Chinese and Indian Entrepreneurs Are Eating America's Lunch

Watch out, Silicon Valley: China and India aren't just graduating bad engineers and stealing intellectual property anymore. They're fostering innovations that will shake the world.

Earlier this month, Americans woke up to the bad news that their education system was just "average" in the developed world. Worse news, however, was that Shanghai, China took the top spot. For a country already in a declinist mood, this was a blow. Perhaps not even U.S. President Barack Obama thought the future would arrive so quickly: As he told a group of educators at the White House earlier this year, the "nation that out-educates us today is going to out-compete us tomorrow." 

America is rightfully worried about its sinking competitiveness, and does indeed need to improve its education system. But it could win the battle and lose the war, because India's and China's successes aren't due to their education systems, but despite them. You've probably heard of Indian outsourcing hotspots like Bangalore and Chennai, but it's not just call centers and software sweatshops Americans now need to worry about: Technology entrepreneurship is booming all over in China and India, and is beginning to innovate; these startups will soon start competing with Silicon Valley. The next Google could well be cooked up in a garage in Guangzhou or Ahmedabad.

Indian and Chinese children are very much like their counterparts in the United States -- intelligent, open-minded, and motivated to change the world. They receive poor education on average, but many are able to rise above that. And the United States is giving an unintended boost to these countries by sending away highly educated skilled foreign workers.

India and China now graduate three to six times more engineers than does the United States. The quality of these engineers is, however, so poor that most are not fit to join the workforce; their system of rote learning handicaps those who do get jobs, so that it takes two to three years for them to achieve the same productivity as American graduates. As a result, significant proportions of China's engineering graduates end up working on factory floors; Indian industry has to spend large sums of money on retraining its employees, as my research team at Duke and Harvard learned.

Despite this, India has built a $73 billion-per-year information technology service business and has been offering IT services of steadily increasing sophistication. Its engineering R&D industry is now a $10 billion business -- a three-fold increase in four years. It develops sophisticated products for Western firms in the aerospace and automotive industries, and in telecommunications, semiconductors, consumer electronics, and medical devices. And most significantly, there are thousands of new startups that are building web technologies, clean-tech products like low-power lighting, and mobile applications.

China has built world-class universities and state-of-the-art research facilities. The numbers of papers its faculty members publish and patents its researchers file are increasing dramatically. But these numbers are deceptive, as the patents and papers are largely plagiarized or irrelevant. There is also practically no innovation coming from the state enterprises that dominate industry. The big change that has occurred in China, however, is the emergence of technology startups: thousands of them, just as in India.

The first generations of Indian startups focused on selling IT services, and the Chinese developed copycat web technologies such as Baidu, China's Google rival, and Sina, its Twitter clone. But they are going beyond that now. They are gaining the knowledge -- and developing the confidence -- to create innovative products, not only for domestic markets, but also for global ones.

How are India and China overcoming the problems in their education system?

In India, top private companies started learning from the best practices of the Western companies that outsourced their computer systems and call centers there. Their initial focus was on training new recruits and meeting shortages of entry-level skills. Then, Indian industry started investing in constantly improving the skills and the management abilities of its workers. It has effectively built its own surrogate education system, one that can take the workers coming from a weak education system and turn them into R&D specialists. One major Indian company, Infosys, has facilities to train 30,000 people at a time at its Mysore campus.

Now, many of these workers are leaving their high-paying tech-services jobs to start their own ventures. It's the same dynamic as in the United States, where entrepreneurs start their companies when they are, on average, 39 years old. They have 10 to 15 years of work experience and ideas for products that solve real customer problems; they have gotten tired of working for others; and they want to build wealth before they retire. And so it is in India. There are no hard estimates available on the number of Indian entrepreneurs starting companies, but at one recent conference devoted to start-up companies, there were 1,200 attendees -- up from less than 100 attendees at such events just 4 years ago. There are now start-up events in every major Indian city, with hundreds of people in attendance -- mostly from new companies.

China is getting a major boost from the return home of Western-educated, skilled workers. They are returning because of frustrations with U.S. visa policies that make it extremely difficult for skilled workers from high-population countries to obtain permanent-resident visas; because of opportunities back home; and because the Chinese government is offering huge incentives to engineers and scientists. These returnees are teaching locals how to build world-class companies and how to innovate. In almost every high-growth tech company in China, you find returnees in senior management positions. In scientific research, top research labs have returnees in lead positions. And these scientists are beginning to make breakthroughs.

What has held would-be Indian and Chinese entrepreneurs back has been the taboo associated with failure, and the low social esteem granted to startups. This is changing. Given the success of the first generation of technology startups, the youth have role models, and parents are becoming more accepting. Chinese and Indian youth are also much more ambitious and confident than their parents were. In addition, they are also connected to each other and to their counterparts in other parts of the world through social networks.

American children should prepare to face a lot of competition from their peers in Asia. They will need not only to improve their mathematics and science skills, but also to learn about global markets and cultures. They need to be ready for a much more competitive world; otherwise the Indians and Chinese are going to eat their lunch.



Will Facebook Friend China?

Mark Zuckerberg's meeting this week in Beijing with Baidu CEO Robin Li set off another round of speculation that the social-media giant may be coming to the Middle Kingdom.

