Will China Outsmart the U.S.?

As consumers, we don’t care if our products are invented in the U.S. or in some other country. But as a work force, we should. While much has been written about Chinese factories’ stealing U.S. manufacturing jobs and destroying our businesses, the two countries have reached an uneasy, unspoken economic agreement over the past decade. American firms find they can compete with low-cost manufacturing by constantly developing new products. This has worked out well for U.S. companies — though, notably, not for U.S. manufacturing workers — because there are much fatter margins in owning the intellectual property of a hot new thing than there is in churning out a huge volume of cheap components. And these higher margins manifest themselves in higher salaries for American workers. Partly as a result, the U.S. still dominates the world of research and development, as it has for more than a century. The country spends nearly double the annual R.-and-D. budgets of Japan and Germany combined. But China’s decadelong rise from a nonplayer in R. and D. to the world’s second-largest spender poses a serious threat. A recent study by the Battelle Memorial Institute, a research firm, predicts that China’s spending will match ours around 2022. In research terms, that is effectively today.

China already has plans to focus on exciting but vague ideas now — like green energy and bio- and nanotechnology — that will most likely become products in the 2020s. And if U.S. government labs, university departments and corporate researchers aren’t already on top of the next generation of breakthroughs, the country will very likely fall behind in 10 or 20 years when those innovations become marketable products. Our global competitiveness is based on being the origin of the newest, best ideas. How will we fare if those ideas originate somewhere else? The answers range from scary to scarier. Imagine a global economy in which the U.S. is playing catch-up with China: while a small class of Americans would surely find a way to profit, most workers would earn far less, and the chasm between classes could be wider than ever. Unfortunately, there isn’t much to prevent this trend. Overall government research spending (relative to G.D.P.) has been heading down since its peak in the space-race years of the 1960s. And because it’s nearly impossible to imagine Congress significantly increasing research financing, any growth in long-term R. and D. will be, largely, up to the private sector. And that’s the real problem. From a C.E.O.’s perspective, long-term R. and D. is a lousy investment. The projects cost a lot of money and often fail. And even when they work, some other company can come along and copy all the best ideas free. Charles Holliday Jr., the C.E.O. of DuPont who retired three years ago, told me that it’s tough to get investors to think more than two years ahead — at most. “The stock market pays you for what you can do now,” he said. As a result, DuPont isn’t the only American company changing the way it does R. and D. Corporate research labs at I.B.M., AT&T, Xerox and others have also been slimmed way down or cut altogether.

The government can’t simply pass a law forcing companies to think longer-term, of course. But Congress can do other things, like shift incentives away from rampant short-termism. It could, for example, reduce capital-gains taxes on stocks held for many years. Alternately, companies could create different classes of stock, giving more voting rights to those who hold the stocks longer. Another idea popular among businesspeople: enticing foreign Ph.D. students to develop their new ideas in the U.S. The question of how U.S. companies will make a buck has probably never been more important. With one war over and another winding down, thousands of young men 25 and under, many without college degrees, will soon enter a work force with no place for them. (Their unemployment rate is nearly double the already miserable national average.) We have no idea how an Iraq war veteran will make a living a decade or two from now. We can only hope there is someone still being paid to figure it out.

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