i ASSESSING CHINA’S EFFORTS TO BECOME AN “INNOVATION SOCIETY” – A PROGRESS REPORT HEARING BEFORE THE U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION ONE HUNDRED TWELFTH CONGRESS SECOND SESSION MAY 10, 2012 Printed for use of the United States-China Economic and Security Review Commission Available via the World Wide Web: www.uscc.gov UNITED STATES-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION WASHINGTON: 2012 ii U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION Hon. DENNIS C. SHEA, Chairman Hon. WILLIAM A. REINSCH, Vice Chairman Commissioners: CAROLYN BARTHOLOMEW Hon. CARTE GOODWIN DANIEL A. BLUMENTHAL DANIEL M. SLANE ROBIN CLEVELAND MICHAEL R. WESSEL Hon. C. RICHARD D’AMATO LARRY M. WORTZEL, Ph.D. JEFFREY L. FIEDLER MICHAEL R. DANIS, Executive Director The Commission was created on October 30, 2000 by the Floyd D. Spence National Defense Authorization Act for 2001 § 1238, Public Law No. 106-398, 114 STAT. 1654A-334 (2000) (codified at 22 U.S.C. § 7002 (2001), as amended by the Treasury and General Government Appropriations Act for 2002 § 645 (regarding employment status of staff) & § 648 (regarding changing annual report due date from March to June), Public Law No. 107-67, 115 STAT. 514 (Nov. 12, 2001); as amended by Division P of the “Consolidated Appropriations Resolution, 2003,” Pub L. No. 108-7 (Feb. 20, 2003) (regarding Commission name change, terms of Commissioners, and responsibilities of the Commission); as amended by Public Law No. 109-108 (H.R. 2862) (Nov. 22, 2005) (regarding responsibilities of Commission and applicability of FACA); as amended by Division J of the “Consolidated Appropriations Act, 2008,” Public Law Nol. 110-161 (December 26, 2007) (regarding responsibilities of the Commission, and changing the Annual Report due date from June to December). The Commission’s full charter is available at www.uscc.gov. iii June 4, 2012 The Honorable Daniel Inouye President Pro Tempore of the Senate, Washington, D.C. 20510 The Honorable John A. Boehner Speaker of the House of Representatives, Washington, D.C. 20515 DEAR SENATOR INOUYE AND SPEAKER BOEHNER: We are pleased to notify you of the Commission’s May 10, 2012 public hearing on “Assessing China’s Efforts to Become an Innovation Society-A Progress Report.” The Floyd D. Spence National Defense Authorization Act (amended by Pub. L. No. 109-108, section 635(a)) provides the basis for this hearing. At the hearing, the Commissioners received testimony from the following witnesses: Dr. Robert D. Atkinson, President, Information Technology and Innovation Foundation; Dr. Danny Breznitz, Associate Professor of International Affairs, Georgia Institute of Technology; Richard P. Suttmeier, Professor of Political Science Emeritus, University of Oregon; Dr. Denis Fred Simon, Vice Provost for International Strategic Initiatives, Arizona State University; Dr. Earl C. Joseph II, Program Vice President, IDC; Dr. Horst Simon, Deputy Director, Lawrence Berkeley National Laboratory; Timothy K. Harder Director, EMC Cloud Infrastructure Division; Kathleen Walsh, Associate Professor of National Security Affairs, U.S. Naval War College; and Dr. Thomas Mahnken, Professor of Strategy, U.S. Naval War College. The hearing provided a broad overview of the innovation climate in China and specifically addressed research and development programs, emerging information and communication technology capabilities, and Chinese defense sector innovation. The hearing reviewed these issues in the context of their implications for the United States. We note that prepared statements for the hearing, the hearing transcript, and supporting documents submitted by the witnesses will soon be available on the Commission’s website at www.uscc.gov. Members and the staff of the Commission are available to provide more detailed briefings. We hope these materials will be helpful to the Congress as it continues its assessment of U.S.-China relations and their impact on U.S. security. The Commission will examine in greater depth these issues, and the other issues enumerated in its statutory mandate, in its 2012 Annual Report that will be submitted to Congress in November 2012. Should you have any questions regarding this hearing or any other issue related to China, please do not hesitate to have your staff contact our Congressional Liaison, Jonathan Weston, at (202) 624-1487 or via email at [email protected]. Sincerely yours, Hon. Dennis C. Shea Hon. William A. Reinsch Chairman Vice Chairman iv CONTENTS THURSDAY, MAY 10, 2012 ASSESSING CHINA’S EFFORTS TO BECOME AN “INNOVATION SOCIETY” – A PROGRESS REPORT Opening Statement of Chairman Dennis Shea (Hearing Co-Chair) ........................................... 1 Prepared Statement............................................ 