Responding to Chinas innovation and competitiveness policies

With a special focus on the renewable energy challenge

Energy Secretary Steven Chu has explained why China’s bid for clean energy leadership should be our “Sputnik Moment.” The Center for American Progress and ClimateProgress have previously discussed China’s aggressive strategy to assume leadership in clean energy (see “Green Giant” and “China begins transition to a clean-energy economy”).

Now CAP’s Kate Gordon, Susan Lyon, Ed Paisley, and Sean Pool have put together a major 50-page report laying out the full challenge posed by China and what a progressive response by the United States might look like. Below is the executive summary and the section from the report on renewable energy.

When Chinese president Hu Jintao alights in Washington, D.C. next week for a summit meeting with President Obama, he will learn firsthand that China is fast becoming the touchstone against which everything wrong with the U.S. economy is measured. In the run up to last year’s midterm congressional elections, candidates across the country accused one another of “sending jobs to China” instead of creating jobs at home. Members of Congress on both sides of the aisle regularly promise to seek trade sanctions against China for undervaluing its currency. The United States recently accepted a United Steelworkers petition accusing China of unfairly subsidizing its exports and hoarding raw materials essential for clean energy technology development. And U.S. companies across a range of industries are increasingly voicing their complaints about China’s theft of their intellectual property and the country’s forced transfer of cutting-edge U.S. technology in exchange for access to the nation’s vast and fast-growing domestic market.


The overarching message coming from the United States is this: If China would just stop cheating, the U.S. economy would rebound, helping both nations and the rest of the world recover more sustainably from the Great Recession and sparking broad-based economic growth on both sides of the Pacific. Equally forcibly (though in more diplomatic language), President Barack Obama is expected to deliver that same message.

What this view assumes is that if only China would stop cheating, the U.S. economy would do what it has done best for the last hundred years or so””lead the world based on our prowess at science, technology, and innovation. After all, our universities are the best in the world, our entrepreneurialism is world-renowned, and our ability to turn new ideas into new job-creating products and services is unsurpassed. But this interpretation is not entirely accurate.

China is now investing in many of the building blocks of innovation-driven economic growth that the United States has all but abandoned over the past several decades. Pick your sector and you’ll find China spends more on a per capita basis, and sometimes in total amounts, on public investments in basic science and education, research and development, or R&D, infrastructure development, and workforce training. What’s more, China’s leaders have crafted coherent policies and programs in support of domestic manufacturing and services for export abroad and to ensure Chinese companies have the prime positions in China’s rapidly growing domestic economy.

China, in short, is actively and methodically building up the basic foundations for future economic growth while also ensuring a market for its current and future products and services at home and abroad. The country’s leaders understand completely the message driven home by The World Economic Forum, in its monumental Global Competitiveness Report 2010–2011, which underscores the importance of innovation as the basis for long-term economic growth:

Although substantial gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability, or improving human capital, all these factors eventually seem to run into diminishing returns. The same is true for the efficiency of the labor, financial, and goods markets. In the long run, stan- dards of living can be enhanced only by technological innovation. Innovation is particularly important for economies as they approach the frontiers of knowl- edge and the possibility of integrating and adapting exogenous, [or imported,] technologies tends to disappear.


China and the United States have very different legal, political, and economic systems, but both are bound by the same reality that to be competitive in the 21st century global economy, they have to innovate. But unlike most political leaders in the United States, China’s leaders recognize that innovation is not created in a vacuum. Across the globe, developed and developing countries are realizing what economists have known for years””that technological innovation, more than any other factor, fuels long-term economic competitiveness and growth, and that innovation in turn requires a robust and well-integrated foundation of education, research, and infrastructure.

The widespread recognition of these principles has sparked a global race to the top in innovation, science, and technology policy. But judging from the state of our innovation policy, the United States seems to have missed the memo. Other nations see innovation and competitiveness as two sides of the same economic coin. And not surprisingly, as John Podesta, Sarah Wartell, and Jitinder Kohli point out in CAP’s recent report, “A Focus on Competitiveness,” “”¦other countries organize their economic policy apparatus more explicitly around the question of how to effectively compete.”

China in particular does this very well. In this paper, we examine the challenges posed to current and future innovation-led economic growth in the United States by China’s drive to boost innovation at home by any means available. As we will demonstrate, some of these challenges cut to the core of our nation’s own global economic and scientific strengths””even though some of China’s innovation policies and programs are plagued by inherent liabilities that are built into the country’s approach to innovation.

Some Chinese R&D spending, for example, ends up fueling academic fraud, a huge problem in China, where local scientists often try to lay claim to new discoveries that are bogus. But the spending levels are still impressive, as is the fact that China has taken pains to invest across the entire innovation chain from basic science, to R&D, to market creation for new technologies, to production and deployment of these technologies. This is paying innovation dividends in hybrid electric vehicles, advanced batteries, high-speed rail, and solar power systems, to name a few.

