China and India: Emerging Technological Powers; Asia's Economic Groundswell Is No Longer Breaking News, but the Critical Details of This Transformation and Its Staying Power Are Just Coming into Focus

Article excerpt

Although the growing economic stature of China and India is widely recognized, the factors underlying their success are still not well understood. The advantage of a large low-wage workforce is apparent to everyone, but that can never be the foundation of an economic superpower. True economic leadership comes only with the ability to produce high-quality high-technology goods and services and to create innovative new products and technologies. To appreciate the long-term potential of China and India, we need to take a comprehensive look at their innovative capacity.

China and India are the two most populous countries, accounting for 20.4% and 17% of the world's population. Although they are still developing countries with per capita incomes of just $1,740 and $720 (2005), they already are the fourth and eleventh largest economies in the world at nominal exchange rates. However, in terms of purchasing power parity (PPP), they already have been for some time the second and fourth largest economies. Moreover, they are growing more than three times faster than the world average. Even though the percentage of persons with higher education in their populations is still low by developed country standards, because of their enormous size, they have a critical mass of highly educated people and of scientists and engineers. In addition, they have a critical mass of expenditures on R & D. As a result they have a large innovation capacity that is being deployed not only for their own needs but also to perform R & D for multinational companies. They are becoming increasingly important players on the global stage.

Innovation in China and India should be understood to include not just knowledge that is new to the world, but also knowledge that is new to these countries. It is important to consider this second dimension of innovation because it helps to understand why these economies are growing so fast and how rapidly they are likely to grow in the future.

Illustrious histories

China and India are among the world's oldest civilizations, stretching back three to four millennia. To put their current rising prominence in perspective, it is useful to briefly review their relative importance over the past two millenniums. For most of the first millennium AD, China and India accounted for a quarter and a third of total world economic activity. During the last 200 years of the first millennium and for most of the second millennium they lost prominence with the rise of Japan and Western Europe. This loss of relative economic size was particularly rapid in the past 250 years, a period of rapid economic growth in Western Europe, the United States, and Japan. The main reason for this was not that their economies collapsed, but that they missed the Industrial Revolution. Thus, they did not benefit from the rapid growth that came to the countries that pioneered and quickly adopted industrial production technology.

In the past 25 years China and India have been rapidly increasing their share of global gross domestic product (GDP). To a large extent it is because they are tapping into global knowledge and integrating themselves more into the global economy. They are reemerging as major global players.

Roughly in the middle of the 20th century both countries underwent a radical regime change. India won its independence from England in 1947, and Mao's communist revolution triumphed in China in 1949. Initially, both countries followed a development strategy heavily influenced by Russia, including five-year industrial development plans marked by state control of the economy and strongly autarkic trade policies.

China began to move to a market economy and to open itself up to the rest of the world in the late 1970s. Its pace of reform speeded up in the 1980s and the 1990s. This included the proliferation of special economic zones, increasing receptivity to direct foreign investment, and the decision to join the World Trade Organization in 2001. …