Dr. Wordman
Whether it is a free economy or planned economic development, the economic development path seems to always start with cheap labor (labor-centric) then entering industrialization (factory-centric), and then into a phase of advancing technology and innovation (R&D Centric). Take the most advanced economy, the United States as an example, as a colony before it became an independent nation, its economy started with agriculture requiring a heavy labor force. Thus, it imported slaves from Africa to support its labor needs despite the violation of Christian philosophy. After industrialization (1760-1840) occurred in Europe, machine operation and factories came to the new country, a growing United States. With its rich agriculture, forestry, and mineral resources, the U.S. became the largest GDP of the world in 1890 surpassing China (the world’s largest GDP from 1820 - 1870). The U.S. benefited from the two world wars and grew its GDP to become 40% of the world GDP in 1960. American goods were desired all over the world. The U.S. was the principal supplier if not the world factory.
Industrialization continued with combustion engines and electronics with rapid advances so that research and development (R&D) became the engines driving technology development. The U.S. was leading in R&D throughout the twentieth century in almost all fields, computerization aided the semiconductor revolution pushed automation and network control, and communication far beyond human labor capability. The expansion in R&D is no longer limited to mechanics and electronics; interdisciplinary interactions have widened the R&D sphere to many areas including supercomputers, high-speed internet, advanced materials, biomedical research, virtualization, space exploration, etc. as well as all sorts of modeling and simulation work in financial engineering taking advantages of large data and past experiences. With fast computing and the accumulation of large databases available for simulating the human brain, human ability (motion, speech, and vision), and machine learning, artificial intelligence has become the next revolutionary wave. However, the broader and more advanced R&D, the more opportunities would require astute selection and focused funding and human effort, since R&D is to explore the unknown, its results can never be guaranteed success. R&D work requires taking calculated selection (risk) and continued human talents and capital supply to beat its odds (often a low percent level).
The path of labor-centric (manpower) to factory-centric (manufacturing productivity), then to R&D-centric (advancing technology or discovering new fields, intellectual properties ) seems to be the success path for the U.S. before and including the 20th century, but into the 21st century, the U.S. GDP has been slowing down relative to the fast-growing countries in the world, from 40% (1960) down to 25% or less (2023). Whereas China has gained from 1.75% (1990) to 18.6% in 2021 with a projection to surpass the U.S. in less than a decade. The U.S. has adopted a policy to thwart China’s growth by launching a tariff war and technology sanctions eventually to an all-out anti-China strategy. However, China is the number one trading partner with 120 countries and has essentially become the world factory. Despite the U.S. anti-China stand, many countries including the U.S. allies have a vested interest to consider. Hence, foreign investors continue to invest in China, not only in manufacturing and business but also in R&D. In the last couple of years under the U.S. anti-China policy, China’s economy suffered a negative impact but the U.S. economy was also hurt. The total investment and Foreign Direct Investment (FDI) tell a good story of a nation’s R&D and its economy.
China received FDI of $163.25B and invested in other countries $130.25B in 2023. Thus, according to the State Administration of Foreign Exchange (SAFE), China's net foreign direct investment in 2023 was $33 billion, which is notably a 30-year low and an 80% decrease from 2022. (China’s FDI was $180.96B in 2021 and $189.13B in 2022, showing a 13.7% drop from 2022 to 2023). The net exchange ($33B) was positive because new investment was greater than outflows and the $163.25B FDI figure represents a significant confidence of foreign investors in China. However, China’s net direct investments in 2023 are down $142.6 billion, which is the second time the country has had a deficit. This is no doubt an indication of China’s current economic challenge. Despite the downturn in net investment figures, R&D activities (foreign joint venture establishing R&D centers) are still striving in China, people expect a high success rate in China just like Silicon Valley has enjoyed that reputation. However, China has more than one ‘Silicon Valley’ distributed in China, Beijing, Shanghai, Shenzhen, Hangzhou, Suzhou, and even Anhui and Sichuan. And more importantly, China has a huge market and appetite for new development. The success of R&D efforts has to be proven by business returns. Recently, The Economist magazine has published an article highlighting China’s R&D potential.
The Labor, Manufacturing, and R&D path seems to be a successful model for China so far, however, history did present different outcomes for other countries. Hence, there is no guarantee of success. If one examines the economic development of the G7, their R&D phase did not always pan out, in some cases due to political influence and sometimes simply due to poor management of R&D direction. In the case of the U.S., its economy showed relative weakening at the turn of the 21st century. The terrorist attack may have triggered the U.S. pro-military policy which directed capital away from non-military R&D. In addition, the management of R&D steering away from hard goods manufacturing towards financial engineering and services resulted in creating fewer new job opportunities than taking away more manufacturing-based workforce. This choice also offered the opportunity for China to rise as a world manufacturer. China’s rapid economic growth has brought her to the critical R&D phase of economic development. So far, China has avoided making political mistakes (engaging in military confrontation and costly alliances) but focusing on commerce development based on its manufacturing strength to provide job opportunities and wealth building. The goal of lifting people from poverty and seeking co-development with the world for mutual prosperity has paid off so far.
Despite external pressure from the U.S., China is at the juncture of steering its R&D to bring sustainable economic growth. Will China succeed? The FDI trend is an honest indicator. Let’s watch how China is going to manage its R&D phase by investing in BRI with a co-prosperity goal (hence choices of R&D directions: Green Energy, Electric Cars, Commerce Infrastructure, and Platforms) and by leveraging its huge market and manufacturing base to draw investments to fund its R&D to success.
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