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Chapter 5
The New Global Competitive Environment
America’s innovation system has long been the envy of the world.
Now the rest of the world is racing to catch up. Virtually every important trading
partner has declared innovation to be central to increasing productivity,
economic growth, and living standards. They are implementing ambitious, far-
sighted, and well-financed strategies to achieve that end. This chapter will
describe how different nations studied by the STEP Board are addressing their
innovation challenge.
Indeed, just as the global movement toward free markets in the 1990s
became known as the Washington Consensus, the first decade of the 21st century
has seen the emergence of what could be described as the Innovation Consensus.
Governments everywhere have been sharply boosting investments in research
and development, pushing universities and national laboratories to
commercialize technology, building incubators and prototyping facilities for
start-ups, amassing early-stage investment funds, and reforming tax codes and
patent laws to encourage high-tech entrepreneurialism. What’s more, these
efforts are backed by intense policy focus at the highest level of governments in
Asia, Europe, and Latin America.
Underlying this trend is an emerging understanding of what makes a
nation globally competitive. Carl J. Dahlman of Georgetown University notes
that economists traditionally have viewed competitiveness as a function of
factors such as capital, the costs of labor and other inputs, and the general
business climate. In a more dynamic world in which information technology
and communications enable knowledge to be created and disseminated at ever-
greater speeds, competitiveness increasingly is based on the ability to keep pace
with rapid technological and organizational advances.1
1
See presentation by Carl J. Dahlman of Georgetown University in National Research Council,
Innovation Strategies for the 21st Century: Report of a Symposium, Charles W. Wessner, editor,
Washington, DC: The National Academies Press, 2007.
201
OCR for page 202
202 RISING TO THE CHALLENGE
The innovation agendas and precise policies differ from country to
country, based on national needs and aspirations. In some cases, governments
are implementing policies modeled after those of the United States. In others,
they are borrowing from successful models pioneered in Europe and East Asia
that leaders regard as more attuned to the competitive realities of the 21st century
global economy. In that regard, other nations’ experiences offer valuable lessons
for policymakers in the U.S. federal government, regions, and states.
To better understand global trends in innovation policy, the National
Academies’ Board on Science, Technology, and Economic Policy (STEP)
conducted an extensive dialogue over the past several years to compare and
contrast policies of many nations. This section presents a number of case studies
from those symposia and our research. While it is of course difficult to
generalize, a number of common policy themes recurred through this extensive
dialogue. They include:
• The paramount importance of investment in education to provide the
skills base upon which an innovation-led economy is based.
• The value of increasing public and private investment in research and
development, with at least 3 percent of GDP generally viewed as a
desired target.
• The importance of establishing a far-thinking national innovation
strategy that lays out broad science and technology priorities and a
policy framework that addresses the entire ecosystem, including skilled
talent, commercialization of research, entrepreneurship, and access to
capital. Such national strategies require attention of top political
leadership, coordination of government agencies, sustained funding,
and collaboration with stakeholders at the regional and local level.
• An increasingly prominent role for public-private partnership in which
industry, academia, and government pool resources to accelerate the
translation of new technologies into the marketplace.
• A recognition that while universities’ primary roles are education and
research, they also can serve as powerful engines of economic growth
if granted greater freedom to collaborate with industry and to
commercialize inventions.
• Focus on programs to encourage firms to transform basic and applied
research into new products and manufacturing processes.
• Greater policy emphasis on the institutional framework needed to
sustain new business creation, such as intellectual property-right
protection, competitive tax codes, and an efficient and transparent
regulatory bureaucracy.
This chapter will describe how different nations studied by the STEP
Board are addressing these and other issues. The chapter describes the
innovation policy approaches of nations at three tiers of development.
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THE NEW GLOBAL COMPETITIVE ENVIRONMENT 203
In the first tier are the emerging economic powers. We looked at China
and India in some depth. Both nations have charted ambitious innovation
agendas for improving living standards and moving well beyond labor-intensive
manufacturing and low-skill services to high-tech and knowledge-intensive
industries. They are leveraging their large domestic markets and low-cost
workforces to attract foreign investment in next-tier industries and are
developing globally competitive corporations. They also are making strategic
choices about technologies that address domestic needs and in which they are
best positioned to compete globally in the future.
In the second tier are the more mature newly industrialized economies.
We focus on Singapore and Taiwan, which have extraordinarily well-educated
populations and have attained world standards in industries such as high-tech
electronics, biotechnology research, and chemicals. They are striving to develop
innovation ecosystems that will allow them to rank among the world’s richest
nations and compete head-to-head with the West and Japan in next-generation
industries.
The third tier represents mature industrialized nations. We devote
special attention to Germany because of that nation’s ability to remain globally
competitive in advanced manufacturing exports despite wages and other costs
that are higher than in the United States. Our case studies also include Japan,
Finland, Canada, and the Flanders region of Belgium. Each of these nations has
revamped their national innovation strategies in order to increase R&D
spending, collaboration between industry and academia, and new technology
start-ups.
In most cases, it is too early to offer a full assessment of whether the
strategies and policy tools selected by other nations will achieve their stated
targets. What’s more, not all of these policy options are appropriate for America.
Yet they offer many valuable lessons for U.S. policymakers and present a
picture of the changing global context as America prepares for 21st century
competition.
