THE DRAGON AND THE ELEPHANT

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THE DRAGON AND THE ELEPHANT Understanding the Development of Innovation Capacity in China and India Summary of a Conference Stephen Merrill, David Taylor, and Robert Poole, Rapporteurs COMMITTEE ON THE COMPETITIVENESS AND WORKFORCE NEEDS OF U.S. INDUSTRY BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY POLICY AND GLOBAL AFFAIRS THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. SB 1341-06-Z-0011, TO #2 between the National Academy of Sciences and the Technology Administration of the U.S. Department of Commerce; Contract/Grant No. SLON 2005-10-18 between the National Academy of Sciences and the Alfred P. Sloan Foundation; and Contract/Grant No. P116Z05283 between the National Academy of Sciences and the U. S. Department of Education. Conference support was provided by the Levin Graduate Institute of the State University of New York, Indo-US Science and Technology Forum, National Science Foundation, Office of Naval Research, Booz Allen Hamilton, Eli Lilly, Inc., Hewlett Packard, Inc., and Microsoft, Inc. Additional support for this publication was provided by the Levin Graduate Institute of the State University of New York and the Indo-US Science and Technology Forum. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-15160-3 Library of Congress Catalog Card Number-10: 0-309-15160-0 Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 500 Fifth Street, N.W., Keck Center 574, Washington, D.C., 20001 Phone: (202) 334-2200 Fax: (202) 334-1505 E-mail: step@nas.edu Copyright 2010 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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CONFERENCE PLANNING COMMITTEE David T. Morgenthaler, Chair Founding Partner, Morgenthaler Ventures David C. Mowery, Vice-Chair William A. & Betty H. Hasler Professor of New Enterprise Development University of California at Berkeley Ashish Arora1 Devesh Kapur Professor, The Fuqua School of Business Director Duke University Center for the Advanced Study of India University of Pennsylvania Nicholas M. Donofrio Thomas R. Pickering2 Executive Vice President, Innovation and Technology (retired) Vice-Chairman, Hills and Company IBM Corporation U.S. Career Ambassador (retired) Kenneth S. Flamm AnnaLee Saxenian Dean and Professor, School of Information and Dean Rusk Chair in International Affairs Professor, Department of City and Regional Lyndon B. Johnson School of Public Affairs University of Texas at Austin Planning University of California at Berkeley Richard B. Freeman Denis F. Simon3 Herbert Ascherman Professor of Economics Harvard University Professor, School of International Affairs The Pennsylvania State University Mary L. Good Donaghey Professor and Dean Richard P. Suttmeier Donaghey College of Engineering & Professor of Political Science and Director, Information Technology Asian Studies Program University of Arkansas at Little Rock University of Oregon Kent H. Hughes Director, Program on Science, Technology America and the Global Economy Woodrow Wilson International Center for Scholars 1 At the time of the conference Dr. Arora was Professor of Economics and Public Policy at the Heinz School of Public Policy and Management, Carnegie Mellon University. 2 At the time of the conference Mr. Pickering was Senior Vice President, International Relations at Boeing Co. 3 At the time of the conference Dr. Simon was Provost and Vice-President for Academic Affairs with the Levin Graduate Institute of International Relations and Commerce at the State University of New York. v

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PROJECT STAFF: Stephen A. Merrill Study Director Mahendra Shunmoogam4 Program Associate Daniel Mullins5 Program Associate Cynthia Getner Financial Officer 4 Until July, 2008. 5 Joined the STEP program September, 2008. vi

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BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY For the National Research Council (NRC), this project was overseen by the Board on Science, Technology, and Economic Policy (STEP), a standing board of the National Research Council established by The National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to bear on important public policy questions. The members of the STEP Board and the NRC staff are listed below. Edward E. Penhoet, Chair Director, Alta Partner Lewis W. Coleman Joseph P. Newhouse President John D. MacArthur Professor of Health Policy and DreamWorks Animation Management Director, Division of Health Policy Research and Alan M. Garber Education Henry J. Kaiser, Jr. Professor and Professor of Harvard University Medicine Director, Center for Health Policy and Center for Arati Prabhakar Primary Care and Outcomes Research General Partner Stanford University U.S. Venture Partners Ralph E. Gomory William J. Raduchel Research Professor, Stern School of Business Independent Director and Investor New York University Jack W. Schuler Mary L. Good Co-Founder Donaghey Professor and Dean Crabtree Partners, LLC Donaghey College of Engineering & Information Technology Laura D. Tyson University of Arkansas at Little Rock S.K. and Angela Chan Chair in Global Management Amory Houghton, Jr. Haas School of Business Former Member of Congress University of California Berkeley William F. Meehan III Alan Wm. Wolff Lecturer in Strategic Management Partner Stanford Graduate School of Business Dewey & LeBoeuf LLP David T. Morgenthaler Founding Partner Morgenthaler Ventures vii

