Global Innovation: Foundations and Futures

Turnover is common on the Bloomberg Innovation Index. The 2020 list is no exception, as nations are rising and falling in the rankings across the board.

Who Will Lead in Innovation in 2030?

China is catching up with the rest of the advanced world economically and technologically. Vast infrastructure projects – from high speed rail to 5G – have led many to wonder if China will soon surpass the United States as the global leader in technology.

To understand the future of technological domination, one must consider several factors of production:

  • Higher education,
  • cultural attitudes,
  • funding and financial incentives,
  • the legal framework.

Higher education. American universities are the best in the world. According to Times Higher Education’s 2020 rankings, the United States is home to 40 of the global top 100 universities. By comparison, Europe has 36 (eleven in the United Kingdom, eight in Germany, seven in the Netherlands, four in Switzerland, three in France, two in Sweden, and one in Finland), and China has three (six if Hong Kong is included). Similarly, U.S. News & World Report places 44 of the top 100 universities in the United States.

Cultural attitudes. Perhaps because of our long history of individualism, innovation is a key feature of the American spirit. Indeed, Founding Father Benjamin Franklin was a prolific inventor. Despite constituting only about 4% of the world’s population, Americans are responsible for 22% of global patent applications, with China coming in second with 21%.

But patents don’t tell the whole story. Chinese culture, particularly its education system, reveres tradition, is obsequious toward authority, and does not encourage the sort of “outside-the-box” thinking that innovation requires. Schools brainwash their kids with Communist Party-approved groupthink. China’s schools notoriously practice rote memorization, which certainly helps prepare students for the standardized tests that the Chinese dominate. But, Inside Higher Education reported on a study that concluded that the highest-performing Chinese students are less creative than others. Fear of failure is also deeply ingrained in Chinese culture, a collective phobia that likely prevents the emergence of would-be entrepreneurs.

Funding and financial incentives. According to the previously referenced R&D Magazine report, the entire world spent roughly $2.3 trillion on research and development in 2019. Almost 25% ($581 billion) came from the U.S., 22% ($519 billion, PPP-adjusted) came from China, and 20% ($472 billion, PPP-adjusted) came from Europe. China has been greatly increasing its R&D investment in recent years, and at its current rate, may surpass the U.S. sometime this decade. R&D Magazine predicts this will occur in 2024.

In the U.S., nearly 2/3 of research dollars are spent by industry. It is difficult to make such a distinction in China, since most major companies are either partially owned or subsidized by the government. This means that China’s ability to further ramp up its R&D spending and business investment probably exceeds that of the U.S.

The U.S. has a distinct financial advantage compared to Europe, however, and not just for R&D. Venture capital funding in Europe is stingy compared to the U.S., partially due to the continent’s cultural aversion to risk.

Legal framework. “If at first you don’t succeed, try, try again,” is the unofficial motto of American startup culture. There is no shame in opening a business and failing. In fact, many entrepreneurs see it as a badge of honor because they learned something valuable in the process. Bankruptcy laws make it relatively easy to pick up the pieces and start over.

While Americans take those truths for granted, they simply do not exist in many other countries, including European ones. Failure is frowned upon in Germany, and laws make it possible for entrepreneurs to be held financially or even criminally liable if the business becomes insolvent. Furthermore, enshrined within one of the European Union’s treaties is the “precautionary principle,” which in theory exists to minimize risks to public health and safety but in practice is used as a blunt weapon to bludgeon technologies that Europeans dislike, such as genetically modified food.

Though Chinese culture may not be an incubator for innovation, its legal framework might be. At the very least, China does not seem remotely concerned if it behaves in ways that Western nations would deem unethical.

Intangibles. Finally, there is an “intangible factor” that essentially boils down to this question: Where do scientists want to do research? With the possible exceptions of theoretical physics (because Europe hosts the Large Hadron Collider) and fields such as computer science and civil engineering (which are dominated by universities in China and Singapore), most cutting-edge research in most fields – especially in biology and medicine – occurs in the U.S. The fact that the U.S. has more Nobel Prize winners than any other nation attests to that.

For these reasons, the graduate schools of American (and European) universities are filled with foreign students. Science is an international endeavor, and a technologically successful country must attract the world’s best talent. But very few scientists want to move to China. That fact is unlikely to change, so long as it insists on remaining an authoritarian country. __

A few comments on the issues of education, culture, financing, and legal framework, with regard to China:

  • First, the Chinese educational system has a serious problem with cheating. In fact the entire Chinese culture has a terminal affliction of lying, cheating, and stealing that is unlikely to go away soon.
  • Chinese culture is authoritarian, with a high value on conformity, and a low value on creativity.
  • Financing in China is oriented toward state-owned enterprises and other companies that are well connected to high Party officials or their families.
  • As for “legal framework,” there is no rule of law in China. Only rule of the party as interpreted by high party officials.
  • Always remember that 90% of China’s ultra wealthy have close ties to families of the communist party’s ruling elite.

    Does anyone ever ask whether China can continue to prosper if forced to do without forced labour, without political concentration camps and its bloody organ harvest, or if forced to comply with international laws of trade? No stealing of intellectual property, no counterfeiting of other nations’ signature products, no “poison trade goods” including foods or pharmaceuticals? Such simple things to ask, but how monumentally difficult for communist China to comply.

