Apr 17, 2015Legal
The Engine Behind China’s Patents

China’s explosive growth in patent filing has caught the attention of the world over the last few years.  Many have been impressed with China’s rapid progress as it works to take its place on the global stage.  However, there have also been questions raised about the methodology behind the growth and weather the amazing numbers were the result of true innovation or rather lower quality patents issued as the result of a well developed incentive system.

China has developed a wide ranging set of policies incentivizing innovation, but more specifically patent filing.  The Chinese government’s 12th Five-Year Plan included a new Chinese National Patent Development Strategy.  The strategy called for improvements to China’s patent capacity, specifically with the goal of becoming one of the top two countries globally in terms of number of patents granted annually to domestic applicants.  The strategy also includes a filing goal of two million patents by 2015.  It should be noted that the two million patent goal includes a special classification of patents called “utility model patents” which exist in China, but not the US.  This type of patent generally addresses engineering features in a product and are less involved than a traditional US patent or “invention patent” in China.  

This focus on numbers has been of concern to some analysts who note that larger numbers of simpler patent types do not necessarily equate to real growth in innovation.  However, it should be noted that the strategy does also call for improvements to patent quality and improved benefits for patent holders including the establishment of patent transaction services with a goal of 100 billion yuan in annual transactions.

These efforts are further complemented by the Chinese “Indigenous Innovation Policy.”  This policy gives precedence for government contracts and procurement deals to innovative firms that have filed for IP in China.  There are also dedicated tax incentives for patent filing including the High and New Technology Enterprise (HNTE) program.  This tax break is given out by the the Ministry of Science and Technology at the provincial level.  Companies engaged in R&D and patent filings can have their corporate income tax cut from 25% down to 15%.

The patent policy numbers game has not been limited to national government level.  In pursuit of federal patent goals, many provincial and municipal governments in china have implemented different types of patent quotas, usually specifying a target number of patent applications per year. Research also shows that professors with patents are favored for tenure.  Additionally many provinces and municipalities actually subsidize patent filings to help meet quotas.  For example, Shanghai provides subsidies of 3,000 RMB for invention patents filed domestically, and 10,000 RMB for each foreign filing up to 30,000 RMB. Even the national government has crafted policies for subsidizing international patent applications.

Other municipalities and organizations have added their own motivational tools.  In 2012 Shanghai instituted a policy for non-shanghainese college graduates, stipulating that students who file patents will have an improved chance of earning a hukou, or residency permit. Individual companies also provide incentives to their employees for patentable ideas.  Private companies are also incentivizing, for example Huawei pays bonuses of 10,000-100,000 RMB in relation to patents.  

The success of these policies in driving applications cannot be doubted.  China’s patent office, SIPO, has become the world’s busiest patent office receiving 825,000 invention patent applications in 2013, close to one third of the total global patent application.  That number increased to 928,000 in 2014.  However, doubts remain. China has taken some positive substantive steps, like establishing a new court system dedicated to IP, achieving long term sustainable innovative progress isn’t a metrics game countries win by having the most patents.  China will need to pivot towards emphasizing quality.

There are key costs to not incentivising quality. Low quality patents are often never exploited either to create innovative products, or even to assert in court as there is little confidence in their merit. Thus incentivising them wastes time and resources, both in terms of time companies spend filing, the effort and times patent examiners spend reviewing, and government funding for the patent office and subsidies.  All of these resources could be more beneficially allocated.

A large pool of low quality intellectual assets is also very harmful in the long term.  The US is currently suffering many of those consequences in the form of high litigation rates and all of the costs and effort of eliminating bad patents after the fact.

There are some positive steps that China could take to encourage innovation and patent quality. Incentive systems are not inherently negative, but if china pivoted towards incentivising metrics other than number of patents there could be a strong positive impact.  One option would be incentivising patents not at the time of grant, but only when a new product using them goes to market, or when they are referenced by a later patent.  These and other metrics could better capture quality and real utility of patents that genuinely benefit the economy. If the government wants to continue to incentivise based on numbers, they could perhaps only consider the more rigorous invention patents.  

These suggestions only scratch the surface of alternative possibilities, and there are many creative options China could pursue.  While China’s initial growth has been impressive, it is time to look to the future and consider policies that will leave China in a stronger global economic position, beyond it’s impressive patent filing statistics.

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