These feats of Chinese ingenuity join many other recent innovations in a range of industries. Western companies beware: This is not the China you are accustomed to, and the ramifications for your research and development strategies may be profound.
For much of the last two decades, foreign innovation in China has been driven by competition among foreign companies and by imitative threats from local Chinese companies.1 R&D has generally been managed according to the following paradigm: Foreign R&D competes against other foreign R&D in higher-end market segments, while Chinese companies operate in lower-end market segments, often competing only indirectly with foreign R&D.2
Moreover, many have long been skeptical about the ability of China’s ecosystem, especially its political, cultural, educational, and financial institutions, to foster genuine indigenous innovation. Many foreign companies we have spoken to over the years have admitted to contributing to this narrative, in part hoping that it would become a self-fulfilling prophecy.
However, the face of the Chinese competitor has visibly changed in the past five years due to a variety of factors.
"According to Sacha Wunsch-Vincent, co-editor of the GII, China's success story can be explained by its consistent and persistent innovation policy planning and execution for more than three decades, as well as by the fact that it has impressively increased spending on education, science and technology.
But, more importantly, it is the country's ability to translate pro-innovation policy and innovation inputs into sound results, such as intellectual property, innovative products and high-tech exports.
More than two years after it was first proposed, Congress has finally passed one of the most anticipated legislative efforts of the Biden presidency: a bipartisan bill to help the United States compete more effectively with China. The Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) and Science Act, which is expected to soon be signed by President Biden, promises to invest tens of billions of dollars in public funds to develop advanced technologies—most notably to subsidize semiconductor manufacturing. Lawmakers on both sides of the aisle agree the act is sorely needed. Sen. Roger Wicker (R-Miss.) proclaimed that the CHIPS Act is “needed to outcompete China.” Sen. Maria Cantwell (D-Wash.), meanwhile, explained her support for the bill by evoking the Cold War: “I believe this is a Sputnik moment, where it is clear to Americans that we are falling behind on innovation and we can’t risk falling further behind.”
There is, however, one major problem with this ambitious, multibillion-dollar plan to compete with China on advanced technology: It won’t work, at least not on its own. And, ironically, given that CHIPS Act champions have cited as an inspiration the Soviet Union’s 1957 launch of Sputnik, the world’s first artificial satellite, the U.S. response to that launch provides insight as to why the act risks failing to boost American innovation as much as its supporters hope. The lesson of the United States’ Sputnik moment 65 years ago is that when it comes to technological competition, money isn’t everything, and subsidies are often wasteful ways to encourage innovation. People, culture, and institutions matter as much as, if not more than, money in stimulating technological innovation. And unfortunately, there are worrying signs that these key ingredients in America’s special sauce for innovation are growing scarce.
Today, the Sputnik moment of 1957 is remembered as a shining example of Washington at its best. Congress responded to the launch of Sputnik by dramatically increasing federal support for science and technology and creating new, technology-focused agencies such as NASA and the Defense Advanced Research Project Agency—all in less than a year. A little over a decade later, and largely thanks to this burst of federal action, the U.S. won the space race by beating the Soviets to the moon. But the history of this period tells us that if Congress really wants to stimulate American innovation, it can’t rely solely on subsidies and state direction.
It is often forgotten that the Eisenhower administration’s initial response to Sputnik was marked more by annoyance than alarm. President Eisenhower was particularly concerned that a post-Sputnik spending spree would distract from other priorities, including what he believed to be more militarily significant technology. At a press conference held just a few days after Sputnik entered orbit, Eisenhower was dismissive, referring to the satellite as merely “one small ball in the air.” Later, in his first major speech about Sputnik, delivered from the Oval Office on Nov. 7, 1957, Eisenhower attempted to frame growing calls for investment in science and technology as misguided. “Certainly, we need to feel a high sense of urgency,” he conceded, “but this does not mean that we should mount our charger and try to ride off in all directions at once.” Instead of a call to arms, Eisenhower proposed “selectivity in national expenditures of all kinds.” Most of his suggested responses to Sputnik sounded downright dull, including the “pooling of scientific effort” with American allies—which Eisenhower was quick to note would entail “no cost.”
But faced with a public and Congress seized by panic, Eisenhower tried another tactic, seeking cheaper ways to respond to Soviet technological advances that relied less on government and more on the country’s private enterprise and civil society. In a second speech, while boasting that the federal government was “stepping up its basic research programs,” the president emphasized that “the biggest share of the job is in the hands of industry and private organizations.”
