Here is Laura W. Geller’s interview of Adam Segal from the “True Tales of Fortune” series featured by strategy+business magazine, published by Booz & Company.

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Council on Foreign Relations fellow Adam Segal decodes the rise of innovation in China and India — and what it really means for the United States.

In recent years, the threat of competition from Asia has defined the way U.S. business leaders and policymakers think about innovation, as headlines warn of China’s and India’s emerging economic power. But in Advantage: How American Innovation Can Overcome the Asian Challenge (W.W. Norton, 2011), Adam Segal, a longtime observer of technology development in Asia, argues that this threat has been overblown.

Segal, the Ira A. Lipman Senior Fellow for Counterterrorism and National Security Studies at the Council on Foreign Relations, acknowledges that China, in particular, has invested large sums in R&D and is positioned to eventually outspend the United States. But focusing only on such metrics as how much is being spent and how many engineers are being trained, he says, is a mistake. The U.S., with a culture and institutions that encourage individual initiative, risk taking, and collaboration, is uniquely positioned to lead in innovation. He argues that the rise of Asia is more of an opportunity than a threat, even for countries that may see themselves in competition with China and India. Indeed, the distinction Segal makes between innovation “hardware” (engineering and technology) and innovation “software” (institutions and ideas) is relevant for R&D leaders anywhere in the world. Segal spoke with strategy+business in February, shortly after President Obama’s State of the Union address, which put U.S. innovation in the spotlight.

S+B: We know that China has been investing heavily in innovation, but what else should we be thinking about when measuring the impact of such investment?

SEGAL: Policymakers and business leaders have been overly focused on measuring what I call the hardware of innovation: the amount of spending on R&D and the number of engineers and scientists, patents, and publications. And whereas the hardware has clearly been built up in China, what I call the software — the political, cultural, and social institutions and understandings that help move ideas from lab to marketplace — are lagging behind. Without the software in place, the whole is much less than the sum of its parts. The Chinese themselves admit that they’ve put a lot in, but they’re not really getting a lot out.

Although China has massive numbers of engineers coming out of its universities, most don’t have strong “soft” skills. They’re very good at the projects they are assigned to, but don’t necessarily think about the next problem coming down the pike. The Chinese education system is still very focused on rote memorization and examinations. Moreover, intense pressure on scientists to advance has resulted in a great deal of plagiarism and data theft.

We’ve witnessed a massive expansion of entrepreneurship, particularly among young Chinese. But the focus of most Chinese startups is on incremental and business process innovation, or what’s called C2C [“copy to China”]: taking a U.S. model and then applying it to the Chinese market. It’s where the money is being made. Government intervention also distorts the market. Because the government is so focused on reducing dependence on foreign technology, they say, “Here is the cutting edge. We think it’s this Intel processor or this database software. We want you to copy that.” This government direction encourages startups to reverse engineer, rather than to focus on science-based product innovation. Across the board, we see heavy-handed government intervention. There’s still a great deal of deference to political authority and to seniority, which is not supportive of individual initiative.

S+B: What’s happening in India?

SEGAL: Indian spending on science and R&D has been pretty flat over the past decade or so. In 1995, it was 0.8 percent of GDP, and by 2010 it had risen to only 0.9 percent (whereas the Chinese have gone from spending 0.5 percent in 1995 to 1.5 percent today, and the goal is to go to 2.5 percent by 2020). In addition, the majority of R&D in India is done through the government research labs, and they’re run like government agencies, so there’s not a great deal of emphasis on entrepreneurship or individual initiative or new breakthroughs and new research.

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To read the complete interview, please click here.

Laura W. Geller is deputy managing editor of strategy+business.