Summary

The return of the once-dormant economies of China and India to dynamism and growth is one of the most remarkable stories in recent history. The two countries are home to nearly 40 percent of the world’s population, but until recently neither had played an influential role in the contemporary global economy. Just a few decades ago, for example, Americans associated the words “Made in China” with simple, cheaply made manufactured goods of questionable quality and identified “Made in India” with little but crafts and colorful textiles.

In the past two decades, China and India have liberalized internal economic policy, treatment of foreign investment, and trade, and have experienced economic growth at sustained high rates. China’s gross domestic product has been growing at an annual rate near 10 percent for more than two decades, and now ranks as having the fourth largest output in the world, according to the Organisation for Economic Cooperation and Development (OECD).1 China has become a major exporter of manufactured goods, including high-technology items, and a destination of first or second choice for foreign investment. The Chinese population has seen a steady increase in average income, and there has been a sharp drop in poverty rates.

India’s rise has been almost as impressive. For the past 20 years its gross domestic product (GDP) has increased at an average annual rate of more than 6 percent; more recently (2003-2007) the rate was higher, 8.6 percent per year (Panagariya, 2007). In the three years from 2003 to 2006 India doubled the value of goods it exported to the rest of the world, while the export of services grew even faster, more than doubling in the two years from 2004 to 2006. Much of the export growth has come in high-technology industries, particularly software.2

From the point of view of the United States, however, the most important development in the Chinese and Indian economies in the long term may be the strides they are making in developing their own domestic innovation capacities. After a long period of under-investment, both countries have committed to growing their science and education systems to bolster research and further economic expansion. Already there are demonstrable albeit different levels of results in terms of R&D spending growth, numbers of science and engineering graduates at all levels, shares of scientific publications, numbers of domestic and foreign patent filings, and other measures.

Some observers of the recent growth have said that both countries are surging in their efforts to spur innovation; others have emphasized the potential of one country over the other; and still others have suggested that both China and India have a long way to go before achieving innovation-driven growth. With such a range of views, The National Academies’ Science, Technology, and Economic Policy

1

In general, there are two ways of comparing national economies. The market exchange rate (MER) method reports the nominal value of a statistic (e.g. GDP) as calculated at the market official exchange rate; the purchasing power parity (PPP) method accounts for differences in the cost of living between countries. By the MER method, China has the fourth largest GDP; by the PPP method it has the second largest economy.

2

The global economic crisis was only beginning at the time of the conference, but developments since suggest that China and India have weathered the crisis better than many other countries. In October 2009 the International Monetary Fund projected that the U.S. economy would contract by 2.7% in 2009 while that of China and India would grow by 8.5% and 5.4% respectively (all projections refer to real GDP changes).



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Summary The return of the once-dormant economies the rate was higher, 8.6 percent per year of China and India to dynamism and growth is (Panagariya, 2007). In the three years from 2003 one of the most remarkable stories in recent to 2006 India doubled the value of goods it history. The two countries are home to nearly 40 exported to the rest of the world, while the percent of the world’s population, but until export of services grew even faster, more than recently neither had played an influential role in doubling in the two years from 2004 to 2006. the contemporary global economy. Just a few Much of the export growth has come in high- technology industries, particularly software.2 decades ago, for example, Americans associated the words “Made in China” with simple, cheaply From the point of view of the United States, made manufactured goods of questionable however, the most important development in the quality and identified “Made in India” with little Chinese and Indian economies in the long term but crafts and colorful textiles. may be the strides they are making in In the past two decades, China and India developing their own domestic innovation have liberalized internal economic policy, capacities. After a long period of under- treatment of foreign investment, and trade, and investment, both countries have committed to have experienced economic growth at sustained growing their science and education systems to high rates. China’s gross domestic product has bolster research and further economic been growing at an annual rate near 10 percent expansion. Already there are demonstrable albeit for more than two decades, and now ranks as different levels of results in terms of R&D having the fourth largest output in the world, spending growth, numbers of science and according to the Organisation for Economic Co- engineering graduates at all levels, shares of operation and Development (OECD).1 China has scientific publications, numbers of domestic and foreign patent filings, and other measures. become a major exporter of manufactured Some observers of the recent growth have goods, including high-technology items, and a said that both countries are surging in their destination of first or second choice for foreign efforts to spur innovation; others have investment. The Chinese population has seen a emphasized the potential of one country over the steady increase in average income, and there has other; and still others have suggested that both been a sharp drop in poverty rates. China and India have a long way to go before India’s rise has been almost as impressive. achieving innovation-driven growth. With such For the past 20 years its gross domestic product a range of views, The National Academies’ (GDP) has increased at an average annual rate of Science, Technology, and Economic Policy more than 6 percent; more recently (2003-2007) 1 2 In general, there are two ways of comparing The global economic crisis was only beginning at national economies. The market exchange rate the time of the conference, but developments since (MER) method reports the nominal value of a suggest that China and India have weathered the statistic (e.g. GDP) as calculated at the market crisis better than many other countries. In October official exchange rate; the purchasing power parity 2009 the International Monetary Fund projected that (PPP) method accounts for differences in the cost of the U.S. economy would contract by 2.7% in 2009 living between countries. By the MER method, while that of China and India would grow by 8.5% China has the fourth largest GDP; by the PPP method and 5.4% respectively (all projections refer to real it has the second largest economy. GDP changes). 1

