Laura Alfaro

Multinational corporations (MNCs) are the dominant institutions for creating and distributing knowledge across borders. Their activities generate geopolitical externalities when cross-border knowledge spillovers enhance a rival states strategic capabilities in ways neither internalized by firms nor priced by markets. This review examines MNC-mediated knowledge creation and diffusion and the governance regime that has emerged in response. We distinguish three types of knowledge codified, tacit, and organizational that differ in their transmission channels and governability, and trace how each is created within MNC networks, diffused within and across firm boundaries, and targeted by policy instruments.

Trade and industrial policies, while primarily intended to support domestic industries, may unintentionally stimulate technological progress abroad. We document this mechanism in the case of rare earth elements (REEs)--critical inputs for manufacturing at the knowledge frontier, with low elasticity of substitution, inelastic supply, and high production and processing concentration. To assess the importance of REEs across industries, we construct an input-output table that includes disaggregated REE inputs. Using REE-related patents categorized by a large language model, sectoral TFP data, trade data, and physical and chemical substitution properties of REEs, we show that the introduction of REE export restrictions by China led to a global surge in innovation and exports in REE-intensive downstream sectors outside of China. To rationalize these findings and quantify the global impact of the adverse
REE supply shock, we develop a quantitative general equilibrium model of trade and directed technological change. We also propose a structural method to estimate sectoral input substitution elasticities for REEs from patent data and find REEs to be complementary inputs. Under endogenous technologies and with complementary inputs, input supply restrictions on REEs induce a surge in REE-enhancing innovation and lead to an expansion of REE-intensive downstream sectors.