In the run up to this week’s potentially era-defining National Congress of the Communist Party of China, where Xi Jinping is likely to retain a third term as President and demonstrate more consolidation of power, the Economist has dedicated its latest edition to this event covering various aspects of the regime. Indeed, the Economist has an eight-part podcast on the life and times of who it refers to as the most powerful person on the planet. One of the features in its cover issue was about the innovation race between China and the West, something that last week’s piece on the chip wars alluded to. As Xi Jinping aims to regain Chinese glory, becoming a technological super-power is central to these plans. Comparing the tech race between the US and the Soviet Union during the cold war, this piece in The Economist covers where America and China stand on technological prowess today and how are the two super-powers gearing up for this race.
It starts by showing how China has bridged the gap over the past decade:
“In 2008 China spent a third as much as America did on research and development (R&D) and about half as much as Europe, after adjusting for differences in the cost of living. By 2014 it had surpassed Europe. By 2020 its spending was 85% of America’s.
The fruits of this investment are becoming apparent: in August a Japanese research institute calculated that China now produces more of the world’s most highly cited academic research than America does. Since 2015 more patents have been issued in China than in America. China’s output of a basket of sophisticated goods including information technology, pharmaceuticals and electronics is expected to surpass America’s this year, according to a report published by the Information Technology and Innovation Foundation, an American think-tank. “China has become a serious competitor in the foundational technologies of the 21st century,” concluded another report last year from the Belfer Centre at Harvard University.”
On its part, the West is clearly reacting to this: “America’s government is investing more in innovation. In August Congress approved $370bn of spending on green energy, including lots of money for research. The month before it passed the Chips and Science Act, which provides $52bn over five years for the semiconductor industry, some of which will incentivise private R&D.
The act also revamps the National Science Foundation (NSF) to put more emphasis on applied science and technology and potentially doubles its funding. Germany, Japan and South Korea are making multi-billion-dollar investments in computer chips. Last year Britain announced the $1bn Advanced Research and Invention Agency (ARIA) to supercharge high-risk, high-reward science.”
Much like the cold war, the world is likely to benefit from this boom in innovation spend.
“But there remain big differences in approach between China and the West—most notably the far more muscular role the state still plays in directing innovation in China to favoured industries. The West, in contrast, relies on a more diffuse network of universities, non-profits and private businesses that have more freedom to set their own priorities. There is little doubt that China’s system has helped it catch up with the West in some existing technologies, but analysts question whether it will be as good at generating future breakthroughs. The answer will determine the outcome of the global battle for technological dominion.
America’s government invested lavishly in innovation during the cold war, through such organisations as the NSF and the Defence Advanced Research Projects Agency (DARPA). Its spending peaked at 1.86% of GDP in 1964. But after the fall of the Berlin Wall federal spending on R&D fell well below 1% of gdp. Private investment, meanwhile, doubled from 1% of GDP in 1979 to 2% in 2017. Giant tech firms such as Google, Facebook (now Meta), Amazon and Apple sprouted in America. China spawned similar titans, such as Alibaba, Baidu, JD.com and Tencent.
But on both sides of the Pacific the age of free-flowing private capital left many disappointed. The Communist Party has called the spread of big consumer-tech firms a “disorderly expansion of capital”. It has obliged China’s internet giants to follow its priorities, blocking share sales and issuing abrupt regulations to cow wayward firms. It seems to want less video-gaming and online commerce and more ai, chips and green tech.
Many Americans have similar misgivings. Peter Thiel, a fabled investor, has argued that there has been too much investment in “bits” (software and analytics) and not enough in “atoms” (hardware and manufacturing). “With chips we were caught behind the eight ball,” says Eddie Bernice Johnson, a Democrat from Texas who chairs the committee that drafted the Chips Act, “It was a national security imperative.” Mr Young of Indiana agrees: “The totally free-market theories of Friedman, Hayek—they don’t make sense when you’re facing an existential threat that plays with market forces.”
The article argues that the Chinese state driven top down effort is bound to be less productive:
“A paper published in the journal Econometrica in July suggests that Chinese spending on R&D spurs less growth in productivity than that of neighbouring Taiwan. That is in part because the state often supports soes, even if they are less productive. Several studies suggest that corporate R&D in China is about half as productive as in America (although they do not focus exclusively on advanced technology).
America’s expenditure, meanwhile, is much more diffuse. Private businesses account for about 60%, venture capital for nearly 20% and foundations, charities and universities more than 5%. In a recent presentation, Pierre Azoulay, a professor at mit, notes that the “Cambrian explosion of philanthropic funders” is a “silver lining” compared with the perceived sclerosis in government funding. From 2010 to 2019, research funding from non-profits nearly doubled, from $12bn to $22bn. “Our system is unique because its more distributed and bottom-up; not top-down,” says Maria Cantwell, another senator.”
Another difference is the nature of industries:
“China is dominant in some industries, such as 5g telecoms. It makes some 80% of the world’s lithium batteries. But the West is ahead on biotech, cloud computing and ai. It has been the source of most fundamental advances in these fields, such as crispr (a gene-editing technology) and the transformer architecture that underpins many big ai models.”
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