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Comparative Study on China and US Innovation Policies and Effects on Growth Potentials

Jul 03 , 2017
  • Chen Baoming

    Director of Institute of Comprehensive Development, Chinese Academy of Science and Technology for Development (CASTED)
  • Ding Minglei

    Assistant Research Fellow of Institute of Comprehensive Development, Chinese Academy of Science and Technology for Development (CASTED)


A robot carries fruit on Tuesday during the World Robot Conference in Beijing.  (credit: AFP-JIJI)

Currently, the world economy is at a critical juncture as new drivers of growth take the place of old ones. Chinese President Xi Jinping remarked that “[g]rowth drivers from the previous round of technological progress are fading while a new technological and industrial revolution has yet to gain momentum". The key to addressing the challenges of downward economic cycle lies in supply-side structural reforms. Obviously, the new growth cycle must be built upon a new structure - one that features the extensive application of S&T innovation results.

Recovering from the crisis from the virtual economy, the US has put a premium on innovation and the real economy by issuing a string of documents on national innovation strategy to launch a wave of “re-industrialization”, identifying innovation as the key driver of economic growth. The strategy boils down to the development of high-end industries and manufacturing upgrade to forge new competitiveness. Germany has forged a government-industry alliance for the Industry 4.0 Initiative and high-tech strategy to promote smart and green manufacturing. The UK has released “The Innovation and Research Strategy for Growth”, which identifies science and innovation as the centerpiece of the UK’s long-term economic development. The EU’s reform focuses on employment, productivity and competitiveness with plans to increase R&D spending under the Framework Program 8. Japan’s “Comprehensive Strategy on Science, Technology and Innovation” and “Innovation 2025 Plan” and South Korea’s “Creative Economy Initiative” all define innovation as an engine of economic renovation.

Since taking office, US President Trump’s administration has followed an “America First” strategy, delivered on campaign promises and overhauled major policies. Yet to date, the Trump administration has yet to adopt a clear innovation strategy. Although Trump triggered a backlash from the science community and the Silicon Valley, his general approach aims to engage the private sector and spur domestic growth through innovation. It is fair to say that Trump’s innovation policy is an experiment based on the US supremacy on innovation and how his policies unfold remains to be seen.

The US has developed its supremacy in science and technology on all fronts through decades of great efforts on innovation. Not only did the US government invest heavily in innovation with R&D spending accounting for 28% of the world total, but it also successfully attracted the best talents from around the world without whom its great achievements in science and technology would not have been possible. By the end of 2015, there were 320 Nobel laureates in the US, half of the total number in the world. Moreover, the US attaches great importance to the commercialization of S&T results through deregulation and the enactment of the Bayh-Dole Act. Another strength of the US is fundamental research and frontier technologies: each year, a major part of government spending on science and technology is allocated to fundamental research and the development of frontier technologies.

After taking office, Trump made it a top priority to reduce the wealth gaps and enhance infrastructure but did not put forward a clear innovation strategy. In March 2017, Trump unveiled the “Office of American Innovation” staffed by former corporate executives. The US innovation office is expected to modernize the technology and data infrastructure of every federal department and agency, remodel workforce-training programs and hand over some government services to private companies. Foreseeably, as the Trump administration introduces policies in other areas, an innovation-related policy system will also take shape.

Competition and a free market economic system are the cornerstones of the US economy’s vibrancy and competitiveness. The role of government in promoting innovation, which became institutionalized after World War II, has been particularly strong in recent years in the context of fierce international competition. The overall level of R&D has been high and steadily increased during the Obama presidency. According to the National Science Board Science and Engineering Indicators 2016, US R&D spending grew by 0.8% on an annual average basis during 2008-2013. The US ranks first in the world in terms of R&D spending, accounting for 30% of the world total R&D spending in 2014 with the intensity of R&D spending increasing from 2.37% in 2004 to 2.62% in 2015.

After taking office, Trump made it a priority to enhance the military and increase jobs. In his first budget proposal for 2018 released in March 2017, Trump plans to significantly cut government spending and overseas aid to keep fiscal deficits in check, meaning that most federal agencies will face cuts in R&D spending. Trump’s proposed budget cut will not necessarily lead to a reduction in the overall US R&D spending but may cause protests from scientists in government-related R&D institutions, creating some pressures on Trump’s innovation policy.

