Losing the Advantage: Is US on Verge of Being Reliant on China for R&D?

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Is the United States offshoring high-tech leadership to China?

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In March, Apple announced it would establish two new research and development (R&D) centers in China, to accompany two other centers it announced last year. In doing so, Apple joined a growing list of U.S. high-tech companies that have established an R&D presence in China over the past two decades, including Microsoft, Google, Oracle and Intel.

Americans have long worried about the offshoring of U.S. manufacturing jobs to China — fears that Donald Trump exploited to become President. So is the United States on the verge of becoming reliant on China for R&D as well?

The answer is no — for several reasons.

First, while U.S. corporate R&D is globalizing, it is doing so very slowly. Between 2000 and 2010, for example, the share of U.S. corporate R&D performed within the United States fell from 88 percent to 84 percent. The very gradual nature of the shift reflects a number of constraints: the complexity of managing global R&D networks, how embedded multinationals are in their home countries, and the local infrastructure and intellectual property protection that core R&D can require, among others.

Second, U.S. firms conduct R&D in many countries around the world — and China is still low on the list. In 2013, U.S. firms spent more on R&D in eight other countries than they did in China, with Germany and the U.K. leading the way.

To be sure, a given R&D dollar will go further in some countries than others, so if China were particularly cheap this kind of data would understate its importance. But China is not cheap. A few years ago, a survey reported that junior R&D staff were 25 to 30 percent cheaper in China than in the United States or Europe, that middle managers were equally expensive, and that senior managers could cost 20 to 25 percent more in China because of short supply.

Nor is the United States heavily reliant on China as a source of collaborative ventures between firms and other organizations conducting research. From 2000 to 2014, U.S. organizations concluded 2259 R&D alliances, and 1296 of those involved foreign partners, according to the Thomson Reuters SDC Platinum database. Western European countries accounted for half of those, while China accounted for seven per cent.

Third, China is hardly an ideal host country for multinational technology firms’ R&D. A recent survey found that 80 percent of U.S. firms operating in China were concerned about data and IT security policies. The concern was not simply about the protection of intellectual property — although that was certainly an important source of anxiety. There were also serious concerns about the quality of the internet service in China, the availability of global IT solutions, restrictions on cross-border data flows and restrictions on the use of virtual private networks.

And fourth, overseas R&D often complements the work done at home, rather than substituting for it. Firms doing R&D abroad may be trying to tap into expertise not readily available in their home country, or they may be adapting products for foreign markets in an effort to promote local sales — a task more easily done in that market. Such adaptation may actually make a product less advanced. One global wind power firm, for example, re-designed its gearbox in China to make it less expensive — but in doing so it cut the durability of the product in half.

In short, even as China attracts more and more foreign R&D activity, the country has yet to become a vital partner for the United States in this regard.

But this is no call for complacency. The United States faces real challenges sustaining its scientific and technological leadership, but those challenges come from within. The Trump administration’s proposal to slash funding for scientific research — including an 18 percent cut to the National Institutes of Health — ignores decades of bipartisan support for basic scientific research in the United States.

Anti-immigrant sentiment imperils U.S. scientific leadership as well. The United States has long served as a magnet for the world’s top talent in this regard. As of 2013, foreign-born individuals comprised an astounding 42 percent of U.S. workers in science and engineering professions with doctoral degrees. The more the United States is seen as unfriendly to immigrants, the more endangered that remarkable flow of human capital will be.

To hold onto technological leadership, the United States should worry less about high-tech jobs moving to China — and try harder not to shoot itself in the foot.

The News Lens has been authorized to republish this article from East Asia Forum. East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centered on the Asia Pacific region.

TNL Editor: Edward White

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