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I INTRODUCTION

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INTRODUCTION After three decades of astonishing growth, the economy of the Peoples Republic of China is nearing an important crossroad. As China’s leaders themselves acknowledge, the nation’s development model, based on export-led manufacturing in rich coastal provinces, cannot continue to generate sustainable, balanced growth.1 The way forward, top leaders have stressed, is to build an economy that is driven by innovation2. A key question is how this transformation can take place. Can China adopt a successful innovation system directed by the state and designed to favor domestic industries? Or will China eventually adopt a more open, collaborative, and market-based system that integrates knowledge from around the world? This crossroads for China comes as the United States faces a different kind of innovation challenge. While the United States has long been the world leader in science and new technologies, the National Academy of Sciences, in its 2007 report, Rising Above the Gathering Storm, warned of an abrupt loss of U.S. global leadership in science, technology, and 1 On March 15, 2007, Chinese President Wen Jiabao in a press conference following the National People’s Congress described China’s economic model as “unstable, unbalanced, uncoordinated, and unsustainable.” The remarks have been interpreted to mean that China’s economy depends too heavily on fixed investment, manufacturing, and exports rather than private consumption and social equity. 2 Former President Jiang Zemin declared innovation and high-tech industries as core to a nation’s strength in the keynote address to the National Innovation Technology Conference on August 23, 1999. Current President Hu Jintao has stressed the importance of innovation in numerous speeches. Some analysts see the focus by China on innovation led growth as problematic, given how the economy is in fact advancing through stages of effective industrial supply chain collaboration and integration. See Dan Breznitz and Murphree, Run of the Red Queen: Government, Innovation, and Globalization and Economic Growth in China, New Haven, CT: Yale University Press, 2011. 3

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4 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION innovation and its impact on the future prosperity of the United States.3 This report has contributed to a growing awareness in the United States of the need to remain competitive through sustained investments in research that translate into new products, domestic industries, manufacturing, and high value employment. COMMON CHALLENGES AND SHARED OPPORTUNITIES China and the United States have much to gain by learning from each other as they each face their own innovation imperatives. To help advance cooperation in science, technology, and innovation, the National Academies’ Board on Science, Technology, and Economic Policy (STEP) convened a symposium that brought together senior officials from China and the United States, as well as leading academics, and business people who are influential in the formation of innovation policies.4 This conference reflected the fact that both China and the United States share common interests in fostering science and technology to solve the challenges of economic growth, better health, and a greener environment, even as they compete in global markets. While the United States and China are the world’s top two spenders on research and development, they are also by far the world’s two biggest emitters of greenhouse gasses.5 And aging populations in both countries struggle with cancer and other chronic diseases. Indeed, a key premise of the symposium was that these and other global challenges require innovative breakthroughs, which in turn would 3 The report notes that “We fear the abruptness with which a lead in science and technology can be lost—and the difficulty of recovering a lead once lost, if indeed it can be regained at all.” See The National Academy of Sciences/National Academy of Engineering/Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, Washington, DC: The National Academies Press, 2007. 4 The conference, which was organized with the assistance of Cisco Systems, took place May 18, 2010, in Washington. Other sponsors of the symposium included IBM, Intel, the Palo Alto Research Center, Sandia National Laboratories, the Office of Naval Research, the Defense Advanced Research Projects Agency, the National Institute of Standards and Technology, and the National Science Foundation. 5 China and the United States are jointly responsible for more than 40 percent of the world’s greenhouse gas emissions. See New York Times, “China and U.S. Seek a Truce on Greenhouse Gases.” Published June 7, 2009.

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5 INTRODUCTION benefit from closer collaboration. Referring to extensive Sino-U.S. cooperation in science and technology at the commercial levels and increasingly at the university level, Deputy Assistant Secretary of State Anna Borg noted in her symposium presentation that “the United States and China are, in every sense, building a global partnership.”She also identified a number of areas for closer cooperation between the two governments. Ren Weimin of China’s National Development and Reform Commission agreed. Despite all the differences over which economic policies work best, Mr. Ren said, the United States and China “have a lot in common” in terms of what they must achieve. What’s more, he said, the immense R&D resources and strengths of the two nations “are complementary in many respects.” SCIENCE AND TECHNOLOGY COOPERATION AND CONSTRAINTS The National Academy of Sciences has long played a role in fostering academic and research cooperation between the United States and China. In his conference remarks Alan Wolff of the STEP Board noted that as early as 1965 the National Academy of Sciences created a committee to foster academic communication and exchanges between the two nations. After contacts were halted by the Cultural Revolution, visits resumed following the Nixon-Zhou Enlai 1972 Shanghai Communiqué.6 In 1978, China’s Ministry of Science and Technology and the U.S. National Science Foundation resumed formal cooperation. In the following year, China’s Paramount Leader Deng Xiaoping and U.S. President Jimmy Carter signed the first Sino-U.S. Agreement on Science and Technology. This agreement has been extended every five years since, most recently in January 2011.7 Exchanges among between U.S. and Chinese scholars and technical experts have drawn this relationship closer. Some of China’s brightest students attend American universities and China now is the biggest 6 The Sino-U.S. Joint Communiqué, also known as the Shanghai Communiqué, was issued on February 28, 1972, following President Richard Nixon’s historic seven-day trip to China. 7 There have also been challenges to extending S&T cooperation with China in space technologies. See Politico, February 12, 2011, “House continuing resolution would bar NASA from China ties.”

