Is America Losing Its Edge?

Adam Segal

From Foreign Affairs, November/December 2004

Summary:  For 50 years, the United States has maintained its economic edge by being better and faster than any other country at inventing and exploiting new technologies. Today, however, its dominance is starting to slip, as Asian countries pour resources into R&D and challenge America's traditional role in the global economy.

Adam Segal is Maurice R. Greenberg Senior Fellow in China Studies at the Council on Foreign Relations and the author of Digital Dragon: High Technology Enterprises in China.

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.