Competitive Advantage Erosion

EXECUTIVE SUMMARY
The purpose of this paper is to analyze the growing disparity of science and engineering education between the United States and China.
This disparity which is causing businesses to shift their operations to access highly educated talent pools in Asia are a result of 3 key factors.
1. China, understanding the importance of improving science and engineering education aims to leverage its highly skilled population to boost its competitive advantage in the global market.
2. The United States continues to have its competitive advantage eroded away as fewer and fewer college graduates leave higher education with an advanced degree in science or engineering.

INTRODUCTION On October 4, 1957, the former Soviet Union launched Sputnik I, the first man-made satellite, into outer space. Sputnik I was a tiny object, only about the size of a basketball, but despite its size, the impact of this event changed the world with respect to politics, military, technology, and especially scientific development. While the launch of a basketball sized object into outers space might seem like a single but important event, it marked the start of the space age and the U.S.-U.S.S.R space race1. Fears of a "missile gap" and being overtaken technologically, drove the United States to increase funding for science and technology research. This push for technological superiority led to the United States' competitive advantage in information technology that lasted for almost 30 years.
50 years after the launch of Sputnik I, the United States and other economically mature nations are facing a new technology gap. The sharp increase in foreign direct investment being used to build up advanced science and engineering research in Asia along with increased growth of advanced science graduates coming out of Asian universities, will lead to the erosion of the competitive advantage of the United States' while boosting the growth of emerging Asian knowledge economies. As Sputnik changed global politics, military expansion, and science development for decades after its launch, so too will the growth of Asian science education and research.

CURRENT BUSINESS CLIMATE

While many Asian countries like Singapore are expending their knowledge economies, the general focus of the international political environment is being placed on China. As of today, China is becoming an important base of operations for technology research and development. Large technology companies like Hewlett Packard, Intel, Google, and Cisco have created research centers in China. These companies are expanding in one of the world's fastest-growing economies, not just for low cost manufacturing and as a market for U.S. goods, but as a center for innovation with a considerable, educated talent pool2. The aforementioned educated talent pool is an important factor for the growth of research and development of high-end technology in China.
This growth is leading to a massive change in the way Multinational Corporations do business. Many of these new research centers, such as the one being created by HP will focus initially on developing technology for large corporations and government. The new HP research park is focusing its resource son finding ways to connect extensive computer networks. This lab could eventually branch out to focus on consumer technology and trump traditional American technology design labs. This is evidence of a shift in traditional operations. Little more than 10 years ago, American multinationals created the design of their products domestically and only had products manufactured in China to utilize low cost labor. Now, entire company supply chains are being shifted with activities for research, design, manufacturing, and even after purchase support all being conducted in China.
The shift in knowledge and operations is growing. With such a large shift in the availability of highly-skilled match and science skills to fuel technological innovation, what are American multi-national-corporations doing to leverage the increasing amounts of skilled labor in the developing world? In a 2005 press release, Wee Theng Tan, president of Intel China had this to say concerning Intel's growing investment in R&D in China, "China has one of the world's most compelling combinations of R&D talents and market potential. As a leading technology market with a growing number of highly trained researchers and technologists, China is creating the kind of dynamic environment that is an impetus to great R&D. Intel is committed to working with the local industry to help bring Chinese innovation into the world.5" Intel has invested nearly 1.3 billion dollars to China and cultivated a workforce of over 5,000 talented professionals. R&D has been a huge part of the company's investment since it first established the software labs in China in 1994.
The significance of the aforementioned "knowledge" gap is quite clear. The nation that can train and retain a highly talented and skilled talent pool will maintain a dominant position in global politics throughout the 21st century. The ability for society to progress by through the development of technological innovation is directly dependent on the skills of the individuals living within that society. The United State and other modern Western nations, should not fear terrorist attacks, but instead should fear the ever growing highly educated populations of the developing world.

