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The Innovation Advantage

Council on Foreign Relations fellow Adam Segal decodes the rise of innovation in China and India — and what it really means for the United States.

(originally published by Booz & Company)

In recent years, the threat of competition from Asia has defined the way U.S. business leaders and policymakers think about innovation, as headlines warn of China’s and India’s emerging economic power. But in Advantage: How American Innovation Can Overcome the Asian Challenge (W.W. Norton, 2011), Adam Segal, a longtime observer of technology development in Asia, argues that this threat has been overblown.

Segal, the Ira A. Lipman Senior Fellow for Counterterrorism and National Security Studies at the Council on Foreign Relations, acknowledges that China, in particular, has invested large sums in R&D and is positioned to eventually outspend the United States. But focusing only on such metrics as how much is being spent and how many engineers are being trained, he says, is a mistake. The U.S., with a culture and institutions that encourage individual initiative, risk taking, and collaboration, is uniquely positioned to lead in innovation. He argues that the rise of Asia is more of an opportunity than a threat, even for countries that may see themselves in competition with China and India. Indeed, the distinction Segal makes between innovation “hardware” (engineering and technology) and innovation “software” (institutions and ideas) is relevant for R&D leaders anywhere in the world. Segal spoke with strategy+business in February, shortly after President Obama’s State of the Union address, which put U.S. innovation in the spotlight.

S+B: We know that China has been investing heavily in innovation, but what else should we be thinking about when measuring the impact of such investment?
SEGAL: Policymakers and business leaders have been overly focused on measuring what I call the hardware of innovation: the amount of spending on R&D and the number of engineers and scientists, patents, and publications. And whereas the hardware has clearly been built up in China, what I call the software — the political, cultural, and social institutions and understandings that help move ideas from lab to marketplace — are lagging behind. Without the software in place, the whole is much less than the sum of its parts. The Chinese themselves admit that they’ve put a lot in, but they’re not really getting a lot out.

Although China has massive numbers of engineers coming out of its universities, most don’t have strong “soft” skills. They’re very good at the projects they are assigned to, but don’t necessarily think about the next problem coming down the pike. The Chinese education system is still very focused on rote memorization and examinations. Moreover, intense pressure on scientists to advance has resulted in a great deal of plagiarism and data theft.

We’ve witnessed a massive expansion of entrepreneurship, particularly among young Chinese. But the focus of most Chinese startups is on incremental and business process innovation, or what’s called C2C [“copy to China”]: taking a U.S. model and then applying it to the Chinese market. It’s where the money is being made. Government intervention also distorts the market. Because the government is so focused on reducing dependence on foreign technology, they say, “Here is the cutting edge. We think it’s this Intel processor or this database software. We want you to copy that.” This government direction encourages startups to reverse engineer, rather than to focus on science-based product innovation. Across the board, we see heavy-handed government intervention. There’s still a great deal of deference to political authority and to seniority, which is not supportive of individual initiative.

S+B: What’s happening in India?
SEGAL: Indian spending on science and R&D has been pretty flat over the past decade or so. In 1995, it was 0.8 percent of GDP, and by 2010 it had risen to only 0.9 percent (whereas the Chinese have gone from spending 0.5 percent in 1995 to 1.5 percent today, and the goal is to go to 2.5 percent by 2020). In addition, the majority of R&D in India is done through the government research labs, and they’re run like government agencies, so there’s not a great deal of emphasis on entrepreneurship or individual initiative or new breakthroughs and new research.

We always talk about the Indian Institutes of Technology [IITs] and Indian Institutes of Management [IIMs], both of which have trained some of India’s top business leaders and leading entrepreneurs. But they’re just a small part of a much bigger education system in India, in which the vast majority of universities stress rote memorization, use outdated curricula, and provide no instruction in English. In fact, according to the government itself, something like two-thirds of all universities and 90 percent of all colleges are considered to be at poor to middling levels. The IITs and the IIMs themselves are very good at training people, but they do very little basic research. There’s a massive plan to expand university education in India, but the question is going to be, Who will staff it? Someone who teaches at an IIT could probably make two or three times as much going to work for Infosys or Wipro. The last time I checked, IIT Delhi had about one-third of its positions vacant.

On the entrepreneurship side, great things are happening, and a lot of young people are starting companies. But I think part of the problem right now involves incentives. There is a lot of money to be made in established markets such as retail, software services, and telecom, but we’re not seeing a lot of science-based, new-to-the-world innovation. Some argue that if you look at Infosys and Wipro and those types of companies, they’ve moved up so far in the value chain that the type of R&D they’re doing for Western companies is increasingly sophisticated and creative, which is, I think, probably true. But those gains aren’t really captured by the Indian economy. It’s still the foreign firms that are capturing the gains.

S+B: Where can the U.S. find its competitive edge?
SEGAL: The U.S. is incredibly strong in terms of its software of innovation, and that can lead the U.S. forward. That’s not to say that the U.S. should ignore hardware, or that it shouldn’t be spending more on R&D. But just focusing on hardware, which is what the debate has tended to do, seems to me to be a losing game for the long term. Right now the U.S. spends a lot more than China and India, but given the trajectory of the national economies, especially the Chinese economy, eventually those countries are going to spend as much as or more than we do. Therefore, I see the hardware race as a losing proposition for the United States.

The traditional model for how the U.S. works in science and technology was like the old energy grid: the U.S. thought of the ideas and then sent them out to the rest of the world, in the same way you generate energy and you send it out. Instead, the U.S. should start to think of itself as a smart grid. The idea of a smart grid is that you can determine where the greatest demand is and have the ability to moderate and change the flow of energy, but also that people can feed energy back into it. So if I have solar panels on my roof and by three o’clock in the afternoon I’ve already produced enough electricity for my home for the day, I can sell the rest of it to the grid. Increasingly, inventions and ideas will be happening in the places where the U.S. used to just send ideas. And the U.S. has to be able to figure out what those ideas are and how it can apply them to markets and develop them.

This flowing back and forth of people and ideas is incredibly important to the country’s future strength, and right now it is also one of its biggest competitive advantages. If you compare the U.S. to Japan or to Korea or even to European countries, our ties to China and India are much stronger, because of how many Indians and Chinese study in the United States. We want to make sure that these connections remain tight. We need to ensure that the U.S. stays tapped into emerging new centers of technology and innovation. Some of this has to do with ideas flowing into the U.S. and, in particular, with getting visa policy right. And then a lot of it has to do increasingly with young U.S. scientists and engineers spending time abroad.

S+B: So when we get past thinking about threats, we see opportunities for the U.S. to maintain and even enhance its position as a global innovator?
SEGAL: Part of the problem has been this framing of the changing landscape in terms of competition — as a zero-sum game. Instead, we need to realize that the U.S. benefits from the rise of China and India, as long as we can leverage what’s going on. By growing more comfortable with the flowing in and out of ideas, we also strengthen our own position.

Almost all the people I have interviewed in China and India are of the mind-set that they face significant barriers to building innovation systems. They have real problems that need to be addressed and are being addressed, but still have a long way to go. They recognize that the United States has significant strengths, but they also believe that Americans have lost perspective — that the U.S. has forgotten that it has these great strengths that are not easily replicable.

Right now, we have a window of opportunity while China and India are still trying to find their footing. The U.S. is still very well positioned to ensure it will benefit as China and India start making innovation breakthroughs. The other point is that the software of innovation becomes even more important as we move out into the future and innovation becomes even more globalized. The U.S. has a great ability to manage across time and culture in different places, conduct cutting-edge interdisciplinary research, recognize new markets and consumer demands, and welcome new ideas — capabilities that other countries are just learning.

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