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6 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION source of foreign students in U.S. science and engineering programs.8 A surge of investment in research facilities in the 1990s by American corporations in the mainland further bound the two science and engineering communities. Over the past decade, the United States and China have signed some 50 cooperative agreements in fields such as agriculture, energy resources, the environment, and basic science, involving nearly every Chinese government agency.9 Speaking at the conference, Yang Xianwu of China’s Ministry of Science and Technology said that “Cooperation with the U.S. has always been our priority.” At the same time, the relationship between China and the United States has also been characterized by frictions and competing agendas. U.S. companies frequently complain about China’s weak protection of intellectual property rights.10 And officials and business leaders from the United States have joined those in Europe and India in objecting to what they see as discrimination against foreign companies stemming from Chinese industrial policies and a growing focus on zizhu chuangxin, widely translated as “indigenous innovation.”11 Because domestic 8 Institute for International Education, “International Student Enrollments Rose Modestly in 2009/10, Led by Strong Increase in Students from China.” 2011 Press Release. Access at . 9 Perhaps the most far-reaching partnership is in energy, where the two governments signed the Protocol on Sino-U.S. Joint Research Center for Clean Energy. Each country will invest $15 million in the new program and assign its own staff. The center will facilitate joint research and development in an array of clean energy technologies. The agreement to establish the center was announced July 15, 2009 by U.S. Energy Secretary Steven Chu, Chinese Minister of Science Wan Gang, and Administrator of National Energy Administration Zhang Guo Bao. 10 For an example of U.S. industry complaints, see John Neuffer, “China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy,” written testimony to the United States International Trade Commission Investigation No. 332-514 Hearing on behalf of the Information Technology Industry Council, June 15, 2010. (). 11 The Chinese policy for indigenous innovation, zizhu chuangxin, was introduced in a 2006 state-issued report, “Guidelines on National Medium- and Long-Term Program for Science and Technology Development.” Some Chinese sources describe the policy as encouraging research institutes and universities to conduct innovative research and create new intellectual property to meet

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7 INTRODUCTION 12 companies are favored in government purchases —which account for the lion’s share of spending on infrastructure and information technology—foreign companies say selling their products in China is increasingly difficult.13 Meanwhile, some Chinese officials who spoke at the symposium cited overly restrictive U.S. export controls rules on certain “dual use” technologies as needlessly blocking U.S. sales of some high-performance computers, advanced semiconductor manufacturing equipment, and numerically controlled machine tools to China.14 They noted that these curbs have, for example, prevented Chinese companies from buying national demands and to build up China’s innovation capacity. Many foreign firms operating in China however believe that the policy would seek to transfer their patents and other intellectual property to China in order to compete for technology and equipment procurement by the Chinese government. For an analysis of China “indigenous innovation” policy, see Adam Segal, “China's Innovation Wall: Beijing’s Push for Homegrown Technology,” Foreign Affairs, September 28, 2010. Describing the impact of this policy, Segal notes that “In 2009, for example, China’s government, a massive consumer of high-tech products, announced that in order to be a recognized vendor in the government’s procurement catalog, a company would have to demonstrate that its products included indigenous innovation and were free of foreign intellectual property.” 12 China’s 15-year plan for science and technology says the government should practice a “first-buy policy for major domestically made high-tech equipment and products that possess proprietary intellectual property rights.” See Sec VIII, 3 of “The National Medium- and Long-Term Program for Science and Technology Development (2006-2020): An Outline,” pg. 54, State Council of China. 13 In a March 2010 survey by the American Chamber of Commerce in Beijing, 37 percent of U.S. information technology companies said they would lose sales because of "indigenous innovation" policies, leading the Obama Administration to take up this practice at the highest levels. In his May 25, 2010, press briefing in Beijing, Timothy Geithner said that Chinese leaders had expressed “principles of nondiscrimination” regarding China’s indigenous innovation policy and that this represented significant progress. (). In June 2011, China's Ministry of Finance announced that it is scrapping certain rules designed to foster "indigenous innovation. See Wall Street Journal, July 1, 2011, “China Plans to Ease Rules That Irked Companies.” 14 The Bureau of Industry and Security of the Commerce Department enforces Export Administration Regulations (EAR), which restricts exports of items that have both commercial, military, or proliferation applications. American companies often complain they lose billions of dollars in business in China to other nations that do not have these restrictions. See AmCham-China, op. cit.