During Obama’s presidency, the US R&D structure changed in favor of the private sector. In 2015, US private sector R&D spending as a share in GDP reached a record high of 1.7%, while the share of federal government R&D spending in GDP dropped from 0.75% in 2008 to 0.6% in 2015. Despite the small increase of federal R&D spending to reach 129.4 billion US dollars in 2015, up 2.3 billion US dollars from 2008, federal government spending on fundamental research as a share in total federal R&D spending increased from 21.3% in 2008 to 24.7% in 2015 (the Council of Economic Advisers, 2016). Obviously, the rapid increase of private sector R&D spending is a key driver of continued growth in US R&D spending. Meanwhile, federal R&D spending focused more on fundamental research and frontier technologies where private investment is lacking.

Although the National Science Foundation (NSF) is not on the list of budget cuts and NASA’s budget cut is limited (200 million US dollars), most other federal agencies face deep R&D budget cuts and funding to the UN is also reduced, including the cancellation of climate change funds. The proposed budget has cancelled the Advanced Research Projects Agency-Energy (ARPA-E) and related programs. ARPA-E is committed to the research of new energy that can replace traditional energy, an area that Trump believes should be led by the private sector. As revealed by Trump’s budget proposal, the Trump administration’s innovation policy will focus on inspiring private sector investment to offset the reduction of government R&D spending.

Without increasing its fiscal deficit, US’s more spending on the military, infrastructure and public security as urgent priorities means that less money will be spent on long-term R&D programs.

Trump has made a proactive infrastructure plan his priority, vowing to “transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains”. His plan may boost transport, Internet and other infrastructures and greatly increase demand for skilled workers, which will improve the foundation of industrial development and emerging industries in the US.

Since the beginning of his campaign, Trump has had a contentious relationship with the Silicon Valley. For instance, he believes that the Silicon Valley has hired too many foreigners and jobs may only be created by re-shoring manufacturing back to America. President Trump’s conservative attitude toward immigration, however, may cause a brain drain for tech firms.

Since taking office, President Trump has yet to unveil systematic innovation strategies and policies. Proposed budget cuts may reduce the level of support for research agencies and even terminate some technology programs. However, given the US prowess in science and technology, the short-term effects on US economic growth may not be significant. In the long run, the momentum of economic growth may suffer as a result. Trump’s innovation policy is based on the premise of avoiding fiscal deficits. Yet among the “America First” priorities, innovation is obviously not a first priority.

Compared with the uncertainty of US innovation policy, China has developed and is advancing its systematic innovation plans and reform initiatives. With major progress in building an innovation-oriented country, China’s S&T innovation is catching up with and overtaking developed countries, joining the ranks of leading nations for innovation and S&T research.

(1) Increasing clarity of S&T innovation strategy: China has attached utmost importance to innovation as the primary force of development. The Outline of National Innovation-Driven Development Strategy published in May 2016 identified the strategic “three-step” approach for innovation-driven development and the goal to become a global powerhouse in science and technology by 2050.

(2) Rapid growth of R&D spending: In 2016, China’s overall R&D spending exceeded 1.5 trillion yuan, ranking second in the world, and its R&D intensity is one of the highest among developing countries. China has become an important contributor to the global science community. The number of international papers published by China’s S&T personnel over the past decade ranks second in the world and the number of the top 1% most cited papers account for 12.8% of the world total, ranking third in the world (NBS, MOST, 2017). The number of accepted patent applications in China has ranked first in the world for five years in a row. In 2016, the number of international patent applications in China exceeded 40,000, up from 16th to the third highest in the world. China has made strategic breakthrough in innovation, greatly enhanced its international influence in fundamental research and achieved a host of major innovation results including manned aerospace and lunar probe, manned submersible, deep drilling, supercomputing, unusual quantum Hall effect, quantum communication, neutrino oscillation, induced pluripotent stem cell (iPS), etc. All these suggest great progress in S&T innovation in China, the world’s second largest economy.

(3) Greater support of S&T innovation to social and economic development: According to the National Innovation Index Report 2015, China ranks 18th among major countries in terms of the innovation index, approaching the top 15 innovative economies in the world. S&T innovation plays a more significant role in supporting economic and social development, even a leading role in some areas. Contribution of S&T programs increased from 50.9% in 2010 to 56.2% in 2016. The value-added of China’s high-tech manufacturing grew tenfold in a matter of 13 years, accounting for almost 30% of the world total.

(4) Pro-innovation institutional mechanisms and policies system initially taking shape: China is taking solid steps in advancing its reforms of the S&T system and developing an institutional framework encompassing resource allocation, talent incentive and innovation ecosystem. China has developed a new mechanism of S&T resource allocation linking industry with innovation and formed an S&T administrative system. China has been continuously enhancing the market-oriented innovation mechanism and the role of businesses as innovation entities. The implementation of major policies such as pre-tax deduction of R&D expenses is accelerating. The total number of China’s high-tech enterprises reached 79,000 in 2015 alone, and the tax cut for China’s high-tech firms amounted to 100 billion yuan.  A policy system for the commercialization of S&T results is taking shape.

