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Is China Really Innovating? The China Licensing Numbers Say No.

Posted in China Business

Those who say China is innovating often cite to the massive numbers of IP filings being made by Chinese companies in China.  I use those numbers to counter those who allege that filing trademarks, copyrights and patents in China is a waste of time, but I do not think they show much regarding innovation.

The numbers show that Chinese companies are willing to spend money to protect their IP and I just do not think they would be spending on anything that was not perceived to have value.  And if Chinese companies think filing for IP in China has value, then it is fair to think that it does.

But on the innovation side, the reality is that a lot of IP gets filed that isn’t terribly innovative.  This is true of patents as well.  So how what can we use that relates to IP filings to show innovation or a lack of it?

The Financial Times/BeyondBrics just did an article, entitled Chart of the week: China’s patent / royalty disconnect, use patent licensing as a measure of innovation.  The article starts out noting how the “number of patent applications from China has overtaken those from the US “and then asks whether  this means “China will soon be exporting ideas in the way it has exported manufactured goods.  It then notes that China is ranked only 7th in the number of patents granted in the US in 2012, behind “smaller trading partners such as Japan, Germany, South Korea and Taiwan.”

But the new (to me anyway) numbers that I found most salient are those relating to patent licensing.  In 2012, “China had a record deficit in royalties and license fees of nearly $17bn — compared with an $82bn surplus for the US.”  China’s $17bn deficit is a result of China paying out $18bn in royalties and license fees and collecting only $1bn in such fees.  I see these numbers as extremely meaningful and what they say is that China is having to pay huge sums to other countries for innovations created outside of China and substantially less is being paid to China for innovations created there.  Indeed, it is quite possible that a large chunk of the $1bn going into China for licensing and royalty payments is for innovations created by foreign subsidiaries doing research and development work within China.

Clearly though, these numbers reflect two very important things.  One, China cannot yet be deemed to be an innovation economy.  Two — as we have been saying for years — there is a lot of money to be made by Western companies in licensing to China.

For more on China licensing, check out the following:

  • Mike

    Chinese companies do not just file patents to “protect their IP” or anything of that nature. There might be some of those, although I have not seen any. Instead, 100% of the patent filings I am aware of, have been made exclusively for one reason only: free money.
    The “rule” is that the more patents you have (quantity, don’t care about quality), the more “innovative” you are (that’s the Gov’ts assumption), the bigger the chances you get subsidy for your “project”, for example from the 863 plan.
    And that is by and large “free money”, which you can spend on appartments and cars (and a small %% on hongbao for the “inspection” one or twice a year).
    If you really really have to have whatever actual gizmo that the subsidy is supposed to be funding, just steal one from the widely available US or EU products, and change the name. Innovation! You can probably even file some more patents for it. At least, this is normal in “my” industry (high-tech IP).
    Thus, it pays to have patent quantity. For example, (re-)file other people’s (outside China) inventions, chop your own “invention” into pieces, as small as possible, to bump the number of filings. Again, quality be damned; I have yet to see a patent application being rejected (for being bullshit or already existing), although there might be some…
    Thus, large patent quantity does not mean innovation, does not mean the system works, does not mean your IP is safe, also does not mean there’s big money to be made in licensing IP (why pay if you can steal???), so beware…!

  • alokalok

    “Clearly though, these numbers reflect two very important things. One, China cannot yet be deemed to be an innovation economy.”

    The second FT chart shows that China is licencing an increasing amount of IP, which means that it is engaging in increasingly high-tech activities. This is an important precursor to producing its own novel product innovations.

    “China is having to pay huge sums to other countries for innovations created outside of China and substantially less is being paid to China for innovations created there.”

    China is a poor, developing country, with a per capita GDP of less than $10,000. On top of this, the industrial revolution has given the west a 200 year head start on science and technology innovation. Add to this China’s (relatively) cheap labour, which means it can compete in the world economy by manufacturing low cost products. So its highly unreasonable to expect China to compete on an even footing with the US and other developed countries in terms of novel product innovation.