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8 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION equipment from Applied Materials—a U.S. firm—to mass manufacture the current-generation 300 mm silicon wafers. The Chinese participants at the symposium also cited U.S. immigration rules as another irritant. After the 2001 terrorist attacks, they said, it has become harder for Chinese citizens to obtain U.S. entry visas is a timely manner. BACKGROUND ON CHINA’S INNOVATION SYSTEM15 High-Level Commitment and Growth China’s modern innovation system is rooted in the reforms of the late 1970s. At that time, China’s scientific community and university system had been decimated by the Cultural Revolution. Communist Party leaders such as Marshall Nie Rongzhen and Deng Xiaoping argued that science and technology were vital to modernize China’s military and meet basic social needs.16 In 1975, Premier Zhou Enlai named science as one of the Four Modernizations. After he assumed power, Deng advocated at a National Science Conference in 1978 that scientific institutes be run by administrators and scientists, not party cadres. “Without the rapid development of science and technology it will become impossible to build the national economy,” Deng declared.17 More recently, in a report to the 17th National Congress of the Communist Party of China, President Hu Jintao stated that “Innovation is the core of our national development strategy and a crucial link in enhancing the overall national strength.” This high level commitment has been backed by a sharp rise in China’s commitment to R&D spending— from a six percent share of global R&D spending in 1999 to an estimated 12.2 percent share in 2010.18 Over the past 15 years, China has launched many initiatives to boost science, develop high-tech industries, and reduce its dependence on 15 The text in this section provides a brief historical background on the evolution and current challenges facing China’s innovation system. While not directly based on the discussions held at the symposium, the text here provides additional context to the conference discussions. 16 See Evan A. Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the Information Age, Stanford: Stanford University Press, 2003. 17 Deng Xiaoping address at the First National Science Congress, 1978. 18 Battelle, R&D Magazine. December 2009.

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9 INTRODUCTION 19 foreign technologies. The 973 Program, for example, supports 175 chief scientists focusing on “strategic needs,” such as agriculture, energy, information, and health.20 The 863 Program, better known as the State- High Tech Development Plan, is aimed at easing China’s dependence on imported advanced technologies and is credited with leading to the development of China’s Shenzhou spacecraft and Loongson computer processor. The Torch Program, meanwhile, promotes development of high-technology industrial zones.21 “Indigenous innovation” has become a top priority in the past five years. As “guiding principles for science and technology undertakings,” China’s National Medium- and Long-Term Program for Science and Technology Development for 2006 to 2020 lists “indigenous innovation, leapfrogging in priority fields, enabling development, and leading the future.”22 The document says that “in areas critical to the national economy and security, core technologies cannot be purchased,” and that China must “master core technologies in some critical areas, own proprietary intellectual property rights, and build a number of internationally competitive enterprises.” The plan calls for boosting China’s gross R&D spending to 2.5 percent of GDP by 2020, for science 19 For a comprehensive review of China’s innovation policies, see Micah Springut et al., “China’s Program for Science and Technology Modernization: Implications for American Competitiveness.” Prepared for the U.S.-China Economic and Security Review Commission. January 2011. There is also a growing literature by Chinese scholars on policy issues related to innovation. See, for example Zheng Liang and Lan Xue, “The evolution of China's IPR system and its impact on the patenting behaviours and strategies of multinationals in China,” International Journal of Technology Management. 51(2/3/4), 2010. See also, Shulin Gu and Bengt-Åke Lundvall, “Policy learning as a key process in the transformation of the Chinese Innovation Systems,” in Bengt-Åke Lundvall, Patarapong Intarakumnerd, and Jan Vang, Eds., Asian innovation systems in transition, Edward Elgar Publishing Ltd, 2006. 20 The National Basic Research Program, also known as the 973 Program, was approved by the central government in June 1997 and administered by the Ministry of Science and Technology. For an explanation in English of the program, see . 21 For a concise explanation of Chinese innovation policies over the past decade, see Can Huang, Celeste Amorim, Mark Spinoglio, Borges Gouveia and Augusto Medina, “Organization, Programme and Structure: An Analysis of the Chinese Innovation Policy Framework,” R&D Management 34(4), 2004. (.) 22 For a U.S. perspective of the impact of “indigenous innovation,” See Adam Segal, op. cit. See also Breznitz and Murphree, op. cit.

