Testimony of Dan Breznitz

Chairman Shea, Vice Chairman Reinsch and distinguished members of the Commission, thank you for the opportunity to testify on the topic of China's innovation capabilities. This is my first opportunity to testify before this body, and I am honored to have such a chance. There are four central points to be made when considering China's innovation capabilities and the challenge they present for the United States: 1. Globalization has changed the manner in which innovation is carried out around the world. A new production system of global fragmentation evolved where locales specialize in specific stages of particular industries and not the complete value chain. As such, each place is specializing in particular innovation capacities that, ideally, lead different national economies to excel in their chosen stage of production. 2. The rise of global fragmented production of both goods and services has led, for the first time in history, to true economic international interdependency. It is no longer only that we are dependent on trade in order to continue to be wealthy; we now cannot even produce " our " products and services alone. Nonetheless, this does not mean that the world is guaranteed peace and prosperity, far from it. True interdependency lead to sharp divergence between the economic and political logics. Where one highlights the gains, the other highlights the costs. Accordingly, this new system brings accentuated dimensions of insecurity that can lead to rapid destructive escalation. The economic history of the first economic globalization and its violent end in World War I, attest to that only too well. 3. Despite the long-term intentions of, and heavy investment by, the Chinese central government developing " indigenous innovation, " China's true innovational competitive edge is mastering the art of second generation innovation, including the mixing of established technologies and products to come up with new solutions, and the science of organizational, incremental, and process innovation. Thus, China's innovation capabilities are not solely in process (or incremental) innovation but also in the organization of production, manufacturing techniques and technologies, delivery, design, and second generation innovation. This system, built from the bottom up by masses of entrepreneurs, is China's greatest strength and the real competitive challenge facing us. At the same time, " core " technologies and novel product innovations are still rare and difficult to achieve in China. 4. The United States should focus less on China's attempt to outdo Silicon Valley …