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Devon Bull

ECON 735

Instructor: Joshua Rosenbloom

Research Paper

U.S. Policy in Response to Scientific and Technology Advances in India and China

The rapid scientific and technological advances made by India and China are a major

area of concern within the United States, which wishes to remain an economic world leader.

Should the possibility of these countries overtaking the United States scientific and

technological dominance cause U.S. policy makers to create policies in an attempt to maintain

the status quo? This paper will bring into consideration technological and scientific spillovers,

technology licensing, and intellectual property. We will also explore the differences between

each country’s past and current economic systems. Clearly India and China have become global

players and have been attracting the attention of US businesses, politicians, and media. With

this increased level of interest it is important that we explore and better understand the issues

surrounding the role of science and technology in these economies.

Prior to the start of China’s growth in 1979, China had a centrally planned economy

(Morrison, pg. 2). The Communist party, led by Chairman Mao, “set production goals,

controlled prices, and determined the allocation of resources throughout the economy”

(Morrison, pg. 2). Such policies led to the stagnation of the Chinese economy for a number of

years. In fact, by 1978 nearly three-fourths of industrial production was produced by centrally

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controlled, state-owned enterprises (Morrison, pg. 2). China’s scientific community was

decimated in this time: universities were closed, its research institutes shuttered, and the

country’s scientists were sent to the countryside (McGregor, pg. 8). Faced with general unrest

and failure on a massive scale the Communist party launched several economic reforms in 1979

(Morrison, pg. 2). Some state owned enterprises were opened up to market forces and citizens

were allowed to form their own enterprises and compete in a relatively free market (Morrison,

pg. 3). “In addition, state price controls on a wide range of products were gradually eliminated”

(Morrison, pg. 3). However, of all the policies China attempted perhaps the most important was

the removal of many trade barriers. The removal of the trade barriers has allowed China to

become the world’s number one exporter today. Along with economic reforms there was a

large policy shift recognizing science and technology’s roles in creating China’s future

(McGregor, pg. 8). In total, these policy changes were the major drivers of China’s explosive

economic growth for the last thirty or so years.

Recent years have seen China catch up with and overtake global leaders in economic

size and growth. For example, “China’s economy has grown by 9.7% annually for the past 30

years or so” (Sheng, Ma). In 2009 China became the world’s largest exporter, which supports

many peoples view within the United States that China is its main economic competitor (Sheng,

Ma). China became the world’s leading exporter through availability of cheap labor and

intellectual property theft from more developed nations. According to the United States

Intellectual Property Commission’s report in 2013, Chinese-origin IP theft from American

companies and institutions is disproportionately large in size and impact when compared to the

rest of the world (IP Commission Report). In the last few years however, China’s leaders have

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begun to change the direction and focus of the Chinese economy from exports and

manufacturing to advanced technological innovation.

In 2006 China policy makers launched a new fifteen year plan for science and

technology. The goal of the plan is to make China the world leader in technological research

and innovation by “mastering core technologies” (Atkinson, pg. 2). These core technologies

range from smart cars to high performance computers (Atkinson, pg. 2). In 2011 China

announced that it had built the world’s fastest supercomputer, accomplishing one of its stated

objectives from the fifteen year plan (Atkinson, pg. 2). In sum, China has rapidly shifted the

focus of its economic activities and the message is clear. “The Chinese no longer want to

dominate just cost-based commodity production and let us be the innovators, they want to also

win in innovation-based economic competition, America’s main comparative advantage”

(Atkinson, pg. 2). With the ambitious economic competition with China grabbing media

headlines within the U.S., it is easy to overlook China’s neighbor, India and its large potential for

growth.

With its independence in 1947 India became the largest democracy in the world. Home

to over one billion citizens today, India experienced little economic growth until the 1980’s. A

mix of socialist policies is to blame for this. India’s first formal development program, launched

in 1951, was a five year economic plan based on Soviet models of central government economic

planning (Panagariya, xiii). In fact, such policies achieved a growth rate so unusually low that it

was coined “the Hindu growth rate” (Panagariya, pg. 7). Despite this, from its inception India

focused on its education system, specifically in areas like science and technology. With the

Scientific Policy Resolution in 1958 India’s government recognized “the keys to national

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prosperity, are the effective combination of three factors, technology, raw materials and

capital, with the first being the most important” (India Department of Science and Technology).

