There Is No AI Race. Inside the Trillion-Dollar Lie

Digital Disruption with Geoff Nielson

This episode explores the global landscape of technological innovation, challenging the narrative of a U.S.-China AI race. Mehran Gul, author of The New Geography of Innovation, argues that

Key takeaways

• China's rise in tech was driven by large domestic companies (e.g., Alibaba, Tencent) that first monetized their market before investing in research—reverse of Silicon Valley's university-first model.
• The U.S. and China dominate innovation not because they're inherently superior, but due to deep, systemic ecosystems built over decades across multiple institutions.

Main topics

• Global innovation ecosystems
• U.S.-China tech dominance

Notable quotes

"The question really is, should they be worth one-tenth of what they're worth today?" – Speaker 2 on U.S. AI valuations.

"In China, the companies came first, then research departments, then universities." – On China's inverted innovation path.

Conclusion

True innovation ecosystems aren't built overnight or by chasing trends like AI hype. They emerge from

Transcript preview

Speaker 2 (0:01) I don't think you can argue with the fact that America has the best AI ecosystem in the world. The question really is, should they be worth one-tenth of what they're worth today? Should they be worth one-fifth of what they're worth today? And even if that is the answer, they're still more valuable than the Chinese tech ecosystem. They can be worth vastly less and still be the most technologically capable ecosystem out there. And maybe that is the systemic shock that they really need in order to sort of up their game. Speaker 1 (0:30) This is a show about the future of tech and the future of work. I'm Jeff Nielsen, and today we're diving into the future landscape of innovation with predictions for the U.S., China, and the rest of the world. My guest today is big brain Mehran Gol, author of The New Geography of Innovation, and with a rap sheet involving everyone from the World Economic Forum to Yale to McKinsey and the Financial Times. Look. It's no secret that with AI we're living in crazy times and the amount of investment we're seeing is somewhere between reckless and dangerous. Mehran agrees, but he doesn't particularly care. He thinks that the world has become such a two-horse race that American tech companies can lose most of their value and nobody other than China can even come close to catching up. What I love about Mehran is that he's a guy who sees the big picture. He's deeply researched the world's biggest tech companies and economies and has built a compelling model of how breakthrough technologies are taking over the world. I want to ask him what's happening now and what happens next. How dangerous is the bubble? What are different tech hubs getting right and wrong? And what do we need to do to build the next world-changing technology? Let's find out. Speaker 1 (1:47) Muran, thanks so much for joining today. Really excited to have you on the program here. You've written fairly extensively about what you call the geography of innovation. And for those who are not familiar with your work there, can you maybe just set the table a little bit in terms of what you've been writing about and what sort of your central thesis is there? Speaker 2 (2:04) So I started writing. So first of all, thanks so much for having me. It's a real privilege to be on the podcast. So I really started writing about this topic something like five, six years ago. And the idea was at that time, just this dissatisfaction with only talking about the US and China when we talked about technology. And I personally saw so many interesting companies around the world. Spotify is in Sweden. SK Hynix was recently a trillion-dollar company based in South Korea, TSMC in Taiwan. So for me, this was about kind of expanding the conversation beyond the usual suspects when we talk about tech. And there were some other questions that were kind of linked to that, which were, you know, if China could become technologically relevant so quickly, then why is it that other countries that would seem to be much more better positioned to be technologically relevant, like Germany, for instance, France, you know, plenty of other countries in Asia, India, why is it that these places are not taking as much headspace? as China is because in my view if China can do it anyone can do it because 25 years ago this was a very poor country and so it was really out of that kind of view that I thought it's useful to maybe look at technology from a more global perspective and see what's happening in Europe and Latin America in Canada and that's really what the genesis of the book was. Speaker 1 (3:30) So there's two ways you can potentially frame that question. You can frame it as, you know, why China? Or you can frame it as why not all these other hubs? And I'm curious, from your view and your research, which is the more appropriate framing and how would you answer the question? Speaker 2 (3:46) So I think why not other hubs becomes a much more complex question because then you have to pretty much answer 192 questions because Why it's not Germany is very different from why it's not India, right? And it's also, you know, Germany is a country that was very technologically capable 80 years