TRADITIONAL VALUES How did this happen? How did China and other growing knowledge economies in Asia become such a breeding ground for a highly competitive labor force highly skilled in math and science of this magnitude? The recent emphasis that China has placed on advancing science and engineering education is not at all radical. The importance of education has been a focal point for Chinese society since the oncoming of the teachings of Confucius during the 2nd Century B.C. A hallmark of Confucius' thought is his emphasis on education and study. Confucius taught that true understanding can only come about as a result of rigorous study. Confucius He disparages those who have faith in natural understanding or intuition and argues that the only real understanding of a subject comes from long and careful study
MATHEMATICS IN CHINESE HISTORY Core concepts of mathematics that are the essential building blocks of science and engineering are deeply intertwined with Chinese history. For example, Decimal Notation with characters denoting 1 – 10, 100, 1000 and so on were used in long-term counting systems dating as far back as 400 B.C. In the 6th century A.D., Chinese Astronomer Liu Zhou introduced quadratic interpolation which is a process of curve fitting used in calculus. Liu Zhou used quadratic interpolation to describe and measure movement of celestial bodies. Given the philosophical and moral teaching of Confucius in addition to the culture of innovation in mathematics, it is not hard to understand why China can produce so many scientists and engineers out of their university system.
DEVELOPING HUMAN CAPITAL
China, hoping to regain its glory as the Middle-Kingdom of Asia, is using large amounts of government funds to draw in "knowledge capital" to their university system. By attracting top-foreign educated talent, China is hoping fill large cutting edge research centers in joint ventures with the world's top higher learning institutions. The Assistant President of Beijing University had this to say with regards to the trend of Government funded educational development in China, "Our government realizes the connection between a nation's overall power and the quality of its higher education." Over 200,000 foreign educated students, many living in the United States are encouraged to return to China to become top researchers in China's growing universities.
The importance of math and science education in a global competitive economy is quite apparent. Although the economic benefits of a good education fluctuate somewhat from one decade to the next, it is generally the case that higher levels of education result in a higher likelihood of employability and higher wages once employed. Moreover, the benefits associated with education tend to increase with increases in the technical complexity of the associated school-taught competencies.
In technologically complex societies, such as the United States, there is a particular premium associated with math-intensive, science-related skills. As developing nations in Asia, such as China, begin to develop into technologically complex societies, the premium that highly educated individuals in the United States could charge for access to their knowledge will no doubt undergo erosion as a direct result of competition from equally educated professionals in Asia. The average annual salary of an entry level electrical engineer in the United States is about $53,940 while the average annual salary for an entry level electrical engineer in China is $10,875. Understanding that math and science education is the key to global competitiveness, the People's Republic of China has just recent drafted official guidelines for implementing a science development program. Through the use of tax incentives and developing protections for intellectual property, the Chinese government is hopeful that it can build an infrastructure that can leverage the ever increasing knowledge of its educated populace to increase global competitiveness.
To transform itself into a world class knowledge based economy, China has formulated a set of guidelines for implementing the science development program. It said a combination of measures like an increase in funding, tax incentives, improved science education, protection of intellectual property rights and the provision of a planning mechanism for distributing science and technology resources should enable the country to attain these goals. The policy titled "The guidelines for the implementation of the 'National Medium- and Long-term Programm for Science and Technology Development (2006-2020)" is a collection of 10 major guidelines by which China will develop its Science and Technology infrastructure.
How does this progressive policy being set forth by the Chinese government compare to the policies of the United States government with respect to enacting a long-term program designed to promote science and technology development? In the fiscal 2005 year budget passed by Congress in November 2004, the budget for the National Science Foundation, the government institution designed to promote research and funding science education was cut by 1.9 percent. That 1.9 percent of the budget is the equivalent of $105 million. That should provide some perspective as to how the United States is confronting this very obvious crises, in that the United States government has not enacted a plan yet to rival the activities of China. The disparity between the quantity and quality of science and engineering education in the United States and China does not seem to be a key point of focus for the United States Government. The irony of this situation is that a nation once fearful of a "missile-gap" between itself and the Soviet Union would turn a blind eye when a "knowledge-gap" occurs between itself and the rapidly growing economic power of China.
Thomas Friedman, a New York Times columnist has much to say about the subject of the rise of science research in Asian universities in his latest book, The World is Flat, a Brief History of the 21st Century. In his book, Mr. Friedman's analysis of the United States flailing performance in global competition stems from facts released in a recent National Science Board report. "The NSB report found that the number of American eighteen-to-twenty-four year-olds who receive science degrees has fallen to seventeenth in the world, whereas we ranked third three decades ago. It said that of the 2.8 million first university degrees (what we call bachelor's degrees) in science and engineering granted worldwide in 2003, 1.2 million were earned by Asian students in Asian universities, 830,000 were granted in Europe, and 400,000 in the United States. In engineering specifically, universities in Asian countries now produce eight times as many bachelor's degrees as the United States." The Same NSB report as mentioned by Friedman also calls for the federal government and its agencies to immediately increase funding for Science and Engineering education. The NSB report can be quoted as saying, "step forward to ensure the adequacy of the U.S. science and engineering workforce. All stakeholders must mobilize and initiate efforts that increase the number of U.S. citizens pursuing science and engineering studies and careers." Much like the Chinese government and its recent efforts developing a long-term program designed to foster the growth of Science and Engineering, The NSB drafted a series of recommendations for the U.S. government to take action with respect to trying to maintain competitive as funding for advanced science studies and technology continues to surge throughout most of Asia. The report focuses on two major issues.
First, the federal government must direct substantial new support to students and institutions in order to improve success in science and engineering. study by American undergraduates from all demographic groups. Enacting this policy will ensure that all and not just a small population are being developed into a highly competitive workforce for the global market. Federal support for research and graduate and postdoctoral education should respond to the real economic needs of students and promote a wider range of educational options responsive to national skill needs.
During the current reexamination of visa and other policies concerning the mobility of scientists and engineers, it is essential that future U.S. policies: a) strengthen the capacity of U.S. research universities to sustain their leadership role in increasingly competitive international S&E education; b) strongly support opportunities for American students and faculty to participate in international S&E education and research; and c) while enhancing our homeland and national security, maintain the ability of the U.S. to attract internationally competitive researchers, faculty and students."
CONCLUSION
It is clear that due to the sheer mass of science and engineering talent being developed by Asian university, that region will maintain a competitive advantage in developing technological innovations that will dominate future markets. The growing competitive advantage of the Chinese economy can witnessed when American multi-national corporation begin to shift many of their higher level operations towards to the recently developed technology research parks in Asia. As knowledge and resources shift from one side of the world to the next, the competitive advantage of modernized western nations such as the United States will be eroded away unless measures are taken to develop science and engineering education.

