With a bloated bureaucracy and ossified organizations, China still falls short of the US in terms of human capital, investment and innovation.

Today, many scholars and political scientists contend that America’s economic and military leadership is being worn away. The current assertion is that the apparent decline of the United States is mainly due to globalization: Over the past few decades, the integration of economies and the consequential diffusion of technology have led many developing countries to experience rates of economic growth that has consequences for the distribution of relative power among nations.

Those who advocate this position argue that the US is no longer efficient at sustaining its hegemonic roles. In addition, the proponents of this worldview claim that the global distribution of power is on the cusp of a massive adjustment. For them, the power is going to shift toward China in the next 50 years. According to this position, the People’s Republic of China is undertaking significant reforms (in the economic, banking and military sectors) that eventually will lead it to overtaking the United States as the foremost global power. These scholars argue that, judging by economic indicators such as the GDP, China no longer lags behind the US. Furthermore, China is accumulating military power through the modernization of its army, which eventually will reduce the advantages the US currently possesses.

However, the claim that China is going to trump the US as the main economic and military power is flawed. Distribution of power is not abruptly shifting toward China to the detriment of the US, and the latter currently enjoys enormous advantages in terms of technology, military and economy.

For example, China’s growth rates in terms of GDP (the purchase power parity, or PPP, for the World Bank) are above average because its departing point was at a low level. Economists explain the advancement of poor countries through several models, the most famous being the Solow-Swan. This growth model is built upon the concept of diminishing returns to illustrate the convergence of poor countries’ income levels with the income levels of rich countries. In brief, given the slow pace of diminishing returns, developing countries tend to catch up with rich countries through a process called “conditional convergence.”

Heightened access to modern technologies and new modes of production, consequent increases in labor supply — a higher level of productivity (namely, technological progress) within the labor force — and capital foster long-term economic growth. Thus, China has been and is able “to reap the advantages of backwardness, through the diffusion of technologies and methods of production, while skipping the long, arduous process of inventing them.”

Another example is that the single analysis of GDP presents a static view of China’s economy. Such investigations merge size (population, GDP, energy consumption) with power and, by doing so, misrepresent the capabilities of a large but underdeveloped country like China. Nevertheless, upon closer investigation, the fact that GDP does not reflect the size of a country’s power is revealed.

Ashley Tellis defines national power as “a country’s ability to dominate the cycles of economic innovation at a given point in time and, thereafter to utilize the fruits of this domination to produce effective military capabilities.” Likewise, in his The War Potential of Nations, Klaus Knorr argues that what makes a difference for national power is the “surplus wealth” of a country, namely the capacity to extract the surplus for military purposes. Therefore, relative power of a country rests on its stage of economic growth, computed in relation to income per capita. The latter represents a valuable system to assess the capability of any country to obtain cash from ordinary citizens to meet expenditure for new weaponry, foreign aid and so on. Yet China, because of its relatively low per capita income, falls short in disposable surplus wealth with respect to the US. By contrast, its GDP is merely a measure of production that does not consider the size of its domestic market and, thus, the level of per-capita income of the country.

Innovation and Ingenuity

Another widely used tool for measuring economic prowess is the percentage of foreign direct investment (FDI). FDI is an investment made by a foreign company or individual in another country by means of setting business operations or purchasing business assets (via ownership or stocks). These entirely foreign-held businesses represent 70% of FDI in China and are currently seen as an important tool for the transfer of technology, contributing relatively more to growth than domestic investment.

However, wholly foreign-owned enterprises have no general obligation to transfer technology to local partners. What is more, FDI counts on a certain threshold of human capital stock to absorb advanced-technology transfers. Although China possesses an immense supply of cheap and medium-skilled labor, the learning curve and barriers to entry for harnessing and absorbing certain technologies are very steep.

A source of measuring the power of a country is also its ability to innovate, which rests on the adroitness to create new methods of production and new products. Human capital is the key component in the economy of innovation and knowledge. To put it simply, human skills and ingenuity are the essential input.

In the field of innovation, China currently falls short of the United States for several reasons. China’s human capital tends to be downstream-oriented and consequently lacks upstream abilities. As pointed out by various scholars, over the last 50 years, Beijing has been able “to absorb imported technologies, to simplify manufacturing and to adapt advanced design to more basic product at a lower cost.” This has benefited enterprises that depend on settled technologies and machinery such as tankers and shipping equipment.

Yet China seems to be in short supply of the so-called upstream competence. These qualities depend on skills to advance comprehensive understandings of global supply chains of customers’ requirements by creating high-value added goods that integrate new technologies. These include harnessing software development and efficiently managing global supply chains.

