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China is not really innovating

by Dan Harris

Those who say China is innovating often cite to the massive numbers of IP filings being made by Chinese companies in China. I use those numbers to counter those who allege that filing trademarks, copyrights and patents in China is a waste of time, but I do not think they show much regarding innovation.

The numbers show that Chinese companies are willing to spend money to protect their IP and I just do not think they would be spending on anything that was not perceived to have value. And if Chinese companies think filing for IP in China has value, then it is fair to think that it does.

But on the innovation side, the reality is that a lot of IP gets filed that isn’t terribly innovative. This is true of patents as well. So how what can we use that relates to IP filings to show innovation or a lack of it?

The Financial Times/BeyondBrics just did an article, entitled Chart of the week: China’s patent / royalty disconnect, use patent licensing as a measure of innovation. The article starts out noting how the “number of patent applications from China has overtaken those from the US “and then asks whether  this means “China will soon be exporting ideas in the way it has exported manufactured goods. It then notes that China is ranked only 7th in the number of patents granted in the US in 2012, behind “smaller trading partners such as Japan, Germany, South Korea and Taiwan.”

But the new (to me anyway) numbers that I found most salient are those relating to patent licensing. In 2012, “China had a record deficit in royalties and license fees of nearly $17bn — compared with an $82bn surplus for the US.” China’s $17bn deficit is a result of China paying out $18bn in royalties and license fees and collecting only $1bn in such fees. I see these numbers as extremely meaningful and what they say is that China is having to pay huge sums to other countries for innovations created outside of China and substantially less is being paid to China for innovations created there. Indeed, it is quite possible that a large chunk of the $1bn going into China for licensing and royalty payments is for innovations created by foreign subsidiaries doing research and development work within China.

Clearly though, these numbers reflect two very important things. One, China cannot yet be deemed to be an innovation economy. Two — as we have been saying for years — there is a lot of money to be made by Western companies in licensing to China.

For more on China licensing, check out the following:

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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