Challengers to America's Science Crown

Countries from Israel to India are feeding their R&D capabilities with lavish resources so their economies can reap the resulting benefits

William Harris spent most of his career in the U.S. teaching chemistry or working at the National Science Foundation, where he was responsible for doling out $750 million a year in federal grants. But three years ago, Harris, now 59, moved to Ireland, the land of his forebears, to help turn it into a technology power.

He became director general of Science Foundation Ireland (SFI), which since its founding in 2000 has attracted dozens of internationally renowned scholars from the U.S., Britain, Germany, and Russia. The newcomers get labs, promises of fast response to requests for assistance, and, most important, money for research into cutting-edge areas such as nanotechnology. SFI has $1 billion to play with -- an enormous resource for a country of just 4 million people.


  The intent is to emulate America's success as a worldwide technology leader -- a transformation that not just Ireland but China, South Korea, India, and Israel, among others, intend to replicate. As these countries make their run for glory, they could eat into America's dominance, experts say. "The U.S. has more aggressive competition than it has had in the past decade or so," notes Erich Bloch, a principal at Washington Advisory Group, management consultancy in Washington, D.C.

Already, the European Union has outstripped the U.S. in the number of scientific papers it publishes in major journals every year. That's a key barometer of a region's reputation in the scientific world, says R.D. Shelton, president of technology assessment for the nonprofit World Technology Evaluation Center in Baltimore. And the international pressure will only grow as other governments support their domestic companies with ambitions in telecommunications, semiconductors, and nanotechnology, among other initiatives.

Many of these countries already have high-tech cultures from which to launch such efforts. Thanks in part to $60 billion in government loans to Internet service providers, South Korea boasts the widest usage of DSL (digital subscriber line) Net access in the world, with 30% of its 48 million citizens now connected via broadband.


  As a result, businesses around the world see Korea as an ideal lab for testing broadband products. "You can get a glimpse of the future," says Mark Healey, portfolio manager of the Matthews Korea Fund (MAKOX ). On Mar. 8, the world's largest chipmaker, Intel (INTC ), opened its Intel Korea research center in Seoul, which focuses on developing wireless technologies for Intel's version of the digital home -- one in which all electronics devices share information via broadband Net connections.

Finland offers another ideal setting for testing -- in its case, for mobile devices. That's because it has the most cell phones per capita in the world, while the U.S. lags behind. Finnish cell-phone maker Nokia (NOK ), which emerged as a major driver for growth after the Soviet Union's breakup crippled Finland's economy, is the No. 1 maker of mobile-phone handsets in the world. Partly as a result, the country's economy is growing by 3% a year, and unemployment is down to 8%, from 20% as recently as the early 1990s.

Other countries are starting to capitalize on the highly educated segments of their workforces to catch up with America. India's universities have long churned out some of the best engineers in the world -- many of whom have left home to pursue the American Dream. About 50% of the surviving startups in Silicon Valley have at least one Indian co-founder, says Ramesh Emani, president of the product-engineering division at technology-outsourcing concern Wipro (WIT ) in Bangalore.


  As technology outsourcing has become a growing industry in India, however, local entrepreneurs have realized that they can perhaps do better by staying home, Emani says. Indeed, India reaped $1.2 billion in research-and-development-related outsourcing revenues last year, according to India's National Association of Software & Service Companies.

The Indian government's tax policies are designed to stimulate this trend. Most profits from software exports will be tax-free through 2010 -- a huge help to businesses such as Wipro, whose net income in the third quarter of 2003, ended Dec. 31, rose 22%, to $58 million, on a 44% increase sales, to $343 million, vs. the same period the previous year.

China, by contrast, uses financial penalties rather than incentives to attract tech work: It imposes a 17% value-added tax (VAT) on imported semiconductors vs. 3% on locally produced chips. That's a practice common in emerging markets -- and over time will likely prompt Korean electronics and semiconductor powerhouse Samsung to move its memory-packaging operations to those markets, says Tom Quinn, vice-president for marketing at Samsung North America.


  China is also trying to pressure other countries to follow its technological standards and partner with local manufacturers. Starting June 1, it will mandate the use of its own security standards for Wi-Fi, which lets users of laptops and personal digital assistants (PDAs) connect to the Web wirelessly at high speeds. What's more, outfits that want to sell Wi-Fi equipment in China will have to establish co-production partnerships with one of 24 government-approved Chinese manufacturers (see BW Online, 3/15/04, "China's Wi-Fi Wrangle").

Such decisions are raising hackles in the U.S. "This discourages companies from importing technology into China," declares Doug Andrey, principal industry analyst for the Semiconductor Industry Assn. in San Jose, Calif. On Mar. 9, Intel announced that it might boycott the Chinese Wi-Fi market. But considering that China is the world's fastest-growing market for semiconductors, that isn't a step to be taken lightly.

So, as in the past, many Western companies will comply with the new directive. Networking concern 3Com (COMS ) has already formed a joint venture with China's Huawei, a government-approved supplier that now distributes 3Com's switches and routers in Japan and China.


  Finally, some countries are trying to cash in on types of research that the U.S. doesn't fund. Unlike Washington, Israel, South Korea, China, and many other countries allow for government funding of research into embryonic stem cells, which potentially can be used to treat diseases like cancer and recreate perhaps entire organs. In February, South Korean scientists announced that they had harvested stem cells from a cloned embryo, something U.S. researchers have yet to achieve.

Israel is also becoming a leader in stem-cell research. Gamida-Cell, an Israeli startup that's partly funded by the government, hopes to release by 2006 a stem-cell therapy called StemEx for treating leukemia and lymphoma, says Ehud Marom, its CEO. While the success of Israel's stem-cell push won't be apparent for years, the country's other government-focused efforts -- most notably in information security -- have born rich fruit.

Israel-headquartered Check Point Software Technologies (CHKP ) holds 48% of the firewall and VPN (virtual private network) market, according to IDC. And the country's high-tech exports have tripled in the past decade as it has transferred discoveries from its defense research -- particularly in communications and security -- into the civilian sector, says Dan Gilat, CEO of Tel Aviv-based fund Alon Technology Ventures, which invests in local startups.


  The U.S. will benefit from many of these discoveries by virtue of its position as the world's largest market for drugs and other health-care products. Israel's Proneuron, which is developing treatments for spinal injuries, is conducting the bulk of its second set of trials in the U.S. to satisfy the Food & Drug Administration. Its Phase One research, conducted mainly in Israel, has drawn attention from the likes of paralyzed actor Christopher Reeves.

America also buys more info-tech gear than any other country in the world, says IDC analyst Stephen Milton. That means that the best equipment invented and developed in other countries will still make its way to America. And some of it will be developed abroad by units of U.S. companies -- more than half of research and development in India is done by such subsidiaries.

Indeed, many U.S. businesses say it makes more and more sense to do research globally since they serve global markets. Sharp's development of LCD (liquid crystal display) production technologies is happening simultaneously in Japan, Europe, and the U.S. -- so it can benefit from the different approaches and backgrounds of researchers in each market, says Gary Feather, director of Sharp Labs of America in Camas, Wash.

Nonetheless, using the best technology isn't always the same as developing it -- and making money on it. So the U.S. has to watch out: Other countries are boosting their technology efforts and catching up -- fast.

By Olga Kharif in Portland, Ore.

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