Pumped-up Propaganda Patents Produce ...

Pumped-up Propaganda Patents Produce Poor Profits

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Port Moody, Canada

#1 May 6, 2013
Chart of the week: China’s patent / royalty disconnect

May 6, 2013 8:06am by Valentina Romei

If a mark of being a developed country is innovation, then look out: China is certainly throwing ideas about.

The number of patent applications from China has overtaken those from the US, a remarkable catch-up over the last few years. But does this mean China will soon be exporting ideas in the way it has exported manufactured goods? Chart of the week takes a look.

In 2011, as the World Intellectual Property Organization puts it, China overtook the US to become the biggest patent office in the world, having surpassed Japan in 2010.

The Chinese catch-up is impressive considering that at the start of the decade it produced just a fifth of the number of US patent applications and a tenth of the number filed in Japan.

The rise in Chinese patents is largely a result of the government’s “indigenous innovation” programme. In 2006 China’s State Council published its medium and long term plan for development of science and technology, where it called for China to become one of the top five countries by number of patents granted to its citizens.

However, the number of Chinese patents filed abroad is still low. China ranks 10th in the world for patent applications filed overseas with fewer than 20,000 applications in 2011 compared with over 184,000 from the US.

And it is a big step from applying for a patent to getting it granted. Although China is the biggest supplier of goods to the US, it ranked only 7th by number of patents granted in the US in 2012, behind smaller US trading partners such as Japan, Germany, South Korea and Taiwan.

The low number of overseas patent approvals is one factor contributing to China’s big balance of payment deficit in royalties and licence fees – the payments made by someone who wants to use an idea, invention or artistic creation that legally belongs to someone else. In 2012, China had a record deficit in royalties and licence fees of nearly $17bn – compared with an $82bn surplus for the US.


Port Moody, Canada

#2 May 6, 2013
The large deficit in 2012 is a product of receipts in royalties and licence fees of just $1bn in 2012 and of record high payments of nearly $18bn, driven by multinationals that levy royalties on their local Chinese units for providing R&D, marketing and branding. It’s not an issue for China alone: rising royalty payments across Asia have become a big concern for investors.

So how should China go about reversing the trend? Chinese companies should strengthen their international intellectual property protection, a process that can be costly. According to a report by the Boston Consulting Group, Chinese companies have opted out of markets – for example, US and European DVD-players – rather than protecting their intellectual property because the cost would make them uncompetitive against a consortium of cross-licence sharing international manufacturers.

The report points out that Taiwan and South Korea went through the same process of intellectual property development, as their companies progressed from using cheap labour and natural resources to exporting higher value-added and technological goods. As their presence increases in international markets without a corresponding rise in international property right protection, they became vulnerable to IP attacks. Not surprisingly, China is the main source of US intellectual property-related seizures.

The next stage is to invest in intellectual property protection – either by acquiring or collaborating with IP-rich companies – and thus starting to close the balance gap.

China’s overtaking of the US as world leader in patent applications has been cheered as a sign of innovation. But there is a long way to go. The Boston Consulting Group calculates that Chinese companies will need to invest 30 times more in international IP rights than they do today if they are to match the standards set by their competitors in developed countries.


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