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10 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION and technology to account for 60 percent of the economy, and cutting dependence on imported technology to 30 percent.23 China’s Innovation Challenges This strong emphasis by its leaders has led to some remarkable progress: Investment in research and development, patent filings, output of published scientific papers, exports of high-technology electronic products, and engineering and science graduates with advanced degrees all have risen rapidly over the past decade.24 However, China’s output of new technologies and breakthrough product remains weak. An extensive study of China’s innovation system by the Organization for Economic Co-Operation and Development and the Chinese Ministry of Science and Technology concluded that the heavy investments have “yet to translate into a proportionate increase in innovation performance.” The report faulted “deficiencies in the current policy instruments and governance for promoting innovation.”25 A World Bank study of Chinese enterprises reached similar conclusions. 26 A survey of nearly 300,000 of industrial enterprises found 53 percent of large enterprises, 86 percent of medium-sized, and 96 percent of small in 2004 through 2006 did not have continuous research and development. As a result, they don’t own core technologies and rely 23 State Council of China, “National Medium- and Long-Term Program for Science and Technology Development, 2006-2020,” (.) 24 See National Research Council, The Dragon and the Elephant, Understanding the Development of Innovation Capacity in China and India. S. Merrill ed., Washington, DC: The National Academies Press, 2010. 25 OECD Reviews of Innovation Policy: China, Organization for Economic Co- Operation and Development, September 2008. OECD Publishing. (.) 26 Chunlin Zhang, Douglas Zhihua Zeng, William Peter Mako, and James Seward, Promoting Enterprise-Led Innovation in China, Washington, D. C.: The International Bank for Reconstruction and Development/The World Bank, 2009. (.)

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11 INTRODUCTION “upon factors other than innovativeness” to compete globally. The study described the system as one of “manufacturing without innovation.”27 In addition to low corporate R&D investment, these studies cite a number of other reasons for China underachievement in innovation. They include weak intellectual property protection, shortages of capable and skilled personnel, an over-emphasis on export manufacturing of commodity goods, and weak linkages between government-funded research institutions and the private sector.28 China’s Innovation Agenda Speaking at the conference, some Chinese officials said that they were aware of these shortcomings. In his presentation, Yang Xianyu of the Ministry of Science and Technology said that Chinese businesses have been slow to invest in R&D and that “a key challenge is to transform China’s economic development pattern so that it is driven by innovation.” To spur investment in innovation, the government is offering generous tax incentives to companies in “high-priority” sectors and that meet certain R&D investment benchmarks, Mr. Yang said. For every renmenbi spent on R&D, they get 1.5 renmenbi in tax credits.29 The government also is establishing more small-business incubators in science and technology parks and training centers for entrepreneurs. It is boosting funding for national laboratories, engineering centers, and university science parks. 27 The economies of previously emerging economies have followed a comparable pattern of manufacturing without innovation. For analyses of these cases, see, for example, Linsu Kim, Imitation to Innovation; The Dynamics of Korea’s Technological Learning, Boston: Harvard Business School Press, 1997, at for example, pp. 192-213, 234-243. See also Glen Fong, who has shown a series of stages through which innovative economies must move – see Glenn R. Fong, “Follower at the Frontier: International Competition and Japanese Industrial Policy,” International Studies Quarterly, 42(2), 1998. 28 See Denis Fred Simon and Cong Cao, China’s Emerging Technological Edge: Addressing the Role of High-End Talent, Cambridge: Cambridge University Press, 2009. 29 Tax incentives for R&D in China is vary with the location of the investment and the type of technology in use. In addition, provincial and local governments often provide additional tax advantages for corporate R&D. The PRC Government’s R&D tax credit is permanent and offers businesses a tax deduction of 150 percent, if R&D spending increases 10 percent over the previous year. See .

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22 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION Universities in America’s Innovation System Universities have played a significant role in the U.S. innovation system since the Civil War, when the federal government began allotting land to each state to establish institutions to teach agriculture and engineering, National Academy of Engineering President Charles Vest explained in his presentation. That role expanded after World War II, when the federal government set up a system to fund basic research at universities, and in 1980, when the Bayh Dole Act allowed universities to commercialize intellectual property generated by federally funded research. “This started a very different and increased relationship of universities to the private sector,” explained Dr. Vest, a former president of the Massachusetts Institute of Technology. BOX B A Complex Innovation System In his conference presentation, Charles Vest of the National Academy of Engineering observed that the development of innovative products is increasingly the result of knowledge that flows back and forth among complex, inter-linked, and often ad- hoc “innovation ecosystems” at universities, corporations, government bodies, and national laboratories. The so-called U.S. innovation system “frankly is not really a system,” he said. “It is not designed or planned very explicitly.” The innovation process involving government, universities, and industry has historically been “very decentralized, very loosely organized, and highly entrepreneurial,” Dr. Vest said.44 It also tends to vary from region to region. But it has worked remarkably well at producing commercial products, processes, and services. An estimated 60 percent of America’s economic growth has been attributed to technological innovation, and the system has produced such “earth- shaking” advances as computing, the laser, the World Wide Web, financial engineering, and much of modern medicine. 44 The U.S. innovation system is characterized by both decentralization as well as strong networks of collaboration. Vernon Ruttan has noted that nearly all the major world innovation waves of the second half of the 20th century were characterized by government initiated linkages across the innovation system. See, Vernon W. Ruttan, Is War Necessary for Economic Growth, Military Procurement and Technology Development. Oxford University Press, 2006.

