Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 1
The Dragon and the Elephant: Understanding the Development of Innovation Capacity in China and India - Summary of a Conference Summary The return of the once-dormant economies of China and India to dynamism and growth is one of the most remarkable stories in recent history. The two countries are home to nearly 40 percent of the world’s population, but until recently neither had played an influential role in the contemporary global economy. Just a few decades ago, for example, Americans associated the words “Made in China” with simple, cheaply made manufactured goods of questionable quality and identified “Made in India” with little but crafts and colorful textiles. In the past two decades, China and India have liberalized internal economic policy, treatment of foreign investment, and trade, and have experienced economic growth at sustained high rates. China’s gross domestic product has been growing at an annual rate near 10 percent for more than two decades, and now ranks as having the fourth largest output in the world, according to the Organisation for Economic Cooperation and Development (OECD).1 China has become a major exporter of manufactured goods, including high-technology items, and a destination of first or second choice for foreign investment. The Chinese population has seen a steady increase in average income, and there has been a sharp drop in poverty rates. India’s rise has been almost as impressive. For the past 20 years its gross domestic product (GDP) has increased at an average annual rate of more than 6 percent; more recently (2003-2007) the rate was higher, 8.6 percent per year (Panagariya, 2007). In the three years from 2003 to 2006 India doubled the value of goods it exported to the rest of the world, while the export of services grew even faster, more than doubling in the two years from 2004 to 2006. Much of the export growth has come in high-technology industries, particularly software.2 From the point of view of the United States, however, the most important development in the Chinese and Indian economies in the long term may be the strides they are making in developing their own domestic innovation capacities. After a long period of under-investment, both countries have committed to growing their science and education systems to bolster research and further economic expansion. Already there are demonstrable albeit different levels of results in terms of R&D spending growth, numbers of science and engineering graduates at all levels, shares of scientific publications, numbers of domestic and foreign patent filings, and other measures. Some observers of the recent growth have said that both countries are surging in their efforts to spur innovation; others have emphasized the potential of one country over the other; and still others have suggested that both China and India have a long way to go before achieving innovation-driven growth. With such a range of views, The National Academies’ Science, Technology, and Economic Policy 1 In general, there are two ways of comparing national economies. The market exchange rate (MER) method reports the nominal value of a statistic (e.g. GDP) as calculated at the market official exchange rate; the purchasing power parity (PPP) method accounts for differences in the cost of living between countries. By the MER method, China has the fourth largest GDP; by the PPP method it has the second largest economy. 2 The global economic crisis was only beginning at the time of the conference, but developments since suggest that China and India have weathered the crisis better than many other countries. In October 2009 the International Monetary Fund projected that the U.S. economy would contract by 2.7% in 2009 while that of China and India would grow by 8.5% and 5.4% respectively (all projections refer to real GDP changes).
OCR for page 2
The Dragon and the Elephant: Understanding the Development of Innovation Capacity in China and India - Summary of a Conference (STEP) Board set out to describe developments in both countries, in relation to each other and the rest of the world, by organizing a conference in Washington, D.C., to discuss the recent changes at the macroeconomic level and in selected industries and their causes and implications. The meeting drew academic experts, private sector leaders, and public officials from both countries and international organizations and attracted an audience in excess of 350 people. Titled, “The Dragon and the Elephant: Understanding the Development of Innovation Capacity in China and India,” the conference yielded observations about policy priorities in both countries as well as some observations about how the U.S. might respond. Meeting on the 50th anniversary of the launch of Sputnik by the U.S.S.R, speakers noted that just as that event spurred a renewed U.S. commitment to science and engineering education and to research, the economic challenges posed by the rise of China and India could stimulate a similar renewal. China and India share some characteristics, such as enormous populations and domestic markets, deeply-rooted cultures, recent histories of liberalizing formerly collective economies, and extensive diasporas of highly trained people. But there are significant differences in many areas, including demographics (India has a younger population), education systems, capital markets, infrastructure needs, and levels of GDP and research investment. Perhaps the most salient difference is in political regimes—between democratic India and authoritarian China. The relationships among regime type, economic liberalization, growth, and political stability are not at all obvious, especially in the case of China. These relationships merit much more thorough examination than this conference gave them. Many observations ran counter to conventional wisdom. For example, several speakers challenged the popular impression that China and India are far surpassing the United States in producing advanced-degree graduates of world class caliber in science and technology. In fact, all three countries may be facing a shortage of talent. Education quality, rather than quantity, will likely be the most important driving force in innovation. Shortfalls in India’s professoriate and higher education system, apart from elite technical institutions, are well known and will require not only the added investment recently announced by the government but also new models of learning and instruction, as Sam Pitroda noted in his keynote address. The diasporas of both China and India, people who have studied, staffed and started businesses abroad, will be important drivers of change and adaptation. It is expected that improving research and economic opportunities will induce more of these assets to return home. A large proportion of those who remain abroad are developing close relationships with indigenous enterprises in their countries of origin. Venture capital investment, particularly in China, has matured and focused on domestic markets, contributing to the growth of indigenous innovative firms. Increasingly, foreign (especially U.S.) investor partnerships are active in both China and India. India has more mature financial markets but also more restrictive labor rules. For international firms, complex legal structures in the two countries entail a greater reliance on legal services and greater regulatory risk. Both countries lack transparency in debt disclosure and impose restrictions on investment options. As market infrastructure improves and allows investors to price risk, demand and supply in venture-capital markets will grow. Growth in consumer demand can create further investment potential and help drive innovation. In contrast to a generation ago, the private sector accounts for a growing share of R&D investment in both countries. Still, weak linkages between private and public sector R&D institutions hamper innovation. This is compounded in some sectors by the dominance of state-owned or quasi-governmental companies. Although no clear example of global technical leadership has yet surfaced in either country, areas of strength are clearly emerging. Sectors where China can make particular contributions to global science and technology include biology and Chinese medicine, nanotechnology, space science and technology, and energy, including cleaner technologies.