Therefore, China is not shifting “from low-end, first-generation exports to high-end, second-generation exports as quickly as Japan or South Korea did” in the past. Also, China currently fails in turning its economic power into a credible and attractive hub for innovation and entrepreneurship on a global scale. America’s edge over China lies in its innovation-friendly environment, resulting in “superior high-performance products and direct foreign investment in operations that are global in scale, but responsive to local conditions and needs.”

Intangible Assets

The major components that enable a country to lead in cutting-edge technology depend on intangible assets, most notably what economists call the forces of agglomeration: systems of property rights and a sophisticated industrial base, full labor markets, an efficient judicial system and flexible organizations, presence of specialized service providers, knowledge spillover and trust embedded within society. Many authors have contended that open societies, like the US, benefit from these trends vis-à-vis their authoritarian counterparts.

As Ian Bremmer states, “openness is a measure of the extent to which a nation is in harmony with the crosscurrents of globalization — the processes by which people, ideas, information, goods, and services cross international borders at unprecedented speed.” As far as innovation is concerned, this means that it is not what a country can produce, and at what pace, but the underlying ecosystem that tie physical goods to networks, research clusters and command centers. Such ingredients — property rights, social networks, capital markets — constitute the supporting infrastructure and the capacity to absorb that are needed to integrate innovation into an effective and coherent entity.

China has clearly been exceptionally gifted at managing low- and medium-cost technologies ever since globalization has contributed to the spread of technology. However, as the economic return on human capital and innovation have also grown accordingly, China continues to rely heavily on top-down policies for research and education without tackling its shortage of social capital and institutions that could encourage innovation and entrepreneurship and empower an investment-friendly environment.

Arms Race

This situation seems particularly true when the military power of China is gauged and compared to the US. The rise of quality (in terms of human capital, ingenuity and skills, embedded in a sophisticated ecological system) as the predominant character in military technology has finally made obsolete and illogical the current systems of calculating relative military power. Therefore, a technological edge has come to matter most rather than possessing large forces.

Despite China having undertaken a process of military modernization for decades — it has abandoned compulsory military service and has shrunk its large forces, alongside a tenfold increase in defense spending — the US holds a major advantage in terms of the technological base for the construction and maintenance of sophisticated and advanced weapon systems. Development, as well as integration, of military technology into military forces is a process that takes place in the long run in the broader context of defense science, technology and industrial base of a country.

Advances in defense innovation are affected by several determinants that span from distinctive national styles — design philosophy, political assumptions of the élite and leadership support — and trade-offs between designers and military. Additionally, another variable to consider is the interaction within the industrial-military complex, such as the growing sway of defense conglomerates, research and development (R&D) base for innovation and civil-military integration.

Nevertheless, a major stumbling block for manufacturing and maintaining cutting-edge military technology rests on the ability to mobilize financial resources and possessing a high level of organizational capital. These constraints are widely known as “ecosystem challenges” — namely, the idea that any innovation generally demands organizational and infrastructural support.

Over the last 30 years, China has allocated a large amount of financial resources to become a frontrunner in military technology. Beijing has put in place sweeping reforms aiming at converting its defense, science and industrial ecosystems from state-run into a market-driven systems that would allow technological innovation to thrive and spread. Therefore, Beijing has implemented some restructuring to fully embrace a network-centric technological industrial process, namely the creation of a global supply chain in development, manufacturing and marketing of weaponry.

Moreover, its research, development and acquisition system (RDA) has undergone major organizational and regulatory reforms. In addition, the defense industry has witnessed a deepening cooperation and coordination between the People’s Liberation Army (PLA), civilian defense industry officials and science and technology experts. However, both RDA and the defense industry are struggling with the classical problems of a transition from central planning to a market-based system: sprawling bureaucracy, compartmentalization, lack of accountability and activity-management rather than performance-based policy.

Ultimately, military production heavily depends on a civilian technology base and its effectiveness turns on particularly on advances in commercial technology — microelectronics, computers, biotechnology, chemicals — that finally spill over into the military realm. Therefore, China’s future capabilities to outproduce the United States in advanced weaponry rests on its ability to develop a groundbreaking industrial ecosystem that integrates commercial and military technology.

