Chinese and US S&T Innovation Policies and Their Effects on Economic Growth Potentials*

Abstract:

Since the eruption of the recent global financial crisis, major countries have been pushing forward structural reforms with science and technology (S&T) innovation at the heart. Since taking office, US President Donald Trump has adopted an "America First" strategy but has yet to specify a clear S& T innovation policy. However, Trumps current policies have already affected S& T innovation and his planned budget cuts will impact US growth potentials. Compared with the US, China is steadily implementing its innovation-driven development strategy with significant improvement in S& T innovation that increasingly supports economic growth. To spur future economic growth, China should steadfastly follow its S& T innovation strategy, promote the utilization of S& T innovation results, boost its economic growth potentials and make the most of global innovation resources. Keywords: S& T innovation, economic growth, structural reforms JEL classification: E65; P52

DOl: 10.19602/j .chinaeconomist.20 17.04.02

1. Structural Reforms with S& T Innovation at the Heart Are Vital to Future Economic Growth

The evolution of fundamental technologies is a decisive factor behind cyclical economic volatility. Russian economist Kondratieff divided half a century of economic development into individual long cycles( Kondratieff, 1925) - cycles that resulted from new technologies being introduced in the economic system as argued by Schumpeter and Van Gelderen (Schumpeter, 1939; Van Gelderen, 1913). Schumpeter's theory of "continuous industrial revolution" is based on the qualitative transition of economy enabled by new technology (Schumpeter, 1912). Each business cycle - irrespective of its uniqueness - is defined by innovation as its most salient feature. These economists regard innovation as the primary force of capitalist growth and source of business profits. Cyclicality is a pattern of economic growth. Currently, the world economy is at a critical juncture as new drivers of growth take the place of old ones. CPC Central Committee General Secretary Xi Jinping remarked that "[ g] rowth drivers from the previous round of technological progress are fading while a new technological and industrial revolution has yet to gain momentum" (Xi, 2016). The key to addressing the challenges of downward economic cycle lies in supply-side structural reforms. Obviously, the new growth cycle must be built upon a new structure - one that features the extensive application of S&T innovation results.

Since the G20 Hangzhou Summit in September 2016, the necessity of structural reforms underpinned by S& T innovation is

increasingly accepted as a consensus. Despite different paths and emphases in various countries, structural reforms are characterized by the strategic orientation of S& T innovation, as reflected in their identification of key priorities, industries and investments ( Ding and Chen, 2016). Recovering from the crisis from the virtual economy, the US has put a premium on innovation and the real economy by issuing a string of documents on national innovation strategy to launch a wave of "re- industrialization", identifying innovation as the key driver of economic growth. The strategy boils down to the development of highend industries and manufacturing upgrade to forge new competitiveness. Germany has forged a government- industry alliance for the Industry 4.0 Initiative and high- tech strategy to promote smart and green manufacturing. The UK has released "The Innovation and Research Strategy for Growth", which identifies science and innovation as the centerpiece of the UK's long- term economic development. The EU's reform focuses on employment, productivity and competitiveness with plans to increase R& D spending under the Framework Program 8. Japan's "Comprehensive Strategy on Science, Technology and Innovation" and "Innovation 2025 Plan" and South Korea's "Creative Economy Initiative" all define innovation as an engine of economic renovation.

2. The Trump Administration's Innovation Policy and Its Effect on Economic Growth

Since taking office, US President Trump's administration has followed an "America First" strategy, delivered on campaign promises and overhauled major policies. Yet to date, the Trump administration has yet to adopt a clear innovation strategy. Although Trump triggered a backlash from the science community and the Silicon Valley, his general approach aims to engage the private sector and spur domestic growth through innovation. It is fair to say that Trump's innovation policy is an experiment based on the US supremacy on innovation and how his policies unfold remains to be seen.