OCR for page 3
The Dragon and the Elephant: Understanding the Development of Innovation Capacity in China and India - Summary of a Conference India holds strengths in product, component, and process design, pharmaceuticals, and automobile and aircraft parts. Legal frameworks for innovation have undergone major changes in the past 10 years and are still evolving. Intellectual property systems in both countries have evolved toward international standards, although weaknesses remain. In China the enforcement system lags behind modernization and expansion of the patent administration system. India’s patent system is experiencing backlogs and delays. China recently enacted a new anti-monopoly law and is making a major effort to develop and promote its own technical standards in the IT sector. There is some ambiguity about the extent to which either or both of these developments and others such as the recently announced government procurement policy will be applied to favor indigenous firms over multinationals and foreign competitors. U.S.-based multinationals are investing heavily in China and India, including in R&D operations, although in most cases on a larger scale in China. Some of these affiliates work to adapt proprietary designs to local markets; others are working at the technological frontier on advanced products for world markets. The inducements to expand operations in the two countries are diverse – less expensive skilled labor, market access, opportunities to collaborate with world class scientists and engineers in academic and research institutions, and government grants and tax concessions. China has a more developed policy of subsidizing enterprises to promote regional economic development. In India, geographical dispersion is hampered by inadequate infrastructure. In both cases, there is a lack of experienced native-born managers. Within China and India there is ambivalence about the role of international firms. They are seen as contributing to the broadening and deepening of the overall level of technology in the economies, but they are also suspected of monopolizing key technologies, crowding out opportunities for indigenous firms, and siphoning off top talent. Multinationals are responding to pressures to follow a more collaborative innovation model. Representatives of US-headquartered global firms emphasized the high level of labor turnover, making skills available to local enterprises, but they also acknowledged a tension between sharing of intellectual property to facilitate collaboration and building capabilities of indigenous firms that become competitors. Four breakout sessions addressed recent changes in innovation capacity in important sectors of the Chinese and Indian economies—information technology and telecommunications, transport equipment, pharmaceuticals and biotechnology, and energy. A theme of the IT session was the importance to innovation of a proximate population of highly skilled users. Although Chinese and Indian IT firms are gaining in scale and scope and certainly in manufacturing capability (for example, in semiconductors and personal computers), significant innovation, especially in software, is handicapped by the lack of a sophisticated customer base compared to those of the United States, Europe, and Israel. However, this gap may close within a decade or two. Both China and India have ambitious plans to upgrade and expand domestic aircraft and automotive industries and become significant players in global markets. A key factor in both countries is the growing sophistication of engineering and design services, from fuselage design and avionics to passenger car platforms. The movement of design services to both countries has in large part been a function of cost differentials; but increasingly, it reflects a pursuit of talent. The Chinese and Indian automobile industries have moved from copying western designs to licensing technology and joint venturing with multinational companies (MNCs). The growing emphasis on indigenous innovation is illustrated by the Tata low-cost car for mass markets with wide income disparities. To become a significant supplier to western markets, the Chinese industry will have to overcome fragmentation and lack of brand identification. As in other sectors, the roles of Chinese and Indian firms in pharmaceuticals and biotechnology reflect partly the breakdown of the self-contained innovation chain in western multinationals and partly the long-standing strengths in particular research, development,
OCR for page 4
The Dragon and the Elephant: Understanding the Development of Innovation Capacity in China and India - Summary of a Conference and manufacturing segments. This phenomenon is represented by the involvement of indigenous enterprises in early stage research, laboratory services, and especially clinical trials. In India, the evolution of the intellectual property regime for pharmaceuticals has fostered strength in process technology and manufacturing, evident in the growth of the generic pharmaceutical industry. Now some of those firms are venturing into the development of innovative products. China has opportunities to capitalize on knowledge of traditional medicines and on a rapidly growing biomedical research enterprise to contribute to the development of new pharmaceuticals. Energy production in China and India was discussed in the context of two forces—on the one hand, rapidly growing demand fueled by domestic economic growth and, on the other hand, international pressures to reduce greenhouse gas emissions to decelerate global warming. In China demand has been met largely by expansion of coal-fired power generation capacity at an unprecedented rate. In the future there is prospect for some diversification, with nuclear, hydro and wind power playing a greater role. Accounting for a large share of the world’s new power generation capacity over the next few decades, China is poised to become the lowest price producer and therefore the global manufacturing base for energy technology, which could include clean coal technologies as well as alternatives to fossil fuels. Although the conference revealed few, if any, examples of Chinese- or Indian-origin globally important next-generation products or services, it was acknowledged that that may have been a function of hindsight or the selection of industries for discussion. Regardless, most participants agreed that as a function of their sheer size and dynamism, the Chinese economy in the near term and perhaps the Indian economy in a somewhat longer timeframe will have a much more profound impact on the United States than did Japan’s growth in the 1980s. Participants were less clear about how the United States should respond other than to place a much greater premium on improvements in education, expansion of research, access to foreign-born talent, international collaboration, and strategic planning in an environment of rapid change.