EMERGING POWERS
China’s Rapid Rise
After achieving decades of astonishing growth led by export
manufacturing and heavy capital investment, China’s leadership stresses that the
nation’s future as a global power rests on its ability to build an innovation-led
economy.2 China has pursued that goal with substantial investment and
2
Government pronouncements on the importance of innovation began earlier. For example, then-
President Jiang Zemin declared in the keynote address to the National Innovation Technology
Conference on Aug. 23, 1999, that “the core of each country’s competitive strength in intellectual
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204 RISING TO THE CHALLENGE
impressive focus. National spending on R&D has risen by an average of 19
percent a year since 1998,3 and in under a decade has grown from less than one
percent of GDP to 1.7 percent.4 China’s share of global R&D spending soared
from 6 percent in 1999 to 12 percent in 2010.5
By virtually every conventional benchmark—successful patent
applications, scientific publications, post-graduate degrees awarded, and global
market share in high-tech goods--China’s progress in science and technology
has been solid. China has emerged as a major exporter of everything from solar
cells to high-end telecommunications equipment and has accelerated the
construction of high-speed trains. As R&D Magazine noted, China’s financial
commitments and record of generating intellectual property is such that it no
longer can be regarded as an “emerging nation” in science and technology. 6 In
2010 alone, for example, China’s international patent filings surged by 56.2
percent, to 12,337, compared to average growth worldwide of 4.8 percent.7 The
most visible manifestations of China’s innovation push are its sprawling science
parks. China’s 54 major research parks average 10,000 acres, compared to
around 350 acres in the U.S.8
China’s achievements are a testament to the nation’s ability over the
past three decades to overhaul a dilapidated science and technology
establishment, maintain policy focus at all levels of government, and mobilize
immense public resources to invest in higher education, infrastructure, and
R&D. That commitment continues to grow. China’s long-term plans call for
boosting gross R&D spending to 2.5 percent of GDP by 2020 and for science
and technology to account for 60 percent of the economy.9 The government has
set an ambitious target of having 2 million patents of inventions, utility models,
and designs by 2015.10
innovation, technological innovation, and high-tech industrialization.” Current President Hu Jintao
has stressed the importance of innovation in numerous speeches.
3
UNESCO, Institute for Statistics Database, Table 25, Gross Expenditure on Research and
Development in constant dollars. Growth rate from 1998 to 2008.
4
Ministry of Science and Technology of the People’s Republic of China, China S&T Statistics Data
Book 2010, Figure 1-1.
5
Battelle and R&D Magazine, 2012 Global R&D Funding Forecast, December 2011
6
Martin Grueber and Tim Studt, “Global Perspective: Emerging Nations Gain R&D Ground,” R&D
Magazine, Dec. 22, 2009.
7
Xinhua News Service, “China 2010 International Patent Filings up 56.2%,” China Daily, Feb. 2,
2011.
8
Data from Research Triangle Foundation.
9
State Council of China, National Medium- and Long-Term Program for Science and Technology
Development, 2006-2020
(http://webcache.googleusercontent.com/search?q=cache:y800l0iQlS8J:www.cstec.org/uploads/files
/National%2520Outline%2520for%2520Medium%2520and%2520Long%2520Term%2520S%26T
%2520Development.doc+china+National+Medium-+and+Long-
Term+Program+for+Science+and+Technology&cd=18&hl=en&ct=clnk&gl=us&client=firefox-a).
10
State Intellectual Property Office, “National Patent Development Strategy (2011-2020),”
(http://graphics8.nytimes.com/packages/pdf/business/SIPONatPatentDevStrategy.pdf).
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THE NEW GLOBAL COMPETITIVE ENVIRONMENT 205
China’s heavy focus on absorbing foreign technology, rather than
inventing it, also explains its industrial rise. The U.S. devotes 17.4 percent of its
R&D spending to basic research, another 22.3 percent to applied research, and
60.3 percent to R&D development.11 China invests 82.7 percent of national
R&D spending to development of products and manufacturing process, while
devoting just 4.7 percent to basic research and 12.6 percent to applied research.12
[See Figure 5.1]
When it comes to creating truly innovative products, however, China
still is regarded as an underachiever.13 One hurdle is weak R&D spending by
Chinese companies, especially state-owned enterprises.14 Even though business
enterprises in China accounted for 73 percent of R&D spending in 2009,15 a
World Bank study of nearly 300,000 Chinese enterprises big and small found
that the vast majority did not conduct continuous R&D and described Chinese
industry as “manufacturing without innovation.”16
China’s weak protection of intellectual property rights is a serious
restraint on innovation, preventing companies from enjoying the full profits of
their inventions and making foreign investors wary of conducting sensitive R&D
in China.17 Other often-cited weaknesses are shortages of the right kind of
11
National Center for Science and Engineering Statistics, National Patterns of R&D Resources:
2008 Data Update, Detailed Statistical Tables, NSF 10-314 (March 2010), Tables 1-4.
12
Ministry of Science and Technology of the People’s Republic of China, China S&T Statistics Data
Book 2010 , Figure 1-3 at http://www.sts.org.cn/sjkl/kjtjdt/data2010/cstsm2010.htm.
13
As a recent National Academy report concluded “China’s S&T investment strategy is ambitious
and well-financed but highly dependent on foreign inputs and investments. Many of its stated S&T
and modernization goals will be unachievable without continued access to and exploitation of the
global marketplace for several more decades. China plays a critical role in low- and select high-tech
industry production and logistics chains, but it cannot (yet) replicate these processes domestically.”
National Academy of Sciences, Natural Research Council, S&T Strategies of Six Countries:
Implications for the United States, Washington, DC: The National Academies Press, 2010, p.23.
14
Gruber and Studt, ibid.
15
China S&T Statistics Data Book 2010, ibid., Figure 1-2.
16
Chunlin Zhang, Douglas Zhihua Zeng, William Peter Mako, and James Seward, Promoting
Enterprise-Led Innovation in China, Washington, DC: The International Bank for Reconstruction
and Development/The World Bank, 2009
(http://siteresources.worldbank.org/CHINAEXTN/Resources/318949-
1242182077395/peic_full_report.pdf).