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23 INTRODUCTION None of these breakthroughs “were explicitly planned or envisioned in advance,” Dr. Vest observed. Nor were some of America’s most important innovation clusters, such as Silicon Valley or Boston’s Route 128. The question now is how to adapt the U.S. innovation system at a time when the venture-capital industry has become more averse to risk and to deal with enormous challenges such as energy, climate change, food, and water, Dr. Vest said. How the University of Maryland Drives Growth The University of Maryland at College Park illustrates the broad range of ways in which a university can impact the innovation economy—locally, regionally, nationally, and even internationally, university President Mote said in his presentation. Dr. Mote explained that “the spirit of entrepreneurship is embedded into the infrastructure of the university.”45 The University of Maryland has a special dormitory for student entrepreneurs, for example, that spawns an average of 17 start-up companies a year. Another program works with community colleges to nurture entrepreneurs in their 30s and 40s. The university’s engineering school has run the Maryland Technologies Enterprise Institute for 25 years, while the business school operates the Dingman Center for Entrepreneurship. Both offer services to start-ups. Maryland also runs weekend “technology start-up boot camps” that draw up to 600 from outside the university who want to launch companies. It has even organized a local network of angel investors. The university runs the oldest small-business incubator in the state and a “bioprocess scale-up facility” that develops commercial production processes, Dr. Mote explained. It also offers a state-funded consulting practice that has been replicated around the United States in which faculty help companies commercialize products. In addition to spawning a number of start-ups, many of which are based in an adjacent science park that is responsible for 6,000 jobs, the University of Maryland co- developed products ranging from power tools and telecom systems to boat sails. Nationally, the University of Maryland collaborates with several federal laboratories in energy, life sciences, aerospace, and national security and receives $500 million in federal research funding a year, Dr. Mote said. The National Oceanic and Atmospheric Administration is 45 The Kauffman Foundation 2009 report, “Entrepreneurial Impact: The Role of MIT” details a different but also interesting account of university innovation ecosystem. Available at .

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24 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION establishing a global climate-change and weather-predication center at the university research park, while the National Institute of Science and Technology is contributing funds for a new lab building on campus devoted to quantum physics. The University of Maryland also has an extensive relationship with China. Its Institute for Global Chinese Affairs, for example, has trained 3,000 Chinese executives since 1995, while 160 Chinese executives have received one-year degrees from Maryland’s Executive Master’s in Public Administration program. The university also has a special “international incubator” that has helped launch 11 Chinese companies in industries such as solar energy and software. In 2002, the Chinese government and Maryland set up a joint research park near campus that now houses facilities of companies from Beijing, Shanghai, and Guangzhou. COOPERATION IN INFORMATION AND COMMUNICATION TECHNOLOGIES Participants in the conference noted that 21st century innovation systems are based on state-of-the-art data and telecommunications infrastructure. Chen Ying of China’s Ministry of Industry and Information Technology noted in his presentation that information and communications technology (ICT) has become an increasingly important driver of economic growth. He cited a World Bank study that concluded a 10 percentage point increase in broadband penetration rates can increase economic growth by 1.3 percentage points in developing nations and by 1.2 percent in advanced nations.46 Over the next five years, ICT is expected to create $5 trillion in new economic activity. China’s Broadband Strategy China views broadband infrastructure as a catalyst for new growth industries such as software, logistical services, information technology outsourcing, and a wide range of digital devices. Several years ago, Mr. Chen explained, the government set a target of 30 percent annual growth 46 See Christine Zhen-Wei Qiang, “Broadband Infrastructure Investment in Stimulus Packages: Relevance for Developing Countries,” Global ICT Department, World Bank, 2009. This World Bank study includes Internet and broadband, in addition to the fixed and mobile phones, in an econometric analysis of growth in 120 countries between 1980 and 2006. Results show that for every 10-percentage-point increase in penetrations of broadband services, there is an increase in economic growth of 1.3 percentage points.