1. NASA.GOV
"Sputnik and the dawn of the Space Age." 21 FEB 2003 http://history.nasa.gov/sputnik/index.html Steve Garber, NASA History Web Curator

2. CNET.com
"HP opens R&D Lab in China." 15 Nov 2005 http://news.com.com/HP+opens+R38D+lab+in+China/2100-1008_3-5952724.html. 3. Riegel, Jeffrey, "Confucius", The Stanford Encyclopedia of Philosophy (Fall 2002 Edition), http://plato.stanford.edu/archives/fall2002/entries/confucius

4. The University of Kansas. Office of the Chancellor. 8 Sep 2005. http://www.chancellor.ku.edu/speeches/Convocation/fscospeech05.shtml

5. Intel.com
"Intel expands research and development in China." 15 Sep 2005. http://www.intel.com/pressroom/archive/releases/20050915corp_b.htm. 6. Friedman, Thomas L. The World is Flat, a Brief History of the 21st Century.
New York : Farrrar, Straus and Giroux. 2005

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HEADLINE: CHINA'S GUIDELINES FOR IMPLEMENTING SCIENCE DEVELOPMENT PROGRAMME

BODY:

In order to promote businesses to form the vanguard in technological innovation and for the Chinese nation to become an innovative-type country, China has formulated a set of guidelines for implementing the science development programme. It said a combination of measures like an increase in funding, tax incentives, improved science education, protection of intellectual property rights and the provision of a planning mechanism for distributing science and technology resources should enable the country to attain these goals. The following is the apparent full text of "The guidelines for the implementation of the 'National Medium- and Long-term Programme for Science and Technology Development (2006-2020)'", carried by official Chinese news agency Xinhua (New China News Agency); subheadings as carried:

Beijing, 26 February: To implement the "National Medium-and Long-term Programme for Science and Technology Development (2006-2020)" (Guo Fa [ 2005] No 44, hereinafter called the "Programme"), create an environment for encouraging making innovation independently, promote enterprises to become the main body of making technological innovation and strive to build an innovative-type country, the following guidelines have been specially formulated:

I. Input into science and technology

1. Increase the input into science and technology by a big margin. Establish a pluralistic and multi-channel science and technology input system, increase year after year the percentage of the input of the whole society into research and development in the GDP, and enable the level of the input into science and technology will meet the requirements for ranking side by side with innovative-type countries.

2. Ensure the steady growth of financial input into science and technology. Governments at all levels should regard the input into science and technology as a key guaranteed point in their budgets and the distribution of the exceeding revenue in the formulation of budgets at the beginning of the year and in implementing budgets should give expression to the requirements of growth in the input as legally stipulated. The central financial input into science and technology should increase by a big margin in 2006 and on this basis, the range of growth in the financial input into science and technology should be notably higher than the range of growth in the current financial revenue in the "11 th Five-year" period.

3. Earnestly ensure the smooth implementation of important special projects. The implementation of important special projects set by the "Programme" should follow the principle of "starting a project only when conditions are ripe" and experts should be organized to carry out comprehensive and in-depth feasibility proofs in terms of technology, economy, and other aspects. Such projects should be reported to the State Council for approval according to the needs of the country's development and how ripe the conditions for implementation are. After this, special funds should be allocated through overall planning and these projects should be launched one after another according to separate plans.

4. Optimize the structure of financial input into science and technology. The focus of financial input into science and technology should be put on supporting basic research, research for public good and research on frontier sciences. Funds for the normal operation of scientific research institutes, government science and technology plans (funds) and the building of scientific research conditions should be rationally arranged. Importance should be attached to the building of the ability to carry out scientific research of industries for public good and a mechanism should be established for giving stable support to the scientific research of industries for public good. The government science and technology planning system should be optimized and the direction of its support should be clearly defined as mainly solving major science and technology problems in national economic and social development, industries and regions.

5. Give play to the guiding role of financial funds in encouraging enterprises to make innovation independently. Innovate the input mechanism, integrate government funds, increase the efforts to support, and encourage enterprises to make technological innovation and to digest, absorb and re-innovate introduced advanced technology. Guide and support large core enterprises to carry out pre-competition research and development of strategic and crucial technology and important equipment and establish a platform for technological innovation at the international advanced level. Strengthen the building of the system for serving the technological innovation of enterprises. Increase the input into the technological innovation of small and medium technology-type enterprises and encourage them to make innovation independently.

6. Innovate the mechanism for managing financial input into science and technology. Set up a coordinated and highly-efficient management platform should be set up for laying out scientific research bases, the building of capable personnel, the formulation of government science and technology plans and the improvement in the conditions for scientific research. Optimize the distribution of resources to maximize the benefits of the financial input into science and technology. Reform and strengthen the management of funds for scientific research and establish a strict and standardized supervision and management system for the entire process of the application, examination, assessment, putting on record, implementation and obtaining results of the tasks and funds of scientific research. Establish a system for assessing the performance and effectiveness in using financial funds for science and technology, clearly define the targets of performance and effectiveness in formulating government science and technology plans and in projects for the application of science and technology, and establish a mechanism for tracking the effectiveness and results.

II. Taxation incentive

7. Increase the pre-tax credit for the income tax of enterprises for their input into making innovation independently. Allow enterprises to offset 150 per cent of their income tax they should pay for the relevant year according to the actual expenses on technological development of the same year. If the income tax of that year is not sufficient for offsetting the actual expenses on technological development, the remaining amount can be offset within five years according to the Tax Law. Expenses for the education of the staff and workers within 2.5 per cent of the total taxable wages retained by enterprises can be offset in the pre-tax enterprise income. Study and formulate a tax collection policy that promotes the integration of production, teaching and research.