2.1 The Trump Administration Has Yet to Develop a Systematic Innovation Strategy

Historically, the clarity of the US innovation strategy increased over time. For instance, the Obama administration released three documents on a national innovation strategy underpinned by a combination of political, military, diplomatic and financial commitments. The US innovation strategy highlights the promotion of innovation, longterm growth and the third wave of innovation and entrepreneurship. While S& T innovation boosted the potentials for the US economic recovery, economic conundrums, wealth gaps and political impasse present risks of long- term stagnation for the US economy.

Before the Obama administration, the US developed its supremacy in science and technology on all fronts through decades of great efforts on innovation. Not only did the US government invest heavily in innovation with R& D spending accounting for 27% of the world total (NSF, 20 16), but it also successfully attracted the best talents from around the world without whom its great achievements in science and technology would not have been possible. By the end of2015, there were 320 Nobel laureates in the US, half of the total number in the world. Moreover, the US attaches great importance to the commercialization of S& T results through deregulation and the enactment of the Bayh-Dole Act. Another strength of the US is fundamental research and frontier technologies: each year, a major part of government spending on science and technology is allocated to fundamental research and the development of frontier technologies.

After taking office, Trump made it a top priority to reduce the wealth gaps and enhance infrastructure but did not put forward a clear innovation strategy. In March 20 17, Trump unveiled the "Office of American Innovation" staffed by former corporate executives. The US innovation office is expected to modernize the technology and data infrastructure of every federal department and agency, remodel workforce- training programs and hand over some government services to private companies. Foreseeably, as the Trump administration introduces policies in other areas, an innovation-related policy system will also take shape.

2.2 Trump's Budget Cuts May Trigger Some Backlash from the Science Community

Competition and a free market economic system are the cornerstones of the US economy's vibrancy and competitiveness. The role of government in promoting innovation, which became institutionalized after World War II, has been particularly strong in recent years in the context of fierce international competition. The overall level of R&D has been high and steadily increased during the Obama presidency. According to the National Science Board Science and Engineering Indicators 2016, US R&D spending grew by 0.8% on an annual average basis during 2008-2013. The US ranks first in the world in terms of R&D spending, accounting for 30% of the world total R&D spending in 2014 with the intensity of R&D spending increasing from 2.37% in 2004 to 2.62% in 2015.

After taking office, Trump made it a priority to enhance the military and increase jobs. In his first budget proposal for 2018 released in March 2017, Trump plans to significantly cut government spending and overseas aid to keep fiscal deficits in check, meaning that most federal agencies will face cuts in R&D spending. Trump's proposed budget cut will not necessarily lead to a reduction in the overall US R&D spending but may cause protests from scientists in government- related R& D institutions, creating some pressures on Trump's innovation policy.

2.3 Inspiring Private Sector Investment Is Likely to Be a Focus of the US Innovation Policy

During Obama's presidency, the US R& D structure changed in favor of the private sector. In 2015, US private sector R& D spending as a share in GDP reached a record high of 1.7%, while the share of federal government R& D spending in GDP dropped from 0.75% in 2008 to 0.6% in 2015. Despite the small increase of federal R&D spending to reach 129.4 billion US dollars in 2015, up 2.3 billion US dollars from 2008, federal government spending on fundamental research as a share in total federal R&D spending increased from 21.3% in 2008 to 24.7% in 2015 (the Council of Economic Advisers, 2016). Obviously, the rapid increase of private sector R&D spending is a key driver of continued growth in US R&D spending. Meanwhile, federal R&D spending focused more on fundamental research and frontier technologies where private investment is lacking.