Indeed, one of China’s other innovation “assets” is its growing direct investment in basic research and development. In 2008, China’s gross national expenditure on research and development stood at roughly $66 billion, or about 1.5 percent of China’s gross domestic product. This is the highest investment level among developing economies as a percent of their domestic economy and ranks China fourth in the world in overall R&D spending behind the United States, Japan, and Germany.

Similarly, China’s massive domestic investments in global market-scale industries such as clean technology products, transportation, mobile telecommunications and aerospace are now enabling Chinese companies in these sectors to compete for business abroad and dominate their home market. Again, there are liabilities built into this strategy: Economists can point to costly misplaced investments in some of the infrastructure needed to get these industries off the ground””misinvestments that saddle the Chinese state-owned banking system with an entire new raft of nonperforming loans and resulting in way too many empty science parks and regional industrial zones that are no more than property speculation gone awry.


This same strategy””key directed investments in science and innovation to spur rapid economic growth no matter the cost””is even evident in the Chinese government’s planning processes. China’s famous communist-era “five-year plans,” which often bore little relation to reality, are now precise blueprints for strategic market-oriented, innovation-led economic growth to spur job creation at home and exports abroad. Then as now, however, local political and business leaders in China’s provinces and cities, counties and townships continually go their own way in interpreting these plans and then spending the cash, often resulting in misleading statistical data flowing back to Beijing “proving” the metrics of the blueprint are being met while in fact the funds are being spent on a variety of other activities, including local property development and speculation.

But these liabilities do not mean that U.S. policymakers can afford to be complacent. China’s so called “import/assimilate/re-innovate” model of technology development, for example, actively drives foreign companies to share their technologies with Chinese joint venture partners in exchange for access to the cheap Chinese workforce and burgeoning domestic marketplace. This strategy poses a direct challenge to U.S. competitiveness because it enables Chinese (often state-owned) companies to gain access to cutting-edge technologies but also build upon them incrementally to create a Chinese innovation ecosystem. Never mind that economists recognize that the downside to this model of economic development is that it delivers diminishing returns without genuine domestic innovation delivering world-class breakthroughs.

In the pages that follow we will examine China’s innovation assets and liabilities as the country races to build a globally competitive innovation-led economy, and then consider how the United States should react to these challenges. We then offer our recommendations to U.S. policymakers on steps our own government can take to ensure our nation rises to meet the challenges posed by China. Briefly, though, we will argue that the U.S. government needs to give our nation’s innova- tion engine a tuneup by:

  • Modernizing our basic infrastructure to allow businesses to more effectively collaborate and compete in domestic and international markets
  • Investing more in science and math education and workforce development to ensure we have workers able to participate in the technology-driven economy of the present and future
  • Crafting finance policies to make more public and private capital available to innovators and bolster our culture of entrepreneurship by rewarding risk-taking and competitiveness
  • Promoting international trade policies that ensure access to foreign markets, and the free flow of goods, services, knowledge, and capital across borders
  • Honing our research and development policies so that we invest not just in basic research but also the full innovation lifecycle from invention, to development, to production and commercialization

These are progressive proposals that would boost our national competitiveness and jobs growth in the short run and ensure our once-dominant position in science and technology, innovation and entrepreneurship, and job creation is not eclipsed by China in the 21st century. On the eve of Chinese president Hu Jintao’s visit to Washington, these are progressive proposals that Congress and the Obama administration dearly need to take to heart.

JR: Here is the renewable energy section.The Renewable Energy Challenge

The different approaches taken by China and the United States toward the development of 21st energy solutions epitomize the real challenge posed by China. On the basic research front, U.S. government spending on energy R&D declined from a high of $9 billion in 1980 to roughly $3.2 billion in 2006. Likewise, private investment in energy research and development has shrunk from a high of nearly $7 billion in 1980 to approximately $2.5 billion in 2006.

In contrast, China’s overall spending on R&D has risen at nearly twice the rate of economic growth in recent years, climbing from 0.6 percent of GDP in 1995 to over 1.2 percent in 2004.81 The number of researchers in China increased by 77 percent during that time, placing China second worldwide for total number of researchers (just behind the United States).82 In clean energy specifically, China’s spending has been impressive, with numerous and sophisticated incentives programs dumping millions of dollars daily into their renewable energy sector. According to U.S. Commerce Secretary Gary Locke, China’s investment in all forms of clean energy technology acceleration and export expansion today amounts to as much as $12 billion monthly.

Our relative underinvestment leads to a situation where new ideas are born here””the United States is still the leader in emerging renewable energy technologies”” but then are often spirited away by other countries, especially China, for development, commercialization, and manufacture.

Indeed, China’s dedicated pursuit of alternative energy technologies illuminates the strengths of its innovation system, and the weaknesses of our own, at the critical point where a new technology is ready for commercialization. Thanks to forced technology transfer and aggressive process innovation, as well as a policy framework that provides strong market pull and public investments, China is well on its way to becoming a world leader in both the manufacture and installation of renewable energy technology.

