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China becoming a powerhouse of global innovation

In his recent State of the Union address, US President Barack Obama argued that "the nation that goes all-in on innovation today will own the global economy tomorrow" and that China isn't exactly "standing on the sidelines". A new US report shows just how hard Beijing is working to get into the game.

Now that three-plus decades of China's so-called one-child policy has helped create what the International Money Fund calls a "sharp decline" in the pool of extra (read: cheap) labour, Beijing is urgently looking for ways of designing its own products rather than manufacturing someone else's. Put another way, it wants to shift from making iPhones to inventing them. A recent report by a respected US federal agency - which shows Chinese high-tech output nearing that of the United States, China committing an increasingly large portion of its wealth to R&D, and a huge jump in the number of Chinese graduates with engineering degrees - suggests it may soon have that chance.

The country is already more innovative than the massive, neo-Maoist factory assembly lines so prevalent in US popular imagination might suggest. China's start-up scene is abuzz with new products, new ideas and new investment, with some indigenous innovations like mobile messaging app WeChat offering a user experience that can rival that of any US competitor. On January 16, the Wall Street Journal hailed the "rise of China's innovation machine". A new report by the National Science Board (NSB), which sets policy for the US government's National Science Foundation, details what that shift actually looks like.

Although the NSB report is careful to note that it focuses on "broad trends", its fundamental conclusion is unmistakable: The centre of high-tech gravity is shifting to Asia and to China - the United States' greatest geopolitical rival - in particular. China's share of the world's high-technology manufacturing spiralled from 8 per cent in 2003 to 24 per cent in 2012, the report says. The US share of 27 per cent may not rank at No 1 for much longer, given that China's overall R&D is growing at 18 per cent per year.

These trends look set to continue. In a February 6 conference call to launch the report, NSB chairman Dan Arvizu said it's "possible China will overtake the US" in high-tech output "in the near future". That doesn't directly make the United States worse off: The international R&D pie is actually getting bigger, and the United States' slice looks smaller only by comparison. The United States and even Europe have actually poured more combined private and public money into R&D investment over the past decade, only to see their shares of the total pie shrink. From 2001 to 2011, the US portion of global R&D fell from 37 per cent to 30 per cent. Meanwhile, China's share jumped from 2.2 per cent in 2000 to 14.5 per cent in 2011.

Another area of striking gain for China is what the report calls "R&D intensity", which compares R&D expenditures against a given country's GDP. The US share has held mostly steady over the past 20 years, even declining slightly in 2010 and 2011. Meanwhile, the report shows China's own focus on R&D ramping up fast.

And then there's education. In 1999, fewer than 1 million Chinese graduated from a university; by 2013, it was almost 7 million. The net result, according to the NSB report, is that China is now churning out far more recipients of "first university degrees" than the US, defined as programmes sufficient to prepare the holder for entry into advanced research programmes or jobs.

That may not be particularly surprising or worrisome, given that China's population of approximately 1.3 billion dwarfs that of the United States, which has roughly 316 million people. The devil is in the details: The types of degrees being awarded. In China, 31 per cent of its undergraduates leave with degrees in engineering; in the United States, the figure is just 5 per cent.

None of this means that China will out-innovate the United States anytime soon. High-tech industry still accounts for a greater proportion of GDP in the United States - 40 per cent - than in any other country. And while the global financial crisis and subsequent economic downturn didn't spare the United States, where high-tech expenditures stagnated in 2009 and 2010 for the first time in 50 years, investment soon picked right back up.

China, meanwhile, is facing serious challenges in its quest to lead the world in innovation. Many of its most talented graduates leave the country to study or conduct research in richer countries. Its universities are plagued by bureaucratic red tape and intellectual dishonesty.

The Chinese education system still emphasises rote learning over creativity, raising questions over how many future Jobs, Gates, and Zuckerbergs populate its ranks. NSB vice chairman Kelvin Droegemeier told reporters that "China is able to produce a lot of very smart people, but they are challenged substantially" when it comes to turning discoveries into useful new products - the hallmark of innovation.

Taken together, the report's findings confirm two trends important to those who care about the US-Sino relationship: First, the United States is, and remains, the technology centre of the world, with an unmatched quantity of researchers and R&D money and the kind of cultural hard-wiring that continues to produce breathtaking discoveries. Second, China is catching up.


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