This issue comes up regularly: how is China doing with innovation policy, and how should we measure success? The government and the press like to use simple metrics that are easily understood. These include the number of patents filed, the number of engineers graduated from Chinese universities, and the amount of R&D spending by Chinese firms and government agencies.
This approach gives us a steady diet of this sort of mind-numbingly boring news article:
Innovation in Chinese enterprises is steadily increasing with more patents filed and more funds invested in research and development, the China Enterprise Confederation said on Saturday.
The top 500 Chinese enterprises possessed 169,000 patents in 2010, up 13.3 percent from last year, according to a report released by the CEC.
Among the top 500 companies, 41 had more than 1,000 patents, while 36 companies owned more than 200 patents for innovations, the report said.
Chinese enterprises were also investing a larger share of their revenues into R&D.
Each of the top 500 firms allocated, on average, 775 million yuan (US$113.9 million) into R&D, an increase of 14.4 percent from 2009 and accounting for 1.4 percent of their total revenues, the report said.
Of the 500 firms, 17 spent more than 5 percent of their revenues on R&D, while another 60 enterprises invested from 5 to 10 percent of their revenues into R&D, the report said.
The article basically refers to three different metrics: R&D spending, total patents filed, and invention patents filed (called “innovation patents” in the article). Are these accurate measures of innovation performance?
1. Using patents filed is OK, but patents granted is even better. This supposedly kicks out invention patent applications, for example, that do not meet novelty requirements.
2. Total patents vs. invention patents. Design and utility model patents are real patents, but since they are not subject to substantive review during the application process and can therefore be worthless “junk” patents, invention patents are perhaps a better indication of where things are headed.
3. R&D spending is a very broad measure. Moreover, when we’re talking about money spent by private enterprises, it’s very difficult to tell what is actually going on. Suffice it to say that the account books of many Chinese companies are, well, not really transparent/accurate. I don’t have a great deal of faith in their reported expenditures on R&D spending, particularly since they know that the government wants them to inflate those figures as much as possible.
So if these metrics leave a great deal to be desired, what else can we look at? I’ve been saying for years that one of the big motivators here is not just “IP for the sake of IP,” but the net result of IP trade. In other words, the government doesn’t care so much in the end how many patents are filed, but rather how many of those inventions ever get licensed/sold to foreigners, contributing to China’s trade numbers. This was the subject of a Xinhua editorial last month on China’s “IP trade deficit.” Related to this, of course, is the burden of license fee payments on Chinese manufacturers; lower license fee payments equates to more competitive exports.
If we want to focus in on those trade figures, it actually isn’t all that difficult. I took two minutes and found useful data on the World Bank’s web site, which has a time series for China’s royalty and license fee receipts as well as payments. Let’s take a quick look at those numbers for the past couple of years and then see if there is a trend for the balance of payments (i.e. deficit or surplus).
Royalty and License Fee Receipts (inward payments to China)
2005 — $157,401, 786
2006 — $204, 503, 785
2007 — $342,634,075
2008 — $570,536,223
Royalty and License Fee Payments (outward payments from China)
2005 — $5,321,253,863
2006 — $6,634,081,020
2007 — $8,192,067,402
2008 — $10,319,466,356
Both trends are positive, which is what you would expect from a rapidly developing country like China that is actively encouraging the creation of IP. However, if we subtract payments from receipts, we get numbers that are not too pleasant for Beijing:
Royalty and License Fees (China’s Balance of Payments)
2005 — ($5,163,852,077)
2006 — ($6,429,577,235)
2007 — ($7,849,433,327)
2008 — ($9,748,930,133)
You can see that the trend is quite clear and moving in the wrong direction (from China’s perspective). By the way, the deficit for 2009 was reported to be $10.6 billion, continuing the trend towards larger deficits.
So is China making progress in building an innovation society? Yes and no. All those patents being filed, engineers graduating and money spent on R&D spending is probably helping, and you can’t argue with that positive line for inward payments of royalties/license fees. However, these things might take quite a while to kick in on a larger scale, sufficient to make up for the much large outward payments.
In the long term, we should keep our eyes on the bottom line: the so-called IP deficit. Currently, that figure is not only tilting in favor of foreigners, but the trends is for higher, not lower, deficits. When we see the payments and receipts lines narrowing, perhaps then one can say that China’s innovation society reforms are actually coming to fruition.