China Innovation Metrics: the Good, the Bad, and the Worthless

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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.

7 responses on “China Innovation Metrics: the Good, the Bad, and the Worthless

  1. Sam

    Using royalty and license fees to measure the innovation has a number of shortcomings too:

    – There’s a lag between the innovations and the royalty fees
    – People invent, but corporations collect fees
    – Royalty fees may be generated from business maneuvers rather than innovations. Standards are one typical example. It’s not like things can’t be done the other way but certain business consortium may at times monopolies the standards and forced the patents on to the others.
    – Royalties paid is proportional to the size of the production. However if the productions are targeting the foreign markets, the royalties paid are again rolled into the price and exported, so it’s not a deficit. Only the royalties paid for domestic consumptions can be deemed as deficit, which is why China over the years had tried (with very limited success) to break away from the DVD, hi definition TV, and 3G communication standards that have patents embedded in.

    Indeed any method may have pros and cons. Here’s how I gauge the progress. I pick a top academic journal or conference proceedings in my area, go through the table of contents and count how many first authors have Chinese names. That’s quite easy to figure out, since people from Hong Kong, Taiwan, and Singapore don’t use Pin Yin.

    Since I have to read papers anyway, here’s my most recent statistics, from a conference that has an acceptance rate at around 20%. Rest assured, it’s a top notch conference. Being accepted normally guarantees the extended version of the paper being published in a good academic journal. If the first author is a PhD student, the chance runs pretty high for him/her to score a faculty offer from a university. And this year the conference is held in the US.

    Total accepted papers: 80
    Papers with first author using Pin Yin style Chinese names: 25
    Papers with first author affiliations in mainland China: 4, one each from PKU, SJTU, Fudan, and Harbin Institute of Technology. I’m surprised Tsinghua didn’t manage one.

    I’d say, not bad at all!

    1. Stan Post author

      I forgot about the “published papers” stat. That is indeed used quite often as well.

      Note that my emphasis on royalty payments was a result of what I’m guessing is ultimately important to the government, not somehow indicative of the more vague notion of “fostering creativity” or something. The IP Trade Deficit is certainly not a perfect stat for the reasons you mention, but it does reflect money changing hands, which I think is key here.

  2. Zhong Mei

    Stan, Great post, distilling hard data.
    i’m now data mining the World Bank site.

    P.S. I have a request. Could you please incorporate an email subscription facility to your posts. Works best for me (and I’m sure a lot of others). Tx in advance

  3. FOARP

    Stan, as I am sure you are aware, the mere fact that other patents are subjected to examination for relative patentability (please note that utility models and designs are still examined for absolute patentability) does not act as any real badge of approval, since in many cases invalidation is possible due to lax standards of examination. The real measure of innovation is income from licensing IP, which as you point out is rising at a rate of 50-80% Y-O-Y.

    As for the supposed ‘IP trade deficit’, I do not think that comparing the licensing money made by Chinese companies licensing IP to foreigners to the money made by foreigners licensing IP to Chinese companies is a worthwhile way of looking at things. As long as China remains an manufactured export-oriented country, where the manufacturing is carried out on license from foreign companies, China will always run an IP ‘deficit’ (whilst, in real economic terms, enjoying a net trade surplus). In truth then the ‘deficit’ is merely a notional expense met in the process of creating a real surplus.

    “Currently, that figure is not only tilting in favor of foreigners, but the trends is for higher, not lower, deficits.”

    I’m not exactly sure I agree with your analysis. Your stats show Chinese licensing income as having more than trebled between 2005 and 2008. In the meantime, foreign licensing income has not quite doubled. This would seem to indicate that the in the long term the ‘deficit’ may disappear, not that the ‘deficit’ is set to increase.

  4. FOARP

    In fact, if the ‘deficit’ for 2009 really was 10.6 billion, this would show a marked slowing of ‘deficit’ increase, since this would be only a 9% increase over 2008, whereas 2008’s figure represents a 25% increase over 2007.