17
For examples 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.
(http://www.itic.org/clientuploads/ITI%20Testimony%20to%20USITC%20Hearing%20on%20Chin
a%20%28June%2015,%202010%29.pdf ). See also Semiconductor Industry Association,
Maintaining America’s Competitive Edge: Government Policies Affecting Semiconductor Industry
R&D and Manufacturing Activity, March 2009, p.31. “Most [semiconductor] companies surveyed
indicated that they would not locate their most advanced and critical R&D activities in China,
despite encouragement and even pressure by the government to do so, and regardless of the
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206 RISING TO THE CHALLENGE
Box 5.1
Constraints on Innovation in China
China’s massive investments in technological infrastructure, science
education, and research programs are key elements in laying the foundation for
an innovation economy. But these investments in themselves do not mean that
China will become a leading innovator in the near term. As China’s Vice
Minister of Science and Technology, Ma Songde commented in 2006, “most
Chinese high-tech products are copies from other countries and that original
inventions are rare on the mainland.”18
In this regard, a recent report by the National Academies noted that
“Although the growth in S&T funding is remarkable, there are still institutional
issues that must be resolved. In particular, there is a general lack of openness
and transparency in funding decisions, which negatively affects the ability of
China to recruit first-rate scientists. Additionally, most R&D spending is geared
toward development activities, rather than basic research. As a result, the quality
and quantity of cutting-edge basic research is still small compared to that of the
United States.” 19
The current World Bank report on China observes that notwithstanding
China’s growing supply of skills and advanced industrial base, most R&D is
conducted by the government and state-owned enterprises in a manner that is
divorced from the needs of the economy. China has seen a sharp increase in
patents and published papers, but few have commercial relevance.20 The report
indicates that “China has relatively few high-impact scientific activities in any
field,” and that the “quantity [of patents] has not been matched by the quality of
the patents.”21
The centerpiece of China’s innovation effort, the so-called ‘indigenous
innovation” initiative, emphasizes the exertion of commercial leverage against
foreign firms to induce the transfer of technology that will be “absorbed,
assimilated, and re-innovated” with Chinese intellectual property—arguably not
availability quality and size of incentives, due to concerns about the inadequacy of intellectual
property protection in that country.”
18
Seminar remarks summarized in Open Source Center Report (July 24, 2006).
19
National Research Council, S&T Strategies of Six Countries, Implications for the United States,
Washington, DC: The National Academies Press, 2010, page 30. The report further notes that
“although China’s university system graduates hundreds of thousands of scientists and engineers
each year, a critical shortage exists of highly qualified faculty, many of whom are attracted instead to
opportunities in the private sector.”
20
World Bank, China 2030, Washington, DC: The World Bank, 2012.
21
World Bank, Supporting Report 2: China Grows Through Technological Convergence and
Innovation. Washington, DC: World Bank, 2012, pages 177-178.
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THE NEW GLOBAL COMPETITIVE ENVIRONMENT 207
a program focused on fostering original discoveries.22 Despite these limitations,
developing major new innovations is not the only source of national strength.
Programs that focus on acquiring new and established technologies can help
develop the technological competitiveness of the Chinese economy and provide
the opportunity for commercial success, first within China and next in export
markets, thus laying the foundation for steadily higher levels of commercial
application of advanced technologies.
To address these challenges to its innovation system, the World Bank
recommends that China concentrate on raising the technical and cognitive skills
of its university graduates, building a few world-class research universities with
links to industry, increasing the availability of patient risk capital for start-ups,
and fostering clusters that bring together dynamic companies and universities
and allow them to interact without restriction.23
human resources, weak linkages between government-funded research
institutions and the private sector,24 a science and technology establishment that
prizes the quantity of journal publications and patents over quality and added-
value, and over-dependence on government bureaucracy in investing R&D
funds. A study by the Chinese Ministry of Science and Technology and the
Organization for Economic Co-Operation faulted “deficiencies in the current
policy instruments and governance promoting innovation.” As a result, the study
concluded, the government’s heavy investments in R&D have “yet to translate
into a proportionate increase in innovation performance.”25 As Deng Wenkui,
director-general of the State Council Research Office put it: “Although China is
a science and technology country with great skill, it is not a powerhouse.” He
added that “without reform and innovation, China cannot develop.”26
22
State Council, “Guidelines for the Medium and Long Term National Science and Technology
Program (2006-2020) June 2006.
23
World Bank, China 2030, op. cit.
24
See Denis Fred Simon and Cong Cao, China’s Emerging Technological Edge: Addressing the
Role of High-End Talent, Cambridge: Cambridge University Press, 2009.
25
OECD Reviews of Innovation Policy, op. cit. This lack of performance is reflected in the
innovation component of the World Bank’s Knowledge Economy Index (KEI), which ranks
China 63rd in the world despite its large absolute spending on R&D. The innovation component of
the World Bank’s index is based on total royalty payments and receipts, patent applications
granted by the U.S. PTO and scientific and technical journal articles. World Bank, Knowledge
Assessment Methodology at http://go.worldbank.org/JGAO5XE940.
26
Remarks by Deng Wenkui of the State Council Research Office at the Sept. 19, 2011 National
Academies symposium “U.S.-China Policy for Science, Technology, and Innovation” in
Washington, DC.
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208 RISING TO THE CHALLENGE
China
Basic
Applied
Development
U.S.
20 80 100
40
0 60
Percent
FIGURE 5.1 China devotes less that 5 percent of total R&D spending to basic
research.