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25 INTRODUCTION for its software and information services industry and for software exports to grow 28 percent a year.47 China’s electronic commerce industry, which Mr. Chen said has been growing by around 25 percent a year, also is expected to see substantial expansion. Large-scale deployment of broadband and improved applications can help transform the entire economy by integrating industries and bringing new sources of high-value services, Mr. Chen said. ICT technologies can revitalize many existing industries, from furniture manufacturing to chemicals, he noted, and can bring greater efficiency and cost savings to companies and government. So in addition to expanding broadband infrastructure, the government is putting a high priority on optimizing the use of ICT and integrating it into “our daily lives,” America’s Broadband Strategy The United States also views broadband as critical infrastructure that must be used in “very interesting and innovative ways” in order to stimulate economic growth, Eugene J. Huang of the Office of Science and Technology said in his presentation. The Obama Administration is focusing on the “entire ecosystem surrounding broadband and how we will use it in the future,” he said. The Recovery Act earmarked $7.2 billion in grants to stimulate broadband deployment throughout the U.S and required the Federal Communication Commission to develop a National Broadband Plan.48 The plan’s “extraordinarily ambitious” goals cover not only broadband access but also its use in everything from health care to managing household energy consumption. The plan calls for affordable access with download speeds of at least 100 Mbps to 100 million U.S. homes and affordable access to at least 1 gigabit-per-second service for key institutions such as schools, hospitals, and government buildings in every community. Another goal is that the United States should have the world’s fastest and most extensive wireless networks. 47 China’s Eleventh Five-Year Plan (2006-2010) also calls for producing around 15 major software enterprises with sales exceeding RMB 10 billion. For a good analysis of China’s information technology and communication strategy by Indian software-industry association Indian software-industry association NASSCOM, see “Tracing China’s IT Software and Services Industry Evolution,” whitepaper prepared by NASSCOM Research, August 2007, (). 48 See Federal Communications Commission, Connecting America: The National Broadband Plan, .

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26 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION In terms of access, the Department of Commerce is using Recovery Act funds to expand broadband infrastructure, public computer centers, and sustainable adoption of broadband service, Mr. Huang said. The Department of Agriculture is spending $2.5 billion to deploy broadband in rural areas. The aim is to make it feasible for every home to connect to high-speed Internet, he said, “along the lines of what the United States did in the 1930s, when it determined it was a priority to get telecommunications distributed throughout the U.S.” These investments are part of a larger strategy to use broadband infrastructure to promote economic growth and achieve national priorities. The Recovery Act included $15.5 billion to develop and implement smart-grid technologies, for example, and $19 billion to accelerate adoption of information technology in health care. Broadband also is key to new Administration initiatives in public safety communications and improving government efficiency, transparency, and public services, Mr. Huang said. Co-developing ICT Products in China Advances in information and communication technologies are fundamentally transforming the process of innovation itself. They are enabling enterprises, for example, to increasingly innovate “globally in a fashion that is inclusive and connected across our borders,” Mark E. Dean of IBM Research explained in his presentation. Indeed, the global innovation system has become so integrated that “innovation in isolation is not significant for a successful company or one country,” he said. “Most of the challenges and opportunities facing us can only be addressed with global collaboration and innovation.” IBM Research is a good example of a truly global organization. It has a network of eight major labs employing 3,000 researchers in six nations, including a 200-engineer basic research lab in Beijing. IBM also has a 5,000-engineer software application and services development lab in China. In all, half of IBM’s research and 60 percent of its 220,000 technical employees are outside the United States. IBM’s goal is to create technologies that will have a global impact. “We work hard to avoid innovation in isolation, because that will create very narrow solutions that have very narrow upside potential,” Dr. Dean said. So IBM is creating a matrix that involves all research labs. “There is not a single project we have across the research division that is isolated to a single country,” he said. The company also co-develops products with other companies around the world. IBM has 10,000 partners in 350 cities in China. They include

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27 INTRODUCTION Futong, Digital China, Kingdee, and Yucheng Technologies. IBM has 100 joint labs and technology centers with Chinese universities and offers curricula that have helped trained 860,000 Chinese students and 6,500 teachers. One of IBM’s biggest collaborations in China is in Shenyang, in the northeastern province of Liaoning. IBM, the municipal government, and Northeastern University forged a five-year, $40 million partnership to develop information and communication technology to manage systems such as water purity, energy, food safety, and integrated urban planning. Dr. Dean predicts such efforts will be replicated around the world. COOPERATION ON MEDICAL RESEARCH Medical research is an important area of collaboration between the United States and China. . This collaboration is driven by mutual interest in finding remedies for chronic diseases. As was America’s experience as its population aged, cancer and other chronic diseases are overtaking infectious diseases in China as the top killers and as a “major health care crisis,” explained Anna Barker of the National Cancer Institute in her presentation. China has 1.6 million cancer deaths a year and reported 2.2 million new cases in 2009. The crisis “will get much, much worse in the next 10 to 15 years,” she said. The United States can benefit from China’s help, too, in order to accelerate the discovery of new treatments and to contain skyrocketing drug-discovery costs. Dr. Barker noted that the United States reports 565,000 cancer deaths a year and new cases are forecast to rise by at least 30 percent by 2020. 49 Annual U.S. spending on cancer treatment is expected to rise from $213 billion to $1 trillion a year. NCI sees China’s large data sets on cancer cases as valuable to an empirical analysis of how variations in the human genome may relate to the development and spread of cancer. According to Dr. Barker, China is also home to a large number of microbiologists, many of whom have been trained in U.S. universities and research organizations. Joint research by the National Cancer Institute and Chinese scientists began in the 1970s with seminal studies of cancers related to certain environments, such as near tin mines or in textile mills. Many of these studies led to worldwide regulation, Dr. Barker said. Chinese hospitals are vital U.S. partners in building new clinical trial systems, she said, not only because of the nation’s large patient population but also because 49 Data from American Cancer Society, 2006 Cancer Facts and Figures.

