Technology Innovation in a World of Growing International Disorder

India’s banning of TikTok, surging hyper-nationalism, the US’ withdrawal of funding from the WHO, the US / China trade war and more: all signs of a rapidly shifting global world order distinct from the liberal, US-led order within which Silicon Valley has grown up. Today’s Innovation Armory piece discusses the implications of the shifting global order on technology innovation and investing.

Next week’s piece: “Beyond Network Effects: The Power of Community Effects” discusses how numerous platforms with network effects no longer serve the purpose for which they were created: fostering meaningful digital connections. Over the next decade, the biggest digital winners will channel “Community Effects” through vertically-focused digital community niches and community marketplace infrastructure and monetization tools.

Silicon Valley, as the world knows it today, has grown up under the post World War 2 world order established by the United States after the victory of the Allied powers. The first personal computer was not even created until the 1970s. The technological innovation that followed WW2 and the Cold War has flourished under a liberal world order, led by the United States as hegemon and maintained at global scale. There are signs that this political order is and will continue to rapidly change, which could have meaningful implications for the technology community and the way we innovate.

I recently read Disunited Nations: The Scramble for Power in an Ungoverned World by Peter Zeihan. He argues that given the relative world peace of the last 6-7 decades (relative to centuries prior), we have largely grown accustomed to a US-protected world order and have forgotten that throughout history competing empires and regional nation-states have fought for power without the security guarantees of a global hegemon such as the US. The post-WW2 global order marked a temporary pause to the larger-scale conflict-based geopolitics of the prior hundreds of years. Most other nations agreed to participate in the liberal world order because the US pledged to leverage its world-class navy and military to provide security and safety guarantees for all of the world’s supply chains and naval routes, enabling an era of never-before seen global trade flows. For these agreeable countries, compared to the age of competitive geopolitical empires, it was as if they had been gifted for free massively improved resource access and independence guarantees. The US made these pledges to sway countries to join its ideological fight against the Soviet Union. The collapse of the Soviet Union marked the end of the strategic necessity of these guarantees. Zeihan argues that this world order was never about free trade, but that free trade was the bribe or carrot to glue together the Cold War alliance. Today, the US is actually the least integrated of the major economies. The below chart shows trade (export + import) / GDP ratios by country for the top 20 economies by GDP size. 

The exposure of the top 20 median economies to world trade flows (62%) is greater than 2x that of the US. Plus, much of the US globaltrading exposure is to Mexico and Canada, 2 of its top 3 largest trading partners with whom the US can conduct land-based commerce without use and security enforcement globally of naval and sea lanes. The US also has one of the world’s best geographies: sea distance from enemies, vast river network, vibrant agricultural lands, shale, natural resources and optimal weather conditions for green energy to adapt to isolationist politics (unlike some of its contemporary peers). Post Cold War, the liberal world order has less of a “reason to be” from the perspective of the US and we are seeing the signs of a potential unraveling of this order before our eyes. We currently live in a world of growing hyper-nationalism and international relations tensions where the US is increasingly taking a more isolationist stance in world affairs:

• President Trump withdrew from the WHO amidst the COVID-19 pandemic

• Trade tariffs on China and presidential candidate Joe Biden’s proposed “Buy American” economic policy

• COVID-19 Visa bans and repeated attempts by the Trump administration to restrict immigration from numerous countries

• Notification that the US will withdraw from the UN Paris Climate Accords

• United States withdrawal from the Joint Comprehensive Plan of Action restricting Iran’s nuclear program

• Affirmation of the US’ commitment to withdraw troops from Iraq in the face of a continued regional threat by ISIS

• Withdrawal from the Transpacific Partnership, opting instead for select bilateral trade deals, i.e. with South Korea and Japan

• Elimination of US membership with the UN Human Rights Council

Outside of the US, there are also alarming signs of stressors to global collaboration, rising international conflict, nationalist isolationism and populism / hyper-nationalism. A few of these signs include:

• Declining European cooperation marked by Brexit and the potential for economic spillover effects to further weaken or collapse the EU

• China’s increased assertiveness, recently evidenced by the border clash between China and India

• Russian attempts to erect a virtual firewall to isolate the Russian internet and censor its population and threats from other authoritarian governments to implement similar systems

• The rise of Modi in India and his policies that prioritize Hindu nationalism

• An increasing number of right-wing populists taking significant power abroad including in Brazil, Austria, Philippines and numerous other nations

• Increased Iranian, Turkish and Saudi Arabian assertiveness in the Middle East as the US is withdrawing troops

The purpose of this piece is not to argue exactly how the global order will change or when dramatic shifts may happen. Rather it is to make the case that there is a plausible argument that US isolationism paired with rising nationalism and populism could end the liberal and relatively peaceful US-led world order that the global technology industry has benefitted from in the modern era. If and when it arrives, this new world order will see a dis-engaged US (unless directly threatened by a regional power), rising power of select regional hegemons, selective bilateral trade engagement and increased political disorder relative to the recent period of multilateral global institutions. The potential economic fallout of COVID-19 has the potential to accelerate damage to the already fragile global order. How should investors and founders think about the potential political and economic effects and risks of the end of the liberal global order and of the global disorder that follows?

