the same model. That model is essentially a combination of industrial policies—driven by agencies like the American DARPA and other forms of direct and indirect innovation support (including a world-class university system)—and the commercialization of innovation through startups and private enterprises. The European Union and some of its member states have moved closer to this model in recent years, but they have done so too timidly to emerge as credible competitors to the two giants: the U.S. and China.

The New Geography of Innovation

In his book, Gul travels to many of today’s innovation hotspots to see whether true alternatives to Silicon Valley might emerge. The Valley has not only survived but repeatedly led the world in waves of technological change over the past seventy years—from transistors to microchips, from the PC to the internet, and now to artificial intelligence.

Its astonishing ability to continually reinvent itself is due to a mix of factors:

• Today world class universities such as Stanford University, once an obscure private school founded in 1884, were transformed—thanks to figures like Fred Terman in the 1930s and 1940s—into hubs of engineering excellence, serving the entrepreneurial and technological culture of the region.

• The rise of venture capital, which revolutionized not only finance but also culture—favoring risk-taking and backing young outsiders with eccentric yet disruptive ideas, often rejected by traditional funding mechanisms.

• AnnaLee Saxenian’s famous doctoral thesis in the 1990s, contrasting Boston’s Route 128 with Silicon Valley, argued that California’s weak enforcement of non-compete agreements gave the Valley an edge: workers could leave a company overnight and bring their know-how to a new or rival venture. This dynamic continues today, with tech giants spending millions or billions to acquire top AI talent.

The ability to attract the world’s best talent remains a hallmark of the American model. As Gul puts it: while “China selects its talent from one billion people, the U.S. does so from eight billion”—in other words, from the entire global population. This enormous advantage—over China and any other country—is now being seriously endangered by America’s current administration for the first time in its history.

The book does not record this latest trend, but, citing another Republican president, highlights the shift. In a farewell speech just before leaving the White House, Ronald Reagan said: “While other countries cling to stale pasts, here in America we breathe life into dreams. We create the future, and the world follows us into tomorrow. Thanks to every wave of new arrivals to this land of opportunity, we are forever young, forever bursting with energy and new ideas, always at the forefront, always leading the world to the next frontier. This quality is vital to our future as a nation. If we ever closed the door to new Americans, our leadership in the world would soon be lost.”

Gul emphasizes that talent attraction is critical for countries without a billion-plus domestic pool. The UK—thanks to language and world-class universities—is the top destination after the U.S. for international students, though its innovation model is excessively concentrated in London. Switzerland, though outside the EU, also thrives through internationalization, with top universities and world-leading companies, especially in pharmaceuticals. Beyond Europe, Singapore and Canada stand out: Singapore has integrated foreign talent directly into its civil service, turning government into an innovation engine; Canada has long hosted three of the world’s top AI scientists—Geoffrey Hinton, Yoshua Bengio, and Richard Sutton—who helped establish world-class AI research hubs in Toronto, Montreal, and Edmonton, spawning vibrant ecosystems.

Despite many such success stories—from Germany and Sweden to South Korea and, of course, China—Gul concludes that Silicon Valley is unlikely to be supplanted anytime soon. Many national ecosystems (notably South Korea and Sweden) have risen in collaboration with, rather than in competition against, the Valley, further reinforcing its dominance.

China vs. the U.S.: Engineers vs. Lawyers

Another recent book sparking debate in the U.S. is “Breakneck” by Dan Wang, a tech expert born in China, raised in Canada and the U.S., and later resident for six years in Hong Kong, Beijing, and Shanghai. Wang contrasts the engineering-driven Chinese system, focused on building fast, with the lawyer-dominated American system, focused on legal processes and vetoes.

He illustrates with high-speed rail:

• In 2008, California voters approved a San Francisco–Los Angeles line. Nearly twenty years later, it remains unfinished, with costs soaring from $36 billion to $128 billion.

• In the same year, China started the Beijing–Shanghai line, of similar length. It opened in just three years, at a cost of $36 billion.

For Wang, this contrast reflects broader truths: America’s legalistic system often blocks housing and infrastructure, raising costs and stifling manufacturing. China, by contrast, has become the world’s factory—though its engineering mindset, dominant among leaders (including Xi Jinping), also produces aberrations, from the one-child policy to zero-Covid strategies.

Still, while China excels at rapid incremental innovation (adopting and scaling technologies like 5G, clean tech, and AI developed elsewhere), the U.S. and others retain the lead in radical innovation, as Nobel Prize counts attest. Yet both Gul and Wang suggest this gap could eventually close.

Europe’s Role in the U.S.–China AI Competition

Against this backdrop, Europe struggles even to act as the sum of its parts. There is no true single market: von der Leyen herself admitted this, citing IMF data showing average internal EU non-tariff barriers of 45% for goods and 110% for services—far higher than U.S. tariffs of 15%. There is also no unified industrial policy. Instead, Europe has produced a patchwork of underfunded, timid instruments lacking the scale and courage needed.

Thus, more than from von der Leyen’s otherwise reasonable but incomplete speech—too weak in pushing Member States toward shared strategies and investments in key technologies—hope comes from two recent developments, alongside the contradictions of the U.S. and China highlighted by Gul and Wang.

• 41 European companies and associations signed a declaration urging ambitious public-private AI initiatives to build a European value chain.

• In an unrelated move, Dutch giant ASML and French AI startup Mistral announced a landmark deal: ASML became Mistral’s largest shareholder, investing €1.3 billion in a €1.7 billion funding round.

This is an important development between companies from different countries, occupying different roles in the ecosystem, but also showing Europe’s potential. Mistral is targeting the business market, with contracts worth €1.4 billion so far, over half with European clients (mostly French).

Deals like ASML–Mistral and joint industry declarations show that Europe’s major companies in strategic sectors must be used as anchors to scale up private investment, alongside significantly greater public investment, ideally through common EU mechanisms.

If Europe can do much more, and do it quickly, along these two lines, then the AI challenge—and more broadly the innovation race—need not be lost.