(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.

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