America’s Green Innovation Problem

As has been widely reported, U.S. company Applied Materials (AMAT), the world’s biggest manufacturer of equipment used to make solar cells, recently decided to construct the world’s largest, most advanced nongovernment solar energy research and development facility in Xian, China. Applied Materials also relocated its chief technology officer, Mark Pinto, to China—the first such case of a top U.S. technology executive moving there.

According to Pinto, researchers in the U.S. and Europe must be willing to move to China if they want to do cutting-edge work on solar manufacturing research. Thus, unlike most R&D in developing markets—adapting products to meet local needs—China’s growing clean energy market is cultivating the sector’s most advanced R&D.

Applied Materials is not alone. IBM (IBM) has announced it will invest $40 million to create the company’s first “energy-and-utilities-solution lab” to develop innovative new technologies for smart grid and other applications. The new lab will also be located in China. These decisions suggest that investment is starting to flow not just to low-cost manufacturing in China, but to high-value R&D as well, threatening the U.S.’s historical “comparative advantage” in innovation.

We shouldn't be surprised at these developments. They represent a trend that has been going on for at least a decade. Such other U.S. companies as GM, Dow Chemical (DOW), and Intel (INTC), have constructed high-tech research labs in China. According to Chinese government statistics, there are now 750 foreign-funded R&D centers in China—up from 50 in 1997. In comparison, the decade from 1995 saw the share of corporate R&D sites in the U.S. decline from 59 percent to 52 percent, with the share in China and India increasing from 8 percent, to 18 percent, according to a 2006 report by Booz Allen Hamilton and INSEAD.Overall, as we pointed out in the February 2009 Information Technology & Innovation Foundation report "The Atlantic Century," the U.S. no longer leads the world in innovation-based competitiveness. The country ranks sixth—behind such nations as Singapore, South Korea, and Sweden—and it ranked last among 40 nations in progress on innovation and competitiveness in the most recent decade. China placed first.

INNOVATION IS GLOBALIZING, TOO

Even as the U.S. continues to slip further behind economic rivals in the production and deployment of clean energy technologies, many commentators still cling to the comforting belief that, as New York Times columnist Tom Friedman has written, America will "specialize in research and innovation."

Yet it is clear that we are moving into an era in which the supposed choice between locating for low-cost manufacturing and locating for innovation is revealed as a false one. As clean energy technology has globalized, innovation has followed manufacturing and markets, something that many in the U.S. have yet to appreciate fully. The globalization of innovation has led many multinationals to become truly global in their R&D, manufacturing, and marketing as they increasingly collaborate with foreign companies and governments.

That’s not happening by chance. The Chinese government has aggressively employed a comprehensive technology-based investment strategy to attract private investment and encourage leading companies to locate high-value research operations in the country. They have also erected a host of global welfare-reducing mercantilist policies to spur green-industry production and exports. These include turning a blind eye to intellectual-property theft, making access to Chinese markets contingent on U.S. firms expanding R&D activities in China, and blatantly manipulating currency values so as to subsidize exports of green products.

CHINA OFFERS LOW WAGES, HIGH SCIENCE

China’s policies are working. Major government investment has allowed China to attract more private investment in clean energy than any other nation. According to a recent Pew study, China attracted $34.6 billion in private capital in 2009. The U.S. came in a distant second, attracting a little more than half as much.

China doesn't need to develop strong domestic companies to have a more innovation-based economy as long as the country manages to attract innovation-based activities from abroad. Low wages (supplemented by an artificially low currency and significant other subsidies) and high science are a powerful combination.

These new developments are particularly troubling because they suggest, as Brookings' Mark Muro writes, “the impending lock-in of a powerful feedback loop of market creation, production, and innovation.” Cleantech clusters are being created in China, but not in the U.S. That’s why U.S. government officials who are supporting the importation of heavily subsidized Chinese cleantech products need to recognize that this Chinese “gift” is actually a Trojan horse—cheaper products now, dramatically fewer high-wage U.S. jobs later.

As such, the federal government must start the important work of facilitating the development of its own clusters of clean energy innovation in the U.S. To succeed, the U.S. must do two key things. First, it should prioritize major public investments in clean energy innovation, advanced manufacturing, and market creation, something it has been unwilling to do in any of the climate and energy bills currently before Congress. Second, it needs to significantly step up efforts to challenge Chinese mercantilism, whether in green industries or any high value-added industry critical to the country’s future.

Without these measures, the U.S. takes a big risk that the clean energy technologies of the future will not just be produced abroad, but invented there, too.

Co-authored with Devon Sweeney Project Director at The Breakthrough Institute.

Originally posted on BusinessWeek.com.