8. Allow enterprises to have depreciation for instruments and equipment that speed up research and development. The instruments and equipment for research and development of enterprises whose unit price is under 300,000 yuan can be included into management expenses at one go or by instalments, and those whose unit price has reached the standards for fixed assets should be managed separately, but no depreciation should be retained; those whose unit price is over 300,000 yuan can follow the policy of appropriately shortening the fixed number of years for the depreciation of fixed assets or quickening the depreciation speed.

9. Improve tax collection policies that promote the development of high-tech enterprises. Promote the reform of levying value-added tax on high-tech enterprises. After strict confirmation, newly set up high-tech enterprises within a national high-tech industrial development zone are exempted from paying income tax for two years beginning from the year in which profits are made, and pay income tax with a 15 per cent reduction after the two years. Continue to improve the tax collection policy for encouraging the export of high-tech products. Improve the policy of giving credit to the pre-income tax taxable wages of high-tech enterprises.

10. Support enterprises in their efforts to strengthen the building of their ability to make innovation independently. Enterprise technological centres, national engineering (technological research) centres, and other centres that meet the requirements of state regulations are exempted from import tariff and value-added tax of the import link in importing articles for scientific research and technological development that fall within the stipulated scope of import. Enterprises undertaking important state science and technology projects, key projects in national science and technology plans, important national projects for the research and development of technology and equipment, and important projects for introducing technology and digesting, absorbing and re-innovating such technology are exempted from import tariff and value-added tax of the import link in importing crucial equipment, raw materials, parts and components that are not produced domestically.

11. Improve tax collection policies that promote the development of scientific research institutes that have changed their system. Scientific research institutes that have partially or wholly run like an enterprise are exempted from enterprise income tax and the urban land use tax on land and housing for scientific research development. After the expiration of the policy for real estate tax, it should be improved according to actual needs so as to strengthen the ability of these institutions to make innovation independently.

12. Support the development of enterprises that make risk investment in doing pioneering work. Enterprises that mainly make risk investment in doing pioneering work in small and medium high-tech enterprises are exempted or partly exempted from investment income tax, or the amount of such investment is deducted according to a certain percentage from their taxable income. This and other preferential tax collection policies should be implemented.

13. Support science and technology intermediary service institutions. Science and technology enterprise hatchers and national university science and technology parks that meet relevant requirements are exempted from business tax, income tax, real estate tax and urban land use tax within a time limit beginning from the date of confirmation. Study and formulate necessary supportive policies for other science and technology intermediary institutions that provide technological advisory and technological services and meet relevant requirements.

14. Encourage the society to donate funds for doing pioneering work. The donation of money by enterprises, establishments, social organizations and individuals to funds for technological innovation of small and medium enterprises of the science and technology type and other funds for encouraging enterprises to make innovation independently that have been set up with the approval of the State Council through social organizations for public good and state organs is donation for public good. Such donation can be reduced from the payment of enterprise income tax and individual income tax.

III. Financial support

15. Strengthen financial support for policy considerations to making innovation independently. Financial institutions for serving policies should grant loans to and focus their support on the scale fundraising for important and special national science and technology projects and important national projects of science and technology industrialization, projects for the transformation of science and technology achievements, high-tech industrialization projects, projects of introducing technology for digestion and absorption, and projects of the export of high-tech products.

The China Development Bank should grant soft loans for high-tech enterprises within the scope of soft loans approved by the State Council for equity participation investment in projects. The China Import and Export Bank sets special fundraising accounts for providing fundraising support to the import and export of core technology and crucial equipment needed for the development of high-tech enterprises. The Agricultural Development Bank of China implements a tilted support policy for the application and industrialization of agricultural science and technology achievements.

16. Guide commercial financial institutions to support making innovation independently. The government should use funds, interest discounts, guarantees and other means to guide various kinds of commercial financial institutions to support making innovation independently and industrialization. Commercial banks should actively give credit support to national and provincial high-tech projects according to national investment policies and credit policies. Commercial banks should make prioritized arrangements for granting loans for the working funds needed by enterprises that are making profits and have the ability to repay loans in exporting independently innovated new products and should focus their efforts on supporting them. They should also provide for enterprises with good credit standing that export independently innovated new products various kinds of financial services in good time according to the requirements in the management of credit and settling accounts and within a certain accredited amount set for them.

17. Improve the financial services for science and technology innovation made by small and medium enterprises. Commercial banks should establish stable bank-enterprise relationship with high-tech-type small and medium enterprises and focus efforts on supporting those that are full of vigour in making innovation. Quicken the building of a credit-rating system for enterprises and individuals and promote the development of various kinds of credit-rating institutions so as to provide support for commercial banks in improving their financial services for high-tech-type small and medium enterprises.

The government should guide and encourage social funds to establish delcredere institutions for small and medium enterprises and mechanisms of guarantor institutions for replenishing capital in cash and sharing risks at various levels. Explore various ways of guarantee so as to make up for the shortage of things to be mortgaged of small and medium enterprises. Banks set up for policy considerations, commercial banks and other financial institutions should make experiments on doing business of mortgaging intellectual property rights (IPR) at selected points.