Below I list a couple of thoughts related to technology investing and the realm of technological innovation:

National Security Technology Upside Asymmetry

Certain technologies will be more important to national security and provide nations self-sufficiency in critical areas such as food security and energy independence. In his book, Zeihan cites energy independence, food security, demographic structure (age distribution), natural borders and military might as important criteria for understanding which nations will thrive in the coming age of global disorder. Investments along these areas that are controllable by technology will benefit not just from existing private sector growth trends but also increased government backing as these investing categories are increasingly associated with national security. For example, renewable energy technology will be important for certain countries to offset potential reduced access to foreign energy markets as declining naval lane protection could impact the flow of energy inputs. In addition, synthetic meat, urban farming, agricultural technology and food procurement marketplaces all help improve intra-national food security. The point is not to choose to invest in a category solely on this political basis, but rather to consider which categories are already growing but have asymmetric upside potential from a national security use case if there were to be a shift in the political order. See below an illustrative example for lab-grown meat market for a hypothetical country dependent on global agricultural inputs for its food security:

In this case, an existing trend (consumer focus on environmentalist ethics) was already benefiting the market. The shift to a post-liberal global order could accelerate the industry’s growth for national security reasons and create asymmetric upside as lab-grown meat would become key to food security. In essence, one could argue that for the illustrative example above, the lab-grown meat industry benefits from political volatility with asymmetric upside in the “onset of global disorder” scenario from national security focus or from the “expansion of global food trade” scenario through greater access to exporting food-enhancing technologies. Similarly, certain industries with dual enterprise and government use cases could reap similar benefits. For example, in cybersecurity, investors and founders should seek to build and back businesses with dual enterprise / government penetration as the latter use case could benefit from asymmetric upside through political volatility as cybersecurity plays a key role in national security. Coronavirus proves the importance of considering how a business will benefit (or be destroyed) by these black swan events (public health or political in this case) that cannot be accurately predicted. Businesses like Twilio, Teladoc and Zoom were already growing prior to COVID-19 and gained asymmetrically from the new public health order. It is important to consider how the occurrence of these paradigmatic shifts could asymmetrically benefit a business that is already on a good growth path. If the political order is maintained it could be a good investment but political volatility could rebirth it into a homerun business. 

Scaling and Product Market Access Restrictions

Rising political tensions in a world of disorder and hyper-nationalism impact how investors and founders ought to think about scaling businesses. In the future, for certain types of businesses, there could be significantly less foreign market access for claimed national security reasons. These scaling constraints are already being imposed in the context of China: for example, India’s recent ban of TikTok and reports that Trump is also eying a potential ban of TikTok. The US and other nations have also prevented Huawei from expanding further into developed markets. In a world of increasing political disorder, it is important to think about which geographical expansion markets are strategically important for the business plan and whether you see any potential national security constraints to expansion in a certain market. In addition, certain sectors may be scrutinized in greater detail due to potential for strategic manipulation and relative adoption / importance to a nation. In the case of TikTok, there is a greater scrutiny because of the potential to leverage social media for election influence and ease of data collection. Technology is coming to to forefront of national security concerns and with this focus comes greater market access restrictions.

Exit and Financial Market Access Barriers

Changes to the political order could have dramatic implications for exit strategies. The US has already stepped up CFIUS reviews on cross-border M&A transactions in an effort to stop deals that could have an adverse national security impact. Moreover, after Luckin Coffee was revealed to be defrauding investors, the US threatened to pass legislation to delist more Chinese companies from the NYSE and Nasdaq. Especially for investors backing businesses in markets outside of the US, it is unclear how meaningfully the route to IPO and cross-border M&A exits could change as national security debates intensify. This could be especially the case for businesses and industries deemed key to national security due to data moat, supply chain or production capacity benefits. Separately, it is plausible the US could conversely intervene to prevent investment by US firms in foreign companies (possibly with a government connection) that improve the militarization / national security status of an adversary. Throughout history, hegemons have effectively leveraged the newest technological revolutions to improve their economic and political power projection outward into international politics. For example, Britain reaped substantial benefits from the steam engine and naval technologies and the US has gained significantly through the digital revolution. I’d expect increased US scrutiny in areas deemed to be at the cutting-edge of technologies that could play an important role in geopolitical power projection including artificial intelligence, biotechnology and CRISPR / gene editing.

Geographic Portfolio Allocation

In his book, Zeihan argues that many of the countries experiencing the most explosive growth under the post-WW2 liberal order lack some characteristics to sustain gains in a world of political disorder. Most notably, he mentions China and Brazil as ill-suited in a world of global disorder and without US naval, trade and security guarantees. The purpose of this article is not to rehash all of his arguments but the gist for each is the following. China is overly-reliant on energy and agricultural imports (and lacks the military power projection to defend its naval lanes) and has unfavorable demographic trends (political discontinuity across a massive and disjointed land area and aging population from the one child policy). Brazil has high infrastructure maintenance costs due to its weather and rainforest areas, over-reliance on agricultural exports but requires imported chemicals as agricultural inputs and suffers from increasing crime and corruption. Of course, there are significant counterarguments to make against each of these claims. However, I found it interesting that a significant concentration of emerging market technology investment goes to both Brazil and China (each of which have grown very rapidly under the liberal world order) rather than other markets that could be better positioned under a new world order but are also moderate growth countries in today’s international relations environment.