SOURCE: China: Ministry of Science and Technology of the People’s Republic
of China, China S&T Statistics Data Book 2010, Figure 1-3; for U.S.: National
Center for Science and Engineering Statistics, National Patterns of R&D
Resources: 2008 Data Update, Detailed Statistical Tables, NSF 10-314 (March
2010), Tables 1-4.
NOTES: China data for 2009; U.S. data for 2008.
Determined to correct these shortcomings, the Chinese government
over the past five years has launched an ambitious agenda to “transform
China’s economic development pattern so that it is driven by innovation,” in
the words of Ministry of Science and Technology official Yang Xianyu.27
President Hu Jintao has declared that innovation “is the core of our national
development strategy and a crucial link in enhancing the overall national
27
From presentation by Yang Xianyu of the Ministry of Science and Technology in National
Research Council, Building the 21st Century: U.S. - China Cooperation in Science, Technology, and
Innovation, Charles. W. Wessner, editor, Washington, DC: The National Academies Press, 2011.
OCR for page 209
THE NEW GLOBAL COMPETITIVE ENVIRONMENT 209
strength.”28 Such pronouncements have been backed with a flurry of
initiatives at the central, provincial, and local levels to upgrade the nation’s
innovation ecosystem. Among other things, the government is greatly
increasing spending on R&D, boosting incentives for corporate R&D, urging
universities and government research institutes to form stronger links with
industry, building immense science parks, investing aggressively in broadband
infrastructure, and vowing to improve intellectual property-right protection.
The strategy is embodied in The National Medium and Long-Term
Program for Science and Technology Development, 2006-2020, a document
drafted over two years and that received input from some 2,000 experts.29 The
overarching goal is to make China an “overall well-off society” driven by
innovation. Among the key targets for 2020 are to become one of the world’s
top five generators of invention patents and published scientific papers, and to
reduce China’s dependence on foreign technology to 30 percent.30 The
document also lists 16 “megaprojects” that will receive heavy government
financial backing.
The aspect of the game plan that has generated the most attention
overseas is the government’s emphasis on “indigenous innovation.” The goal
is to ease China’s dependence on imported technology and to nurture
companies that can compete at home and abroad with their own intellectual
technology. As outlined in the 15-year science and technology plan and
numerous published rules and guidelines over the past five years, the strategy
includes compelling foreign companies to transfer core technology as a price
for being able to sell into China’s immense domestic market.31
In addition to generating tension with trade partners, China’s
innovation strategy seems fraught with internal contradictions. Although the
stated goal is to achieve an innovation-driven economy led by market forces
and enterprises, the technology drive is built around large state-led projects.
28
Hu Jintao report to the 17th National Congress of the Communist Party of China, Oct. 14, 2007.
See Xinhua, “Innovation tops Hu Jintao’s Economic Agenda,” Oct. 15, 2007
(http://news.xinhuanet.com/english/2007-10/15/content_6883390.htm).
29
Cong Cao, Richard P. Suttmeier, and Denis Fred Simon, “China’s 15-Year Science and
Technology Plan,” Physics Today, December 2006
(http://www.levininstitute.org/pdf/Physics%20Today-2006.pdf).
30
National Medium- and Long-Term Program for Science and Technology Development, op. cit.
31
For an extensive discussion of the controversies surrounding China’s indigenous innovation
policies, see James McGregor, “China’s Drive for ‘Indigenous Innovation: A Web of Industrial
Policies, “U.S. Chamber of Commerce, Global Intellectual Property Center, APCO Worldwide
(http://www.uschamber.com/sites/default/files/reports/100728chinareport_0.pdf). Also see U.S.
International Trade Commission, China: Intellectual Property Infringement, Indigenous Innovation
Policies, and Frameworks for Measuring the Effects on the U.S. Economy, Investigation No. 332-
514, USITC Publication 4199 (amended), November 2010
(http://www.usitc.gov/publications/332/pub4199.pdf) and Alan Wm. Wolff, “China’s Indigenous
Innovation Policy,” testimony before the U.S. China Economic and Security Review Commission,
Washington, DC, May 4, 2011.
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210 RISING TO THE CHALLENGE
Although the strategy acknowledges that China needs multinational
investment and greater international collaboration, it is intends to extract
technology from foreign companies to create domestic champions that will
eventually compete directly against them. As an extensive study of China’s
technology modernization drive by CENTRA Technologies concludes:
“Caught between a tradition of state planning and the need for markets—and
between an interest in foreign technology assimilation of the lure of
domestically developed technology—China’s innovation system faces an
ambiguous future.”32
Nevertheless, there is little question China has the raw potential—and
certainly the determination—to emerge as a 21st century innovation power.
China has passed Japan as the world’s second-largest spender on R&D.33
Tertiary enrollment in China rose from 2 percent in 1980 and 22 percent in
2007. As of 2008, China had 27 million post-secondary students, compared to
18 million in the U.S.34 Forty percent of those students are in engineering, math,
and science.35 China’s research workforce that has tripled to some 1.6 million
since 1997,36 and a pool of science and engineering Ph. D’s that swelled more
than fourfold over that time to 20,000. China has extraordinarily high savings
and investment rates of around 40 percent of GDP, double the rate of most other
nations. China also has the world’s second largest manufacturing base [See
Figure 5.2], a surplus labor pool of more than 150 million people, superb trade
logistics, the world’s fast-growing market for advanced technology products,
and the ability to absorb global knowledge through direct foreign investment
and an extensive network of overseas Chinese.37
32
Micah Springut, Stephen Schlaikjer, and David Chen, “China’s Program for Science and
Technology Modernization: Implications for American Competitiveness,” CENTRA Technology
Inc., prepared for The U.S.-China Economic and Security Review Commission, 2011
(http://www.uscc.gov/researchpapers/2011/USCC_REPORT_China's_Program_forScience_and_Te
chnology_Modernization.pdf).
