No illusion to China’s innovation

China’s patent applications have rapidly grown, leaving policymakers scrambling to keep up, Lauren Johnston writes.

The success or failure of the world economy increasingly hinges on China. Since the 12th Five-Year Plan (2012-2017), the Chinese government has considered innovation a fundamental pillar of the country’s growth strategy. This means that understanding the progress of China’s innovative economy is increasingly important to understanding the future of the world economy.

Yet despite this, little attention is paid by the world’s economic scholars to China’s patent-related progress.

Patent quantity and quality indicators offer benchmark measures of innovative capacity. In recent years China’s patent applications (including successful applications) have rapidly grown, with patents held by Chinese innovators now accounting for almost 15 per cent of total world patents registered by the World Intellectual Property Organisation (WIPO).

Understanding what’s happening in innovation requires more detailed study of these patents.

In the footsteps of the Deng Xiaoping approach to letting “some get rich first”, the emergence of a few relatively innovative geographic clusters in China illustrates something of a mirror trend: some in the country’s more advanced economic geographies, such as Shenzhen and Tianjin, are innovative first.

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New political prioritisation of innovation in China, meanwhile, has encouraged the explosion of patent filings in the country. This has created a headache for China’s State Intellectual Property Office (SIPO), which must maintain adequate financial and human resources to study such applications, while also dealing with the fact that patent writing skills in the country lag patent application filings.

This helps to explain an important ongoing debate within and outside of China as to the quality of the country’s patents. This arises both in absolute terms and also in relation to other major and longer-standing patent-filing countries, such as Japan, Germany and the United States.

The complexity of the modern patent system has made it difficult to understand the quality of patents not only in China but elsewhere as well. For example, a subset of patents are filed with the primary objective to either block or inhibit competition. Such patents have no direct commercial value, and yet are fundamental to the total value of a set of patents held by any given firm.

The China Patent Survey takes account of this complicated patent environment by asking a sample of Chinese firms about the technical quality, writing quality, right stability, and market value of their patents held and patent-seeking behaviours. In this way, the survey seeks to overcome the fact that objective measures of patent quality may be inconsistent with the actual value of a patent held.

Our study found that data on self-reported patent quality in China is generally consistent with more objective measures of patent quality, and is positively correlated with both the inventive importance and the strategic market value of patents filed.

In a sign of the potentially transformative power of Chinese research and development (R&D), which is on the rise in public and firm-level budgets, our study also found a positive relationship between R&D expenditure and the quality of China’s patents.

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On the other hand, there appears to be a turning point whereby firms operating in patent-intense industries are also those most likely to hold strategic patents, which in turn reduces the direct value of their patents on average. These firms tend to be relatively sophisticated patent-holders, and their patent behaviours are similar to firms in similar industries in other countries.

The survey data meanwhile reveal that, in China, patent value is negatively related to non-commercial policy incentives. This suggests that greater freedom for market signals to unlock the innovative potential of Chinese entrepreneurs may be a more efficient approach for moving the economy toward the innovation frontier.

In general, our study highlights the importance of subjective measurement tools like the China Patent survey. It also suggests that Chinese policymakers might better target their innovation-related incentives and subsidies to enhancing the human capital of innovation-related areas. This could mean more resources for training patent lawyers, writers and administrators, instead of more narrowly directly incentivising patent filings.

The latter moreover may not only be misallocating innovation-related resources and reducing the overall efficiency of China’s market-oriented innovators, but also be hiding the remarkable rising patent maturity of frontier innovation cities like Shenzhen and Tianjin.

Maybe the West does suffer an “illusion of Chinese innovation”. It best not, however, suffer an illusion that there is low-quality Chinese innovation taking place in the country’s frontier cities. This would be wrong, patently.