【原创】Chinese and US S&T Innovation Policies and Their Effects ...
Chinese and US S&T Innovation Policies and Their Effects on Economic Growth Potentials
Chen Baoming, Ding Minglei
Chinese Academy of Science and Technology for Development (CASTED)
Abstract: Since the eruption of the recent global financial crisis, major countries have been pushing forward structural reforms with science and technology (S&T) innovation at the heart. Since taking office, US President Donald Trump has adopted an “America First” strategy but has yet to specify a clear S&T innovation policy. However, Trump’s current policies have already affected S&T innovation and his planned budget cuts will impact US growth potentials. Compared with the US, China is steadily implementing its innovation-driven development strategy with significant improvement in S&T innovation that increasingly supports economic growth. To spur future economic growth, China should steadfastly follow its S&T innovation strategy, promote the utilization of S&T innovation results, boost its economic growth potentials and make the most of global innovation resources.
Key words: S&T innovation, economic growth, structural reforms
1. Structural Reforms with S&T Innovation at the Heart Are Vital to Future Economic Growth
The evolution of fundamental technologies is a decisive factor behind cyclical economic volatility. Russian economist Kondratieff divided half a century of economic development into individual long cycles(Kondratieff, 1925) - cycles that resulted from new technologies being introduced in the economic system as argued by Schumpeter and Van Gelderen (Schumpeter, 1939; Van Gelderen, 1913) . Schumpeter’s theory of “continuous industrial revolution” is based on the qualitative transition of economy enabled by new technology(Schumpeter, 1912) . Each business cycle - irrespective of its uniqueness - is defined by innovation as its most salient feature. These economists regard innovation as the primary force of capitalist growth and source of business profits.
Cyclicality is a pattern of economic growth. Currently, the world economy is at a critical juncture as new drivers of growth take the place of old ones. CPC Central Committee General Secretary 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” (Xi, 2016). 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.
Since the G20 Hangzhou Summit in September 2016, the necessity of structural reforms underpinned by S&T innovation is increasingly accepted as a consensus. Despite different paths and emphases in various countries, structural reforms are characterized by the strategic orientation of S&T innovation, as reflected in their identification of key priorities, industries and investments (Ding and Chen, 2016). 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.
2. The Trump Administration’s Innovation Policy and Its Effect on Economic Growth
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.
2.1 The Trump Administration Has Yet to Develop a Systematic Innovation Strategy
Historically, the clarity of the US innovation strategy increased over time. For instance, the Obama administration released three documents on a national innovation strategy underpinned by a combination of political, military, diplomatic and financial commitments. The US innovation strategy highlights the promotion of innovation, long-term growth and the third wave of innovation and entrepreneurship. While S&T innovation boosted the potentials for the US economic recovery, economic conundrums, wealth gaps and political impasse present risks of long-term stagnation for the US economy.
Before the Obama administration, the US 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 27% of the world total (NSF, 2016), 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.
2.2 Trump’s Budget Cuts May Trigger Some Backlash from the Science Community
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.
2.3 Inspiring Private Sector Investment Is Likely to Be a Focus of the US 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. In addition, the proposed budget also plans to defund the Manufacturing Extension Partnership (MEP), which has created an extensive innovation service network in America with half of its operating expenses (124 million US dollars) funded by the federal budget. The proposed budget says that MEP agencies should operate in a market-based manner without government funding (Lanzhou Literature Intelligence Center, Chinese Academy of Sciences, 2017). 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.
2.4 Fiscal Spending Gives Priority to Programs That Can Bring About Short-Term Results, Neglecting Long-term Fundamental and Public-interest Research
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. As a result of the 2018 budget cuts, the National Institute of Health (NIH) may not be able to fund new R&D programs. Facing deep budget cuts for its Office of Science, US Department of Energy will scale back support to fund its programs and research agencies, including the Exascale Computing Project under the “National Strategic Computing Initiative” (NSCI). The Office of Science is also a major source of funding for dozens of research agencies under the Department of Energy in such fields as materials, nuclear energy and battery technology. The proposed budget cuts the Environmental Protection Agency’s (EPA) funding by almost one third, putting an end to clean energy initiatives, international climate change programs, climate change research and partnership programs, etc. After the proposed budget was announced, it was criticized by some in the media and science communities as “putting an end to America’s science and technology industries” and “disabling the science engine” (Feng Weiwei, 2017).
Obviously, the Trump administration gives priority to short-term economic results over fundamental and applied research. Some Americans believe that while the US strives to invent new technologies, “other countries are free-riding on US investment” (Paul Davidson, 2017). For sectors with strong spillover effects such as fundamental and applied research, the details of US strategy have yet to unfold.
2.5 Infrastructure Is a Key Enabler of Industrial Development
President Obama introduced a host of initiatives to promote industrial innovation and improve the ba 38 34724 38 13306 0 0 6695 0 0:00:05 0:00:01 0:00:04 6696sic conditions for the development of emerging industries. To promote the development of robotics and Internet communication technology, President Obama signed the Workforce, Innovation and Opportunity Act (WIOA) and pushed “connectting to high-speed Internet” to train the workforce and invest in broadband infrastructure (the Council of Economic Advisers, 2016).
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.
Regarding creating local manufacturing jobs, Trump aims to bring manufacturing jobs back to America, which departs from Obama’s focus on advanced manufacturing. Low energy cost, tax cut and robotic technology are expected to be conducive to re-shoring manufacturing back to America during the Trump presidency. According to a survey conducted by China Economist in the second quarter of 2017, 62.4% of surveyed economists believe that Trump’s policy will effectively re-shore manufacturing back to America, while only 18.4% think otherwise. In his budget proposal, President Trump plans to cut fiscal spending on the R&D of advanced manufacturing, including the defunding of MEP. As part of the National Network of Manufacturing Innovation (NNMI), MEP provides small- and medium-sized manufacturing companies with technical and innovation services. It is very likely that the proposed federal spending cuts may become a reality.