33
OECD, Main Science and Technology Indicators: Volume 2011/1, 2011, p. 18. Data comparison
based on current U.S. dollars.
34
UNESCO.
35
See Carl Dahlman, World Under Pressure, op. cit.
36
UNESCO Science and Technology database.
37
See presentation by Carl Dahlman of Georgetown University in National Research Council,
Innovation Policies for the 21st Century, Charles W. Wessner, editor, Washington, DC: The National
Academies Press. Also see Carl Dahlman, in Building the 21st Century: U.S. - China Cooperation in
Science, Technology, and Innovation, op. cit.
OCR for page 211
THE NEW GLOBAL COMPETITIVE ENVIRONMENT 211
2,000
Manufacturing Value-added (Billions of Constant 2005 Dollars)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
U.S. China Japan Germany Korea India
FIGURE 5.2 China is second only to the United States in manufacturing value-
added.
SOURCE: United Nations Statistics Division, National Accounts Main
Aggregates Database at http://unstats.un.org/unsd/snaama/selbasicFast.asp.
China’s Evolving Innovation System
China re-entered the global economy in the late 1970s with a
scientific establishment, higher education system, and industrial base that had
been crippled by nearly three decades of chaotic rule under Mao Zedong.
After its victory in 1949, the Communist Party implemented Soviet-style
central planning. Private industrialists fled to Hong Kong and Taiwan, and
state took control of the factories left behind. Millions perished in famine as
the result of the Great Leap Forward, Mao’s disastrous grass-roots
industrialization drive. Scientists and academics were purged in an anti-
rightist campaign and again during the Cultural Revolution from 1966 to
1976, when educated Chinese were banished to manual work in the
countryside and universities were shut to virtually all but workers, farmers,
and soldiers. That 10-year period cost China a generation of top scientists and
engineers whose absence is still felt.
OCR for page 310
310 RISING TO THE CHALLENGE
introduce new or significantly improved goods and services.468 The Science,
Technology, and Innovation Council said in a 2008 report that R&D spending
by Canadian firms is “falling behind our major competitors and the gap is
growing.”469 Business R&D spending equaled around 1 percent of GDP in 2009,
compared to a 1.6 percent average for OECD nations.470 [See Figure 5.14]
Milway, executive director of the Institute for Competitiveness and Prosperity,
recently remarked that this performance “is another bit of evidence that our
businesses are not competing on the basis of innovation, value-added and
sophistication.”471 Total R&D intensity in Canada has thus been trending
downward for the past decade, to 1.81 percent of GDP in 2010. [See Figure
5.15]
There also are concerns that Canada is falling short of its goal of
building a sufficient base of knowledge workers. A report by the Canadian
Council on Learning in August 2010 said Canada lags in early childhood
education. While science, math, and reading test scores still are relatively high
in secondary school, other nations are advancing faster. 472 Canada ranks 20th
among OECD nations in terms of natural science and engineering degrees as
share of total degrees and 17th in the number of people in science and technology
occupations.
Such challenges have not slowed Canada’s commitment to investing in
the science and technology foundations of an innovation-led economy. It is early
to pass judgment on Canada’s efforts to stimulate private investment in R&D,
since many of the new programs were implemented just prior to the 2008-2009
recession, which forced companies to cut back. To address challenges in R&D
investment and with the skilled workforce, the Canadian government also
remains committed to expanding research collaborations with foreign companies
and universities, to improving incentives to attract direct foreign investment, and
to recruiting top talent.
468
Industry Canada, Foreign Affairs and International Trade Canada, and Statistics Canada, “Survey
of Innovation and Business Strategy,” 2009. A summary of the survey’s findings can be found on the
Industry Canada Web site at http://www.ic.gc.ca/eic/site/eas-aes.nsf/eng/h_ra02118.html.
469
Science, Technology, and Innovation Council, State of the Nation 2008 (http://www.stic-
csti.ca/eic/site/stic-csti.nsf/eng/00019.html).
470
OCED, Main Science and Technology Indicators, 2010.
471
Rebecca Lindell, “Canadian R&D Spending Continues Downward Spiral: StatsCan,” Postmedia
News, Dec. 8, 2010.
472
Canada Council on Learning, Taking Stock of Lifelong Learning in Canada (2005-2010):
Progress or Complacency? Aug. 25, 2010.
OCR for page 311
THE NEW GLOBAL COMPETITIVE ENVIRONMENT 311
2.15
2.09
2.10
2.04
2.04
2.05 2.07
2.04
2.00
2.00 1.96
R&D/GDP (Percent)
1.95
1.92
1.90
1.90
1.85
1.80 1.81
1.75
1.70
1.65
2001 2002 2003 2004 2005 2006 2007 2008 2009p 2010p
FIGURE 5.15 Canadian R&D intensity has been trending downward in the past
decade.
SOURCE: Statistics Canada, CANSIM, tables 358-0001 and 380-0017 and
Catalogue nos. 88-001-XIE and 88F0006XIE.
NOTE: Data for 2009 and 2010 are preliminary.
Japan
Japan has taken a number of actions since the mid-90s to improve its
innovation system, many of them inspired by the United States.473 Japan has
strengthened protection of intellectual property, overhauled science and
technology policy institutions, enacted its own version of the Bayh-Dole Act to
make it easier for universities and research laboratories to commercialize
technology, and bolstered industry and academic science partnerships.474 Japan
473
A National Academy report recently concluded, however, that Japan has still not adequately
addressed some longstanding weaknesses in its S&T system “which include immobility of
personnel, inadequate entrepreneurialism, insufficient opportunity for younger researchers, and
abiding problems with industry-university-government collaboration.” National Academy of
Sciences, S&T Strategies of Six Countries, op. cit., p. 43.