With such importance placed upon science and technology, the number of universities and

equivalent institutions increased more than sevenfold in the first four decades after

independence (Encyclopedia Britannica). While it has taken a longer than expected amount of

time for India to see economic growth, in recent years this has begun to change.

According to the CIA, India has averaged growth of just under seven percent per year

from 1997 to 2011. This is thanks to a wide variety of economic liberalization measures that

were started in the early 1990s. These include policies changes such as industrial deregulation,

the privatization of state-owned enterprises, and reduced controls on foreign trade and

investment (CIA). Despite these changes India still has roughly half of its workforce in the

agriculture industry (CIA). In recent years however, India has been successfully pushing many

students in its higher education system to pursue scientific and technological fields. Even with

the relatively small amount of scientific workers (in relation to the total population) India has

currently, they still produce large amounts of research and development. With a growing

scientifically oriented labor force, it is a fair assurance that India will continue to develop in

these areas. Clearly, with its recent economic improvements and its eyes on the future India is

expected to better compete with countries like the United States.

Since the period following the second world war the United States has experienced

steady economic growth averaging a 5.3% increase in GDP per year from 1947 to today

(Wolfram Alpha). Contrary to China and India, the U.S. has maintained a capitalist economy

with little governmental interference for a long period of time. Before shifting to technological

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innovations the U.S. was the leading global manufacturing country (as China is today) thanks to

mass production industries (Nelson and Wright, pg. 5). Most notably, “U.S. firms are at or near

the forefront in technological advances, especially in computer technology and in medical,

aerospace, and military equipment; their advantage has narrowed since the end of World War

II” (CIA). Despite this the United States is the world leader in high tech innovation (CIA). “The

U.S. employs nearly one-third of the world’s scientific and engineering researchers and

accounts for nearly 40% of global research and development (R&D) spending” (as of 2005)

(Freeman, pg. 1). In recent decades U.S. firms are the number one provider of high-tech

services, accounting for one-third of the world’s total (Rand, pg. 3). As China and India try to

surpass the U.S. we need to examine each country’s commonalities and differences.

There are major similarities and differences between the three countries. China and

India have both used socialist systems in the post-world war two period, only to adjust to

capitalistic systems around the 1980’s (Panagariya, pg. 260). A key distinction for China is that it

has borrowed technologies from other countries and used its plentiful resources to develop a

strong manufacturing industry that exports to the world. Therefor China’s rapid growth is

attributable to a substantial increase in China’s ability to absorb substantial amounts of foreign

technology, rather than resulting from domestic innovation like the United States (Rand, pg.4).

Comparatively, India has experienced much slower growth than China. Services also compose a

much larger portion of exports in India than China (Panagariya, pg. 267). China has a large

industrial labor force while India has an extremely large agricultural labor force. In complete

contrast to both countries, the U.S. has a large portion of its labor force in the service sector of

its economy. The United States continues to provide high-tech products and services in contrast

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to India’s basic services and China’s manufacturing exports. Ultimately what this underscores is

the difference that technological innovation makes.

Graph of U.S., China, and India’s GDP from 1960-today (Wolfram Alpha)

When comparing the role science and technology within the United States, Chinese, and

Indian economies there are substantial differences. The United States is known for “its

comparative advantage in high-value added technological innovation” (Atkinson, pg. 2).

Furthermore, the U.S. labor market and education system doesn’t incentivize people to enter

the science and technology fields (Rand, pg. 5). The technological sophistication of the U.S.

economy stands in sharp contrast to the Chines economy which has, until recently, been known

for its commodity based production (Atkinson, pg. 2). However, in the last several years China

has seen enormous increases in the number of engineering doctoral and undergraduate

students (Freeman, pg. 4). This increase in Chinese laborers education levels, paired with

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China’s fifteen year plan to focus research and substantial resources into certain technologies,

seem to indicate a rapid technological shift will occur in China’s scientific and technological

capacity within the next few years. Meanwhile, India is experiencing large growth in its services

industry and is placing more emphasis on science and technology (CIA). Clearly there are large

internal differences in each country’s economic journey. In order to better compare them we

must then look to the amount each country chooses to invest in research and development and

their methods of doing so.