18. Speed up the development of undertakings to make risk investment in pioneering work. Formulate supportive regulations for implementing the "Provisional Procedures for the Management of Pioneering Work Investment Enterprises" and improve the legal system for guaranteeing risk investment in pioneering work. Pioneering work risk investment enterprises should be put on record and managed according to law to promote their healthy development according to standards. Encourage departments concerned and local governments to set up funds to guide pioneering work risk investment, guide social funds to flow towards pioneering work risk investment enterprises, and guide pioneering work risk investment enterprises to make investment in pioneering enterprises in their germinating and starting period. On the premise of being permitted by laws and regulations and relevant supervision and management regulations, give support to insurance companies in their efforts to make investment in pioneering work risk investment enterprises. On the premise of conforming with laws and regulations and relevant supervision and management regulations, allow securities companies to do business of making pioneering work risk investment. Allow pioneering work risk investment enterprises to increase their investment ability through creditor fundraising within the scope stipulated by laws and regulations.

Improve the foreign exchange control system for pioneering work risk investment, standardize the foreign exchange control over pioneering work risk investment enterprises under the legal person system, and clearly define the foreign exchange control over foreign-funded pioneering work risk investment enterprises not under the legal person system.

19. Establish a multilevel capital market to support making innovation independently. Support the listing of high-tech enterprises that meet necessary requirements on the main domestic board and the small and medium enterprise board. Make great efforts to promote innovation in the small and medium enterprise board system, shorten the listing coaching period, simplify the verification procedures, and speed up the process of science-and-technology-type small and medium enterprises. The growth enterprise board should be put into operation at an appropriate time.

Promote the transfer of the shares of high-tech enterprises. Start experiments at selected points on the transfer of the shares of high-tech enterprises in the Zhongguancun Science and Technology Park that are not yet listed in the system of agencies of securities companies. On the basis of summing up the experiments at selected points, gradually allow the shares of high-tech enterprises that meet relevant requirements, but are not yet listed, in national high-tech industrial development zones to be transferred in the system of agencies. In localities that meet relevant requirements, the local government should, by means of financial support and other means, support the development of a regional property rights business market and widen the channels for the withdrawal of pioneering work risk investment. Support high-tech enterprises that meet relevant requirements in their efforts to issue company bonds.

20. Support providing insurance services for high-tech enterprises. Support insurance companies in their efforts to develop enterprise property insurance, product responsibility insurance, export credit insurance, business termination insurance and other kinds of insurance to serve high-tech enterprises.

21. Improve the policy for controlling the foreign exchange of high-tech enterprises. The State Administration of Foreign Exchange should fully meet the needs of foreign exchange for goods trade and service trade of high-tech enterprises according to their actual needs. Deepen the reform of the control over foreign exchange in making investment outside the boundary and support domestic enterprises in their efforts to set up overseas research, development and design institutions and to purchase and annex research and development institutions or high-tech enterprises abroad.

IV. Government purchase

22. Establish the system of using financial funds to purchase independently innovated new products.

Establish a system for the confirmation of independently innovated new products and establish a system for the confirmation of standards and assessments. Science and technology departments should work together with departments in charge of comprehensive economic management to confirm independently innovated new products according to open and fair procedures and make public the confirmation. Financial departments should work together with relevant departments to determine a catalogue (hereinafter called the catalogue) of independently innovated new products to be purchased by the government within the scope of confirmed independently innovated new products and carry out dynamic state management.

Strengthen budgetary control and make prioritized arrangements for projects to make innovation independently. Government departments at all levels, establishments and mass organizations (hereinafter called the purchaser) that use financial funds for purchase must give priority to the purchase of products listed on the product catalogue. In making the annual department budget, the purchaser should clearly label independently innovated new products. In the process of examining and approving a budget, financial departments should give priority to making arrangements for the budget for purchasing independently innovated new products if the purchase spending item has been determined. Give play to the supervisory role of financial, auditing and supervision departments and supervise and urge the purchaser to consciously purchase independently innovated new products.

Relevant departments should regard the commitment on purchasing independently innovated new products as a condition for the application and putting on record of launching major national construction projects and projects that use financial funds to purchase important equipment and products and the specific requirements for purchasing independently innovated new products should also be clearly stated. In key projects with the investment of the state and local government, the percentage of purchasing domestic equipment usually should not be less that 60 per cent of the total value. Financial departments should not provide funds if independently innovated new products are not purchased as required.

23. Improve the ways of assessing and examining government purchases and give priority to the purchase of independently innovated new products. Considerations should be given to the factor of making innovation independently in the ways of assessing and examining government purchases. In assessing the bidding of projects that take price as the dominant factor, give priority to units that purchase independently innovated new products if the requirements of the purchase are satisfied. If the prices of independently innovated new products are higher than ordinary products, certain price credit should be given to independently innovated new products according to their science and technology contents, the intensity of market competition, and other factors. If the quotations of enterprises for independently innovated new products are not higher by a certain percentage than those for ordinary products by enterprises at the top of the list, priority should be given to the former in obtaining the purchase contract. In assessing the bidding for projects with comprehensive assessment as the dominant factor, the assessment factor of making innovation independently should be added and percentage of points should be rationally set.

The purchase of service projects that has been confirmed to have a high content of independently innovated technology, but whose technical standards and prices cannot be determined easily can be made through competitive talks with the approval of financial departments and the contract should be given to enterprises with the ability to make innovation independently.