ago. If we were having this conversation in the early 20th century, it would be right up there as one of the three most technologically capable countries in the world. So for Germany, the question is not, you know, why is it not a technology power to begin with, which is the question that we would ask about India. It is how did it lose relevance? And in India, the question becomes somewhat different, which is how come when we go to a place like the US, in every major tech company, so much of the workforce is Indian, so many of the CEOs are Indian, but in India itself, the tech industry really isn't producing that many globally relevant countries. So I think the answer to why was it China is much simpler than, even though it's Speaker 1 (4:51) a Speaker 2 (4:51) fairly complex sort of answer, but it's much simpler compared to the question. why are other countries not showing up which is a different answer for each region. Speaker 1 (5:00) So let's maybe tackle those sequentially. And to me, it's really interesting because, you know, I agree with you. We hear a lot about the U.S. and China. And when I think about the U.S. and I think about Silicon Valley, I mean, that to me is a story that's fairly straightforward. It's been a hub for many decades of, you know, hardware and software, and it just became a center of gravity. China hasn't. Right. And at least my sense is it's not. a one for one parallel of what happened in Silicon Valley. But so let's answer that question first. Why China? How has China been able to gain so much prominence so quickly? Speaker 2 (5:35) So I think China is almost sort of the inverse of a place like the Valley, for instance, where if you look at the genesis of the Valley, the answer sort of is from the beginning, it's more, you know, first there's Stanford, then there's defense contracts, then there's venture capital. And I really kind of try and trace the entire evolution of the valley in the book. In China, on the other hand, it wasn't really the universities that came first. It was really the big tech companies like Alibaba, Baidu, Tencent that came first. The companies came first, then they monetized their domestic market. Then it was research departments within universities, then the universities themselves. And I would argue that the state almost shows up. by accident at the end. People often tend to draw this distinction, which in my view is oversimplified between the US and China, that one is market driven, whereas the other happens to be very statist in character. But if you look at the most iconic Chinese tech companies, ByteDance, for instance, Alibaba, until recently, DeepSeek, in their origins, you don't really see the state. You could almost make as strong an argument. that the state is an obstacle to their development as that the state is helping them out. If you go back to 2020, 2021, you know, this is when the Chinese state had pulled the plug on Ant Financial, which at that point, had it gone public, would have been the largest IPO in history anywhere in the world. And, you know, Jack Ma couldn't show his face in public for two years. He had to go to Japan. And so, you know, and on the other hand, if you look at the US, also the picture of this is a completely market. driven economy is also a little bit muddled by the fact that you know right now 10 % of Intel is owned by the US state. You know, I'm old enough to remember that in 2009 there were these massive bailouts of both the financial sector and then later the automotive sector as well. So I think this distinction that we draw between these two economies as just being completely different on every single level that's maybe a bit sort of simplified. But to come back to your question How did the Chinese tech economy start? It was these large tech companies that came first, which really were structured under Silicon Valley law. In many instances, the venture funding came from Valley venture capital funds. And then from there, they worked their way backwards into creating the research institutions and then doing the science to a level where now Chinese science punches at the highest level globally. Many people... are not aware of the fact that of the 100 most cited papers in artificial intelligence today, 41 have Chinese authors, including the most cited paper in all of artificial intelligence, which is the paper called ResNet. So people often also have this misperception about China that they're good at the application layer or they're good at making products and services, but maybe not the science behind it. But I think all of that has changed a lot in the past three years. Speaker 1 (8:37) It's really interesting to me, and it's... very strongly, I guess, against the conventional wisdom and the narrative that, as you said, that there's just a lot of talk and a lot of taking for granted that it is state-driven. The reason is the state came in, they dropped huge amounts of capital, and that's why China has this sort of unfair advantage there. And to me, the way you describe it is actually a lot more interesting because, at least if I'm processing it correctly, it feels like in some ways that should be more replicable for other countries for other innovation hubs. So let me maybe frame it this way. What are the lessons then that other countries and other innovation