474
See Sadao Nagaoka and Kenneth Flamm, “The Chrysanthemum Meets the Eagle— The Co-
evolution of Innovation Policies in Japan and the United States,” in National Research Council, 21st
Century Innovation Systems for Japan and the United States: Lessons from a Decade of Change,
OCR for page 312
312 RISING TO THE CHALLENGE
also undertook a number of initiatives to increase entrepreneurialism, including
a small-business loan program similar to America’s Small Business Innovation
Research program.
To spur corporate R&D spending, Japan grants generous tax credits.
Largely as a result, Japanese spending on research and development surged from
2.77 percent of GDP in 1994 to 3.8 percent in 2008 before declining slightly to
3.62 percent in 2009.475 [See Figure 5.16] Japanese companies account for three-
quarters of that spending, the highest ratio among OECD nations.476
Driving this change was the realization that innovation would be
central to restoring growth to the Japan’s stagnating economy in the wake of the
financial crash of 1990. Even though Japanese R&D investment and output of
patents remained quite strong on world standards throughout the 1990s,
Japanese companies stumbled as they tried to make the transition from products
derived from well-developed technologies to the creation of more fundamental
breakthroughs.477 Japan’s competitiveness in industries such as semiconductors
and consumer electronics waned with the rise of new rivals in South Korea and
Taiwan. Japan had largely missed out on the U.S.-led booms in biotechnology
and software.478 Japan’s commercial scene, dominated by large conglomerates,
was not producing many dynamic start-ups. The rapid pace of change ushered in
by the information technology revolution and globalization did not play to the
strengths of Japan’s large industrial conglomerates.
Japan’s policy shift began in earnest with passage of the Basic Law on
Science and Technology in 1995.479 Under that plan, the government spent ¥17
trillion ($206 billion in current U.S. dollars) from 1996 through 2000 on science
and technology programs. During the subsequent five-year basic plans, another
¥49 trillion were invested. These funding increases helped Japanese universities
and national laboratories upgrade laboratories that had become outdated.480
Sadao Nagaoka, Masayuki Kondo, Kenneth Flamm, and Charles Wessner, Eds., Washington, DC:
The National Academies Press, 2009.
475
Japanese Ministry of Internal Affairs and Communications, Statistics Bureau at
http://www.stat.go.jp/english/data/kagaku/index.htm. Data refer to fiscal years.
476
OECD, OECD Science, Technology and Industry Scorecard 2011, Figure 2. 5.2.
477
Lee Branstetter and Yoshiaki Nakamura, “Is Japan’s Innovation Capacity in Decline?” National
Bureau of Economic Research, Working Paper 9438, January 2003.
478
Some analysts attribute Japan’s decline as a leader in consumer electronics, characterized by
innovative products such Sony’s Walkman audio devices, to increased importance of embedded
software, an industry dominated by U.S. companies, rather than hardware design. See Ashish Arora,
Lee G. Branstetter, and Matej Drev, “Going Soft: How the Rise of Software-Based Innovation Led
to the Decline of Japan’s IT Industry and the Resurgence of Silicon Valley,” National Bureau of
Economic Research, Working Paper 16156, July 2010.
479
For an unofficial translation of the Science and Technology Basic Law (Law No. 130 of 1995)
see http://www.mext.go.jp/english/kagaku/scienc04.htm.
480
National Science Foundation, “The S&T Resources of Japan; A Comparison with the United
States,” Access at http://www.nsf.gov/statistics/nsf97324/intro.htm.
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THE NEW GLOBAL COMPETITIVE ENVIRONMENT 313
4
3.80
3.62
3
R&D/GDP (Percent)
2.77
2
1
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
FIGURE 5.16 Japanese R&D intensity peaked at 3.8 percent of GDP in
FY2008 before declining slightly in FY2009.
SOURCE: Japan Ministry of Internal Affairs and Communications, Statistics
Bureau, Accessed at .
NOTE: Data refer to fiscal years.
Japan also strengthened national coordination of its innovation strategy.
The Council for Science and Technology Policy, established in 2001, became
part of the Prime Minister’s Cabinet. The council drafts comprehensive science
and technology policies to respond to national and social needs, advises on how
to allocate resources, and evaluates major projects. Funding focused on life
sciences, nanotechnologies and new materials, information and communication,
and environmental technologies.481
The government did not, however, assume greater central control over
research. To the contrary, in 2004 it gave national universities and research
institutes more autonomy to allocate resources, collaborate with industry, and set
481
For an extensive discussion of changes in Japanese innovation policies, see Akira Goto and
Kazuyuki Motohashi, “Technology Policies in Japan: 1990 to the Present,” in 21st Century
Innovation Systems for Japan and the United States.
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314 RISING TO THE CHALLENGE
their own research priorities by separating them from the civil-service system.
These institutions were transformed into non-profit corporations. Because they
account for the bulk of scientific and technological research, the independence
given universities and national labs is expected to allow resources to be used
more flexibly and efficiently. In another crucial institutional reform, government
agencies have begun to allocate much greater shares of R&D funds on the basis
of peer-reviewed competition.482
The greater focus on innovation has led to dramatic increases in
scientific research in strategic areas.483 In 1992, the government set a goal of
tripling investment in life sciences over the next decade. By 2001, the number of
biotech companies had risen from a few dozen to 250; the goal was to have
1,000 biotech companies by 2010. In nanotech, Japan was spending almost as
much on research as the United States--$940 million—as of 2004. Fuel cells, an
important technology not only for portable electronic devices but also for future
electrified vehicles, also received heavy emphasis.