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Preface in search of low-cost location for production, the Until recently, competition for the United world is entering an era in which innovation States in high technology goods and services has itself is far more widely distributed than come from Japan and the countries of Western previously. Europe, but this situation is rapidly changing. For the past three years the Academies’ There has been remarkable growth in innovative STEP program, with funding from the U.S. capabilities in a number of countries that 30 Department of Education, U.S. Department of years ago were classified as developing Commerce, and the Alfred P. Sloan Foundation, economies. Taiwan and South Korea, followed has been studying the globalization of by China and India, are the leading examples of innovation with a series of activities. A pair of this phenomenon. workshops in 2006 and 2007 and commissioned These developments are part of a new phase papers led to the publication of Innovation in in the globalization of the innovation process. Since at least the 1960s large multinational Global Industries: U.S. Firms Competing in a New World (NRC, 2008). This collection, companies from industrialized countries have edited by Berkeley Professor David Mowery and been moving much of their manufacturing and Georgetown Professor Jeffrey Macher, examines some of their research and development (R&D) changes in innovation patterns in ten service as activities offshore, but most of the latter was well as manufacturing industries – personal restricted to development activities intended to computing, software, semiconductors, flat panel modify existing products for foreign markets. displays, lighting, pharmaceuticals, Beginning in the 1980s, however, a new pattern biotechnology, logistics, venture capital, and began to emerge. The R&D activities that were financial services. moved offshore began to include more Because of the growing importance of China “upstream” activities, including original and India to this process and their potential to research, and the companies involved started to profoundly affect the distribution of innovative collaborate more extensively with universities, activity and investment around the world, an ad public laboratories, and firms of the host hoc committee under the STEP program decided countries. With the disintegration of self- to organize a symposium focusing specifically contained, integrated innovation chains within on the role that those two countries are large companies, smaller, younger firms began beginning and likely to play in the globalization to play a larger role in this R&D offshoring; and of innovation. That conference, “The Dragon the companies involved came to include many and the Elephant: Understanding the more non-manufacturing firms than had Development of Innovation Capacity in China previously been the case. Finally, the and India,” was held in Washington, D.C., on destinations of the offshored R&D activities September 24-25, 2007, and drew participants shifted, with more going to industrializing from both countries, the Organization for economies, especially those in East Asia such as Economic Cooperation and Development Taiwan and South Korea, and also to the lower- (OECD), and the World Bank as well as the income, very large developing economies of United States. The meeting was organized with India, China, and Brazil. In short, after an era the assistance of the Levin Graduate Institute of that saw the dispersion of manufacturing activity ix

