Thursday, November 11, 2004

Fwd: From foreignaffairs.org: Is America Losing Its Edge?

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From: rajeev
Date: Thu, 11 Nov 2004 11:51:42 GMT
Subject: From foreignaffairs.org: Is America Losing Its Edge?
To: rajeev


This Comment is from Foreign Affairs Magazine. Read it online at:

http://www.foreignaffairs.org/20041101facomment83601/adam-segal/is-america-losing-its-edge.html

Is America Losing Its Edge?
By Adam Segal
From Foreign Affairs, November/December 2004

The United States' global primacy depends in large part on its ability
to develop new technologies and industries faster than anyone else.
For the last five decades, U.S. scientific innovation and
technological entrepreneurship have ensured the country's economic
prosperity and military power. It was Americans who invented and
commercialized the semiconductor, the personal computer, and the
Internet; other countries merely followed the U.S. lead.

Today, however, this technological edge-so long taken for granted-may
be slipping, and the most serious challenge is coming from Asia.
Through competitive tax policies, increased investment in research and
development (R&D), and preferential policies for science and
technology (S&T) personnel, Asian governments are improving the
quality of their science and ensuring the exploitation of future
innovations. The percentage of patents issued to and science journal
articles published by scientists in China, Singapore, South Korea, and
Taiwan is rising. Indian companies are quickly becoming the
second-largest producers of application services in the world,
developing, supplying, and managing database and other types of
software for clients around the world. South Korea has rapidly eaten
away at the U.S. advantage in the manufacture of computer chips and
telecommunications software. And even China has made impressive gains
in advanced technologies such as lasers, biotechnology, and advanced
materials used in semiconductors, aerospace, and many other types of
manufacturing.

Although the United States' technical dominance remains solid, the
globalization of research and development is exerting considerable
pressures on the American system. Indeed, as the United States is
learning, globalization cuts both ways: it is both a potent catalyst
of U.S. technological innovation and a significant threat to it. The
United States will never be able to prevent rivals from developing new
technologies; it can remain dominant only by continuing to innovate
faster than everyone else. But this won't be easy; to keep its
privileged position in the world, the United States must get better at
fostering technological entrepreneurship at home.

PENNYWISE

At the moment, it would be premature to declare a crisis in the United
States' scientific or technological competitiveness. The United States
is still the envy of the world for reasons ranging from its ability to
fund basic scientific research to the speed with which its companies
commercialize new breakthroughs.

This year, total U.S. expenditures on R&D are expected to top $290
billion-more than twice the total for Japan, the next biggest spender.
In 2002, the U.S. R&D total exceeded that of Canada, France, Germany,
Italy, Japan, and the United Kingdom combined (although the United
States trailed Finland, Iceland, Japan, South Korea, and Sweden in the
ratio of R&D to GDP). And although scholars from other parts of the
world may write relatively more science and engineering papers than
Americans do, U.S. research continues to be cited the most.

The United States also leads the major global technology markets,
holding commanding market shares in aerospace, scientific instruments,
computers and office machinery, and communications instruments. U.S.
information and communications technology producers lead almost every
sector. And for the last two decades, U.S. firms have been the top
providers of high-technology services, accounting for about one-third
of the world's total.

These strengths, however, should not obscure the existence of new
threats to the long-term health of science and innovation in the
United States. A record $422 billion budget deficit, for example, may
undermine future government support for R&D. Recent shifts in federal
spending will leave basic research-that driven by scientific curiosity
rather than specific commercial applications-underfunded, depriving
the economy of the building blocks of future innovation. Although
federal expenditures on R&D are expected to reach $132 billion in
fiscal year 2005 and $137.5 billion in 2009, new spending will be
concentrated in the fields of defense, homeland security, and the
space program. Funding for all other R&D programs, meanwhile, will
remain flat this year and decline in real terms over the next five
years.

In July, Congress approved a record-breaking $70.3 billion for R&D for
the Defense Department in 2005, a 7.1 percent increase from last year
and more than the Pentagon had asked for (in fact, the department's
top brass had asked to cut R&D spending). Such largesse makes it
likely that the Pentagon will be able to continue innovation in the
near term. Its longer-term prospects, however, are more worrying.
According to five-year projections by the American Association for the
Advancement of Science, the Defense Department will focus more and
more on weapons development while neglecting basic and applied
research.

Privately funded industrial R&D, meanwhile-which accounts for over 60
percent of the U.S. total-is also starting to slip as a result of the
current economic slowdown. Private industry cut R&D spending by 1.7
percent in 2001, 4.5 percent in 2002, and 0.7 percent in 2003. This
year, R&D spending is expected to increase-but by less than one
percent, which is less than the inflation rate. Furthermore, with less
than 10 percent of its R&D spending dedicated to basic research,
industry will not be able to fill in the gaps created by the
government's shift of funding to defense and homeland security-related
research.