3 Opening Statement of Commissioner Carte Goodwin (Hearing Co-Chair) .......................................... 5 Prepared Statement............................................ 6 Panel I: China and Innovation Introduction ................................................... 8 Statement of Robert D. Atkinson President, Information Technology and Innovation Foundation... 9 Prepared Statement........................................... 12 Statement of Dr. Danny Breznitz Associate Professor of International Affairs Georgia Institute of Technology.............................. 23 Prepared Statement........................................... 26 Panel I: Question and Answer .................................. 35 Panel II: China’s Innovation Infrastructure Introduction .................................................. 56 Statement of Richard P. Suttmeier Professor of Political Science, Emeritus University of Oregon......................................... 57 Prepared Statement........................................... 60 Statement of Dr. Denis Fred Simon Vice Provost for International Strategic Initiatives Arizona State University..................................... 66 Prepared Statement........................................... 69 Panel II: Question and Answer ................................. 77 v Panel III: Information and Communications Technology Innovation Introduction .................................................. 93 Statement of Dr. Earl C. Joseph II Program Vice President, IDC.................................. 94 Prepared Statement........................................... 97 Statement of Dr. Horst Simon Deputy Director, Lawrence Berkeley National Laboratory...... 107 Prepared Statement.......................................... 110 Statement of Timothy K. Harder Director, EMC Cloud Infrastructure Division................. 117 Prepared Statement.......................................... 120 Panel III: Questions and Answers ............................. 124 Panel IV: Defense Sector Innovation Introduction ................................................. 142 Statement of Dr. Thomas Mahnken Professor of Strategy U.S. Naval War College...................................... 143 Prepared Statement.......................................... 145 Statement of Kathleen Walsh Associate Professor of National Security Affairs U.S. Naval War College...................................... 151 Prepared Statement.......................................... 154 Panel IV: Questions and Answers ............................. 161 1 ASSESSING CHINA’S EFFORTS TO BECOME AN “INNOVATION SOCIETY” – A PROGRESS REPORT THURSDAY, MAY 10, 2012 U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION Washington, D.C. The Commission met in Room 562 Dirksen Senate Office Building, Washington, D.C. at 9:00 a.m., Chairman Dennis C. Shea and Commissioner Carte Goodwin (Hearing Co-Chairs), presiding. OPENING STATEMENT OF COMMISSIONER DENNIS SHEA HEARING CO-CHAIR CHAIRMAN SHEA: Good morning. It's 9:00 o'clock. If we could ask the first two witnesses to come forward and give their opening remarks. Good morning, and welcome to the fifth hearing of the U.S. -China Economic and Security Review Commission's 2012 Annual Report cycle. My name is Dennis Shea, and I am co -chair of today's hearing. We will be examining China's efforts to foster innovation through a variety of policies, some of which are likely to have a profound effect on the United States’ economy. China has made no secret of its ambition to shift its economy from one dependent on manufacturing products invented elsewher e to a more integrated economy that can invent, develop, and produce works whose intellectual property originated within China. The 15 -year Medium and Long -Term Plan, adopted in 2006, describes 402 technologies in which China seeks to gain expertise. The plan also calls for China to limit its dependence on foreign technology to just 30 percent by 2020. The 12th Five -Year Plan, adopted last year, identifies seven strategic emerging industries in which Chinese corporations are expected to become global champions. They include clean energy technology, next generation information technology, biotechnology, high -end equipment manufacturing, alternative energy, new materials, and clean energy vehicles. The goal is to triple the contribution that these industr ies make to Chinese GDP from five percent to 15 percent by the year 2020. To do this, the Chinese government intends to increase spending on research and development, from 1.75 percent of GDP in 2010 to 2.2 percent in 2015. By contrast, the United Stat es spent 2.9 percent of its GDP on research and development in 2009, slightly higher than the developed country average of 2.4 percent according to the OECD. Total expenditures by the Chinese central and local