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A Center for Collaborative Research & Education on Greater China
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The Innovation Wars: The Competition between America and China

2022: Volume 21, Number 1
1. Editor’s Note
2. Is the World Ready for China Risen?
3. China’s Nina Andreeva Moment
4. Security and Economic Challenges for Taiwan in Cross-Strait Relations
5. Watching the COVID World from Taiwan
6. The Innovation Wars: The Competition between America and China
7. Book Review: Red Roulette by Desmond Shum
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This article is based on a presentation given to the International Club of Atlanta on December 7, 2021.

Putting aside the political noise (as much as possible), both China and the U.S. face similar threats and share similar needs for innovation.   Neither is seriously threatened from outside their borders.  The serious threats are found within each country, although aggravated by external forces.  In my view, the most serious threat to both is the failure to share equitably — each country — the very visible prosperity they now enjoy and their failure to create equitable opportunities for those left behind to improve.

While I believe the “war” analogy is not entirely accurate, I will use it to frame my observations on the various “fronts” on which this “war” is being fought and where battle is currently joined.  These fronts are talent, capital, government industrial policy, and intellectual property.

What started this “war?”  China and the United States got to where they are today largely by energizing their economies and organizing their workforces around manufacturing.  America got a head start in the Industrial Revolution when China remained closed.  When China opened under Deng Xiaoping, it became the largest market on the planet.  It has grown three times the rate of the U.S., doubling every seven years.  China has become key to the world’s supply chain and the source of most everything, as well as the world’s largest global trader.  China is now the largest trading partner for more than twice the number of countries than the United States.

In today’s world, however, neither China nor the U.S. can continue to depend on manufacturing as the engine for economic growth.  They must both rely on the growth of innovation-driven economies.   What is central now to economic growth and quality of life in both places is discovering new ways to create value in what we make, how we make it, what we can do with it, and how we consume or use it.  This “Creation of New Valueis my working definition of what innovation is.  It also is not limited to creating new things.  Old things and existing processes used in new ways or to provide new services can also be innovative.

THE CHALLENGE TODAY

Today both China and America are challenged to grow their innovation economies in ways that more broadly share the benefits to assure continued economic advancement, national security, global influence, and domestic political stability.

Both China and America enjoy on average a high quality of life. America still has the larger economy measured by GDP, but in 2014 China surpassed America when measured in Purchasing Power Parity (PPP).  This is a rough comparison of the “felt” prosperity or standard of living.  This is hardly surprising because in the past 35 years the Communist Party in China has raised 500 million people out of abject poverty. Today more than 300 million Chinese enjoy a real middle-class life.  That, however, leaves an economic gap for 900 million Chinese.

Today, in both America and China, the current divisions between the “haves” and the “have nots,” between the economic elites and the “left behinds” or “left outs” or those who “never had a chance,” threaten more than just national economic growth.  These increasing divisions create a loss of confidence in the existing political order and institutions for those who feel ignored.

It is this imperative for continued economic growth sparked by innovation that has led to a global competition for talent, ideas, resources, and rules of the marketplace. This competition has been amplified to “war status” by rising nationalism fed by both the American and Chinese governments.

TALENT

There is no innovation without innovators.

Measuring human capital just in numbers gives China the edge with a population of 1.4 billion. If you are super talented in China (one in a million) there are 1,400 others just like you.  China also has a rigorous, if very regimented, system of education.  The focus through high school is preparing for the gaokao, the national college entrance exam, the lone criterion for admission to Chinese universities.

Education in China is largely based on memorization and hard work with not much critical thinking or problem analysis. The Chinese system, however, produces some people with remarkable talents, commitment to hard work, and self-discipline.  Young Chinese with the talent (and middle-class resources) can also study abroad.  More than 700,000 Chinese are studying outside of China. Roughly half are studying in American universities and high schools under various exchange programs.

America’s advantage has been its appeal to moveable talent across the globe.  America has made up for its sheer lack of numbers by welcoming those seeking refuge and opportunity.  Risk-taking immigrants and those people seeking education in American universities have formed a base of talent and energy that has propelled American innovation for more than a century.  Foreign-born talent that came to America — and their children — have helped create many innovative products and services, and create and lead many innovation-based companies.

America’s great advantage in innovation is this diversity of talent from across the globe.  Where you have different cultures working on the same problem, there is an openness to look for and apply different solutions. This is not easily found in a homogenous population with the same education, perspectives, and culture.  This American innovation advantage from diversity requires cultivation and continued support of diversity of both students and faculty in American universities.