These funding decreases may be exacerbated by a coming labor shortage.
The number of Americans pursuing advanced degrees in the sciences and
engineering is declining, and university science and engineering
programs are growing more dependent on foreign-born talent.
Thirty-eight percent of the nation's scientists and engineers with
doctorates were born outside the country. And of the Ph.D.'s in
science and engineering awarded to foreign students in the United
States from 1985 to 2000, more than half went to students from China,
India, South Korea, and Taiwan.

Such dependence on foreign talent could become a critical weakness for
the United States in the future, especially as foreign applications to
U.S. science and engineering graduate programs decline. With booming
economies and improving educational opportunities in their countries,
staying at home is an increasingly attractive option for Chinese and
Indian scientists. In addition, visa restrictions put in place after
the terrorist attacks of September 11, 2001, have created new barriers
for foreign students trying to enter the United States. Surveys
conducted by the Association of American Universities, the American
Council on Education, and other education groups have blamed
repetitive security checks, inefficient visa-renewal processes, and a
lack of transparency for significant drops in applications to U.S.
graduate programs this year.

ENGINEERING BIOSYSTEMS

The real test for the United States' future will be whether it can
maintain and improve its environment for innovation. For the last 30
years, U.S. companies have led in the invention of new products while
Asian firms have played a secondary role, lowering the costs to
manufacture U.S. inventions. But Asian firms have begun to challenge
that division of labor and are no longer content simply to follow.

This shift has resulted in part from a change in the way U.S.
companies work. During the 1980s and 1990s, U.S. technology producers
started collaborating more with colleagues around the world. Private
industry found that R&D had become too costly and risky for a single
lab at a large company to undertake alone. Instead, cutting-edge
companies began to cooperate with a wide network of other firms,
universities, and industry-government consortia to develop new
products. Such activity flourished in places such as Silicon Valley,
the Route 128 corridor in Boston, and in Austin, Texas-hothouses of
innovation where scientists, venture capitalists, and technology
managers meet and share information. The result has been a shift in
the locus of innovation from individual corporate labs to networks of
technology firms, capital markets, and research universities.

Cheaper communications technologies have also allowed U.S. companies
to operate more globally, dividing production into discrete functions,
contracting out to producers in different countries, and transferring
technological know-how to foreign partners. Contrary to conventional
wisdom, not just labor-intensive manufacturing is being moved
offshore; Microsoft, Intel, Bell Labs, Motorola, and other firms
increasingly perform advanced research abroad.

The attraction of emerging technology clusters in places such as
Shanghai, China, Bangalore, India, and Hsinchu, Taiwan, was at first
based on their cheap labor supply. But as local technology companies
have developed, new research institutes have been founded, and
scientists and engineers from such countries have returned home after
training and working in the United States, these hubs have started
supporting innovation of their own. Craig Barrett of Intel has said
that the Chinese are now "capable of doing any engineering, any
software job, any managerial job that people in the United States are
capable of." And Microsoft has reportedly contracted with the Indian
companies Infosys and Satyam not only to do simple software coding,
but also to provide highly skilled software architects.

No longer content to dominate labor-intensive manufacturing, Asian
governments are also actively promoting technological innovation.
Japan and South Korea each currently spend 3 percent of GDP on R&D
(compared to 2.7 percent in the United States) and Beijing is trying
to reach an R&D spending target of 1.5 percent of GDP in 2005 (up from
0.6 percent in 1996). Asian countries are also trying to take the lead
in three areas that are likely to generate the next wave of
innovation: biotechnology, nanotechnology, and information technology.
Governments have increased their support for all three areas, and Asia
now spends as much as the United States and Europe combined on
nanotechnology. South Korea, China, and Japan have all established
national offices to coordinate research and are spending significant
private and public resources on new developments.

In addition to increasing science and R&D budgets, China, India, South
Korea, and Taiwan are shifting from top-down, state-directed
technology policies to more flexible, market-oriented approaches that
foster innovation and entrepreneurship. Regional governments are using
tax, education, and fiscal policies to create clusters of domestic
start-ups. They are encouraging students, scientists, and technology
managers to return from Silicon Valley to set up their own companies
in Shanghai or Bangalore. And by offering tax holidays as well as
priority access to water, land, and electricity, they are attracting
high-tech companies from the United States, Europe, and Japan.