Innovation Gaps between China and the US

Despite China’s progress in S&T innovation, China still lags behind the US mainly in terms of the stage of development. We should be mindful of these gaps even though some argue that China is overtaking the US and the “China technology threat” theory is being touted in some countries. The US supremacy in S&T innovation is hard to challenge in a short time. Even if China is able to catch up in some respects, it cannot overtake the US on all fronts. In the future, the key task of S&T innovation for both countries is to enhance S&T innovation and work together to bring the world economy onto the path of innovation-driven development.

Compared with the US, China’s weaknesses in S&T innovation are reflected in the following areas: (1) China still has great gaps of R&D investment. In 2014, China’s R&D intensity exceeded 2% for the first time, reaching 2.06% in 2015. The objective is to further increase this ratio to 2.5% by 2020. Since World War II, the US has maintained very high R&D intensity - more than 2% over the past six decades and 2.5% for many years. In 2015, the R&D intensity of the US and Germany reached 2.8 %. (2) China’s core industrial and critical technologies are still controlled by developed countries, particularly the US. China remains at the low-end processing link of the international industrial division of labor and Chinese firms are still weak in innovation. In 2015, the R&D spending of China’s industrial enterprises as a share in their revenue from primary business was only 0.9%. According to a survey conducted by China Economist in the second quarter of 2017, 43.1% of surveyed economists believe that the biggest barrier to China’s industrial international competitiveness is lack of technology. (3) China lacks major original innovations that can propel industrial change and disruptive innovations and still follows advanced countries in the major changes of industrial and technical pathways. (4) Highly qualified and skilled talents represent a small percentage in the workforce. The pro-innovation cultural atmosphere is not strong enough and the market is yet to play a stronger role in spurring innovation.

Suggestions on China’s Supply-side Structural Reforms

In the face of growth bottlenecks, it is imperative for China to bring into play the leading role of S&T innovation and promote innovation-driven economic and social development. As a developing country, China boasts late-mover advantages to swiftly apply frontier S&T innovation results. In addition, China also boasts institutional advantages to see through its strategy of innovation-driven development.

1 Steadfastly Implement An Innovation Strategy Ahead of Its Economic Development Stage

Innovation and economic growth are complementary to each other. As a key driver of economic growth, S&T innovation plays a critical role in transforming the pattern of development. However, S&T innovation is sometimes also affected by the economic situation. While innovation investment cannot be divorced from economic reality, it must be relatively stable and sustainable to yield results.

2 Promote the Transfer and Commercialization of S&T Results and Boost Economic Growth Potentials through Innovation and Entrepreneurship to Embrace a New Growth Cycle

Compared with the US, China’s late-moving advantage, broad market and commercialization conditions allow China to apply the latest R&D results to transform its industrial development. For instance, the US boasts the most advanced wireless broadband technology but many parts of the US are still using fixed network services. China should put innovation at the center of supply-side structural reforms and embrace a new growth cycle by deepening reform, bolstering weak areas, taking advantage of global innovation results and expanding the supply of new technologies, industries and services in the era of the new economy.

3 Deepen Institutional Reform and Policy Innovation to Create Favorable Conditions for Structural Adjustment

Trump’s innovation policy can be summarized as “cutting government R&D budget plus deep tax cuts”. In this major experiment, the key to success is whether the R&D spending cuts will be offset by empowerment of the private sector and the potentials of business innovation and competitiveness unlocked through tax cuts. Similar to the US, China also faces restraints in implementing supply-side structural reforms and fostering a new momentum of economic development. In addressing these challenges, China should further deepen market-based reforms, improve the market environment and mechanisms of fair competition and survival of the fittest, unleash the motive power of innovation and create conditions for the role of innovation to be brought into play. Given the steep US tax cuts, China should also further reduce the burden of businesses in the process of supply-side structural reforms.

4 Enhance Global Partnership of R&D Innovation

In adopting an “America First” strategy to protect US jobs and interests, President Trump should refrain from protectionism. Structural reforms of various countries are interconnected. Only by coordinating the global value chain will countries propel structural adjustment and achieve their objectives. China should follow the trend of innovation globalization and lead the world in fostering and transforming the new momentum of economic development by proactively integrating into the global innovation network and fostering high-end innovation factors. China should adopt a more proactive brain gain policy, promote “Belt and Road” cooperation on S&T innovation, guide and support Chinese firms in participating in global innovation, and work with other countries to forge new growth drivers of the world economy.

*Adapted from China Economist Magazine

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