Improve the management of government contracts for the purchase of independently innovated new products. Financial departments should order units that refuse to accept or provide independently innovated new products as stipulated in contracts to make correction and should not pay for the purchase if they fail to do so.

24. Establish a system of the government being the first to order and purchase independently innovated new products. The government should be the first to buy products on trial production or products marketed for the first time developed and produced by domestic enterprises or scientific research institutes that meet the needs of national economic development and in keeping with the direction of the development of advanced technology, have relatively great market potential, and need to be supported with concentrated efforts after they have been confirmed as such. They can be directly purchased by the purchaser or purchased with government funds.

Regarding important innovated products or technology that need to be researched and developed, the government should invite tenders to determine the signing of government purchase contracts with research and development institutes in the society and should establish corresponding mechanisms for research, development, testing, acceptance and product promotion.

25. Establish a system for the confirmation of domestic goods and a system for the examination and verification on the purchase of foreign products. The purchaser should give priority to domestic products in its purchase according to the Government Procurement Law of the People's Republic of China. The Ministry of Finance should work together with relevant departments to formulate the standards for the confirmation of domestic goods. If a purchaser cannot get the products it needs within China's territory or cannot get them under reasonable commercial conditions (excluding products to be used outside the Chinese territory), it should obtain a written confirmation by an authoritative state confirmation institution before starting its purchase activities. In purchasing foreign products, the principle of being conducive to making innovation independently by enterprises or to digesting and absorbing core technology should be adhered to and priority should be given to purchasing products whose production technology is also transferred.

26. Give play to the role of national defence purchase in supporting making innovation independently. National defence purchase should be based on independently innovated domestic products and technology. Priority should be given to the purchase of independently innovated domestic products and technology that meet the requirements of national defence and national security. In purchasing items involving national security, government departments should first purchase independently innovated domestic products and priority should be given to enterprises or research institutes that have the ability to make innovation independently in awarding purchase contracts.

V. Introduction, digestion, absorption and re-innovation

27. Strengthen the management of the introduction, digestion, absorption and re-innovation of technology. Plans for the introduction, digestion, absorption and re-innovation of technology should be made by the owners of the projects together with the manufacturing enterprises for the import of important technology and equipment really needed by key projects approved by relevant state departments and local governments or launched with government investment to be regarded as an important part of the projects to be examined and approved. These plans should be implemented after they are submitted to relevant competent state departments and are examined and approved (verified and approved).

Strengthen consultation and assessment on the introduction of technology. Plans for the introduction, digestion, absorption and re-innovation of important technology and equipment should be demonstrated, expounded and proved at an expert committee jointly organized by relevant departments to clearly define the planning, objective and progress of digestion, absorption and re-innovation. Whether or not the digestion and absorption will form ability to make innovation independently should be regarded as the important content for the assessment and acceptance of the introduced project.

28. Encourage the introduction of foreign advanced technology and regularly readjust the catalogue of technology encouraged to be introduced.

The state encourages inviting tenders in a unified manner for the introduction of important equipment that is not yet provided domestically and is needed by many enterprises and guides foreign businessmen to join hands with domestic enterprises to submit tender. While importing equipment, advanced design and manufacturing technology should also be introduced and domestic enterprises should be supported to participate as much as possible in subcontracting and realizing local manufacturing.

29. Restrict blind and duplicate introduction. Regularly readjust the catalogue of technology whose import is banned or restricted. The import of crucial technology which we already have the ability to research and develop should be restricted; the import of high-consumption, high-pollution and backward and obsolete equipment should be banned or restricted.

30. Give support by means of policy to enterprises that carry out digestion, absorption and re-innovation of technology. Advanced equipment and products developed through digestion, absorption and re-innovation should be included into the scope of prioritized government purchases. The state should make prioritized arrangements for key national projects that order or use the first set of domestically produced important equipment. Establish an important equipment insurance mechanism for project owners, equipment manufacturers and insurance companies to share risks and interests, and guide project owners and equipment manufacturers to take out a policy for the first set of domestically produced important equipment.

31. Support production enterprises, schools and research institutes to jointly carry out digestion, absorption and re-innovation of technology. In introducing important equipment, the user unit should invite manufacturing enterprises, institutions of higher learning and scientific research institutes to participate in the work, jointly follow the track of the international development of advanced technology, and on the basis of digestion and absorption, jointly conduct activities of making innovation independently. In the construction of the science and technology infrastructure of the country, prioritized support should be given to technological platforms in key industries jointly built by production enterprises, schools and research institutes and new tasks of undertaking the introduction, digestion, absorption and re-innovation of important technology.

32. Implement policies that promote the manufacturing of equipment and the development of technology independently. State equipment and technology policies targeting key development areas of the national economy and society as well as key projects should be formulated by departments in charge of comprehensive economic management with the participation of user departments and manufacturing departments to actively push forward the manufacturing of important equipment independently. Important equipment and technology used in state and local key construction projects should conform with these policies.

VI. Create and protect IPR

33. Grasp the independent IPR of crucial technology and important products. State science and technology departments, departments in charge of comprehensive economic management, and other relevant departments should, according to the characteristics of different industries and fields, jointly compile and regularly publish a catalogue of the independent IPR of crucial technology and important products that should be grasped. National science and technology plans and construction investment should provide key support to the research and production of the technology and products listed in the catalogue. Give support to enterprises that develop the technology and products listed in the catalogue in the application for a patent, the formulation of standards, and international trade and cooperation to develop a number of enterprises with advantages, independent IPR, renowned brand names and relatively great international competitiveness.