All of these changes in Asia highlight one of the paradoxical outcomes
of globalization: geography has become both less and more important to
innovation. Technology firms can now locate anywhere. Production that
was once tied to a specific place can be picked up and moved to other
parts of the world. But to remain competitive, technology companies
need knowledge-and information-rich regions; firms are likely to be
drawn to technology hubs that provide the concentration of ideas,
talent, and capital needed for future innovation. Globalization has
therefore not eliminated geography as a concern, but rather increased
the leverage of those regions that can successfully assemble the
components of innovation.

RAPID RESPONSE

Before rushing to address these challenges, Washington should
understand the limits of the data used to describe S&T trends.
Predictions of labor shortages in the sciences have been frequently
wrong before, graduate school enrollment can change from year to year,
and other data can counterbalance bad news. Although the number of
Ph.D. students coming to the United States has dropped, for example,
the proportion of those choosing to remain after their studies has
increased substantially. Moreover, a bachelor's degree may now be more
relevant to innovation than before, and the number of American
students getting such degrees in science and engineering has increased
over the last decade.

Policymakers should therefore be careful not to focus too much on any
particular statistic. Dollars spent on R&D or research papers
published are easy to measure, but innovation involves many other
factors. The speed at which new technologies such as broadband are
adopted and diffused, the flexibility of labor markets, and the ease
with which new companies can enter and exit technology markets all
affect the ability of innovators to flourish in a particular
economy-yet such factors usually fall outside the parameters of
traditional S&T policy.

The double-edged phenomenon of globalization, which can both
strengthen U.S. technology companies and threaten the innovation
system, makes the task of supporting innovation through policy much
more difficult. Proximity to consumers gives firms a better sense of
potential new markets and allows them to rapidly respond to changing
customer demands. Yet a move overseas, although it might seem good for
shareholders, could also destabilize the complex interactions between
firms and universities that drive technological discovery in the
United States. Removing any one element from a technology cluster can
diminish its ability to generate new ideas. Send manufacturing jobs to
Asia and you risk exporting important components of your innovation
infrastructure.

The United States cannot and should not prevent the emergence of new
technology clusters in Asia. Instead, it should prepare to develop and
absorb new technologies as they emerge elsewhere. The ability to make
good use of diverse ideas and systems remains one of the United
States' most important comparative advantages, and U.S. companies must
make sure that good ideas, no matter where they are developed, are
brought to market in the United States first.

U.S. private industry may want to follow the example of the nation's
armed forces. Washington's military dominance no longer depends on it
denying others access to critical technologies. Many of the sensors
that the U.S. military now uses to detect ships or aircraft beyond
visual range or to provide targeting information are off-the-shelf
items produced by companies around the world. Unable to prevent the
spread of these technologies to potential enemies, the United States
has maintained its military superiority by making sure it is better
than any other country at using such tools, integrating sensor input,
and creating sensor networks. In the commercial sphere, U.S. firms
should similarly strive to maintain their advantage by adopting and
integrating new technologies more rapidly than their competitors.

Maintaining such speed will require that U.S. companies have a
presence in Asian markets to track, develop, and invest in the most
promising new ideas. Washington must continue to pressure its trading
partners-especially Beijing-to meet the terms of current trade
agreements and allow such access. The United States must also promote
voluntary and open technology standards. In March 2004, the Bush
administration protested regulations requiring all wireless imports to
China to contain data-encryption technology produced only by Chinese
companies. Beijing has since withdrawn the regulations, but given
China's interest in developing new technology standards, the United
States should watch for future attempts of a similar nature.

At home, Washington should not strive to identify the next big thing.
Rather, policymakers should ensure that the United States remains the
most dynamic innovation system. Funding for science and education must
be maintained. Although it might be tempting to shrink the budget
deficit by reducing discretionary funding for the sciences, this would
weaken one of the pillars of the country's future economic and
technological health. Money for basic research, especially in the
physical sciences and engineering, and support for the National
Science Foundation should therefore be maintained at current levels or
increased.

Of equal importance, policymakers must also reinforce the United
States' entrepreneurial climate, its greatest asset. The building
blocks of American innovation-flexible capital and labor markets,
transparent government regulation, and a business environment that
rewards risk-need to be strengthened. Making the R&D tax credit
permanent and expanding it to include more types of collaborative
research, for example, would help provide incentives for innovation in
as many technological sectors as possible.

With innovative capacity rapidly spreading across the Pacific, the
United States cannot simply assume that it will remain the epicenter
of scientific research and technological innovation. Instead, it
should meet the challenge from Asia head-on. The United States must
actively engage with new centers of innovation and prepare itself to
integrate rapidly and build on new ideas emerging in China, India, and
South Korea. Above all, it must not assume that future innovation will
occur automatically. Only through renewed attention to science
funding, educational reform, the health of labor and capital markets,
and the vitality of the business environment can the United States
maintain its edge-and the most innovative economy in the world.

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