In late January 2025, a breakthrough open-source artificial intelligence (AI) model called R1 was released, sending shockwaves through the tech industry and among Wall Street investors. R1 appears to perform similarly to OpenAI’s top-tier models, but it is more cost-effective and runs on less-advanced chips. The release of R1 coincides with the revival of industrial policy as a strategic tool for governments aiming to build AI capacity and competitiveness. 

This report examines how a national innovation system framework can guide AI industrial policy to foster innovation and reduce reliance on dominant tech companies. It is difficult for small players to enter the market and compete on fair terms. Without targeted policy interventions, AI risks further consolidating power in a handful of tech companies. 

Successful AI policy must go beyond passive adoption and instead focus on understanding the local context and addressing local needs. It should set clear priorities to enhance domestic innovation capabilities to ensure that AI development aligns with broader economic and societal goals. Strategic investments in AI research and development are essential to drive independent technological progress and reduce reliance on big tech infrastructure. Additionally, restructuring public institutions and adopting a whole-of-government approach to AI governance can improve coordination and effectiveness. 

In this context, aligning trade policy with industrial policy and competition is critical for fostering a fair and dynamic AI ecosystem that supports local innovation and ensures long-term technological sovereignty. The future of AI will be multi-model and multinational.