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Special Edition Magazine, Spring 2020: Beyond the Techlash

The Myth of the Tech Race

By fundamentally misunderstanding the difference between the American and Chinese tech scenes, Western policymakers and analysts have rallied behind a zero-sum competition when they should be looking for opportunities to cooperate and reinvest in domestic capacities. Not only are China and America's technological comparative advantages different from one another, but they could even be mutually beneficial.

ANN ARBOR – “The Chinese government is fighting a generational fight to surpass our country in economic and technological leadership,” warns FBI Director Christopher Wray. “To surpass America, they need to make leaps in cutting-edge technologies.” Ominous statements such as these now echo all across Washington, DC. Beyond the trade war, the United States and China are locked in an even deeper, more protracted struggle over technology.

China’s leaders have made domestic technological development a national priority, starting in 2006 with a national drive to foster “indigenous innovation.” This was followed in 2015 by the “Made in China 2025” initiative, a decade-long plan to upscale Chinese manufacturing across ten high-tech sectors, including artificial intelligence (AI), robotics, and new-energy vehicles. According to Patrick A. Mulloy, a former member of the US-China Economic and Security Review Commission, China’s ever-expanding innovation policies are part of a much “larger strategy to achieve global supremacy.”

Yet for all the Western paranoia over Chinese ambitions, most analysts have missed an important fact: China’s comparative advantage in technology is different from that of the US. Whereas China excels in applying technology to improve business models – for example, in e-commerce and fintech – the US remains the unparalleled world leader in basic scientific research, the foundation of advanced technologies. This fundamental difference challenges the zero-sum mentality often underlying the Sino-American tech race.

Back to Basics

In the West, the term “technology” evokes images of super-intelligent, dazzling inventions like flying cars and thinking robots. During the Cold War, the most vivid sign of technological prowess was the Soviet Union’s launch of satellites into space – the so-called Sputnik moment. But in emerging markets, which have lower average income levels and a lack of basic infrastructure, “technology” is regarded not in utopian terms, but as a pragmatic tool.

Consider the ubiquitous example of mobile phones, a relatively simple device that even the poor can afford to buy. With a phone, one can make calls, access information, borrow micro-funds, and hawk merchandise. The diffusion of this modest technology can subsequently spawn waves of startups in novel domains: fintech, ed-tech, health-tech, and so forth. Beyond the fancy labels, these are all examples of entrepreneurs applying off-the-shelf, widely accessible technologies to enhance the delivery of goods and services. By doing so, they facilitate transactions that spur growth across the economy.

Some of China’s largest and most iconic tech titans – for example, Alibaba, Xiaomi, and Meituan – followed this basic trajectory. Contrary to received wisdom in the West, Alibaba was not a “national champion” handpicked by the Chinese government to succeed. As a private company in a novel industry (e-commerce), it actually faced significant resistance from Chinese authorities. For example, in 2014, state banks tried to block the company’s Yu’e Bao system – which allows users to invest money left over from online payments – by imposing limits on fund transfers into online accounts. According to one senior state media analyst at the time, Yu’e Bao was a “blood-sucking vampire” that must be stopped.

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Tech startups like Alibaba thrived not because the state propped them up, but because they tailored their services flexibly to Chinese consumer needs. By contrast, Alibaba’s American counterpart, eBay, insisted on a one-size-fits-all business model and eventually lost the market. As my interviews with Chinese private-sector entrepreneurs have found, the government endorses so-called champions only after they succeeded on their own. Their strength comes from creating value through competition, not state protection.

These examples also show why it is important to distinguish between seminal and applied innovation. America is strong in both. And it especially dominates in basic research: its universities lead the world across all scientific fields; its corporate giants invest heavily in research and development for advanced products; and both sectors attract the best global talent. Moreover, US academia and business enjoy a symbiotic relationship, as epitomized by Stanford University’s seeding of the technologies that would later define Silicon Valley.

Chinese state planners know that America’s overwhelming strength in basic research has allowed it to dominate the upstream of the technology supply chain, a position that the US government guards fiercely. In an effort to catch up, China intervened with a bevy of top-down policies to support state-selected high-tech sectors. But this top-level battle for world dominance has obscured China’s real competitive edge: commercialization.

New Faces of Innovation

Consider the composition of each country’s tech “unicorns” (private startups with a valuation of at least $1 billion). According to a 2018 Credit Suisse report, only the US has produced more unicorns than China. But the largest share of Chinese unicorns (58%) operate in the e-commerce and gaming sectors, whereas US unicorns are more highly concentrated in AI, big data, robotics, and software. Moreover, while China’s overall spending on R&D is quickly catching up to that of the US, its spending on basic research as a share of GDP has increased only slightly, and remained at less than one-quarter of the US level from 2010 to 2017.

Another telling distinction is the bottom-up emergence of what I would describe as “modular manufacturing” in Shenzhen, a city of 13 million people in Guangdong Province. Once a hub for counterfeiting foreign consumer and luxury goods, Shenzhen has morphed into the “Silicon Valley of hardware,” as one documentary calls it. At Huaqiangbei, a massive marketplace of small vendors, shoppers can buy any electronic part imaginable. And, owing to the emergence of such markets, inventors and entrepreneurs from around the world can create prototypes more cheaply and quickly than anywhere else.

The rise of Shenzhen’s hardware ecosystem has had a global impact. Startups in any country can now create their own brands, produce them in small batches in the city, and then sell to niche markets. One example is Wiko, a smartphone company founded and based in France, whose products are made in Shenzhen. Within two years, reports David Li of the think tank Hacked Matter, the startup captured 18% of the French market, making it the third-most popular smartphone in France (after Apple and Samsung).

