China and India in the Global Economy:

A Cooperative Knowledge
Knowledge-Based
Based
Development Strategy

Ashok Bardhan
University of California
Berkeley

Berkeley, California
• Facts and Compulsions
– Both China and India growing at a fast clip
– Need sustainable growth far into future for
economic, social and political reasons; for job
creation social harmony….
creation, harmon
• Questions Raised
– Wh
Whatt can be
b some off the
th elements
l t off a long-term
l t
strategy for development?
– What is the scope for cooperation between India
and China in the course of this strategy?
 Among Many Strategies, Our Focus:
Knowledge and Innovation Based
Approach
• Why?
– Globalization/offshoring have made industries, firms,
individual jobs FOOTLOOSE; there can be the next wave
of migration to even cheaper countries
– Only way to create both NEW (i.e. at least temporarily
rooted) jobs
jobs, and BETTER (i.e.
(i e high-paying) jobs is
through innovation - new goods, new technologies
– Human Resources key in the Post Manufacturing-Post
Services Economies
– Scale advantage not just in manufacturing and services, but
also in R&D
Key Elements of Knowledge Economy
Strategy
• Benefits from Offshoringg of R&D and Innovative
Activity from Developed Countries
• Innovation Growth Diagnostics
• Education Policies; Soft Infrastructure and other
Institutional Features
• Early
E l Adoption,
Ad ti RapidR id Dissemination,
Di i ti “New“N Goods”
G d”
Factor
• Scope for Economic Cooperation between India and
China
US R&D Spending and Incremental GDP due to
Productivity Growth
$, Bill
300

250

200

150 US R&D Spending

Incremental GDP
100

50

0
1988
988 1990
990 1992
99 1994
99 1996
996 1998
998 2000
000

Source: Calculations by author from NSF, DOC

 OECD R&D Spending Shares of Major
Sectors
100%
90%
80%
70%
60%
Manufacturing
50%
Services
40%
30%
20%
10%
0%
87
88
89
90
91

92
93
94
95

96
97
98
99
00
19
19
19
19
19

19
19
19
19

19
19
19
19
20 The Baumol Paradox with Services!
Source: OECD
 Globalization of Innovative Activity: Offshoring of
R&D tot China,
Chi India,
I di E Eastt E
Europe
• Costs
• Design and Research to Market; Early adopters
• Spillover from Offshoring of Manufacturing and Services
• Broaden Access to Expertise
• Complex Interdisciplinary Nature of Contemporary R&D
• Thin End of the Wedge – Market Entry
• Access to Different Scientific Cultures…Value of Scientific and Technical
“Diversity”

Competitive Edge of Firm Married to Comparative

Advantage of Location
Berkeley Survey Results: i) Mostly Large US Firms Offshore R&D; Captive R&D
Centers; ii) As yet - Small, Innovative Firms Carry out R&D Domestically
Keyy Question:
Q What determines corporate
p distribution of R&D activity
y gglobally?
y
-Market size and skilled labor – key factors ;
 Growth in R&D Performed by Captive Units of
US MMultinationals,
l i i l by b Country
C
%
60

50

40 All countries
Asia
30
China
20 India
EU15
10

0
1995-2005, Annual Growth Rate

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad: Financial and
Operating Data for U.S. Multinational Companies (annual series), .
 India and China at a Glance
INDIA
• Area 3,287,590 sq km
• Population 1.13 billion (2007)
• GDP real ggrowth rate 9.4%
• GDP per capita (ppp)* $3,800
• Exports $112 billion
• Imports from China, U.S.,
Germany, Singapore
• Exports to China, U.S., UAE, UK
• R&D Expenditure
p 1.5% of GDP
• Population aged 18-23, 130 mill
CHINA
• Area 9,596,960 sq km
• Population 1.32 billion (2007)
• GDP real growth rate 11.1%
• GDP per capita (ppp)* $7,800
• Exports $974 billion
• Imports from Japan, S. Korea,
U.S., Germany
• Exports to U.S., Japan, S. Korea,
Germany
• R&D E Expenditure
di 22.5%
5% off GDP
• Population aged 18-23, 130 mill
 Place of Birth of Doctorate Holders in
US Science and Engineering Jobs
%
80
70
60
50
40 1990
30 2000

20
10
0
US EU-15 Asia China India

Source: NSF
Science and Engineering Graduates
600 000
600,000

500,000

400 000
400,000

300,000
1990
200,000 2002

100,000

0
China India EU-15 United
States
 Science and Engineering PhDs
45 000
45,000
40,000
35,000
30 000
30,000
25,000
20,000 1990
15,000 2003
10,000
5,000
0
China India EU-15 United
States
 US Science and Engineering Degrees
Conferred, by Country
3500