2.6 Entrepreneurship, Innovation and IPR Policies Are Murky
Innovation and entrepreneurship are vital to fostering economic momentum and spurring emerging industries. While industry regulation and monopoly may undermine business vibrancy, the shortfall of new jobs, slowing flow of people and tightening immigration policy will take their toll on productivity. By reforming major institutions and laws on intellectual property rights, previous US administrations encouraged small businesses to apply for patents, which increased small business innovation and jobs. The America Invents Act (AIA) that took effect as of September 2011 has imposed restrictions on non-utility patent holders to reduce patent trolls (lawsuits brought by non-utility patent holders against patent users), prohibits litigation against multiple defendants in the same case of patent litigation, and rewards patent holders with public contributions, etc. (the Council of Economic Advisers, 2016).
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. He may suspend the issuance of H-1B visas. He considers that autonomous cars, drones and artificial intelligence will cause more unemployment. He opposes net neutrality and is in favor of collecting the private information of citizens on the Internet, etc. These positions contradict with the values of the Silicon Valley. In fact, US tech firms derive their competitiveness from the global value chain and access to global talents. President Trump’s conservative attitude toward immigration, however, may cause a brain drain for tech firms. According to Immigrants and Billion Dollar Start-Ups published by the National Foundation for American Policy (NFAP) on March 17, 2016, more than half of the billion dollar unicorn start-ups were founded by immigrants and about 70% of the managerial and product development positions of these firms are filled by immigrants. Trump’s Muslim ban triggered a serious backlash (Zhang Penghui, 2017). Regarding the re-shoring of manufacturing, cost and host country markets are the top concerns for the Silicon Valley. Trump’s bias may pose barriers against R&D and the commercialization of artificial intelligence and some other technologies.
According to the proposed 2018 budget, the Small Business Administration (SBA) will cut PRIME (Program for Investment in Micro-entrepreneurs) technical assistance and grants to regional innovation clusters and accelerator by 12 million US dollars. Aside from defunding these important programs, President Trump also shows no particular support for innovation and entrepreneurship. At the dawn of technological and industrial revolution, defunding innovation and entrepreneurship risks abandoning future economic growth.
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.
3. Economic Growth Effects of China’s Innovation Policy and Comparison with the US
3.1 China’s Innovation Strategy Is Moving Forward on a Clear Path
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. China’s S&T innovation strategy consists of specific policies, initiatives and plans. The list of China’s priorities includes: speeding up the implementation of national key S&T projects, creating a new system of industrial technologies, enhancing innovation facilities including national laboratories and innovation centers, promoting mass entrepreneurship and mass innovation, propelling strategic regional innovation and development, integrating into the global innovation network on all fronts, etc. China has identified S&T innovation as the key to its innovation-driven development strategy in supporting economic and social development.
(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. China’s high-tech export equals the combined sum of the US, Germany, France and Japan. China has made breakthrough in high-speed railway, hydropower equipment, ultrahigh voltage power transformation and transmission, hybrid rice, 4G mobile communication, earth observation satellite, BeiDou navigation and electric cars with some product and technologies leading the world and entering the international markets.
(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 104,000 in 2016 alone, and the tax cut for China’s high-tech firms amounted to 100 billion yuan in 2015. A policy system for the commercialization of S&T results is taking shape. China’s legislature has revised the Law for Promoting Commercialization of S&T Results and the State Council and its General Office released the Implementing Provisions for the Law for Promoting Commercialization of S&T Results and Action Plan for Promoting Commercialization of S&T Results respectively. These documents constitute the “trilogy” in the commercialization of S&T results. China is reforming its S&T evaluation and reward system, formulating distribution policies to increase the value of knowledge, and proactively and prudently advancing the reform of autonomy for universities and research institutes. China has also improved the system for openness and sharing of major scientific research infrastructures and major instruments and initially established systems of innovation survey and S&T reporting.
3.2 Innovation Gaps between China and the US
Despite China’s progress in S&T innovation as a key driver of economic transition and the fostering of a new momentum, 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 2013, the R&D intensity of the US reached 2.7%（NSF, 2016）. (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.
4. 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, which is unlike some Western countries where policy often swerves when a new president takes office. After the founding of the People’s Republic of China in 1949, the Chinese government attached great importance to S&T development and scored great achievements in areas such as nuclear weapons, ballistic missiles and satellites in the 1960s and 1970s, which support China to stand proudly among the family of nations. Since reform and opening up in 1978, the Chinese government has attached even greater importance to the role of S&T innovation, as evidenced in various campaigns ranging from “science and technology as primary productive forces”, “invigorating the country through science and technology” to “innovation-driven development”. These efforts are essential for China as a late-moving country to avoid setbacks and accelerate its pace of catch-up. In propelling the structural reforms of economic growth, China must attach importance to the following areas.
4.1 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. Due to fiscal deficits, the US has adjusted its innovation policy, attempting to divert more resources to achieve low-hanging short-term economic objectives. Although Trump’s adjustment of innovation policy has brought some opportunities to China, it is important for China to steadfastly follow and implement its innovation strategies.
4.2 Promote the Transfer and Commercialization of S&T Results and Boost Economic Growth Potentials through Innovation and Entrepreneurship to Embrace a New Growth Cycle
While President Trump has yet to attach sufficient importance to innovation and entrepreneurship, the US as a hotbed of innovation has attracted a large group of talents from around the world and has provided commercialization for numerous S&T results. 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.
4.3 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.
4.4 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.
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