In pure monetary terms the United States definitively invests more in scientific research

and development than either China or India. The United States accounts for 40 percent of total

R&D spending worldwide (Rand, pg. 2). For comparison, in 2011 India spent 0.81% of its GDP on

R&D, China spent 1.84%, and the U.S. spent 2.76% (World Bank). “China’s R&D investment and

science enterprise are growing rapidly but, at present, are still quite small in comparison to

those of the United States” (Rand, pg. 3). “Over the past decade, Chinese R&D expenditures

increased by 21 percent a year” (Atkinson, pg. 5). Because of this China ranks second to the

United States for total investment in R&D (Atkinson, pg. 5). This difference in R&D investment

creates enormous economic differences over time. This rapid growth also means there are

greater incentives for the theft of intellectual property by firms and institutions that don’t have

the same benefits of R&D investment within their geographic area of business.

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R&D Spending by Percentage of GDP (Source: World Bank)

With such large differences in research and development investment amounts how does

each country protect its scientific research and innovations? As we have explored in class, it is

beneficial for firms to maximize profits and engage in technology licensing and joint ventures

with other firms (for the right price of course). However this isn’t always the way firms and

institutions acquire new intellectual property. Many Chinese firms manufacture products for

U.S. companies and can learn many trade secrets by doing so. Amazingly “the annual losses (to

the U.S. economy) are likely to be comparable to the current annual level of U.S. exports to Asia

—over $300 billion” (IP Commision, pg. 3). The problem is compounded by newer methods of

IP theft, specifically cyber-attacks (IP Commision, pg. 3). In addition, “national industrial policy

goals in China encourage IP theft, and an extraordinary number of Chinese in business and

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government entities are engaged in this practice” (IP Commision, pg. 3). There are also

weaknesses and biases in the legal and patent systems that lessen the protection of foreign IP

in China. With such cutthroat competition from China and India what actions could the U.S.

policymakers take to advance our economy and protect our interests?

Arguably the most important aspect of ensuring long term innovative growth is having a

large amount of researchers and innovators. “In a knowledge-based economy, leadership in

science and technology contributes substantially to economic success” (Freeman, pg. 1).

Consequently, there are a number of potential actions U.S. policymakers could take to advance

our leadership within the science and technology fields. One way to improve our science and

technology sector is to invest more resources into science and mathematics for our children’s

early (K-12) educations (Rand, pg. 6). If poor schools produce unskilled laborers, the economy

as a whole will be affected (Rand, pg. 6). In addition to a better education system, the United

States could also encourage research partnerships between U.S. and foreign scientific and

technological research centers. By continuing to use focusing devices such as awards or grants

for important discoveries, research will continue to be incentivized in areas with potentially

high economic rewards (for example the internet). In addition to these ways of advancing the

U.S. economy, there are also policies available that may provide better protection for our firms

in the global marketplace.

According to the Intellection Property Commission, millions of jobs and hundreds of

billions of dollars are being stolen from our economy due to IP theft. In order to combat this

enourmous loss of resources the commission recommends several actions. Arguably the most

effective is “empowering the secretary of the treasury to deny the use of the American banking

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system to foreign companies that repeatedly use or benefit from the theft of American IP” (pg.

13). The commission also recommended better investing in cyber-defense to combat IP theft. In

total, the U.S. needs to focus not only upon advancing our economy but also doing a better job

of protecting it.

While China and India continue to make advances in science and technology the U.S. will

remain the global leader at least for the short term. However, if corrective actions aren’t taken

the U.S. will be surpassed within a matter of a few years by China. There must be an increased

focus on primary education in science and mathematics. The United States must also better

protect its intellectual property which will enhance our competitive advantage. The scientific

and technological growth of China and India, while substantial, are still far from the level of the

United States. If we are to keep it that way we must take action as soon as possible.

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