State science and technology departments should work together with IPR management departments to establish an IPR information and service platform to support and carry out IPR information processing and strategic analysis and to provide IPR information service for the creation of independent IPR and widening the market for IPR.

34. Actively participate in the formulation of international standards and promote the formation of technological standards taking ourselves as the dominant factor. National science and technology plans should support the research on important technological standards, guide production enterprises, schools and research institutes to jointly develop technological standards, and promote the integration of standards with scientific research, development, design and manufacturing. Competent government departments should strengthen coordination and guidance to industrial associations in the formulation of important technological standards, support enterprises and organizations in their efforts to independently formulate, or to participate in the formulation of, international technological standards, and encourage and promote turning the technological standards of our country into international standards. The state should establish a platform to service standards, support and speed up the transformation of advanced foreign standards into domestic standards, and give key support to enterprises that promote the formation of technological standards with ourselves as the dominant factor through re-innovation.

35. Earnest protect IPR. Establish and improve an IPR protection system, make greater efforts to enforce laws to protect IPR, and develop an atmosphere of the rule of law of respecting and protecting IPR. Scientific research institutes, institutions of higher learning and relevant government departments should strengthen forces engaged in the protection and management of IPR. National science and technology plans and various kinds of innovation funds should appropriately subsidize relevant spending of projects being supported to obtain independent IPR abroad according to regulations upon approval. Earnestly protect the IPR and interests of science and technology personnel. Units that have made technological achievements on post should remunerate according to law people who have made the achievement and those who have made outstanding contribution to the transformation of science and technology achievements. Protect according to law the legitimate rights and interests of people who have made invention achievements not on post.

Establish a mechanism specially for the examination of IPR in important economic activities. Relevant departments should organize and establish a special committee to supervise or investigate the merger, purchase, technology exports and other activities of enterprises that have important independent IPR that involves national interests to avoid losing independent IPR and undermining national security. Besides, attention should also be paid to preventing the abuse of IPR to restrain innovation.

36. Shorten the time for the examination of invention patents. Reform the ways to examine invention patents, improve the efficiency in the substantive examination of patents, and shorten the time for examination. With regard to achievements of independently made innovation that produce an important impact on the development of science, technology, economy and society of the country or have international competitiveness, give play to the positive role of the patent system to protect national interests according to law.

37. Strengthen the building of a system for technological trade measures. Speed up the establishment of our country's system for technological trade measures that conforms with current international practice. Relevant government departments should establish and improve a mechanism for circulating notices on technological trade measures and coordinating such measures, a mechanism for speedy reaction, and a research and assessment system for technological trade measures. Government departments, industrial associations, localities and enterprises should jointly establish an overseas technological trade measures early warning mechanism, including early technological warning, follow closely changes in technological laws and regulations, standards, the procedures for qualification assessment, and the requirements of inspection and quarantine in countries targeted for the export of our country's products, and carry out real time monitoring and give real time early warning against possible technological trade measures encountered in export.

VII. The contingent of capable personnel

38. Speed up the training of a number of high-level capable personnel for making innovation. Implement the national project for training high-level capable personnel to make innovation. In basic research, high-tech research, research for public good, and several other strategic science and technology areas that have a bearing on the competitiveness and security of the country, make efforts to train a number of high-level science leaders capable of making innovation in various branches of learning, and form a team and a community of outstanding capable personnel for making innovation with Chinese characteristics. Eliminate the phenomenon of giving priority only to seniority, improve and perfect the academic exchange system, improve the mechanism for confirmation in the same industry, and enable young and middle-aged excellent science and technology personnel to show themselves.

39. Strengthen the training of capable personnel for innovation in connection with the implementation of important projects. In formulating plans for training capable personnel and implementing important national projects and important science and technology plans, attach importance to properly doing a good job in the training of capable personnel for innovation. In the examination, assessment and acceptance of projects in national science and technology plans, the examination and assessment of key national laboratories, and the assessment of the comprehensive performance in the building of scientific research bases, the training of capable personnel for innovation should be regarded as an important index of examination and assessment.

40. Support enterprises in their efforts to train and attract capable personnel for innovation. Improve and perfect the enterprise distribution and encouragement mechanism, support enterprises in their efforts to attract science and technology capable personnel, and allow state-owned high-tech enterprises to implement options and other incentive policies for core technological personnel and core management personnel. Set up in institutions of higher learning and scientific research institutes posts of guest researchers for capable personnel for innovation from enterprises and select and employ high-level experts from enterprises to be part-time professors or researchers. Formulate and standardize procedures for science and technology capable personnel to take up part-time jobs and guide and standardize the ways for science and technology capable personnel of institutions of higher learning or scientific research institutes to take up part-time jobs in enterprises. Support enterprises in their efforts to set up practice and training bases for the students of institutions of higher learning and vocational colleges and institutes. Promote the post-doctoral scientific research in enterprises and attract outstanding doctors to engage themselves in science and technology innovation in enterprises. The recruitment of graduates from institutions of higher learning and the attraction of outstanding personnel should not be restricted by household registration. Formulate corresponding policies to support the training and use of capable personnel for innovation in the war industry and at special posts.

