Will China become a formidable innovation heavyweight in the future?

Phil Libin of Evernote once said jokingly: ‘The amount of innovation in a company is inversely proportional to how often they use the word innovation…I once met someone who was the Vice President of Innovation in the Cloud, that’s the trifecta!

Today, we’ll dig into whether China’s economy is and will be an innovation heavyweight in the world, and the reasons behind that.

But first, let’s define innovation and decide on a way to measure it.

There can be many types of innovation , but typically they are original invention (a product, process, trademark or design) that can generate a meaningful impact on the world. The impact can be small or big. When the impact is big, we usually refer to it as ‘disruption’.

But how can you measure innovation? The most straightforward way to measure it is through patent counting. Every day, inventions, processes, trademarks and designs are sent to various intellectual property offices around the world, these counts are aggregated and published by the World Intellectual Property Organisation (WIPO).

Patent count in third place

In 2013, China’s patent filings under the Patent Cooperation Treaty (PCT) ranked third in the world, growing 15.6% year on year (YoY). China’s patent filing growth outpaced global growth in 2013, which was 5.1%YoY.

The US ranked first with 57,239 patent applications, 2.7times more than China; Japan ranked second with 43,918 patent applications, two times more than China.

Among the top five categories of patent areas are: electrical machinery, apparatus, energy; computer technology; digital communication; medical technology; and measurement. Panasonic ranked first as the top applicant, followed by two Chinese tech-companies, ZTE [HKG:763] and HUAWEI [SZ:002502], listed in Shen Zhen).

China has been particularly strong in digital communication patents, ranking second after the US in 2012. Computer technology, transport and basic materials chemistry saw the US, Japan, Korea and Germany taking the top spots.

In terms of trademark applications, China ranked 7th globally in 2013. Germany ranked first, with 2.9 times more trademark filings than China. Japan ranked 8th, below China.

The top five categories in trademark application are: computer and electronics; services of business; technological services; clothing, footwear, headgear; and pharmaceuticals & medical preparations.

In terms of design applications, China isn’t in the top 10 list. European countries dominated design applications in 2013, with Switzerland ranking first.

The answer is YES and NO

From the data that the WIPO presented, we know that China is becoming a top innovator in an absolute sense, particularly in digital communication and technology. However, it’s still catching up in creating brands; and it has some serious work to do in the design field.

Just to put it into perspective, China’s (excluding Hong Kong) patent applications accounted for 30% of the world’s total patent applications in 2012; this number increased in 2013.

However, if we take into account population and study patent application per capita, then the story is very different. While the US has more patent applications and less population, its per capita patent application volume is 0.0017, which means in every 500 people there is likely one patent application.

China on the other hand, has a 0.00048 per capita patent application, meaning in every 500 people, there are roughly 0.25 patent applications. So it takes 2,000 Chinese to innovate at a level that 500 US people would generate.

ZTE and Huawei alone generated more than 4,000 patent applications in 2013; this accounted for 20% of China’s patent applications. One can expect that companies will play a leadership role in innovation in China, especially in the area of brand and trademark creation.

We can assume a number of things here. China’s urbanisation rate is just over 50%, so with more urbanisation will come more access to urban industrial facilities, schools and capital. This is likely to boost the per capita patent application rate in the future. 

The ‘software’

Will China become a formidable innovation heavyweight in the future?

The answer is there is a high likelihood that it just might. What China needs to do is improve its ‘software’, which is the facilitating factor to innovation. I’m talking about:

  • Grants to institutions, schools and individuals
  • An even higher focus on increasing R&D centre counts (the 12th five-year plan has done a good job in spearheading towards that direction)
  • ‘Steal’ the Silicon Valley model
  • Attract more high-end talents to return to China to work after their studies (Dr Michio Kaku, a renowned astrophysicist at the forefront of string theory, once said somewhere between 50%–70% of US university research staff are of foreign origin. As more top talents are retained within their country or return to their country of origin, one should not be surprised to see India and China playing catch-up fast), and;
  • Engender a strong culture of innovation in societal life and education.

Knowledge is power and power is a forbidden word

Chinese have learned some painful lessons in the past 5,000 years.

When knowledge flourishes, a nation grows strong. That results in intellectuals questioning the status quo, particularly in government. One of the most famous history lessons in China came from the Qin Dynasty (221BC) when the emperor of Qin, after unifying China, burned all the books nationwide and buried scholars alive.

He did that because he knew that the biggest threat to him was people with ‘brains’. Religion and monarchy ruled China until the Qing Dynasty (ending in 1912), when its naval fleet, the largest in Asia at the time, was defeated by a much smaller but technologically and ideologically more advanced Japan naval force.

The rest is history.

So the point is clear. Both the biggest supporter of, and the potential threat to China’s innovation, dare I say, is the state of the Chinese government. Right now, China is led by intellectuals, they are capable men and women with industry and government experience; decisions are made by a group of people.

Although its government isn’t as transparent and democratic as a Western democracy, it’s still functioning well due to the capability of the central group.

In the case of China, innovation is only as good as its government allows it to be.

Ken Wangdong,
Emerging Markets Analyst, Money Morning

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