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2 THE DRAGON AND THE ELEPHANT (STEP) Board set out to describe developments quantity, will likely be the most important in both countries, in relation to each other and driving force in innovation. Shortfalls in India’s the rest of the world, by organizing a conference professoriate and higher education system, apart in Washington, D.C., to discuss the recent from elite technical institutions, are well known changes at the macroeconomic level and in and will require not only the added investment selected industries and their causes and recently announced by the government but also implications. The meeting drew academic new models of learning and instruction, as Sam experts, private sector leaders, and public Pitroda noted in his keynote address. The officials from both countries and international diasporas of both China and India, people who organizations and attracted an audience in have studied, staffed and started businesses excess of 350 people. abroad, will be important drivers of change and Titled, “The Dragon and the Elephant: adaptation. It is expected that improving Understanding the Development of Innovation research and economic opportunities will induce Capacity in China and India,” the conference more of these assets to return home. A large yielded observations about policy priorities in proportion of those who remain abroad are both countries as well as some observations developing close relationships with indigenous about how the U.S. might respond. Meeting on enterprises in their countries of origin. the 50th anniversary of the launch of Sputnik by Venture capital investment, particularly in the U.S.S.R, speakers noted that just as that China, has matured and focused on domestic event spurred a renewed U.S. commitment to markets, contributing to the growth of science and engineering education and to indigenous innovative firms. Increasingly, research, the economic challenges posed by the foreign (especially U.S.) investor partnerships rise of China and India could stimulate a similar are active in both China and India. India has renewal. more mature financial markets but also more China and India share some characteristics, restrictive labor rules. For international firms, such as enormous populations and domestic complex legal structures in the two countries markets, deeply-rooted cultures, recent histories entail a greater reliance on legal services and of liberalizing formerly collective economies, greater regulatory risk. Both countries lack and extensive diasporas of highly trained people. transparency in debt disclosure and impose But there are significant differences in many restrictions on investment options. As market areas, including demographics (India has a infrastructure improves and allows investors to younger population), education systems, capital price risk, demand and supply in venture-capital markets, infrastructure needs, and levels of GDP markets will grow. Growth in consumer demand and research investment. Perhaps the most can create further investment potential and help salient difference is in political regimes— drive innovation. between democratic India and authoritarian In contrast to a generation ago, the private China. The relationships among regime type, sector accounts for a growing share of R&D economic liberalization, growth, and political investment in both countries. Still, weak stability are not at all obvious, especially in the linkages between private and public sector R&D case of China. These relationships merit much institutions hamper innovation. This is more thorough examination than this conference compounded in some sectors by the dominance gave them. of state-owned or quasi-governmental Many observations ran counter to companies. Although no clear example of global conventional wisdom. For example, several technical leadership has yet surfaced in either speakers challenged the popular impression that country, areas of strength are clearly emerging. China and India are far surpassing the United Sectors where China can make particular States in producing advanced-degree graduates contributions to global science and technology of world class caliber in science and technology. include biology and Chinese medicine, In fact, all three countries may be facing a nanotechnology, space science and technology, shortage of talent. Education quality, rather than and energy, including cleaner technologies.