hubs can take away from that sort of Chinese model and that Chinese growth? Speaker 2 (9:21) I think you sort of pointed at something that's really sort of important, which is you can't explain everything in terms of the state because the state everywhere helps the tech industry, right? I mean, in Russia, you had this Kolkovo Foundation that was trying to create a tech hub. didn't quite work out. Even in the US, you know, if you look at Stanford, you know, just 100 years ago, it was a pretty average school. And, you know, it was not nearly anywhere near as prestigious as it is today. Most people trace Stanford's prestige back to right after the Second World War, which is when its provost, Fred Terman, started soliciting defense contracts from the US government. So that is another form of the state helping out a university. becoming sort of what it is today. But at the same time, you know, it's not as if the U.S. state only gave money to Stanford. It was also giving money to Harvard. It was also giving money to MIT. But at the same time, Stanford created a much better environment for startups around it than other universities that were also getting state funding. So, you know, state as a determinant is maybe often over-explained in terms of how important that is. Now, how does China sort of play into it? I think the main thing that... I came out with at the end of the analysis, not just of China, but of other places as well, South Korea, Switzerland, Sweden, was it's not really one formula that applies everywhere. You know, in some places, the state does play a big role. In other places, it was things such as, you know, private initiative. You know, if you look at a place like Germany, for instance, it's really their small and medium enterprises where you find most of the most innovative things happening. You know, we talk about the Boring Company, Elon Musk's sort of, you know, fourth or fifth venture. It's worth about $7 billion today. But there is a German company called Heron Connect, which has done thousands of projects more than the Boring Company. If you're trying to build a subway in Doha, Qatar, for instance, you would, any technical expert would always, almost always turn to Heron Connect rather than to the Boring Company. And so over there, it's really these private and these small and medium enterprises that are driving innovation forward. So I think the benefit of having a comparative approach is exactly that, that you can begin to see innovation as something that doesn't necessarily happen with the Silicon Valley formula. It can happen in other ways as well. In the US, for instance, people have kind of given up on the idea that old companies can innovate. IBM, Xerox, nobody expects them to be at the technological frontier. But if you go to a place like Korea, it is exactly these older companies, some of them over 100 years old, Samsung, SK Hynix, Hyundai, that are at the very forefront of areas like semiconductors or foundation models. So I think, you know, if from China, we can get this idea that, you know, it was companies monetizing the local market, and then from there working their their way backwards to creating universities and research divisions. If you widen the aperture to other countries, you can see that people have been doing it in all sorts of different ways. Speaker 1 (12:39) If you don't work in enterprise technology, you can skip ahead or take a quick braincation. But if you do, InfoTech is your secret weapon. InfoTech helps IT teams get projects done faster, better, and at a lower cost. Whether you're rolling out new tech, improving processes, or just looking for cost savings, InfoTech provides unlimited access to practical tools and expert guidance you need to execute at a fraction of the cost of traditional consulting. No matter the project, from AI strategy to cybersecurity to vendor negotiation, Infotech has you covered. Check it out at the link below and don't forget to like and subscribe. There's an awful lot I want to unpack there around these different determinants, the different geographies and what they're doing right and the structure supporting them. But just before we do, can we just unpack for a minute what is meant by innovation? When you talk about the geographies of innovation, I mean, I think listening to this, there's an inherent notion of, OK, doing new things, tech. How do you define it and what do you need to understand about innovation to make sure that you're kind of up to speed and able to participate fully in this conversation? Speaker 2 (13:50) So the most important question, right? And this is my entire chapter one is devoted entirely to this question. What does it even mean to say that we're going to take a tour around the most innovative countries in the world? Does it? I mean, our current conception has. almost sort of reduced it to saying who has the most number of billion dollar startups. And it might be one important measure, maybe for a venture capitalist, that's the most important way to look at it. But in my book, for instance, I look at three different ways to look at the same question. The first one is this venture capital way of looking at it and saying, who's creating the most number of unicorns? Because say five years ago, six years ago, that was the most fashionable way of asking, what's