Duanxiang (Steve) Xu

Since the economic crisis of 2008, the global economy has been associated with the word “gloomy.” The United States is soft. The European Union is soft. Japan s soft. Latin America is soft. China has appeared to be the only BRIC (Brazil, Russia, India and China) country left unscathed. But even China turned in its lowest growth rate in 13 years, adding to the already “gloomy” global economy. People are losing jobs, cutting spending and seeing a declining standard of living.

The world must have economic growth to improve the standard of living for all, or at least to accommodate its ever-growing population, and the best minds around the globe have been working diligently to tackle this issue.

Yet I would argue that in the long run, global economic growth must rely heavily on a cross-disciplinary, cross-border innovation mechanism rather than on simple growth alone.

Let’s take a step back and look at a useful model of production that depicts economic growth and the factors impacting it. This model, known as the Cobb-Douglas production function, exhibits the relationship between the input to the economy and the output. It shows us that growth in per capita output is coming from two sources: capital deepening and an improvement in technology, but it also tells us that capital deepening cannot be a source of sustained growth in the economy once the economy reaches a steady state. That is to say, sustained growth in per capita output is only possible with technological progress.

Most developing countries are still quite far away from an economic steady state where diminishing marginal productivity would counter the benefits of capital deepening. Therefore, it would seem that increasing investments in the economy should have a higher priority than making technological progress. However, overlooking the importance of technological progress can have a negative impact on economic growth. Without the requisite technological progress, a developing country might have to stick with its suboptimal economic structure and uncompetitive industries. It would then be likely to suffer from trade deficits, which would place downward pressure on its currency valuation. And as a result, people would experience a deteriorating standard of living in their highly import-dependent economy. Thus, even though making technological progress does not seem to be as urgent in developing countries as suggested by the Cobb-Douglas function, it should be taken just as seriously as in developed countries.

Having established the importance of technological progress for sustained global economic growth, we can now turn to look at how best to develop that technology — that is, to innovation. The notion of innovation actually covers the complete “workflow” from inputs (capital and human capital) to outputs (tangible and intangible), and more importantly, a variety of “processes” that determine the overall efficiency of innovation. These determinants include the education system, the R&D environment, motivation and compensation mechanisms, as well as commercialization channels. Different countries present different contexts with regard to these determinants. Even for a given country, in order for these “processes” to work both individually and collectively, concerted efforts are required from multiple disciplines, including but not limited to science, education, politics, law and business. Therefore, taking all these considerations into account, sustainable global economic growth requires a cross-border, cross-disciplinary innovation mechanism.

Consider China as an example. The Chinese economy had a stellar performance during the past three decades, and now has become a potent engine for the global economy. This rapid economic growth was attributable not only to the vast capital being invested, but also to great technological progress. Achievements have been made in all areas. The education system successfully produced a large pool of talent. R&D systems have been fueled with spending that increased at a rate approximately twice that of overall economic growth. Greatly improved motivation and compensation mechanisms also helped attract plenty of talent, much of which has already made great contributions to the Chinese economy as scientists, business leaders and policy makers. However, China’s innovation system still has problems and vulnerabilities. Two of the most significant issues are associated with commercialization channels and intellectual-property (IP) protection. According to a recent government report, about 60 percent of R&D output was not commercialized or transformed to meaningful economic output. Meanwhile, about 70 percent of the R&D capacity belongs to universities and institutions as opposed to companies.

The clear disconnection between R&D output and commercialization has served as something of an impediment to transformation. A so-called “Industry-Academia-Research” (IAR) platform that integrates both R&D and commercialization efforts is the remedy. Building up such a platform involves parties from different disciplines and calls for talent in science, business, law and policy-making. The disconnection among these that now exists reflects a short-sightedness and lack of entrepreneurial spirit in Chinese companies. Lacking patience for the demanding and sometimes time-consuming processes of innovation, companies flock to shortcuts such as reverse-engineering and copying, and this has raised great concern about IP protection.

Dealing with all the IP disputes and creating a healthy and sustainable growth engine for the economy requires a cross-disciplinary approach, but
also a cross-border approach. China has to work internationally with other countries to make IP protection a core part of its innovation culture.

One might think that the requirement for a cross-disciplinary, cross-border innovation mechanism would apply only to developing countries such as China, but I would argue that even a well-developed country like the United States needs this innovation mechanism. After working for a start-up biotech company in Illinois for three years, I learned a great deal about what makes for a successful approach. Although the company had a great product, with a high-potential proprietary technology, there was little clarity about the business development path, and as a result the company struggled to have a real economic impact. Sixteen years after being incorporated it was still more of a workshop of scientists and engineers than a successful business. Although large companies have known great success in commercializing science and technology outputs, for most small companies successful commercialization has proved elusive. And lacking cross-disciplinary collaborations or even a mindset of cross-disciplinary efforts often has been a large factor in their demise.

Like most international students in the United States, I encountered complications in getting permission to work while I was employed by this company. The company did not lose me because of those issues, but it was, in fact, forced to take on an extra financial burden. In the larger scheme of things, the U.S. economy suffers when its immigration policies effectively encourage the outflow of a high-skilled workforce trained with U.S. resources. When this company that I worked for dealt with international business and R&D collaborations, it stumbled on several occasions due to regulatory and legal issues or simply cultural differences. Big corporations are usually well-positioned on these issues, but most small companies find it extremely difficult to tackle them without the support of a cross-border, cross-disciplinary platform.

In sum, the U.S. economy as a whole (not just big corporations, but hundreds of thousands of small companies as well) needs a cross-disciplinary, cross-border innovation mechanism to propel its long-term, sustainable growth. The global economy is getting increasingly intertwined, and the solution is no longer simply a question of capital investment. It is technological progress through innovation that ultimately drives sustainable global economic growth in the long run. Real life situations and stories suggest that the global economy requires an innovation mechanism that integrates cross-border and cross-disciplinary efforts, be it in developing countries or in developed countries. While the details of such a mechanism still require a significant amount of research, it is never too late to equip our future global leaders with this crucial cross-border and cross-disciplinary mindset.