Although the National Science Foundation (NSF) is not on the list of budget cuts and NASA's budget cut is limited ( 200 million US dollars), most other federal agencies face deep R& D budget cuts and funding to the UN is also reduced, including the cancellation of climate change funds. The proposed budget has cancelled the Advanced Research Projects Agency-Energy (ARPA-E) and related programs. ARPA- E is committed to the research of new energy that can replace traditional energy, an area that Trump believes should be led by the private sector. In addition, the proposed budget also plans to defund the Manufacturing Extension Partnership (MEP), which has created an extensive innovation service network in America with half of its operating expenses (124 million US dollars) funded by the federal budget. The proposed budget says that MEP agencies should operate in a market- based manner without government funding (Lanzhou Literature Intelligence Center, Chinese Academy of Sciences, 20 17). As revealed by Trump's budget proposal, the Trump administration's innovation policy will focus on inspiring private sector investment to offset the reduction of government R&D spending.

2.4 Fiscal Spending Gives Priority to Programs That Can Bring About Short-Term Results, Neglecting Long- term Fundamental and Publicinterest Research

Without increasing its fiscal deficit, US's more spending on the military, infrastructure and public security as urgent priorities means that less money will be spent on long-term R&D programs. As a result of the 2018 budget cuts, the National Institute of Health (NIH) may not be able to fund new R&D programs. 1 Facing deep budget cuts for its Office of Science, US Department of Energy will scale back support to fund its programs and research agencies, including the Exascale Computing Project under the "National Strategic Computing Initiative" ( NSCI). The Office of Science is also a major source of funding for dozens of research agencies under the Department of Energy in such fields as

materials, nuclear energy and battery technology. The proposed budget cuts the Environmental Protection Agency's (EPA) funding by almost one third, putting an end to clean energy initiatives, international climate change programs, climate change research and partnership programs, etc. After the proposed budget was announced, it was criticized by some in the media and science communities as "putting an end to America's science and technology industries" and "disabling the science engine" (Feng Weiwei, 2017).

Obviously, the Trump administration gives priority to short- term economic results over fundamental and applied research. Some Americans believe that while the US strives to invent new technologies, "other countries are freeriding on US investment" (Paul Davidson, 2017). For sectors with strong spillover effects such as fundamental and applied research, the details of US strategy have yet to unfold.

2.5 Infrastructure Is a Key Enabler of Industrial Development

President Obama introduced a host of initiatives to promote industrial innovation and improve the basic conditions for the development of emerging industries. To promote the development of robotics and Internet communication technology, President Obama signed the Workforce, Innovation and Opportunity Act ( WIOA) and pushed "connectting to highspeed Internet" to train the workforce and invest in broadband infrastructure (the Council of Economic Advisers, 2016).

Trump has made a proactive infrastructure plan his priority, vowing to ''transform America's crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains". His plan may boost transport, Internet and other infrastructures and greatly increase demand for skilled workers, which will improve the foundation of industrial development and emerging industries in the US.

Regarding creating local manufacturing jobs, Trump aims to bring manufacturing jobs back to America, which departs from Obama's focus on advanced manufacturing. Low energy cost, tax cut and robotic technology are expected to be conducive to re- shoring manufacturing back to America during the Trump presidency. According to a survey conducted by China

Economist in the second quarter of 2017, 62.4% of surveyed economists believe that Trump's policy will effectively re- shore manufacturing back to America, while only 18.4% think otherwise. In his budget proposal, President Trump plans to cut fiscal spending on the R&D of advanced manufacturing, including the defunding of MEP. As part of the National Network of Manufacturing Innovation ( NNMI), MEP provides small- and mediumsized manufacturing companies with technical and innovation services. It is very likely that the proposed federal spending cuts may become a reality.

2.6 Entrepreneurship, Innovation and IPR Policies Are Murky

1 Nlli had the highest growth in fiscal allocation in a decade over the Obama's presidency.

Innovation and entrepreneurship are vital to fostering economic momentum and spurring emerging industries. While industry regulation and monopoly may undermine business vibrancy, the shortfall of new jobs, slowing flow of people and tightening immigration policy will take their toll on productivity. By reforming major institutions and laws on intellectual property rights, previous US administrations encouraged small businesses to apply for patents, which increased small business innovation and jobs. The America Invents Act (AlA) that took effect as of September 2011 has imposed restrictions on non-utility patent holders to reduce patent trolls (lawsuits brought by non-utility patent holders against patent users), prohibits litigation against multiple defendants in the same case of patent litigation, and rewards patent holders with public contributions, etc. (the Council of Economic Advisers, 2016).

