Can state-sponsored patents generate innovation?

China’s economic success in the last three quarters is mainly due to cheap labor and export-oriented economies of scale. However, the leadership is quite aware of the unsustainability of this approach, and as wages are rising in the country, they are working to increase the value chain of domestic production.

Their foreign technology transfer strategies and highly incentivized, state-sponsored private sector research and development support have started to pay dividends. According to the World Intellectual Property Organization (WIPO), Chinese domestic patent filings increased from 15,600 in 1999 to 122,000 in 2006. An average 35 percent annual increase is not a bad accomplishment. This rate is 6 percent in America, 5 percent in South Korea, 4 percent in Europe and 1 percent in Japan.

In “Is the Dragon Learning to Fly? An Analysis of the Chinese Patent Explosion” (University of Oxford, CSAE Working Paper 2011/15), Markus Eberhardt, Christian Helmers and Yu Zhihong investigated the drivers behind this patent explosion. Based on the firm level data, a very tiny number of companies generates the bulk of these patents: 75 percent of the domestic patent filings in China are registered by 10 companies that are operating in the ICT (information and communication technology) business; 85 percent of the Chinese patents registered in the US are also registered by the same 10 companies.

For these companies, a substantial share of the patents is new product innovation despite their low-tech character. If you check the next 10 year national patent development strategy, the quantity gets more attention than the quality when you check the measurable targets and metrics they would like to achieve. However, focused efforts on ICT, energy technologies, especially wind and solar, make the Chinese companies quite competitive in their own field.

Chinese firms’ ability to stay close to the technology frontier of the world is praised by the same authors. However, their contribution to this frontier is a mixed bag and a work in progress. The funds and staff they allocated to the transformation from imitation to innovation can be easily observed.

Another interesting development I would like to share with you is the business share of the national research and development (R&D) expenditure in the world. The US is the leader in innovation, and the US private sector is the main driving force of the innovation culture of the US. If you check Asian success in technology and innovation over the last decades, you can easily see a similar structural development as well.

In the 1980s the Japanese government was widely seen as the master practitioner of industrial policy based on technology and patents. But we did not see Japanese software giants or information technology companies focused on innovation. Japan, Korea, the US and Germany all have more than a 70 percent business share in national R&D expenditures. Most of these countries became patent generators.

 

China as well, changed domestic dynamics considerably and increased the business share of R&D expenditures from 49 percent to 72 percent from 1999 to 2006. State sponsored but privately held technology companies are definitely generating a more innovative private sector.

There are lessons for many emerging economies from these statistics. Take Turkey, for example. Turkey is allocating substantial funds for R&D via the Scientific and Technological Research Council of Turkey (TÜBİTAK) and other state-funded institutions. The target R&D expenditure in Turkey is expected to be 2 percent of gross domestic product (GDP) soon. This share almost doubled in the last seven years from 0.48 percent to 0.85 percent. But, these fund allocations seem to lack the business and entrepreneurship focus. Universities and academics are getting the biggest chunk of this spending. The business share is stagnant at around 40 percent. This is one of the lowest shares among Organization for Economic Cooperation and Development (OECD) countries, as can be seen from the following table taken from the paper written by Eberhardt, Helmers and Yu.

China’s state sponsored innovation and technology promotion activities turned out to be successful in the last decade after they started to generate new funding mechanisms for startups and the private sector.

 

 

04 October 2011, Tuesday