    It is assumed in China that a person will lie, cheat, or steal, if it is convenient. There is no such thing as trust in China. Why do the Chinese send friends and relatives to Hong Kong to buy simple things like milk or chocolates? Because those and many other products cannot be trusted inside party-controlled territory. Why do they send their money and their families overseas if they can?

    Tyler Cowan, an economist whom I normally greatly admire, has come out with his diagnosis of what ails the US-China relationship. It’s not trade, he says, but a “lack of trust.”

    … President Trump has been very vocal about what China was trying to do and has put in place trade restrictions in an effort to force Beijing to accept international standards for trade and navigation in the oceans, for starters.

    The measures have had some effect — China’s economy has slowed dramatically, not entirely due to tariffs from the US, but the taxes have begun to bite.

    While China is often described as a market economy, consider this: shortly after Beijing put retaliatory tariffs on soybeans, Chinese imports of US soybeans went nearly to zero. Was this in reaction to a 10% tax, or did the government spread the word that US soybeans were not to be imported. I suspect the latter, which demonstrates that the term market economy really doesn‘t apply to a one-party system with no respect for the rule of law.

    So my answer to Professor Cowan: it’s not a lack of trust but systematic aggression by China against our people, our business and jobs that has rendered them unworthy of our trust.

    __ Charles Wallace in Forbes

    Some Problems in Mainland China

    The recent “independence votes” in Hong Kong and Taiwan cast a long shadow over the ambitions of Xi and other top officials. It is just as well that they are not being allowed to have a free hand in those places, since the economic well-being of China’s elite depends upon the existence of trusted intermediaries with the outside world — such as the so-far relatively independent Hong Kong and Taiwan. China has proven itself to be untrustworthy at every test.

    Economic growth in China lowest in about 30 years

    China is subject to major viral outbreaks

    Outbound planes and trains halted from Wuhan

    PDF download explaining cultural aspects of China’s lying and cheating culture

    The US has been the world’s wealthiest nation for 140 years, and the most innovative nation for most of that time. The US has been the world’s most powerful nation for 75 years and the world’s sole superpower for roughly 30 years.

    But for the past 20 years, media and academic pundits have been predicting that the 21st century would be “The China Century.” And by hook or by crook, the dragon has clawed its way into a position of wealth, power, and technological savvy. Since President Clinton boosted China into the WTO, nothing from the administrations of Bush II or Obama has caused intellectuals in the world of chatter to doubt that China would take over as the wealthiest, most innovative, and most powerful nation by 2050 — if not decades sooner. It is only in the past two years that any push-back toward Chinese illegal practises could be seen or felt from any part of the world. China’s sense of inevitable triumph has only recently seemed increasingly hollow and ghost-like.

    The 574% private debt-to-GDP is conservative… Moreover, it’s highly likely that there are more unreported financial debts out. If you factor in that China’s GDP is likely lower than stated, and that their debts have risen, you could get up into debt ratio approaching 800%.

    By comparison, the usual benchmark for a lofty debt-to-GDP ratio is anything over 150%… That makes China’s staggering debt problem almost unfathomable by most metrics. The only reason why debt-to-GDP bubble has gotten so big (without bursting) is that the Chinese government controls the economy.

    Whenever the Chinese economy slows, like it is doing now, the Chinese government intervenes. It adds fiscal and monetary stimulus or monkeys around with the financial system to kick the can down the road.

    This papers over the cracks but makes the problem worse. It’s now only a matter of time before this debt bubble burst. __

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    2 Responses to Global Innovation: Foundations and Futures

    1. Gavin Longmuir says:

      What methodology put Germany top of an Innovation Index? Germany???

      To the point of Higher Education — the US may well have 40 of the top 100 global universities (leaving aside the natural question about how that ranking was developed). But what is going on within those 40 universities?

      I visited one of those top universities a few years back in connection with a cutting-edge project. The university had a large active graduate program — but not one of the many MS or PhD postgrads was a US citizen; more than half of them were Chinese. Some of those foreign students wanted to become US citizens, but the Obama Administration kept sending them home. Only about half of the professors were US citizens. A university is mostly people — and not enough of those people these days are Americans. This will undoubtedly impact the future.

      When I enquired about the absence of US postgrads, the explanation offered was that job opportunities for US graduates in this technical field were so attractive that none of them wanted to stay on for further study. Whether that explanation is true or not, it is clear that the next generation of professors will not come from the US.

      • alfin2101 says:

        Universities can charge foreign students more than they can charge in-state students. The financial motive is probably only a very small part of the phenomenon you describe, however.

        US primary and secondary education is generally inferior — and sometimes it seems to have been designed that way. If young minds are not primed for great knowledge and skills at the appropriate stages of development, then millions of youngsters may miss the boat.

        The US has always attracted large numbers of opportunity seekers from abroad. Very few Americans oppose legal immigration for the highly qualified. But it is sad that large numbers of Americans are not being given the opportunities they deserve because the educational establishment in the US is dominated by politically correct dogma.

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