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28 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION managers at China’s university hospitals are often familiar with NCI, many of them having been trained there. Cancer genomics is a particularly valuable area for Sino-U.S. collaboration that could lead to important new therapies, Dr. Barker said. Chinese researchers were among the first to identify the SARS genome. The National Cancer Institute is working with Chinese institutes on an ambitious project to sequence genomes of all cancers. It also is partnering with the Beijing Genomics Institute, the world’s largest next- generation sequencing center, in brain-tumor research. Nanotechnology, which will “touch everything we do in medicine in the next 10 years,” is another area of “very strong collaboration,” Dr. Barker said. Five thousand scientists at 50 Chinese universities, 20 Chinese Academy of Sciences Institutes, and 300 nano-technology enterprises focus on the field.50 The third meeting between U.S. and Chinese medical researchers on nanotechnology will be held in fall 2010. The National Cancer Institute wants to keep expanding its Chinese partnership. Future health care research “is going to be a very distributed enterprise,” Dr. Barker predicted. “But I think it will be dominated by the U.S. and Chinese because we are making the investments.” SOME CHALLENGES TO CLOSER COOPERATION WITH CHINA Ambassador Wolff observed that America can learn from China’s search for solutions to common challenges. For example, the United States should study China’s financial support for renewable-energy projects, its approaches to carbon sequestration, and the balance between large enterprises and small- and midsized firms. “We should learn something from each other by comparing these two sets of national policies,” he said. Mr. Yang noted that Sino-U.S. collaboration has “some areas for improvement,” Going forward, a number of frictions between China and the United States can be worked out, allowing collaboration on innovation to move to a deeper level. Trade The divergent paths in innovation policy may require the United States and China to recalibrate their trade relationship, said Anna Borg of 50 Data from Science 309: 65-66, 2005.

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29 INTRODUCTION 51 the State Department in her presentation. There needs to be a “frank discussions” she said, about a “broader constructed trade framework supported by generally accepted rules and international institutions.” At the same time, there was acknowledgement from individual Chinese and American participants that U.S. technology export curbs and visa policies are also significant obstacles to closer collaboration.52 Intellectual Property Protection Ms. Borg also noted that some Chinese practices hurt innovation, such as weak protection of intellectual property rights. To maintain a successful innovation environment, nations must “embrace and enforce an intellectual property system that allows innovators to reap the benefits of their ideas and reward their risk-taking,” she said. “Without it there is little or no incentive for companies to produce new products or services.” She said cooperation on protecting copyrights and trademarks in industries such as software, drugs, music, and fashion “will go a long way in deepening” Sino-U.S. cooperation in innovation. Weak IPR enforcement also can make it harder for nations to fully benefit from global innovation networks, Ms. Borg suggested. “Nations that fail to protect intellectual property will find themselves cut off from these dynamic global partnerships because innovative firms will hesitate to invest in or form partnerships with countries where their intellectual property may be stolen,” she warned. Chinese officials countered that their nation has made tremendous progress is establishing laws to protect IPR rights and courts to settle disputes. Enforcement “is not only the work of the government,” Mr. Wang said. “Enterprises should provide evidence of IPR infringement. With evidence, a court will make a ruling.” Mr. Chen of the Ministry of 51 For a review of U.S. China trade issues, see Wayne M. Morrison, “China-U.S. Trade Issues” Congressional Research Service, June 1, 2010. See also New York Times, September 14, 2009, “China-U.S. Trade Dispute Has Broad Implications.” 52 See, for example, the remarks by Yang Xianwu of the Chinese Ministry of Science and Technology, who noted that the United States still places some restrictions on exports of high-tech products to China. In addition, he claimed that high-level personnel from China continue to encounter unpleasant experiences in obtaining visas to the United States. Responding to a question at the conference, Dr. Anna Barker of the National Cancer Institute said that obtaining visas for Chinese counterparts was a significant barrier for the first year after the September 11, 2001, terrorist attacks, but added that this situation has significantly improved.

