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.

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.