Robotics is another top Japanese research priority. The government is
especially interested in developing technologies used in core components that
can be applied across the industry, such as power sources, control systems,
mechanics, software, and structures. Two of Japan’s biggest investments in
science were the $1 billion Spring-8, one of the world’s largest synchrotron
radiation facilities, and the Earth Simulator, a $450 million scientific computer
billed as the world’s fastest when it opened in 2003.
Japan also has resuscitated R&D consortia, a key element of industrial
policy until the 1980s. The government cut funds for consortia in areas like
semiconductors following trade friction with the U.S., but began to renew such
programs after Sematech started to benefit U.S. producers and Japanese
chipmakers’ fortunes declined.484
Strengthening University-Industry Partnerships
Japan has moved to strengthen universities’ collaboration with industry.
In 1999, Japan enacted a law that gave universities and research institutes the
ability to patent investments derived from publicly funded research, similar to
the Bayh-Dole Act of 1980. Since then, these institutions have established
technology-transfer organizations. The government also helped universities set
up Collaborative Research Centers that compete for government grants for joint
482
A concise analysis of Japan’s shift in innovation policy is found in National Research Council,
S&T Strategies of Six Countries: Implications for the United States, Committee on Global Science
and Technology Strategies and Their Effect on U.S. National Security, Washington, DC: The
National Academies Press, 2010.
483
See presentation by David K. Kahaner of the Asian Technology Information Program in
Innovation Policies for the 21st Century, op. cit.
484
Nagaoka and Flamm, op. cit.
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THE NEW GLOBAL COMPETITIVE ENVIRONMENT 315
university-industry research, small-business incubators, and a network of 45
Venturing Business Laboratories, which help young researchers commercialize
their work. In addition, the government relaxed rules that had barred university
faculty from serving on the boards of private companies.
These efforts led to significant results. University-industry research
collaborations surged from around 1,500 in 1995 to more than 6,000 in 2003.
Companies spun out of universities increased to around 150 a year as of 2003,
nearly half of them in life sciences and information and communication
technologies.485
While it is too early to assess the full impact of Japan’s reforms, there
have been noticeable improvements. The World Economic Forum ranks Japan
9th overall in its most recent Global Competitiveness Index and 4th in
innovation.486 Patent applications by universities and technology-licensing
offices increased from 641 in 2001 to 8,527 in 2005, a comparable level to the
United States. University-industry joint research projects jumped from less than
1,500 annually in 1995 to more than 10,000 in 2005. Spinoffs from Japanese
universities also rose sharply.487 And overall, Japanese patent applications have
been increasing in recent years. [See Figure 5.17]
Such data suggest that university-industry partnerships have become
“important for science-based innovation in Japan,” said Masayuki Kondo of
Japan’s National Institute of Science and Technology. “They narrow the gap
between Japanese high science and technology potential and low industrial
performance to help strengthen the innovation capability of Japanese industry.”
However, Mr. Kondo said, Japanese universities bring in only a fraction of the
licensing revenues of American universities. Only a handful of Japanese
spinoffs so far have gone public.488
Stronger protection of intellectual property rights has improved Japan’s
innovation system since the early 1990s. Initially, the Japanese government
responded to pressure from the U.S. to strengthen enforcement of violations.
The World Trade Organization’s Trade-Related Aspects of Intellectual Property
Rights (TRIPs) agreement in 1995 also had a major impact. The government
enacted a series of other reforms since then, including the Basic Law on
Intellectual Property in 2003 and establishment of the Intellectual Property High
Court in 2005, which is modeled after the U.S. Court of Appeals of the Federal
Circuit. Criminal sanctions have been raised, and the scope of invention that is
patentable has been greatly broadened.489
485
Presentation by Masayuki Kondo of Japan’s National Institute of Science and Technology Policy
in 21st Century Innovation Systems for Japan and the United States.
486
World Economic Forum, The Global Competitiveness Report 2011-2012, op. cit.
487
Presentation by Masayuki Kondo, op. cit.
488
Ibid.
489
See presentation by Sadao Nagaoka of Hitotsubashi University in 21st Century Innovation
Systems for Japan and the United States.
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316 RISING TO THE CHALLENGE
60,000
50,000
U.S.
PCT International Applications
40,000
Japan
30,000
20,000
Germany
China
10,000
Korea
0
2006 2007 2008 2009 2010e
FIGURE 5.17 Japanese patent applications have been increasing in recent
years.
SOURCE: WIPO, "International Patent Filings Recover in 2010," February 2,
2011, PR/2011/678.
NOTE: 2010 data are estimated.
IPR protection in Japan is now widely recognized to be very high.
According to Business Software Alliance, Japan has the third-best record of
enforcement following the U.S. and New Zealand. Patent-infringement claims
have increased sharply. The overall impact on Japanese innovation is more
difficult to assess because there are concerns that the IPR system’s complexity
and overburdened judiciary may hinder the ability of companies to
commercialize technologies efficiently and raise transaction costs.490
Rediscovering Small Companies
Small business played a big role during Japan’s post-war economic
takeoff. But starting in the 1970s, new company formation began to fall to the
point where entrepreneurship was perceived as stagnant, explained Takehiko
Yasuda of Japan’s Research Institute of Economy, Trade, and Industry. One
reason was that Japanese policy tended to protect small enterprises from large
490
Ibid.
