Weakest Link?

On summer nights along Nanjing Road, Shanghai's classy shopping street, Chinese yuppies strut in Italian leather jackets and designer jeans. But the hip young consumers show off Chinese-made mobile phones, shirts and even cars. Once known only for cheap goods, China and other emerging powers like India are now competing with America in making high-end products. Indian drug companies are becoming global giants, while China's carmakers are preparing to export.

Is the U.S. actually losing its competitive edge? Some signs suggest fear is justified. A recent report by the National Academy of Sciences, ominously titled "Rising Above the Gathering Storm," warns that America is falling behind in science and technology. It suggests that the U.S. has become an importer--not an exporter--of high-tech goods and hasn't dramatically boosted funding for science research in decades, while nations from France to Singapore have. Meanwhile, a lack of government investment in the internet means the U.S. has plummeted to 15th in world rankings of broadband net penetration.

The alarmist reports spurred Congress to act. It passed the America Competes Act last summer to support new science research and education, and President Bush quickly signed the legislation. Said Rep. Bart Gordon (D-TN), one of the legislation's advocates, "I'm concerned that the next generation of Americans may be the first generation to inherit a national standard of living [that's worse] than their parents'. This bill will help turn that corner."

In addition, a recent study by the Ewing Marion Kauffman Foundation noted that the shortfall of U.S. resident visas means America is turning away thousands of skilled immigrants--just the type of people who develop new products, start new companies and make the country competitive. The Kauffman Foundation found that immigrants started 1 in 4 engineering and tech companies in America from 1995 to 2005. Meanwhile, new regulations like Sarbanes-Oxley and confusing patent laws riddled with red tape have fallen hard on small companies, making it more difficult to compete with foreign firms. One study showed that small companies spend 42 times more, as a percentage of their revenue, on complying with Sarbanes-Oxley than larger companies. American competitors like Canada and the European Union boast streamlined patent regimes that benefit small companies. Yet the Council on Competitiveness, a group that evaluates America's business environment, believes small companies "are increasingly important drivers of innovation, an area traditionally dominated by large companies." If patents remain tough to get, these small firms will eventually move abroad.

But these fearful reports and media headlines don't capture the whole picture: In the World Economic Forum's latest Global Competitiveness Report, the U.S. placed first. U.S. universities continue to dominate: In the latest ranking of world universities compiled by Shanghai Jiao Tong University, American schools took eight of the top 10 spots. And though China and India produce many engineers, they struggle to match U.S. quality. As commentator Gerald Bracey said in a study of China's production of engineers, many of the supposedly 600,000 or so engineering graduates China produces each year are actually technicians--the equivalent of graduates of American vocational schools. Another study by Duke University, which looked at how much training these engineers actually got, showed that the U.S. produced more skilled engineers per capita than either India or China.

Even better, America's on top in other areas critical to entrepreneurs. It supports a far more diverse range of entrepreneurs than other nations, including women and minorities. It's far easier, in terms of days and dollars spent, to start a business in the U.S., partly because there are so many ways to raise small amounts of capital. So don't expect Nanjing Road to replace Fifth Avenue--or your local Main Street--just yet.