In turn, China is likely to surpass Europe in R&D spending by the late 2010s and the US by the early 2020s, as evidenced by my recent report of US innovation.

US companies account for over a third of R&D investment by the top 2,000 companies worldwide, slightly more than Europe. While China's share of R&D spending is still low, it has grown by a factor of 15 over the past decade, while spending has contracted in Europe, US and Japan.

America accounts for most global venture capital (VC). But US VC continues to suffer from the burst of the Internet boom and the aftermath of the global crisis. Initial public offerings (IPOs) tell a similar story.

Chinese VC and IPOs, though starting from a very low base, are rising rapidly. In 2012, Facebook raised US$16 billion of the total US$21.5 billion. That pales in comparison with the historic US$25 billion IPO of Alibaba whose market value was estimated at US$231 billion.

Shanghai is well-positioned. It has strengths in student performance, patents and R&D, and high-level universities. It has significant presence by foreign multinationals and their R&D operations and high-quality foreign direct investment (FDI).

The city is pushing new initiatives to promote itself as a start-up hub, including the "Entrepreneurship in Pujiang Action Plan" and host of new entrepreneurship schools which aim at 200,000 technology entrepreneurs by 2020.

China's first Free Trade Zone (FTZs) was launched in Shanghai, while new FTZs are being created in its rival cities. But unlike them, Shanghai has a far more international outlook and more expats. Shanghai is on the right path. But it won't win without fierce competition.

Dan Steinbock, Research Director of International Business at the India, China, and America Institute and a visiting fellow at Shanghai Institutes for International Studies in China and the EU Center in Singapore.

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