Clearly define the duty of the people responsible for state-owned enterprises in leading innovation independently made by enterprises. The input into technological innovation and the building of the ability to make innovation of enterprises should be regarded as an important part of the appraisal of the performance of people responsible for state-owned enterprises.

41. Support the training of rural practical science and technology capable personnel. Science and technology personnel who provide services for technological innovation in the rural areas and poverty-stricken areas should be supported by means of policies. Make full use of radio, television, networks and other long-distance educational resources to raise the level of the broad masses of peasants in using practical and advanced agricultural technology and to raise their vocational skills.

42. Actively introduce overseas outstanding personnel. Formulate and implement plans for attracting outstanding personnel studying abroad and overseas science and technology personnel to return to the country (to come to China) to work and serve the country. In connection with the national strategy of making innovation independently, important special science and technology projects, and key innovation projects, introduce outstanding overseas capable personnel through the introduction of capable personnel teams, introduction spurred on by core capable personnel, and other ways. The return of overseas high-level capable personnel studying abroad to the country to work should not be restricted by the establishment of the units using them, the quotas for increasing personnel, the gross amount of wages and their household registration before they went abroad. The requirements for outstanding foreign science and technological capable personal in their application for a work permit in China and for permanent residence in China can be appropriately relaxed and they can apply for a multiple entry visa as long as their residence documents are valid. Formulate procedures to protect the legitimate rights and interests of foreign high-level capable personnel in China who have the status of permanent residence. Properly solve the problems of medical insurance, the employment of the spouses, the schooling of the children, and other problems of overseas outstanding personnel who have returned to the country (come to China) to work.

43. Reform and perfect the personal system of science and technology establishments. Reform the structure of the management of professional and technological personnel and promote, according to different categories, the reform of the system of professional and technological ranks and posts. Deepen the reform of the personnel system of scientific research establishments and comprehensively implement the system of employment under contract and the post management system. Science and technology establishments can independently set up innovation posts at various levels and independently employ personnel under contract. They can implement a system that integrates fixed posts with mobile posts and integrates the use of personnel with tasks and projects. With the exception of posts involving secrets, they can implement the system of open employment under contract of domestic and foreign personnel for crucial posts and scientific research projects. Science and technology institutions can implement a personnel agency system for new recruits. Encourage science and technology units and their working personnel to join social insurance, actively promote the reform of the old age insurance system of establishments, and improve the procedures for the continuation of the social insurance relationship of science and technology personnel who flow to enterprises. According to the requirements of the wage reform of establishments, reform and standardize the wage and distribution system of scientific research units, establish an income distribution system with post wages and performance wages as the main contents, and forbid the distribution of funds for national scientific research projects in violation of regulations.

44. Establish an appraisal and award system that is conducive to encouraging capable personnel to make innovation independently. Establish a pluralistic checking and appraisal system that conforms with the laws governing science and technology personnel, carry out management according to different categories of personnel for scientific research, scientific research management, technological support and administrative management, establish a system for appraising different types of capable personnel in different areas, and clearly define the indexes and essential factors of appraisal. Reform and perfect the state science and technology award system, establish a science and technology award system with government awards as guidance and social awards and awards by the employing units as the main body that encourages making innovation independently, and regard the discovery, training and pooling of science and technology capable personnel, especially top capable personnel, as the main contents of state science and technology awards. Establish and perfect a science and technology credit system, supervise the credit of personnel undertaking projects in national science and technology plans and relevant management personnel and institutions, and strengthen the code of conduct and promote the building of the style of study.

VIII. Education and the popularization of science

45. Give full play to the important role of institutions of higher learning in making innovation independently. Deepen the reform of tertiary education, readjust the structure of tertiary education, and strengthen the building of key branches of learning. Meet the needs on our own initiative of various kinds of capable personnel in specialized fields for economic and social development, optimize the layout of different branches of learning, promote the dovetailing of different branches of learning and firmly grasp the training of capable personnel that are badly needed. Promote in a down-to-earth manner the building of high-level universities, increase the ability to make innovation and to serve the society of institutions of higher learning, and build several first-rate universities and a number of high-level research-type universities of the world. Innovate the mechanism for training postgraduate students and focus efforts on developing their spirit of making innovation and their ability to practice. Persistently integrate production, teaching and research and encourage and support institutions of higher learning to establish close cooperation with enterprises and research institutes through various channels and in various forms to jointly train capable personnel for innovation and conduct innovation activities. Increase the number of postgraduates sent to study abroad, improve the procedures for selection, and carry out international cooperation at a higher level to train science and technology capable personnel and high-level capable personnel.

46. Make great efforts to develop and reform vocational education. Speed up the training of badly needed capable personnel with technical skills and the training of mobile rural laborers. Earnestly increase the ability to strengthen the foundation of vocational education, expand the scale of running schools for secondary vocational education, improve the quality in running colleges of tertiary vocational education, and make great efforts to promote the mode of training capable personnel of the integration of work and study and the cooperation between schools and enterprises.

47. Comprehensively promote quality-oriented education. Make great efforts to promote the reform of the basic education curriculum and teaching reform, and strengthen and improve the education on ethnics, intelligence, physique and aesthetics so that teenagers can develop lively and on their own initiative. Make great efforts to advocate the elucidation method of teaching, and emphasize training the students' ability to work with their own h