Such an ecosystem incorporates platforms that tie together defense science and technology-related infrastructure, services and resources that serve as the primary means for defense innovation. In this field, the US has taken a bottom-up approach that has brought about a bigger and better integration of military and civilian sectors to help further advance the innovation process and develop the aforementioned platforms. So much so that in the US, private firms and corporations steadily continue integration of commercial technology into military capability. In this sense, the commercial applications of certain technology, such as civilian satellites or biotechnology, have benefited from the openness of the market and have engendered the process of trade-offs and interactions that enable clusters of innovation to thrive.

China’s outlook for developing and manufacturing advanced conventional weaponry seems more comparable to South Korea or Taiwan in the 1970s rather than the one of the US at the present time.

Significantly, innovation in military realm can stress hardware (technology) in addition to practices (such as doctrine or operational art) and software (organizational change). Tai Ming Cheung asserts that the “China’s military innovation programs have been more technologically that doctrinally or organizationally focused.” Because of the absorption of already existing foreign-derived technology, China succeeded in the first stages of technological development of military knowhow as well as in the following ones: creative imitation and creative adaptation.

Given better innovation capability facilities, equipment and human resources, from the 1990s onward China began to reverse-engineer several Russian weapons systems, primarily in the field of aviation. Beijing absorbed and mastered the technology and knowhow that Russia handed over and, at the same time, updated the acquired technology through indigenously-developed systems that tailor Chinese technological capabilities.

Falling Short

To put it simply, China’s key element innovation strategy (zizhu chuangxin) smoothly proceeded along small-scale and incremental advances of foreign-acquired technologies, as well as limited updating of an existing indigenously- developed system. When it comes to more sophisticated innovation, however, China’s organizational and doctrinal changes do not always maintain the pace of technological advances. Especially, it is pivotal to consider the way “hard capabilities” — such as input and infrastructural basis, as well as development facilities, laboratories, research institutes, universities, human capital, access to foreign market technology, manufacturing capabilities — are tied together to bring about disruptive and radical breakthrough in both new component technology and architecture.

China is currently displaying its skills in developing asymmetric doctrine and capabilities such as anti-ship ballistic missiles and cyber warfare, especially through the integration of organizational structures, doctrinal process and technology.

However, China falls short in comparison of the US in mastering radical innovation. Drawing on business literature insights, a large number of studies contends that the US takes advantage of what in marketing is known as first-mover advantage. Indeed, it is crucial to consider strategy and population ecology applied to organizations (in this case, countries like China and the US). Strategy refers to the links between survival, financial strength and the timing of firms’ entry into the marketplace, while population ecology takes into account the population density of firms at the time of their founding and the size and growth of the markets they address in appraising the survivability of organizations.

This metaphor helps to understand how the US, by exploiting some initial asymmetry, gained advantage in terms of leadership in technology and pre-emption in the acquisition of scarce assets while capitalizing on switching costs. Therefore, America’s edge lies in its broad-based, world-class R&D capabilities and personnel along with deep financial resources and the nature of its integration into the global economy and technological order.

By way of example, we can consider the ability of China of mastering stealth-technology. Despite claims that Beijing has the ability to harness such technology with its J-20 fighter jets, the stealth of the aircraft has been called into question, as well as its maneuverability, electronics and communications systems. At the bottom of this lies the fact that being a second-mover in such technology presents a major difficulty.

The US, on the other hand, possesses tactical, organizational and operational concepts to master such technology, not to mention advanced communications systems, command and control infrastructures and skilled personnel to operate this platform. Overall, alongside suffering from poor infrastructure, heavy reliance on foreign technology and lack of top-notch R&D capabilities, China falls short in human capital, investments, as well as bloated bureaucracy and ossified organizations. Therefore, the prospects of narrowing the gaps are few and the US should maintain its leadership status for a long time to come.

China’s outlook for developing and manufacturing advanced conventional weaponry seems more comparable to South Korea or Taiwan in the 1970s rather than the one of the US at the present time. Accordingly, while the United States occupies the upper tier in the global defense industry, China currently languishes in the lower parts of the second tier, with few capacities for designing and producing relatively advanced conventional weapon systems.

Nevertheless, according to Roger Cliff, “pockets of respectability exist in some areas, such as short-range ballistic missiles, anti-shipping cruise missiles” and cyber warfare. However, a coherent and comprehensive assessment of China’s asymmetric capabilities must consider every aspect of Beijing’s strategy and must not exaggerate the threat posed to the United States. An across-the-board investigation must highlight the strength and weaknesses of the key trends in China’s economic prowess and innovation, as well as the integration of commercial technology into the military field and the ecosystem challenge posed by innovation at organizational and financial levels.

*[This article is based on an earlier paper written by the author for Johns Hopkins University, Washington, DC.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: Nikada