On Dec. 20, Facebook founder Mark Zuckerberg -- who was recently named Time's 2010 "Person of the Year" -- stopped by the Beijing offices of Baidu, China's leading web-search company, to chat with co-founder Robin Li. The two men, both youthful, energetic, self-made billionaires, have much in common. In addition to Silicon Valley ties (after leaving Harvard University, the now 26-year-old Zuckerberg took his company to the Valley; and the 42-year-old Li studied in the United States and worked in the Valley before moving back to Beijing), they share an affection for no-frills attire (Li's bright-colored polo shirts and windbreakers are a notch fancier than Zuckerberg's storied brown hoodies), lofty spots on their country's respective most-wealthy lists (Li ranked second on Forbes's 2010 "China Rich List" and Zuckerberg was 35th on the American version), and planetary ambitions.

Whether or not any formal partnership was discussed -- Baidu spokesperson Kaiser Kuo declined to share details of the meeting with Bloomberg News -- one thing is certain: If Zuckerberg is seriously considering entering the Chinese market, which means learning to play by Beijing's rules, there is no better guide than Li.

Facebook is officially blocked in China, alongside other foreign-owned social-networking sites, including Twitter. That means that Facebook's 550 million users do not include any (or very few) of China's 420 million-and-counting Internet users. When a Facebook employee recently mapped social networks among the site's global users, China was rendered as an ominously dark space, among the last unconquered frontiers. But over the past year, there have been an increasing trickle of news stories that Facebook is eyeing the Middle Kingdom.

In October, Zuckerberg told an Internet forum at Stanford University that Facebook must "figure out the right partnerships we would need to succeed in China on our terms.... China has values that are somewhat different from the U.S.... I would spend a lot of time studying it."

Entering China would first mean bowing to Beijing's political requirements. (This spring, Google decided it was no longer willing to play ball, and so withdrew its search operations from mainland China.) No outsider can predict what Facebook's principled growth calculus might be, but it is possible to sketch out what Zuckerberg would have to stomach if China is indeed among his next targets.

Operating an Internet search or social-network company within mainland China requires blocking users' access to prohibited content originating outside China (e.g., information about the Dalai Lama); this is what's commonly known as the "Great Firewall." But it's only the first level of censorship. The second level involves collecting information about users and search patterns. The particular categories of information are dictated by the Chinese government, and all such information is subject to police inspection upon request. In other words, Internet companies in China must not only tolerate, but become active participants in, Beijing's censorship policies if they wish to remain in business.

Since launching Baidu in 2000, Li has accepted China's rules. As he told Bloomberg Television in August, "We have to spend a lot of resources to make sure our content and services abide by Chinese law." Li's reasoning is that it's better to toe the line than risk being shut down. For a company based in China, he sees just one option.

And Facebook? Restricting users' access to "sensitive" links would be a mammoth technical challenge. But more worrying, say Internet experts, is the second category of censorship: making available Chinese users' information to authorities.

In the course of its fast-paced global expansion -- 70 percent of Facebook users are now outside the United States -- Facebook has often drawn criticism for failing to recognize the consequences of entering new markets with political circumstances very different from those in the United States. Jillian York, project coordinator at Harvard's Berkman Center for Internet and Society, this year authored a report, "Policing Content in the Quasi-Public Sphere," that spotlights the ways that social-networking services, including Facebook, have been used by authoritarian regimes to track down political activists and identify other users in their online networks. (One example is the case of a 26-year-old Moroccan IT engineer who was  imprisoned for six weeks after creating a Facebook page mocking the king; questions as to how his personal information was obtained by the authorities remain unresolved.)

One of York's main findings is that Facebook in the past has rushed into new markets without fully understanding local circumstances, particularly how users might be put at risk. Her report pointed out that while Facebook is available today in more than 70 languages, its terms of service -- which describe what happens to personal information users provide -- were initially available in only five languages, all of them European. As York told me: "How can a user consent when he or she can't read the terms?" (The company has since told her it is working on further translations, though legal implications make the process slower than hoped.)

Columbia University law professor and author of The Master Switch Tim Wu framed the question like this in a article: "[W]hat will Facebook do when faced with such predicaments in trying to enter, or stay in, tricky overseas markets?... It's one thing giving Facebook access to your private information. It's something else entirely if governments then obtain access, too." For all the recent focus on privacy concerns within the United States, such questions carry potentially much higher stakes elsewhere. "How Facebook reacts to such scrutiny will give us a sense of the soul of this company," Wu writes, "more so than any recent movie ever could."

Perhaps the aim of Zuckerberg's meeting with Baidu's Li this week was to probe deeper. Few understand the paradoxes of the Chinese Internet better than Li -- or can better translate between the culture and expectations of Silicon Valley and those of Beijing. Li is also the author of the 1998 book, Business War in Silicon Valley, an account in Mandarin for Chinese entrepreneurs wanting to decipher Palo Alto and Menlo Park.

While in China, Zuckerberg also visited the offices of web portal and cell carrier China Mobile. But neither of those visits stirred nearly the same degree of speculation -- complete with grainy digital photos posted on myriad Chinese websites -- as Zuckerberg's sit-down with Li.

Most of the chatter has revolved around the question of what Li might teach Zuckerberg -- and whether, and how soon, Facebook could be coming to China. But it's also worth asking what know-how Zuckerberg might impart to Li. "I think that five to 10 years down the road," the Baidu founder told Wall Street Journal in August, "we'll have a very meaningful part of our revenue come from international expansion."

In other words, another common trait the two trailblazing founders share is the ambition of growing their businesses beyond their home countries and the high-stakes endeavor of weighing what rules to accept. In addition to wondering how Facebook might fare in China, it's not too soon to start asking what impact a China-based search engine will have operating outside the Great Firewall, for Chinese and global netizens alike.

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