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SUMMARY 3 the high level of labor turnover, making skills India holds strengths in product, component, and available to local enterprises, but they also process design, pharmaceuticals, and automobile acknowledged a tension between sharing of and aircraft parts. intellectual property to facilitate collaboration Legal frameworks for innovation have and building capabilities of indigenous firms undergone major changes in the past 10 years that become competitors. and are still evolving. Intellectual property Four breakout sessions addressed recent systems in both countries have evolved toward changes in innovation capacity in important international standards, although weaknesses sectors of the Chinese and Indian economies— remain. In China the enforcement system lags information technology and telecommunications, behind modernization and expansion of the transport equipment, pharmaceuticals and patent administration system. India’s patent biotechnology, and energy. system is experiencing backlogs and delays. A theme of the IT session was the China recently enacted a new anti-monopoly law importance to innovation of a proximate and is making a major effort to develop and population of highly skilled users. Although promote its own technical standards in the IT Chinese and Indian IT firms are gaining in scale sector. There is some ambiguity about the and scope and certainly in manufacturing extent to which either or both of these capability (for example, in semiconductors and developments and others such as the recently personal computers), significant innovation, announced government procurement policy will especially in software, is handicapped by the be applied to favor indigenous firms over lack of a sophisticated customer base compared multinationals and foreign competitors. to those of the United States, Europe, and Israel. U.S.-based multinationals are investing However, this gap may close within a decade or heavily in China and India, including in R&D two. operations, although in most cases on a larger Both China and India have ambitious plans scale in China. Some of these affiliates work to to upgrade and expand domestic aircraft and adapt proprietary designs to local markets; automotive industries and become significant others are working at the technological frontier players in global markets. A key factor in both on advanced products for world markets. The countries is the growing sophistication of inducements to expand operations in the two engineering and design services, from fuselage countries are diverse – less expensive skilled design and avionics to passenger car platforms. labor, market access, opportunities to collaborate The movement of design services to both with world class scientists and engineers in countries has in large part been a function of academic and research institutions, and cost differentials; but increasingly, it reflects a government grants and tax concessions. China pursuit of talent. The Chinese and Indian has a more developed policy of subsidizing automobile industries have moved from copying enterprises to promote regional economic western designs to licensing technology and development. In India, geographical dispersion joint venturing with multinational companies is hampered by inadequate infrastructure. In (MNCs). The growing emphasis on indigenous both cases, there is a lack of experienced native- innovation is illustrated by the Tata low-cost car born managers. for mass markets with wide income disparities. Within China and India there is ambivalence To become a significant supplier to western about the role of international firms. They are markets, the Chinese industry will have to seen as contributing to the broadening and overcome fragmentation and lack of brand deepening of the overall level of technology in identification. the economies, but they are also suspected of As in other sectors, the roles of Chinese and monopolizing key technologies, crowding out Indian firms in pharmaceuticals and opportunities for indigenous firms, and biotechnology reflect partly the breakdown of siphoning off top talent. Multinationals are the self-contained innovation chain in western responding to pressures to follow a more multinationals and partly the long-standing collaborative innovation model. Representatives strengths in particular research, development, of US-headquartered global firms emphasized

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4 THE DRAGON AND THE ELEPHANT large share of the world’s new power generation and manufacturing segments. This phenomenon capacity over the next few decades, China is is represented by the involvement of indigenous poised to become the lowest price producer and enterprises in early stage research, laboratory therefore the global manufacturing base for services, and especially clinical trials. In India, energy technology, which could include clean the evolution of the intellectual property regime coal technologies as well as alternatives to fossil for pharmaceuticals has fostered strength in fuels. process technology and manufacturing, evident Although the conference revealed few, if in the growth of the generic pharmaceutical any, examples of Chinese- or Indian-origin industry. Now some of those firms are globally important next-generation products or venturing into the development of innovative services, it was acknowledged that that may products. China has opportunities to capitalize have been a function of hindsight or the on knowledge of traditional medicines and on a selection of industries for discussion. rapidly growing biomedical research enterprise Regardless, most participants agreed that as a to contribute to the development of new function of their sheer size and dynamism, the pharmaceuticals. Chinese economy in the near term and perhaps Energy production in China and India was the Indian economy in a somewhat longer discussed in the context of two forces—on the timeframe will have a much more profound one hand, rapidly growing demand fueled by impact on the United States than did Japan’s domestic economic growth and, on the other growth in the 1980s. Participants were less hand, international pressures to reduce clear about how the United States should greenhouse gas emissions to decelerate global respond other than to place a much greater warming. In China demand has been met premium on improvements in education, largely by expansion of coal-fired power expansion of research, access to foreign-born generation capacity at an unprecedented rate. In talent, international collaboration, and strategic the future there is prospect for some planning in an environment of rapid change. diversification, with nuclear, hydro and wind power playing a greater role. Accounting for a