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Is America Losing Its Competitive Edge?
Heide B. Malhotra
12/14/2006

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America may be losing its competitive edge to India and China.

Funding sources for research facilities—the bread and butter for a burgeoning economy—are gradually leaving American shores.

A report titled "Measuring the Moment: Innovation, National Security and Economic Competitiveness—Benchmarks of our Innovation Future II," released by the Task Force on the Future of American Innovation last month, suggests that without vigorous funding, the United States will be reduced to a follower instead of a leader in the world economy.

"State-managed science and technology research programs in China … draws American capital, talent and research efforts out of the U.S.," said Larry Wortzel, Chairman of the U.S.-China Economic and Security Review Commission in the report. "If we are going to remain competitive, we need to focus our basic research at home and put more resources into funding it."

Rep. Frank Wolf (R-VA) wrote that either we can wait and watch other nations catch up to us, or we can move vigorously forward and remain in the driver's seat for the foreseeable future, according to the report.

"America finds itself at a crossroads," said Wolf. "We can continue down the current path, as other nations continue to narrow the gap, or we can take bold, dramatic steps to ensure U.S. economic leadership in the 21st century…"

Some experts believe that the United States is becoming overly dependent on foreign talents. Since 2000, foreign students outnumber U.S. students in university graduate programs across the country, according to researchers. "The outnumbering of American students raises the concern of an over-dependence on foreign talent."

The Task Force on the Future of American Innovation was established in 2004 with funding from the National Science Foundation and draws on the research of top U.S. economic and science experts.

Food for Thought

China has become the world's largest exporter of information and technology products, according to a November release by the Organization for Economic Co-operation and Development (OECD).

Yet, OECD economists remained skeptical of its sustainability. Questions raised during an online debate with a number of renowned economists include: "Can they [China] keep up the pace? Do they have enough home-grown engineering and managerial talent to compete with the rest?"

Wim Suyker of the CPB Netherlands Bureau for Economic Policy Analysis does not think that China can hold a candle to European and U.S. university graduates. China presents the world with large numbers of graduates, but when viewed as a "percentage of the total population," these numbers are not comparable. There are very few graduates from higher-level programs when one compares to the total labor force.

"Moreover, there are doubts about the quality of Chinese graduates," suggested Suyker. "According to a McKinsey survey, 9 out of 10 Chinese engineers are not suited to work for a multinational because of poor communications [skills], lack of teamwork skills, and excessively theoretical approach."

Chinese graduates may be useful in low-skilled production of goods and services, but when it comes to advanced research and analysis, they lag far behind their U.S. counterparts, he added.

Surprises From the Global Competitiveness 2006–2007 Report

According to the World Economic Forum's (WEF) 2006–2007 Global Competitiveness Report, the United States lost its first place in competitive edge to Switzerland, a country with only a fraction of America's people and resources.

Augusto Lopez-Claros, Chief economist and director at WEF, suggested that Switzerland achieved first place because of a "well-developed institutional framework, characterized by the rule of law, an efficient judicial system, and high levels of transparency and accountability." Augusto also was highly impressed with the quality of its education system.

The United States slipped to sixth place in 2006. The report suggests that America needs to become more fiscally responsible with its public finances—which took a hit with wars in Iraq and Afghanistan, and the War on Terror—as well successive tax cuts. U.S. consumers also spend more money and take on more debt than their counterparts abroad.

Finland kept its second place, followed by Sweden, which jumped from seventh to third place in this year's rankings. The researchers were impressed with the Finnish government's ability to "run budget surpluses … and to meet future social commitments linked to the aging of the population."

Augusto still views the United States as "one of the most competitive economies in the world." But security issues, global account deficits, and possible tax cuts may further erode its competitive edge.

Surprisingly, India moved up two spots to number 43 in 2006, while China moved down six places to 54th overall in 2006.

India's financial markets have shown marked improvement over prior years. However, unless India brings the vast majority of its population out of poverty, it may not be able to sustain its present growth for long, says Lopez-Claros.

The Global Competitiveness report is based on a survey of over 11,000 global business leaders from 125 countries on economic factors, and compares a nation to its prior year's performance.

Thoughts on Global Competitiveness

What do the world's people think? People of different nationalities were surveyed by the Chicago Council on Global Affairs, an independent, nonpartisan organization, in its report titled "The United States and the Rise of China and India."

Americans see job protection as their highest priority and believe that unfair trade is the reason for erosion of competitiveness in the United States. China, India, and Mexico were found to be the worst in practicing unfair and unethical business practices. Americans, on the whole, don't necessarily support trade barriers but are against completely free trade agreements—especially when it comes to China, India, and South Korea.

The Chinese have a long way to go to catch the United States in the race for new, more advanced and technologically innovative products and services.

India, on the other hand, believes that it is ahead of China and very close behind the United States regarding new product development and technological advances.

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