In terms of geographical portfolio allocation, investors ought to consider allocating more investment to countries that are faring moderately well under the current world order but who have the geography, energy independence and demographic features to be winners over the medium-to-longer term under the new political order. Of course, investment time horizon also plays an important role when considering political conditions. Zeihan believes some of the countries (besides the US) that will fare well in a world of global disorder include France, Turkey and Argentina. I also think it is interesting to consider which regional trade relationships (especially land-based) would benefit from restrictions to broader multilateral trade. For example, increased reliance by the US on Mexico could generate a need to build additional logistics, commerce and payments infrastructure across Mexico. I’d note that it is important to also have confidence in the liberalization of the political institutions wherever one invests (particularly in frontier markets) and where there is confidence that intellectual property rights will be protected. Certain technology businesses can help accelerate the transition to more liberal political and economic institutions where an observable shift is already underway. These categories tend to focus on informational and commerce inclusion and access with notable areas including logistics, financial and educational technologies. Within the logistics space, given rising trade tensions and potential US naval isolationism (and the potential cascading effect on sea lane protection), I am more excited about trucking and land-based logistics technology innovation rather than marine-based technologies.

Harnessing Immigration Diversity for Innovation

In considering where to invest in technology businesses, I think it will be important to track changes in immigration policies across the globe. There is record-high xenophobia across the globe. COVID-19 has sparked significant racism against Asian populations. There is a growing climate of foreign intolerance in Europe specifically of muslim populations, centered around Syrian refugee debates. Many of the US’ most valuable technology companies have an immigrant founder. 55% of America’s unicorn status startups have at least one immigrant founder. Numerous high-level current and former executives at massively transformative US technology companies come from immigrant backgrounds: Google’s CEO Sundai Pichai, Microsoft’s CEO Satya Nadella and Google Co-Founder Sergey Brin to name a few. Immigrant innovation also played a critical role in the war effort that brought about the post World War 2 political order through the victory of the allies, i.e. Albert Einstein and the Manhattan Project. Silicon Valley has historically enjoyed a large innovation edge by attracting the world’s top talent with international and global perspectives. The countries that fight back against rising nationalist tendencies and harness immigration and diversity to power their economies will enjoy more innovation.

Growing Importance of the African Continent

Over the coming decades, the African continent is expected to grow into the largest consumer market in the world. Between now and 2050, the population in Sub-Saharan Africa is expected to double to approximately 2.5 billion people. China has been making massive infrastructure investments across the African continent as part of its Belt and Road Initiative and Chinese VC investment into Africa is significantly on the rise. Given its growing population, large resource base and geographical position, economic relationships with Africa will become more important geopolitically with regards to securing alliances and trade partnerships in a world of political disorder. China’s massive investment now is anticipatory of the expected strategic importance of the continent in the future. For both geopolitical and demographic reasons, I expect increased investment allocations to the African continent especially in critical infrastructure areas around supply chain and payments to improve distribution and product access in the region. In addition, tracking the African market will play an important role in predicting longer-term trends that will impact the US and more developed markets. The tendency for emerging and frontier markets to “leapfrog” other markets provides an interesting predictor of what the US or other markets would look like if current systems were redesigned efficiently putting aside barriers to entry and lower innovation incentives that existing incumbents may have. In China this took the form of jumping from cash to mobile payment (skipping credit) and for African IT hardware has meant skipping PC computers and going straight to mobile.

Without the systematic constraints and entrenched interests of large technology incumbents, greenfield technology infrastructure startups here could provide insight into what the longer-term future in more developed markets may look like. For example, in the US, drone shipment has not gained traction due to regulatory barriers. However, in African markets the lower sophistication of existing logistics networks and ground infrastructure gaps (not enough bridge and road infrastructure) make it more ripe a playground for drone automation in the near-term.

The thoughts above are not meant to be prescriptive or predictive about how to adapt and what timing will be of a potential shift in the liberal world order to which US business interests have become accustomed. When backing and founding businesses, investors and founders ought to consider the range of plausible changes to the global order given the extent of observed US disengagement and international tensions to provide themselves the most optionality to adapt to structural shifts. In addition, domestic investors allocating capital abroad should consider how to diversify geographical exposure so their aggregate portfolio benefits asymmetrically from potential political shifts or at the very least is relatively immune to them. Silicon Valley was born into and grew up in the post World War 2 era that afforded startups the luxury of unfettered access to foreign markets, talent and relatively limited oversight on geographical expansion and M&A. Silicon Valley’s biggest winners of the coming half century will adapt their strategies so that they can thrive even in conditions of greater political volatility.

All Innovation Armory publications represent expressly my individual views and the views of those interviewed and do not represent the views of companies with which I have previously been associated or with which am soon to be associated. These publications are my personal opinions and are not meant to be relied upon as a basis for investment decisions.