About one-third of all current graduate students at Georgia Tech are foreign born.  Chinese students represent one-third of that number. They are not displacing American-born students who might otherwise be here.  The fact is we don’t have enough American-born students capable of participating in the level of research we conduct at Georgia Tech.  Foreign-born faculty are also an important part of the innovation talent pool.  Maintaining this global talent pool and the exchange of published research is not only critical for the academic tradition and process, but it also feeds innovation.

There are also important cultural barriers to innovation in both countries.  In China, status counts for a lot of behaviors.  Obtaining and preserving status is important to the individual and to their family. This tends to make the Chinese culture generationally more risk-averse.  Since starting a new enterprise or project carries some risk of failure, there is often a fear that failure of a new project might also stain the person as a failure.  In contrast, in Silicon Valley if you haven’t failed a couple of times, you are probably not trying hard enough.  Therefore, the entrepreneurial bug is harder to cultivate in China, but they are working on it.

The American cultural barrier to innovation is the increasing populist hostility to immigration that threatens the diverse pool of talent needed for innovation.   America’s ability to compete successfully for global talent has always depended on America’s promise of both safety and opportunity.  The U.S. government’s current paralysis to address immigration reforms and its suspicion of foreign-born talent working in fields of technical innovation threaten the high-level basic research that is essential for American innovation.  It is from this high-level basic research that a broad variety of applied innovations in products and services are derived.

America used to have a lock on foreign talent trained here who would wish to stay here.  But we are losing some of our best. The U.S. has erred in failing to staple a green card to every Ph.D. we graduate.  Those who graduate now can often find opportunities in their home countries with lower costs of living, less hostility to the way they look, and increasing support for their research.

China is funding and creating, with financial and regulatory support, special urban innovation districts that focus on areas for innovation emphasized by the Chinese government.  These places look a lot like the American garage culture, staged startup growth spaces and featuring the essential start-up coffee or tea shop.

China is also seeking to repatriate talent it lost to America by offering both financial support and research facilities.  This program is neither surprising nor a crime.  Faculty, however, failing to be truthful in their disclosures of foreign support or in discussions with the FBI can be criminal.  There have been several highly publicized arrests of distinguished Chinese academic scholars.  Most have failed to result in convictions or even prosecution.  But the overall anti-Chinese publicity is having a chilling effect in important areas of innovation and impacts the needed pool of talent.

This is particularly a problem for public universities that are more susceptible to the political winds.  American research universities have for many years provided the required export controls and protections for restricted or classified research.  But the rise of American hostility to immigration is eroding America’s innovation advantage by ignoring that our diversity is our strength — not a weakness or a threat.

America’s other cultural barrier to innovation is the historical discrimination that wastes half our domestic potential by underfunding education, employment training, access to technology, and opportunities in general for children of color and children of all colors in distressed communities.  Both countries also suffer from gender discrimination that fails to provide women the full range of opportunities and support needed for success in technology.  With a population that is less than 25 percent of China’s, America should avoid wasting any potential pool of talent.

Another key issue in both countries is developing an innovation workforce. Both countries confront new generations of young talent that favor a better “work-life balance.”  There is dissatisfaction in China with the current “996” work philosophy (9 a.m. to 9 p.m. six days a week).  China social media has seen a new “lying flat” (tang ping) movement (that advocates lying down instead of working hard). This was quickly taken down by the Chinese government, but not before being joined by millions of young Chinese who share that view.

In both countries, those born since 1980 do not believe that hard work is its own reward.  While they are capable, motivated to succeed, and are fine with less space, money, and status, they do seek more “self-time,” ”life balance,” and mobility.  They can get good jobs, but most do not expect to live better than their parents.  In both countries, many of these talented and educated young people cannot afford to buy a condo/home and thus will become a generation of “renters without roots,” free to pursue their next opportunity, wherever it may be.

Mobility is a big deal.  Those with the skills needed for innovation will be able to move freely and globally from job to job and place to place.  The pandemic has accelerated fundamental changes in how (and where) business operates.  An MBA or a graduate degree in computer science or any advanced technology has become a “global passport.”  Those with these skills can move to work anywhere, for anyone, and from anywhere.  They can and will move from job to job — or the jobs may come to them wherever they are.  Their longer productive years will also involve several different and changing jobs as technologies evolve.  Thus, the young in both countries need to develop the skills to be adaptive, lifelong learners in a changing global society or risk becoming obsolete.