3000

2500

2000 China
1500 India
EU-15
1000

500

0
1989 1991 1993 1995 1997 1999 2001 2003

Source: NSF
• From Early Adoption, Dissemination and Leapfrogging to –
C ti off “NEW”
Creation

– New Goods
– New Processes
– New Companies
– New Jobs
– New Brands
• March to your own Drummer
– Not necessary to emulate
– Let Global as well as Domestic Demand Determine
Innovation
 …..Learn - from Advantages and Disadvantages
of Silicon Valley Location to High-Tech
High Tech Firms
ADVANTAGES
Skilled Labor
Professional Network
Quality of Life
Communications
Overseas Markets
DISADVANTAGES
Housing Costs/COL
Labor (and management!) Costs
Transport Congestion
Taxes/Gov't Reg.
Comm'l RE Cost/Avail

0% 20% 40% 60% 80% 100% 120%

Percent of Firms Interviewed

Source: Interviews with computer cluster firm executives.
 …..But - Pre-empt Innovation from Developed Countries
Next Innovative Burst: Where will it Come From?
Cognitive Computing Embedded Systems
(Artificial Intelligence)

Alternative Energy New Materials

The Next Big Thing?

Pervasive Computing/
Bio-Info-Nanotech
Networkingg
 Innovation Diagnostics System
An Example
Low Level of Innovative Activity

Weak Creation of Startups Skills Shortage

Lack of
Auxiliary
Incentive
Services Stigma/Fear of Shortcoming of St t
Structure
Failure Higher Education
Insufficient Venture Financing

Supply Unresponsive Funding

Regulatory
Low Appropriability? (Institutional Inertia) Issues
issues

Market Failures –
Need for Public/Pvt Weak Linkage between Labor
Mechanisms g
Mkt & Higher Education
Anomalies in India-China Economic
R l i
Relationship
hi
• Fast growing trade (>$40bill), but…
• Minuscule Mutual FDI
• Mutual People Flows
• Educational and other Contacts
• Insignificant R&D collaboration in
commerciali l sphere
h
 Foreign Collaboration in Joint Science and
E i
Engineering
i Articles,
A i l 2003
CHINA INDIA

Other US
27% 28%

Other
26% US
34%

Japan
14%
Japan
Europe 10%
26%

Europe
35%

With Each Other: 2.5%!

SOURCES: Thomson ISI, Science Citation Index and Social Sciences Citation Index http://www.isinet.com/products/citation/,
accessed 19 December 2006; ipIQ, Inc.; and National Science Foundation, special tabulations.
 Scope for Mutual Collaboration
• R&D
• Intra-Industry
• Manufacturing/Marketing Joint Ventures
• Joint Comparative Advantage
• M t l FDI
Mutual
» India: Marketing, Financial, Services, Institutional
Expertise
» China: Manufacturing, Organizational Scale, “Hard”
Management
 Policy Issues in Mutual
“K
“Knowledge”
l d ”C Collaboration
ll b i
• Informational problems
• Promotion of Intermediaries
• Standard policy instruments, such as conferences,
workshops, exchanges, joint R and D projects
• Improvement of border/port infrastructure critical to
mutual ties
Mutual Opportunities Surrounding The Next
Big Thing
• Critical mass/clustering being achieved, individually
and jointly
• Need to focus on keyy compatible,
p , competitive
p
advantage in high end R&D
p
• Cooperative Institutional support
pp and dynamism:
y
VCs, trade organizations
• Tapping and “triangulating” Diaspora: US, Europe,
Asia-Pacific
 China and India in the Global Economy:
Th K
The Knowledge-Based
l d B dD Development
l S
Strategy
• China and India uniquely
q y ppositioned to take advantage
g of the ppresent
economic situation
– Globalization is the “era of large nations”
– Human resources – key factor
– First time since Industrial Revolution,
Revolution the two fastest growing nations,
nations and potentially
among the largest economies, are also neighbors! With implications for trade, FDI and
spillover impact.
– Leveraging ancient cultural and historical traditions and ties for promoting innovation
– Private-public
Private public initiatives and monitoring critical at this stage,
stage because of–
of i) complexity
of modern economy, ii) inequality/development process, iii) globalization, iii) financial
market and other market regulation, iv) environmental and sustainability issues, hence
India-China may be somewhat better positioned relative to other developing countries

Scope for mutually beneficial “knowledge-based” strategy of development