Eisenhower may have been motivated primarily by budgetary concerns. But six decades later, China’s own struggles to boost innovation suggest that he was on to something when it comes to the nonfinancial catalysts of successful innovation. Beijing has funneled huge sums of money into research and development in recent decades, but the results have been generally underwhelming. Studies suggest that crucial innovation processes in China are undermined by pervasive corruption, an over-reliance on state control and direction, and an organizational culture that disincentivizes collaboration. The biggest informal constraint on innovation in China, though, is the authoritarian control of information and _expression_, which stifles new ideas. In a sign that China’s rulers recognize the linkage between free _expression_ and robust innovation, Beijing passed legislation, the 1993 Scientific and Technological Progress Law, that explicitly guaranteed freedoms for researchers and inventors. But in practice, censorship and restrictions on internet access continue to hamper innovation. As one Chinese academic commented, “[I]t is very difficult to achieve world-leading results or to be a frontrunner in global scientific research without any knowledge of [other countries’ achievements] and without comparison.”
The contrast between the United States’ reaction to the launch of Sputnik and the case of China today holds two crucial lessons for the CHIPS and Science Act and other efforts to compete more effectively when it comes to science, technology, and innovation.
First, there is a big difference between investment in basic research and development, which tends to confer long-term benefits, and subsidies, which often do not. Second, Eisenhower’s restrained reaction highlights the fact that government plays an important, but only partial, role in fostering innovation. Indeed, thoughtful accounts of the development of Silicon Valley and other highly innovative ecosystems emphasize that it is the combination of public investment in basic research, culture, values, and institutions that make up the secret sauce of innovation. Other research has found that the U.S. Cold War-era space program succeeded where its Soviet competitor failed primarily because of its superior organizational ability to marshal the combined ideas and resources of government, industry, and academia.
These informal norms, values, and institutions are extremely difficult to engineer or to legislate—and they rely as much on the energies of the private sector and civil society as on government efforts. This is why even as China increasingly challenges the technological leadership of developed democracies, it might never entirely catch up. Yet the reverse is also true: If the U.S. wants to remain ahead, it needs to strengthen liberal values and institutions, which will foster collective and coordinated leadership by government and civil society in science, technology, and innovation.
Unfortunately, there are growing signs that the United States’ innovative culture may be eroding. For reasons that aren’t entirely clear, focus on innovation appears to be declining across a large swath of American businesses, and new business formation has been declining for decades. While the causes are complex, many observers and scholars of American innovation agree that part of the problem is cultural and are issuing warnings to that effect: “We are losing our collective sense of purpose along with our fire, ambition, and determination to achieve,” said author John Kao. Most worrying of all, America’s political dysfunction and the perception that it is straying from long-held liberal values may be dimming the attraction of the United States as a destination for work and study for would-be innovators from across the globe.
In this context, the CHIPS and Science Act’s shortcomings are notable. The bill is centered on the subsidy approach and relies largely on federal agencies like the Commerce Department to get America’s innovative juices flowing. In fairness, the bill makes major, laudable investments in basic research and development. These investments might promote advances in technological research and production in the near term. But the bill’s emphasis on subsidies and state action threatens to crowd out cheaper approaches that might facilitate more sustainable technological innovation in the near term and the long term. Education and training is a good example: In the CHIPS and Science Act, a commitment to invest in semiconductor workforce training is authorized at $200 million, compared to $39 billion to subsidize semiconductor manufacturing. Perhaps most glaring of all, the bill does little to address the critical role that America’s broken immigration system plays in maintaining its competitive edge.
To boost American innovation and compete effectively with China in advanced technology, legislation must do more than shovel money into manufacturing. In particular, Congress must take three additional steps to strengthen America’s innovation ecosystem. First, America needs a serious investment in K-12 education in science, technology, engineering, and mathematics (STEM), including at the elementary level. A national teacher shortage and gaping inequality among school districts necessitate a major effort to boost teacher recruitment in STEM fields, especially in rural areas.
Second, Congress must make it easy for foreign students in tech-friendly fields to work and gain permanent residency in the United States after graduation. In many fields, America’s innovation edge depends on access to foreign talent—which the pandemic and other pressures threaten to disrupt. New legislation is needed to streamline the path to permanent residency and citizenship for students with crucial STEM skills.
Third, America’s political leaders need to recommit to basic values like academic freedom. Partisan attacks on scientists and academic researchers must stop. America cannot be a leader in science, technology, and innovation if its political leaders target and undermine science and scientific researchers.
If Washington really wants a new Sputnik moment to help America compete more effectively with China, it must learn the period’s most important lesson: When it comes to technological competition, some things matter more than federal funding.