CAPITAL

For 20 years China has invested heavily in both the hard and soft infrastructure needed for innovation education and research.  During this same time, the United States has been losing ground in global Gross Domestic Expenditure on Research & Development (GERD) for Innovation.  In the 20 years from 1999 to 2019, the U.S. share of the global R&D investments dropped from 40 percent to 30 percent.  In contrast, China’s global share has grown from 15 percent to over 24 percent in just the last 10 years.

In 2014, I was invited to speak on the future of Innovation at the Chinese Economic Conference in Shenzhen, China.  This was the part of China first to “open up” under Deng Xiaoping’s initiative.  In 2000 Shenzhen was a fishing village across from Hong Kong.  By 2014, Shenzhen had grown to become a thriving metropolis of 15 million people and the biggest hub of innovation in China.

Shenzhen lacked a major Level 1 research university to spawn ideas, talent, and companies.  To meet this need they began to build campus “outposts” for other major research universities in China and globally.  Some American universities had operated a campus in China for years, mostly in Shanghai or Beijing.  NYU, Duke, Michigan, Berkeley, and Georgia Tech were among them.

Georgia Tech was the first American university to create a joint venture in China (China Tech) after Deng Xiaoping’s Atlanta visit in 1979.  Georgia Tech began in Shanghai and decided to move to Shenzhen in 2010 after the provincial government agreed to build Georgia Tech a new campus in Shenzhen in a joint venture with Tianjin University.1

While China’s R&D is supported by large state investments, most R&D in the United States comes through private investment seeking a profit. According to the National Center for Science and Engineering Statistics:2

  • In 2019, the United States is estimated to have spent over half-a-trillion dollars ($656 billion) on R&D. The majority of those investments — $486 billion (74 percent) — came from the private sector.
  • Manufacturers account for roughly two-thirds of private-sector R&D spending in 2018. More than 20 percent of private R&D investments come from IT companies.3
  • About 15 percent was done by small businesses (fewer than 500 employees).

The American government tends to make major industrial investments only when it feels a threat to the nation.  In the 20th century, the Depression sparked the New Deal (CCC, TVA) and World War II, aviation, atomic energy, radar, and the GI Bill.  The Cold War and Sputnik led to major investments in technology universities, moonshot, and interstate highways.

The American government does fund high level basic research.  America, however, relies on private enterprise and entrepreneurship to create innovations and advances in applied technology and lets the market determine the winners and losers.  Thus, the search for innovation in America is driven as much (or more) for profit as for advancement of technology.

GOVERNMENT INDUSTRIAL POLICIES

China has a national innovation policy that spends serious money to quickly build labs and provide funding in exchange for them creating new patent applications.  As a result, the annual number of Chinese filed patent applications is now greater than all the rest of the world combined.  These are just applications — and many are just design patents — but it reflects the high level of Chinese activity and support.  Significantly, in 2019 China for the first time filed more international patent applications than the U.S. under the Patent Cooperation Treaty (PCT) that reserves the option to file for patents in other member countries.

The American quest to preserve profits has also led to disruptive innovation.  Kodak and Polaroid invented digital photography but did not want to give up profits from films.  Xerox’s Palo Alto Research Center invented the mouse and graphic user interface, but the company decided to stay with copying.  IBM thought it was selling computer hardware not programmable functionality.  Other innovative firms emerged to take advantage of these gaps to create important innovations, notably Microsoft, Apple, and Google.

China’s strength and its biggest problem is the government’s ownership of the major industries.  Because state-owned industries have easy access to government funding they have expanded to unprecedented scale.  They employ millions (as part of the migration from rural to urban).  They have also exported their capacity to build industrial plants and infrastructure across the globe. The problem is they tend to stifle growth of private and start-up firms which are often sources of disruptive innovation.

On the other hand, when China decides to build something, they can do so promptly and very efficiently.  Their expansion of expressways, high-speed rail, housing, and other infrastructure in 2011-2013 resulted in China pouring more concrete in those three years than the U.S. did in the entire 20th century.

There are other similarities.  Both governments have discovered because of the global marketplace they must rely on foreign sources for critical parts of their supply chain for essentials such as energy, food, rare earths, and computer chips.  Both are now trying to create domestic sources of supply.  Both China and America are busy blaming the other for domestic political reasons.  The result is rising public antipathy on both sides that is pointless since neither China nor America are going away. But it is useful for domestic political purposes.

INTELLECTUAL PROPERTY

The different focus in America and China on profits and national priorities impacts governmental policies regarding intellectual property. The U.S. Constitution authorizes Congress to grant “exclusive licenses to authors and inventors, for limited periods of time, to promote the progress of science and the useful arts.”  It says nothing about profits or preserving competitive advantage, but that is how our system has evolved.