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x PREFACE conference participants, the planning committee, the State University of New York, Woodrow the Board on Science, Technology, and Wilson International Center for Scholars, Urban Economic Policy, or the National Academies. Institute, and Athena Alliance. The organization of the document follows In his opening remarks as chairman of the the organization of the symposium, whose conference, David Morgenthaler observed that agenda can be found in Appendix A. Chapter 1 innovation can mean several different things. It offers an overview of the current recent can refer, for example, to producing more of performance of the Chinese and Indian what already exists and adapting existing economies and their roles in the global capabilities, such as cell phone technology, to economy, while Chapter 2 describes various the specific needs and resources of a particular ways in which United States interests are customer base, such as the populations of China affected. This is followed by a series of chapters or India. It can refer to institutional changes such examining the factors contributing to and in as those needed to take advantage of technical some cases inhibiting the development of world advances or scientific discovery. And it can refer class innovation capacity. Chapter 3 discusses to political system changes, market human capital in the two countries and improvements, and new business models. summarizes the keynote speech of Satyanarayan China and India face all three challenges— Gangaram Pitroda, Chairman of the Indian development of new science-based technological National Knowledge Commission, whose advances to satisfy growing middle- and upper- remarks focused primarily on human capital class populations, technology adaption and development in India. Chapter 4 covers capital application to alleviate great poverty, and markets and investments; Chapter 5 looks at institutional change to sustain economic research and commercialization infrastructures; progress. Because of their great size, how well and Chapter 6 examines the legal environments India and China succeed in this endeavor will in the two countries as they affect the have a great bearing not only on their own development of innovation capacity. Chapter 7 populations’ welfare but also on global offers a look at the two countries from the economic welfare. It is this grand experiment or perspective of multinational corporations. series of experiments that the symposium Chapter 8 contains summaries of four separate participants endeavored to illuminate and breakout sessions that compared developments explore. in four key industrial sectors in the two The symposium was designed to offer a countries—information technology, transport snapshot of where these two countries are now equipment (automobiles and aircraft), as they strive to improve their capacity to pharmaceuticals and biotechnology, and energy. innovate and to explore what can be expected Finally, Chapter 9 summarizes some of the from them in the near future. Although many conference speakers’ and participants’ final people who are unfamiliar with the situation see observations. China and India as having very similar economic An effort was made to select and guide trajectories, the economies of the two countries presenters to enable comparisons between China are actually very different. Each has its own and India along the same dimensions, but it was strengths as well as weaknesses and challenges not always possible to adhere to this standard. to overcome in order to become a globally For example, although the evolution of important center of innovation in a range of intellectual property policy in both countries has technologies and industrial sectors. attracted much attention and was addressed in This document is a summary report of the the conference, it was difficult to find experts in presentations and discussions that took place at Indian competition and technical standards the conference. The planning committee’s role policy. was limited to planning the conference. This During the conference there was also a summary report was prepared by consultants and poster session in which nine young scholars the study director. The views expressed in this presented recent research on innovation-related summary are those of the speakers and developments in one or both countries. The list discussants and are not the consensus views of

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PREFACE xi perspectives and technical expertise, in of participants in this session and their research accordance with procedures approved by the topics can be found in Appendix B. National Academies’ Report Review The National Research Council (NRC) and Committee. The purpose of this independent the Board on Science, Technology, and review is to provide candid and critical Economic Policy (STEP) are grateful to comments that will assist the institution in principals of the four co-organizers of the making its published report as sound as possible conference—Denis Simon of the Levin Graduate and to ensure that the report meets institutional Institute of the State University of New York, standards for quality and objectivity. The review Kent Hughes of the Woodrow Wilson comments and draft manuscript remain International Center for Scholars, Hal Salzman confidential to protect the integrity of the of the Urban Institute, and Kenan Jarboe of the process. Athena Alliance. In addition to the Alfred P. We wish to thank the following individuals Sloan Foundation, U.S. Department of for their review of this report: Sean Dougherty, Education, and U.S. Department of Commerce Organisation for Economic Co-operation and the following provided financial or in-kind Development-Paris; Vinod Goel, The World support without which the conference would not Bank; Jeffrey Macher, Georgetown University; have been possible: The Levin Graduate Thomas Ratchford, George Mason University; Institute, Indo-U.S. Science and Technology and Harold Salzman, Rutgers University. Forum, National Science Foundation, Office of Although the reviewers listed above have Naval Research, Booz Allen Hamilton, Eli Lilly, provided many constructive comments and Inc., Hewlett Packard, Inc., and Microsoft, Inc. suggestions, they were not asked to endorse the Most indispensable to the meeting’s success was content of the report, nor did they see the final the participation of public officials, private draft before its release. Responsibility for the sector leaders, academic experts, and others final content of this report rests entirely with the knowledgeable about economic developments in authors and the institution. China and India, many of whom traveled very long distances to attend. This report has been reviewed in draft form Stephen A. Merrill, Study Director by individuals chosen for their diverse

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Contents SUMMARY 1 1 INDIA AND CHINA IN THE GLOBAL ECONOMY 5 2 WHAT IS THE UNITED STATES’ INTEREST? 11 3 HUMAN CAPITAL DEVELOPMENT 13 4 CAPITAL MARKETS AND INVESTMENT 17 5 RESEARCH AND COMMERCIALIZATION INFRASTRUCTURE 21 6 THE LEGAL ENVIRONMENT: COMPETITION POLICY, STANDARDS, AND INTELLECTUAL PROPERTY 27 7 MULTINATIONALS’ EXPERIENCE 31 8 SIMULTANEOUS SESSIONS: 33 Information Technology 33 Transport Equipment (Automobiles and Aircraft) 36 Pharmaceuticals and Biotechnology 38 Energy 40 9 CONCLUDING OBSERVATIONS 43 APPENDIXES A. Conference Agenda 45 B. Conference Poster Session Presenters 49 C. Speakers’ Biographical Sketches 51 xiii

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