the most innovative place in the world? The most obvious drawback to saying, you know, we're only going to look at valuable startups is that, you know, innovation doesn't just happen in new companies. Today, the most important, the most valuable company in the world today is NVIDIA. And nobody would say it's a startup. Nobody would say it's a new company. You know, it's almost 30 years old now, more than 30 years old, which would make it, by American standards, a middle-aged company. And, you know, so you have to look at old companies and new ones as well. So in my book, I look at, you know, most innovative places as measured by the number of unicorns there. The most important and the most innovative places as measured by the total market cap of all tech companies based there, which I think shows a very unequal picture of the world where the US would be something like, you know, $30 trillion in total market cap. China would be barely $5 trillion. Europe would be something like $2 trillion and the rest of the world would be just about marginal. And the third one is to maybe look at it beyond just the question of tech valuations in general. And the World Intellectual Property Organization, which is a UN body, comes out with a global innovation index, which places Switzerland on top, Sweden second. And then counterintuitively, the US comes in third and China comes in 10th in that ranking. And so over there, they really look more at things like how many patterns are you producing? How many STEM graduates are coming out of your universities? And so that's a much more multifactorial way of looking at it. I think all three approaches have limitations. But I agree with you that we need to at least be asking this question more. You know, what does it even mean for a place to be innovative? I think all three answers that I present in the book are partial answers. And that's why I've used them as three different entry points into answering the same question. Speaker 1 (16:20) I like that approach and I like having a multifaceted approach. One of the concerns I've had in the past with this kind of unicorn labeling is if we're talking about valuation versus, you know, let's say revenue or annual recurring revenue to me. You know, we're sort of stepping away from how much value is this company actually creating versus what's the ecosystem of capital available. And it seems like it almost becomes a proxy for density of VCs or of, you know, financial institutions floating around and creating excitement around this. You know, what's your reaction there? Is revenue another piece that we should be looking at? Or are there more systemic reasons why we should be looking at the valuation itself? Speaker 2 (17:04) I think valuations are a partial way of looking at it. I'll maybe reframe sort of your question or the answer to your question in another way, which is I think people often look at the fact that, you know, companies like OpenAI and Anthropic are now worth a trillion dollars. And there really isn't any company, even in China today, that reaches that scale. You know, if NVIDIA is five trillion, the most valuable company in China, listed company in mainland China today is... CXMT, which recently made its public debut, which is only about half a trillion dollars, right? And to a layperson, that might be, and the companies that we're talking about most recently, like for instance, Moonshot, these would be 20 billion, $30 billion companies, which would benchmark to AI companies in America that nobody would even have heard about because all the companies that we talk about, Databricks. These are all hundreds of billion dollars or trillions of dollars worth in value now. But I think the important thing over there is that company valuation is not just a reflection of how good your company might be or how good its prospects might be. But it's at its basic level a reflection of how much capital you have available in your environment. So in places like the US, capital from all over the world is chasing companies in the US. So that's why they end up having these inflated valuations. Now, how valuable would a company like Samsung be if it was listed in the US? How valuable would a company like BYDB, which at this point sells more EVs than Tesla, if it was listed in the US? Same for companies like Huawei, a bunch of other companies that I can mention. So, you know, this purely numerical assessment of saying a company is worth this much in the US and another company is worth a fraction of that in China. doesn't mean that their relative capacities are that much different as well. The problem really becomes when you look at the limitations of this way of measuring innovation. And then if you say, well, we're going to come up with an alternative way of measuring innovation. All the other alternatives that I've seen are also heavily, I mean, they have a lot of issues as well. If you look at WIPO's index, for instance, which is the most cited innovation index in the world, you know, just on... Just as even as a layperson looking at it, you would say that there's something not quite right here, because even if you say, I agree that it should be a multifactorial assessment, seven out of 10 of the most innovative countries, according to WIPO, are based in Europe. And yet, if you asked European