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THE NEW GLOBAL COMPETITIVE ENVIRONMENT 317
firms, rather than see them as sources of innovation and job creation.491
Policymakers also viewed large corporations as bigger contributors of wage and
labor productivity. By the 1990s, however, the government recognized that start-
ups were providing major stimulus to the economies of the U.S. and England.492
The government began introducing policies to encourage more start-
ups in 1999. It enacted the Small and Medium Enterprise Basic Law to promote
their growth. Two years later, the government launched the Start-up Doubling
Plan, which set a goal of increasing the number of start-ups from 180,000 in
2001 to 360,000 in five years. Japan removed minimum capital requirements for
new limited-liability companies, established the National Startup and Venture
Forum to educate entrepreneurs, reformed the bankruptcy code, and launched a
start-up loan program through the government-owned National Life Finance
Corporation. The loans required no collateral, guarantors, or personal
guarantees. In 2008, this unit was folded into the Japan Finance Corporation,
whose small- and medium-sized business unit provided ¥20 trillion in support in
2009.493
Japan also established its own Small Business Innovation Research
program, modeled after the one run by the U.S. Department of Commerce. The
program aims to enhance the ability of small and midsized enterprises to
develop technology and innovative products. As with the U.S. SBIR program,
Japanese agencies that make research grants set aside a certain portion of their
funds for small and midsized enterprises.
Removing the minimum capital requirement of ¥10 million for joint-
stock companies in 2004 had an immediate impact. Between Feb. 1, 2004, and
Jan. 21, 2006, there were 24,639 confirmed applications with 20,211 notification
completions. Based on the success of this policy, the Japanese government
enacted the Corporate Law in 2005 to remove the minimum capital requirement
for establishing firms in general, which is consistent with the U.S. joint-stock
corporation policy.
Remaining Challenges for Start-Ups
One of Japan’s most pressing challenges is to create new companies. A
1997 survey by Japan’s Ministry of Public Management, Home Affairs, Post
and Telecommunications found that only one in 50 employed people aspired to
become entrepreneurs, a very low level on world standards, and that only half of
them were actually preparing to become self-employed.494 The environment has
491
S&T Policies in Six Nations, op. cit.
492
See presentation by Takehiko Yasuda of the Research Institute of Economy, Trade, and Industry
in 21st Century Innovation Systems for Japan and the United States.
493
Japan Finance Corporation Web site.
494
Employment Status Survey by the Ministry of Public Management, Home Affairs, Post and
Telecommunications, 1997.
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318 RISING TO THE CHALLENGE
not improved dramatically since then. Of 59 nations studied by the Global
Entrepreneurship Monitor, Japan ranks second to the bottom, behind only Italy,
in entrepreneurial activity.495
A lack of capital is a major reason. A survey of start-ups found that 49
percent of Japanese entrepreneurs reported that “procuring funds for entry” is a
major problem, well ahead of finding customers and hiring high-quality
employees.496 To remedy this problem, the National Life Finance Corporation
set up a new program to lend up to ¥10 million to start-ups without requiring
collateral, guarantors, or personal guarantees. Between 2002 and 2006, the
number of recipients rose from 2,975 to 7,942.497
Some Early Progress
Japan’s new innovation system has begun to change the dynamics of
the national economy. Patenting and technology transfer from Japan’s top public
research institutes have increased sharply. That system is still evolving,
however, and inefficiencies remain. America’s National Institutes of Health, for
example, coordinates all government-funded biomedical research. In Japan,
similar activity is dispersed among many funding agencies that do not share
information on researchers, according to a 2006 analysis by Yosuke Oka, Kenta
Nakamura, and Akira Tohei.498 Nor are there guiding principles of peer review
across agencies. “This could explain why a small number of star scientists
receive a large share of research funds from multiple funding agencies,” the
authors noted. Government research funding also tends to flow to a handful of
top schools. The top 10 universities garner half of research grants in Japan.499
Even though patent filings increased, technology transfer from
Japanese research universities was not impressive when measured licensing
revenue, according to Dr. Oka, Dr. Nakamura, and Dr. Tohei. Among other
things, they attributed the poor performance to rudimentary technology-transfer
contract practices and overly restrictive rules on using research funds.
University researchers prefer “informal collaborations” to get around red tape.
What’s more, despite relaxed rules allowing academics to work in the private
sector, most university researchers remain at their jobs rather than circulate
495
Donna J. Kelley, Niels Bosma, Jóse Ernesto Amorós, “Global Entrepreneurship Monitor 2010
Global Report,” Global Entrepreneurship Research Association, 2011, pg. 23.
496
Applied Research Inc., “Survey of Environment for Start-ups,” November 2006.
497
Data cited in Yasuda presentation, op. cit. For an explanation of the National Life Finance
Corporation program, see Jun-ichi Abe, “Small Business Finance & Support for Startups in Japan
(Case of NLFC),” National Life Finance Corporation, December 2004
(http://www.afdc.org.cn/upload/18/downloads/JUN-ICHI%20ABE.pdf).
498
Yosuke Oka, Kenta Nakamura, and Akira Tohei, “Public-Private Linkage in Biomedical
Research in Japan: Lessons of the 1990s,” in 21st Century Innovation Systems for Japan and the
United States.
499
Ibid.
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THE NEW GLOBAL COMPETITIVE ENVIRONMENT 319
through industry. Sadao Nagaoka and Kenneth Flamm suggest that Japan still
may lack the complementary institutions needed to make U.S.-style industry-
university partnerships more effective, such as infrastructure for supporting
high-tech startups, availability of risk capital, and professional services.500
A number of reforms have been proposed in Japan to address many of
these shortcomings. While it is too early to measure progress, the changes
implemented over the past decade in Japan’s innovation ecosystem have
provided a much stronger institutional framework for success in the 21st century
global knowledge economy.
500
Nagaoka and Flamm, op. cit.
OCR for page 320