In other words, the system of modular manufacturing that sprang up in Shenzhen in recent years is upending the traditional model of global mass manufacturing, which was previously dominated by large multinational companies presiding over a passive chain of suppliers. The ability to launch, brand, and produce a new product is quietly being “democratized” at the global level from a single Chinese city. This creative movement emerged with scant attention, let alone support, from grand strategists in Beijing.

Similarly, the realities of bottom-up Chinese innovation rarely reach the halls of power in Washington, nor do they feature much in mainstream Western media. Instead, analysts continue to describe China’s technological ascent in Cold War terms. A recent commentary in Forbes is a case in point: “This is indeed a Sputnik moment for the US, a wake-up call for the US just as it was when the Soviet Union launched its first satellite, the Sputnik I, and beat the USA into space.”

Stepping Back from the Brink

But the China of 2020 is nothing like the Soviet Union of the post-World War II era. Nor is technology a zero-sum game, where only one county can hit a given target first and “win.” A more balanced assessment of Chinese and US strengths and weaknesses would go a long way toward mitigating an unnecessarily acrimonious and costly rivalry.

Leaders on both sides should understand that countries can and do have different comparative advantages in technology. China excels in commercialization and applied innovation because it has a massive domestic market and few or no established players in emerging industries. These conditions provide fertile ground for decentralized experimentation. Moreover, as is true in many fast-growing emerging economies, the Chinese private sector is driven by “a culture of hyper-competition,” as one tech businessman put it to me. China today is a place where entrepreneurs aspire to make big money fast.

Unparalleled US leadership in basic scientific research, on the other hand, rests on a longstanding institutional foundation that is reinforced by a culture of freedom to pursue original ideas. Moreover, the US tech sector continues to reap the benefits of the government’s deliberate investments in basic science during the post-war era. According to Vannevar Bush, the director of the Office of Scientific Research and Development under President Franklin D. Roosevelt, US science policy during that period was premised on the belief that “basic research is the pacemaker of technological progress,” and that it should be “performed without thought of practical action.”

By understanding and accepting divergent national competitive advantages, policymakers in both countries can start to move away from zero-sum competition and toward cooperation. For the world as a whole, the most consequential area of potential US-China collaboration is in cutting carbon emissions. As John Helveston of George Washington University and Jonas Nahm of Johns Hopkins University note, the US produces many times more patents in clean-energy technologies than China does, but Chinese manufacturers have established a competitive advantage in “commercialization, scale up, and cost reduction” in this same domain. Combining these strengths could achieve significant price reductions and accelerate the pace at which these critical technologies become commercially viable.

Détente 2.0

Moreover, Chinese and US policymakers should not overestimate what industrial policy can achieve. The West has been so busy wringing its hands over China’s top-down innovation initiatives that few have stopped to question whether such policies actually work. In fact, state-led innovation has some drawbacks. In a 2019 study with Nan Jia of the University of Southern California, “The Limits of Commanding Innovation,” we analyzed the impact of the government’s 2006 campaign to promote indigenous innovation. We found that while the quantity of patents registered in China rose dramatically between 2006 and 2015, the share of novel patents (a common measure of the quality of innovation) declined.

State action can accelerate science and innovation, but only if the right measures are taken. In general, governments should support basic research that would otherwise struggle to attract commercial funding, while also investing in infrastructure and other public goods that private companies cannot or will not provide for themselves.

The Chinese government’s efforts at promoting innovation have been most successful when focused on infrastructure provision. The construction of a nationwide broadband network, by boosting Internet penetration and connection speed, paved the way for the subsequent boom in e-commerce. On the other hand, when apparatchiks try to “select winners” in high-end technologies or intervene in corporate decisions, such efforts tend to backfire.

Finally, rather than fixate on “containing” a perceived enemy, US and Chinese leaders should harness competitive pressures as a source of motivation for self-renewal. To be sure, there is no question that China wants to move up the technology value chain, and that the US should be vigilant in monitoring China’s acquisition of advanced technological capabilities that have security implications. Complaints about Chinese intellectual-property theft also are not unwarranted; indeed, China has pledged to strengthen IP protections as a part of the “phase one” trade deal with the US signed in January 2020.

But tit-for-tat escalation is not the right way to respond. I recently attended a conference where someone asked why the US hasn’t matched China’s Thousand Talents Program to recruit top scientists and technologists. Why should it? With its world-class universities and generally open immigration policy, America has been the world’s top talent recruiter for more than a century.

Know Thyself

The first thing the US can and should do in response to China’s ambitions is to maintain its own core strengths. In 2017, the US government’s spending on basic science and technology research comprised just 1.7% of the federal budget, or half the level in the 1960s. And in the last decade alone, state governments have cut funding for public institutions of higher education by $9 billion. Across the country, public schools are struggling with funding shortages and stagnant or falling teacher salaries.

Meanwhile, fearing Chinese influence, the US government has launched investigations into American or US-based scientists of Chinese descent. As the journal Nature warns, “Some fear the rising tensions could lead to an exodus of researchers with Chinese backgrounds from US institutions.”

Similarly, at a recent forum hosted by Stanford University, Asian-Americans voiced concerns about potential ethnic targeting – a practice that undermines the bedrock of democracy and recalls darker moments in America’s past. Fortunately, there have also been voices of restraint. Last year, more than 200 scholars and foreign-policy experts in the US published an open letter arguing that “China is not an enemy.”

Even if the US insists on treating China as a foe, it should be informed about the different and novel forms that technological innovation takes in the twenty-first century. Cold War analogies confuse more than clarify.

In truth, the biggest threat to both American and Chinese economic strength comes from within each country. Given the extraordinary stakes of the growing Sino-American rivalry, the rest of the world can only hope that leaders on both sides will find common ground and turn the competition into a force for fixing problems at home.

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