The American entertainment and pharma industries have been aggressive in seeking to protect their profits globally based on American intellectual property rights.   As a result of the combined economic muscle of the Western economies, a special set of rules (TRIPS) was adopted by the World Trade Organization to set minimum standards for the protection and enforcement of intellectual property rights, according to western views.  These minimum IP standards are enforced by threats to impose trade sanctions.  This was essentially the West using its market muscle to protect Western IP rights.

With all its new patents, China has created new Intellectual Property Courts to enforce rights.  Yet it continues to insist foreign joint ventures share any imported technologies with the Chinese partner having control.  Thus, China is using its market power to enforce its rules for those wishing to take advantage of its enormous market.  Example:  Alibaba Group Holding Ltd.’s Singles’ Day shopping festival in 2021 posted one-day record sales of 540.3 billion yuan ($84.5 billion), compared to U.S. single-day sales in 2021 of $10.7 billion for Cyber Monday and $8.9 billion on Black Friday.  Thus, we have a global competition for the real governance of innovation, with many American companies voluntarily choosing to accept the risks and rules in China in exchange for access to the vast Chinese market.

Most important to China is the protection of the Communist Party from any potential threat to its power to govern.  This includes limiting access to or any use of innovative technologies that might undermine the Party’s ability to control flows of information to and/or about its population.  Dramatic improvements in China’s infrastructure have been made in parallel with advances in its surveillance technologies.  The Chinese government has a zero-tolerance policy toward COVID-19.  Automated monitoring of all innovations in social media, banking, and travel are set to promptly remove or prevent any perceived threat. China is also moving to invest in and effectively control Chinese joint ventures and startups, and to rein in the digital tycoons.

THE FUTURE OF INNOVATION

I see the future of innovation in America and China as a mix of competition and collaboration.  There are problems now and in the future that will unavoidably be shared and working together will be essential.  There will remain distinct cultures but shared appetites for styles, services, and status shown by the consumption of goods and services created in both places.  China faces challenges in making the transition from low-cost manufacturing to an innovation and service economy while maintaining control.  America faces challenges in restoring trust in its government to function and creating new employment opportunities to sustain both continued growth and a shared belief in the future.

Both China and America will be dramatically impacted by the forces of future change and their global impacts.  Key among these: urbanization, changes in technology, global economics, demographics, rising populism, and importantly, climate. These will all impact the need for clean air, fresh water, new temperate zones in which to live and grow food, and the likely global migration of large populations from endangered zones.

Another shared challenge will be the needs of aging populations with longer lifespans.  This will be particularly acute in China where the “one-child” policy has created a smaller workforce to replace pairs of working parents.  It also creates the “1-2-4 problem” (one child to care for two aging parents and four grandparents).  Both China and America are below replacement of their native population.  So, both will require (and welcome) significant immigrant support workers. Both will also need to properly educate and “future-proof” their children to be able to thrive in a rapidly changing global environment.

There will be continued competition between America and China for global influence based on the strength and attractiveness of their domestic economies and how well they share the opportunities and benefits.  In this regard, “soft power” will have as much influence and importance globally as “hard power” from a strong military and economic sanctions, but both are essential.

The real competition between China and America will have less to do with their capacity to innovate and more to do with their capacity to govern ourselves.  Herein lies a key difference between China and America. China defines itself by its dominant Han ethnic culture.   China views those of Chinese descent as citizens of China wherever they are.  America is such a mix of cultures that no single ethnic group is a majority.  America’s current extreme political polarization, however, has created gridlock and a struggle to find a coherent national identity.

Autocracies and emperors have existed for thousands of years, and they exist in many places today.  Autocracies have the benefit of clear rule, and they work until they don’t.  America’s most important innovation is its popular democracy.  America’s real competition is within its borders.  The challenge is whether America can continue to seek “a more perfect union” that can more equitably share the promised opportunities for “life, liberty and the pursuit of happiness.”

  1. One of the challenges now confronting Georgia Tech is that in 2020 Tianjin University was placed by the Department of Commerce Bureau of Industry & Security on the “Entity List” because there is reasonable cause to believe they may be involved in activities that are contrary to U.S. national security and foreign policy. This recent designation now significantly restricts Georgia Tech’s activities with Tianjin University.
  2. National Center for Science and Engineering Statistics | NSF 21-312; National Center for Science and Engineering Statistics (NCSE) | Beta site for NSF – National Science Foundation
  3. Fact Sheet – Research & Development by the Numbers; https://investinamericasfuture.org/fact-sheet-research-development-by-the-numbers/
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