July 25, 2005    Volume 12, No. 14

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China And India Are Poised
To 'Leapfrog' U.S. In Innovation



BY KEN JACOBSON


The idea that innovation will ensure continued U.S. economic well-being is open to challenge as scientific and technological skills build in countries such as China and India, according to Harvard economist Richard Freeman. Large increases in the number of scientists and engineers in the large developing countries "creates the possibility" of what Freeman calls "human resource leapfrogging" of American innovation.

The leapfrogging of the developing "South" over the industrialized "North" can occur when "populous developing countries employ enough scientists and engineers to compete with the advanced countries in the high-tech vanguard sectors that innovate new products and processes," says Freeman. Such a leapfrogging "threaten[s] the North's monopoly in these sectors," he writes in a paper titled "Does Globalization of the Scientific/Engineering Workforce Threaten U.S. Economic Leadership?"

Sketching out an ominous scenario for the industrial North, Freeman warns that "loss of comparative advantage in the high-tech sector to a low-wage competitor can substantially harm an advanced country. The advanced country would have to shift resources to less desirable sectors, where productivity growth through learning is likely to be smaller. Wages and living standards would remain high in the advanced country because of its skilled workforce and infrastructure. But the monopoly rents from new products or innovations would shift from the advanced country to the poorer country.

"If the low-wage country deployed its scientists and engineers to take a global lead in sectors with sizeable employment and significant throughput to the rest of the economy," he argues, "economic losses to the advanced country could be substantial."

These losses "would be larger than those that might occur if the advanced country lost its technological advantage to an equally advanced competitor because wages would have to fall more to make another sector competitive with the low-wage competitor."

Freeman summarizes the generally accepted North-South trade model as follows:

  • "The advanced area (the North) has the skilled workforce and R&D capability to innovate new goods and services, while the less advanced area (the South) cannot compete in these areas";
  • "The North innovates new goods and trades them with the South, which produces older goods as it gains the technology to do so. Once the two regions have access to the same technology, the lower-wage South produces the good or service";
  • "Workers are higher paid in the North...both because they are more skilled and because the North has a monopoly on the new products. More rapid technological advance increases wages in the North relative to wages in the South, while more rapid diffusion of technology has the opposite effect";
  • "The South competes with the North for production of older products through low wages but is unable to compete in the newest technology." Clouding this picture, which has been comforting to many in the United States, is the emergence of circumstances in which, Freeman argues, "a populous developing country could...do what the North-South trade models have assumed the South could not do: compete effectively in R&D intensive high-tech industries."

There are three factors Freeman sees as necessary to "shift the comparative advantage in high-tech industries from the North to the South":

1. A "Southern country must be sufficiently populous that it has large numbers of S&E workers even though it deploys only a relatively small proportion of its workforce in those fields."

2. The Southern country must be able to devote researchers to problems in sufficiently larger numbers than its Northern competitors to offset whatever advantage in R&D productivity the latter derive from organizational structures -- from, for example, "the close ties between [the United States'] universities and business and [its] well-developed system of competition for research funding."

3. The Southern country must have "the production competence to develop leading-edge commercial products even thought the bulk of [its] workforce is less skilled" and the country lags its Northern competitors in infrastructure.

Such conditions are likely to be fulfilled only in the largest developing countries, China and India. But if they are, then Freeman believes the U.S. will have a fierce fight on its hands.

"Even if the developing country had somewhat lower-quality scientists and engineers or lacked some infrastructure that gave its laboratories lower productivity than those in advanced countries," he writes, "it would have a cost advantage in R&D in terms of lower wages for scientists and engineers, and would be able to employ less-costly production labor to produce the relevant commercial products."

To back the point up, he cites a statement by Cisco Systems CEO John Chambers that the company was trying to "'outline an entire strategy of becoming a Chinese company'" and had begun to move its contract manufacturers to that country.

Cisco's action, Freeman observes, "presumably reflects more than a request of Chinese leaders," which was mentioned by Chambers. "The potentially lower costs of producing in China," he posited, were also likely involved.

Copies of Freeman's paper, published last month by the National Bureau of Economic Research Working Paper 11457, may be purchased for $5 online at www.nber.org/papers/w11457.


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