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China's innovation illusion

Innovation is a critical source of a nation’s ability to grow, become wealthy and, ultimately, develop into a global power. And a widely-recognised measure of innovation is patent applications – when an inventor is sufficiently confident that he or she has discovered something new to seek intellectual property protection.

By that measure, China is not only already ahead of everyone else; it is steadily increasing its lead. The latest annual survey of patent applications from the World Intellectual Property Organization in Geneva shows that in 2017 China filed 1.38m applications -- more than twice as many as the United States in second place. Moreover, China's total was up 14% on the prior year while the US and most of the other leading filers saw no increase or even a decline.

The table below gives the stark numbers and here is a link to the full report.

China                1.38m     +14%
USA                   607k       flat
Japan                 318k      flat
South Korea       205k      -2%
Europe               167k     +4%

The real picture, however, is more complicated than these figures suggest. For a start, not all patents are equal. A patent for a new toothbrush is likely to be less valuable than one for a new type of semiconductor - as this thorough analysis from the Centre for Strategic & International Studies (CSIS) think tank makes clear. A good way of judging a patent's underlying value is its number of academic citations and on this measure Chinese patents score far lower than equivalent US ones - in a sector like data processing, the ratio is 1-to-6.

A second measure of value is whether the patent owner is seeking to protect their innovation in international markets or only domestically. Greater confidence in the invention and higher standards are required for the former. But the vast majority of Chinese patent applications -- more than 95% -- are domestic only. Chinese patents also have much shorter shelf lives compared to those in advanced economies. Since patent owners have to pay recurring fees, if they let a patent lapse this suggests it no longer has any economic value. According to Bloomberg, roughly 91% of Chinese design patents, 61% of utility patents, and 37% of invention patents granted in 2013 had been discarded by 2017. For the US, the figure was less than 15% over the same period.

Add in the fact that the government in Beijing appears to be actively encouraging patent filings and that standards in China are therefore lower than in, say, the US or Europe, and it becomes easier to explain the apparently huge gap in the numbers cited in the table above.

China deserves praise for strengthening its intellectual property protection over the past decade - though the American government and many multinational companies argue that IP theft is still an issue. Nor is there anything wrong in filing a large number of lower-value patents that focus on tweaks in design or incremental improvements. Arguably, Japan and South Korea did - and still do - the same. And some Chinese companies, especially in telecommunications, like ZTE and Huawei are these days making significant technological advances and winning market share internationally.

However, simply taking China's high volume of patent applications as a measure of its growing prowess in innovation is misleading. Yes, China is catching up and its economy is moving up the value chain. But it has a long way to go before it matches the levels of innovation of the best in the west.

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