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30 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION Industry and Information Technology also noted that the government has ordered all manufacturers of computers in China to pre-install only legal operating systems. Ninety percent of computers released by the 22 largest hardware manufactures in China have legal operating systems, he noted. “We have the hard figures to prove that, at least at the operating system level, the piracy issues have greatly improved,” Mr. Chen said. ‘Indigenous Innovation’ Ambassador Wolff challenged China’s focus on “indigenous innovation,” especially at a time when knowledge flows with increasing ease and speed throughout the world. “In this globalized world, there is no indigenous innovation,” he contended. The question is whether “on balance, these policies are helpful or harmful to China.” Ms. Borg also said that policies favoring domestic innovation could backfire. Some of the greatest benefits of innovation come from adopting innovations of others. Investment barriers or domestic intellectual- property requirements “will ultimately be self-defeating,” she warned. “In the short run, China's entire economy will be less competitive when it is denied access to the full range of innovative products available in the global market.” China's own creative industries will be stifled if they are denied exposure to international competition and new technology, she said. Requirements that government agencies buy locally developed technology also “constitute a step toward import substitution” and “invite retaliation,” Ms. Borg said. As they seek to boost their investments abroad, Chinese companies also will benefit from a transparent regulatory and legal environment, she said. Despite the growing emphasis on indigenous innovation, China still attaches great importance to international cooperation in science and technology, Mr. Yang of the Ministry of Science and Technology said. He acknowledged that China’s innovation system “cannot be separated from the rest of the world.” He noted that China has signed science and technology cooperation relationships with 152 nations and regions, sent science diplomats to 45 nations, and has joined 350 different international science and academic organizations, in which 265 Chinese scientists hold posts. China has participated in the Human Genome Project and European Galileo Program, which is developing a satellite for geo-positioning systems. China’s main objection is to “absorb innovation” from the outside and adapt it to serve “Chinese conditions.”

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31 INTRODUCTION Few relationships have been more important than that with the United States, Mr. Yang said. He noted that the United States and China have signed some 50 cooperation agreements in fields such as agriculture, energy, and medicine involving nearly every Chinese government agency. The most recent agreement, to establish the Sino-U.S. Joint Research Center for Clean Energy, is one of the most significant. For the first time, each nation will contribute an equal amount of money and assign scientists to an independently managed research center focusing on clean water, clean air, and other areas. “This represents an historic point,” Mr. Wang said. “In the past, cooperation mainly focused on exchanges of personnel. This is the first time both governments donated directly to a joint program.” Equal Treatment for U.S. Firms in China’s Markets Another U.S. complaint is that foreign companies collaborating in R&D in China aren’t treated as equals when it comes to the domestic market.53 Although IBM works with the government, “we’re not viewed as a Chinese company, which can be a constraint in many ways,” said IBM’s Mark Dean. “We would like to be viewed as an equal partner, because we believe our investments will be on par with those of Chinese companies.” There also was a sense by some on the American side that the United States often gives more than it benefits from R&D partnerships with the Chinese. If cooperation is to work, “it must be based on an equal exchange,” Michael Borrus of X/Seed Capital remarked. “Each side must give as well as get.” To move towards greater reciprocity, the key to success may lie in creative incrementalism. As suggested by Michael Borrus in his concluding remarks: “We need to try some things together, demonstrate mutual gain, and then turn those smaller-scale collaborations into larger collaborations.” 53 The U.S. Chamber of Commerce has called the regulatory environment in China increasingly difficult for foreign companies citing government procurement rules that favor local companies, a postal law that excludes foreign suppliers such as FedEx Corp. and curbs on rare-earth exports. See New York Times, January 18, 2011, “U.S. Shifts Focus to Press China for Market Access.”

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32 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION BUILDING ENDURING FOUNDATIONS For all of the philosophical differences voiced in the symposium, the common theme was on the strong foundations available on which to build U.S.-China cooperation in science and innovation. Individual participants from both the United States and China voiced their support for the basic elements of a globally connected innovation system, which include developing strong commitments to open scientific and applied research, education, spurring corporate R&D investment, and growing international partnerships, especially in areas of compelling mutual interest such as medicine and energy. The mission of universities also is expanding in both countries to pay more attention to commercial applications. “Universities should remain focused on discovery of new scientific knowledge, new technologies, and new processes,” noted Dr. Vest. “But I think they are going to be increasingly use-inspired. People are simultaneously exploring the unknown, but with a broad end-goal in mind,” he said. There also was evidence of some convergence in philosophy. China is trying to transform an innovation system dominated by state institutions into one driven more enterprises and the market. “We learned from advanced countries,” Mr. Wang said. The United States, by contrast, is searching for a more effective and impactful role for public policy and federal agencies. Nations with state-led innovation systems “are all trying to work their way to the bottom,” observed the University of Maryland’s Mote, “while the United States is trying to work its way to the top.” Which mix of innovation policies and investments proves most effective in tackling enormous global challenges such as climate change, energy, and medical care for aging populations remains to be seen. As we see in the proceedings, summarized in the next chapter, the participants in this workshop highlighted a variety of areas where cooperation between China and the United States can help address these global challenges.