Fact of the Week: Subsidies Have Reduced China’s Overall Patent Quality to Just 19 Percent of What It Would Have Been Otherwise

Source: Putnam et al, “Innovative Output in China,” Competition Dynamics, March 2021.

Commentary: Patenting is essential to secure returns from innovation, so the volume of patent applications in a country is a well-accepted measurement of its rate of knowledge creation. But given differences in national standards and objectives for innovation policy, not all patents represent equal innovative value. A comparative decline in innovation quality has been especially stark in China, where patent applications have exploded in the last two decades, from 25,000 in 2000 to 1.4 million in 2018. China has showered subsidies at every level of government that have incentivized its inventor population to over-apply for patents beyond the optimal amount that would be expected for the actual amount of knowledge created.

To study the impact that this incentivized overproduction has had on patent quality, the economic research firm Competition Dynamics conducted economic modeling to compare Chinese patenting to that of other knowledge-based economies. It found that the annual growth rate of resident patent applications in China was about 19 percentage points greater than that of the United States, but less than 20 percent of this difference in patent growth rates was attributable to growth in China’s patent-determining economic indicators. The driver of the remaining 82 percent of Chinese patent growth is explained by the change in patenting behavior.

Based on China’s economic characteristics, Competition Dynamics estimates it should have seen about 212,200 resident patents in 2018, not the observed 1.4 million. Their model concludes that the surge in patenting that subsidies produced represented only 19 percent of the innovative quality that Chinese patents would have enjoyed absent of subsidies. When subsidies reduce the required value for new innovations to bring to be patented, less-valuable innovations will be produced and patented in higher quantities. While China’s contribution to knowledge creation certainly is growing, its takeover of global innovations is well overstated.