Race to the top

Intellectual property (IP) is the in-thing at the moment. China’s rising investment in research and expansion of its higher education system mean that it is fast closing the gap with the United States in intellectual property and the struggle to be the No.1 global technology power, according to patent experts.

While US President Donald Trump’s threat of punitive tariffs on high-tech US exports could slow Beijing’s momentum, it won’t turn back the tide, they say. Washington’s allegation that the Chinese have engaged in intellectual property theft over many years – which is denied by Beijing – is a central reason for the worsening trade conflict between the world’s two largest economies.

Forecasts for how long it will take for Beijing to close the technological gap vary – though several patent specialists say it could happen in the next decade. And China is already leapfrogging ahead in a couple of areas.

Indeed, IP lawyers now see President Xi Jinping’s pledge earlier this week to protect foreign IP rights as projecting confidence in China’s position as a leading innovator in sectors such as telecommunications and online payments, as well as its ability to catch up in other areas.

Last year, China overtook Japan as the No. 2 patent filer in the world, with 13.4% annual growth, according to the World Intellectual Property Organisation. If maintained, the pace will take it above the United States in just over a year, a strong indication of its ambitions. That progress has been built on foundations which are likely to strengthen further.

China now spends 2.1% of its GDP on research and development (R&D), not yet matching US levels of 2.75%, but a remarkable increase from just 0.7% in the 1990s and nearing the 2.35% average among members of the Organisation for Economic Co-operation and Development.

World Bank data show China now produces 1,177 R&D researchers per million of its population, three times the level in the 1990s and in line with the world average. The US produces many more researchers per million – at 4,321 – but that is more than offset by China’s population being about four times the size. And the number of Chinese researchers is only going to increase.

According to United Nations Educational, Scientific and Cultural Organisation, China now enrols more than 40% of its students in tertiary education, half the US percentage, but a staggering rise from just 0.1% in the 1970s.

Online payments are the clearest example where China has leapfrogged the United States, with mobile phones replacing credit cards almost entirely as a form of payment in major Chinese cities, while many Americans still use cheques.

Stock markets provide one sign of Chinese progress – at least in the eyes of investors. According to Reuters, the total returns on Facebook stock since its listing in 2012 are 373%, versus 883% for its Chinese social media rival Tencent Holdings. In microblogging, Twitter has returned a 28% loss since its 2014 listing, while Weibo Corp., has seen a whopping 656% gain. However, IP experts say China is still behind in areas such as semiconductors, robotics, and biotech.

Furthermore, patent numbers don’t tell the whole story. There is a perceived gap in quality, which suggests China will take a while longer to catch up. Smartphone maker Huawei Technologies is the only Chinese company that made it into Clarivate Analytics’ top 100 innovators last year, a ranking based not only on patent volumes, but also on their influence on other organisations.

In 2016, China produced almost 500,000 scientific papers according to data from global information analytics firm Elsevier, taking the No.2 spot globally and closing in on America’s 600,000. The gap has halved in five years. But on average, a Chinese paper gets 0.93 citations, versus 1.23 for US documents. Citations are an indication of how valuable a researcher’s work is seen by his or her peers. On that metric, China is 11 places behind the United States in 33rd, with only countries that published more than 10,000 papers included. That could be a proxy for the quality of each country’s research work.

If Washington wants to slow China’s technological advance, it might consider measures that further restrict what products US companies licence to Chinese firms and broaden definitions of trade secrets. But tougher rules could be counterproductive as firms can find ways around them, including by setting up entities in non-US jurisdictions to maintain access to the vast Chinese market.

Xi pledged on Tuesday that China will protect the intellectual property of foreign firms, saying he hoped foreign countries did the same. Chinese IP protection laws are comparable to US and European legal standards. The fault is in implementation, with high levels of bureaucracy, court decisions applying on a provincial level rather than nationally and judges often having different interpretations of the laws.

The recent creation of a State Intellectual Property Office, however, shows political intent and should lead to more uniform enforcement. The political will has been articulated in a very powerful way and once it’s communicated to each of the bureaucracies lower down, we would expect very positive developments.

Alan McQuaid (13/4/18)
Economist

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