That means incremental innovation will happen in China, not here, by Chinese design””especially if China also acts on its spoken commitment to addressing climate change through low-carbon development strategies. A member of the Chinese delegation to the United Nations Framework Convention on Climate Change, the international forum that is attempting to forge global rules for carbon reduction, said recently that China “will not copy the developed countries’ old way of energy-intensive economic development.”

To support this, it is widely anticipated that China’s twelfth five-year plan will likely include strict carbon intensity reduction targets and other aggressive climate mitigation and clean energy deployment measures. Of course, one of China’s major liabilities is the inability of its central leadership to command its local and provincial leaders to follow the guidelines of their five-year plans. Yet even setting the goals means that production and installation will proceed more quickly in China than in countries that do not have these goals, most pertinently the United States.

Indeed, as part of this push, the China Clean Development Mechanism, the government fund that invests money from carbon credits, announced an additional $1.5 billion for clean energy projects by 2012.86 Though the Kyoto Protocol did not require emissions reductions from China, the United Nations-backed CDM fund allows industrialized countries to buy credits from developing ones, and Chinese companies have sold 229 million metric tons of so-called certified emissions reductions under the CDM since 2005.

These kinds of public investments bring results. In 2008, China had nearly twice the installed capacity of renewable electricity of the United States in absolute terms. In 2009, Chinese investment in renewables, at $34.5 billion, rose to first in the world. Meanwhile, the United States invested only $18.6 billion in 2009. China’s push in solar energy is equally striking. Six of the top ten global photovoltaic solar cell manufacturers are now in China, and the country’s solar manufacturers produced nearly 2 gigawatts of panels in 2008, or roughly one-quarter of global production. Although a large majority of this production was exported to Europe and the United States in 2009, the country is also aggressively ramping up its domestic market through Solar Roof and Golden Sun Projects, which provide subsidies to eligible firms and local provinces for distributed solar installation and transmission projects.

During this past December’s climate change talks in Cancun, Mexico, the Chinese Finance Ministry announced an even more aggressive ramp up of public investment in domestic solar installation through new incentives and subsidies””the creation of 13 industry zones, covering up to half the price of equipment for solar power projects, and a subsidy of 4 to 6 yuan per watt of generating capacity.92 When a team from the Center for American Progress travelled to China to investigate developments first hand, we discovered this dedication to solar was very real.

Solar is just one piece of the puzzle. Global consultancy Ernst and Young’s November 2010 report ranks China the “clear leader in the global renewable market,” giving China the top spot of 71 out of 100 points for country attractiveness in their November 2010 All Renewables index. The United States came in second at 66, five points behind China. This metric measures wind, solar, biomass, and other renewable potential to provide “an overall score for national renewable energy markets, renewable energy infrastructures, and their suitability for individual technologies.”

If Beijing follows its own plans, as much as 15 percent of Chinese power could be generated from renewable sources by 2020. In comparison, the United States might possibly reach 10 percent by 2020, but only if policy, funding, and deployment can be vastly accelerated.96 This huge market for clean energy and the burgeoning supply of young scientists and engineers has lured companies such as industrial giant DuPont and Applied Materials to set up their solar photovoltaic R&D facilities there. And China’s investment in smart grid technology has attracted the interest of other American companies, among them General Electric, who are looking for profitable opportunities overseas in the absence of any U.S. commitment to developing new markets at home.

And that’s why the U.S. position in renewable energy innovation is slipping. In a CAP report earlier this year, CAP staffers compared the United States with China, Germany, and Spain to find that the United States has failed to make significant strides towards clean energy deployment because it lacks the long-term, stable policy environment to do so.

Whereas these other countries all have promoted comprehensive policies to enlarge their clean-energy sectors via policies that help build markets, provide critical financing, and build long-term infrastructure such as the transmission grid, the United States has so far relied mostly on short-term or state-based policies. New technologies sometimes require a source of “demand pull” in order to bridge the commercialization gap and scale up. Without this critical factor, renewable energy technologies in particular languish in a premarket purgatory unable to bring their potential benefits to society. The U.S. marketplace is vibrant and dynamic, yet many critical clean energy industries have been unable to introduce new products and services based on new technologies, whether due to market failure, regulatory and jurisdictional chaos, or perverse subsidies.

This lack of a strong and long-term market signal means that investment in U.S. clean energy innovation is underperforming. When coupled with a lack of an overall national competitiveness strategy””as we will discuss in our concluding set of recommendations beginning on page 32″”these developments put the United States’s economic leadership in serious jeopardy. In the clean energy transformation and beyond, the U.S. still retains an edge in innovation and commercialization, but our footing is beginning to slip as China barrels along full steam.

Download this report (pdf)

Download the executive summary (pdf)

Read this report at Science ProgressThis is reposted from Science Progress and CAP. Kate Gordon is the Vice President for Energy Policy, Susan Lyon is a Special Assistant for Energy Policy, Ed Paisley is Vice President for Editorial, and Sean Pool is a Special Assistant for Energy, and Science, and Technology Policy.

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