Since the beginning of his campaign, Trump has had a contentious relationship with the Silicon Valley. For instance, he believes that the Silicon Valley has hired too many foreigners and jobs may only be created by re-shoring manufacturing back to America. He may suspend the issuance of

H-1B visas. He considers that autonomous cars, drones and artificial intelligence will cause more unemployment. He opposes net neutrality and is in favor of collecting the private information of citizens on the Internet, etc. These positions contradict with the values of the Silicon Valley. In fact, US tech firms derive their competitiveness from the global value chain and access to global talents. President Trump's conservative attitude toward immigration, however, may cause a brain drain for tech firms. According to Immigrants and Billion Dollar Start-Ups published by the National Foundation for American Policy (NFAP) on March 17, 2016, more than half of the billion dollar unicorn start-ups were founded by immigrants and about 70% of the managerial and product development positions of these firms are filled by immigrants. Trump's Muslim ban triggered a serious backlash (Zhang Penghui, 20 17). Regarding the re- shoring of manufacturing, cost and host country markets are the top concerns for the Silicon Valley. Trump's bias may pose barriers against R&D and the commercialization of artificial intelligence and some other technologies. According to the proposed 2018 budget, the Small Business Administration (SBA) will cut PRIME (Program for Investment in Microentrepreneurs) technical assistance and grants to regional innovation clusters and accelerator by 12 million US dollars. Aside from defunding these important programs, President Trump also shows no particular support for innovation and entrepreneurship. At the dawn of technological and industrial revolution, defunding innovation and entrepreneurship risks abandoning future economic growth.

Since taking office, President Trump has yet to unveil systematic innovation strategies and policies. Proposed budget cuts may reduce the level of support for research agencies and even terminate some technology programs. However, given the US prowess in science and technology, the short-term effects on US economic growth may not be significant. In the long run, the momentum of economic growth may suffer as a result. Trump's innovation policy is based on the premise of avoiding fiscal deficits. Yet among the "America First" priorities, innovation is obviously not a first priority.

3. Economic Growth Effects of China's Innovation Policy and Comparison with the US

3.1 China's Innovation Strategy Is Moving Forward on a Clear Path Compared with the uncertainty of US innovation policy, China has developed and is advancing its systematic innovation plans and reform initiatives. With major progress in building an innovation- oriented country, China's S&T innovation is catching up with and overtaking developed countries, joining the ranks of leading nations for innovation and S&T research.

(1) Increasing clarity of S& T innovation strategy: China has attached utmost importance to innovation as the primary force of development. The Outline of National Innovation- Driven Development Strategy published in May 2016 identified the strategic "three- step" approach for innovation-driven development and the goal to become a global powerhouse in science and technology by 2050. China's S&T innovation strategy consists of specific policies, initiatives and plans. The list of China's priorities includes: speeding up the implementation of national key S&T projects, creating a new system of industrial technologies, enhancing innovation facilities including national laboratories and innovation centers, promoting mass entrepreneurship and mass innovation, propelling strategic regional innovation and development, integrating into the global innovation network on all fronts, etc. China has identified S&T innovation as the key to its innovation-driven development strategy in supporting economic and social development.

( 2) Rapid growth of R& D spending: In 2016, China's overall R&D spending exceeded 1.5 trillion yuan, ranking second in the world, and its R& D intensity is one of the highest among developing countries. China has become an important contributor to the global science community. The number of international papers published by China's S&T personnel over the past decade ranks second in the world and the number of the top 1% most cited papers account for 12.8%