While effective patent law protects the financial returns on investment in R&D, thereby encouraging more people to invent new things, ineffective patent law can create roadblocks to innovation as patent owners exclude competitors from using and developing their inventions.

This appears to be a particular problem in China. It also seems that China has grown tired of being the manufacturer of US and other developed nations’ inventions and has sought to get its own cut of the innovation action by introducing national domestic patent targets and a string of incentive schemes designed to reward and incentivise patent ownership. The measures are known as “indigenous innovation policy”.

However, despite the Chinese government’s efforts and the explosion in the number of patent filings in China (more than 1.5 million in 2011 alone), last month the European Union Chamber of Commerce in China released a 210 page Report (click here for the executive summary), suggesting that these numbers are misleading, and that in fact less than a third of all patents filed in China during 2011 actually represent new inventions. This discrepancy is attributed to the “utility model patent” system. Similar to Australian innovation patents, utility models are patents that provide a shorter monopoly than a standard patent, and have a lower threshold requirement of inventiveness.

The Report suggests that utility model patents reward developments in existing technology, but don’t provide an incentive for game-changing inventions because of the lower threshold of inventiveness required. Combine this lower threshold with the patent ownership targets set for Chinese companies by the Government, and you end up with large and medium-size Chinese companies focusing their efforts on filing many utility model patents rather than seeking patent protection for the “highest-quality inventions”.

The Report also identifies several other impediments to Chinese innovation. In particular, provincial governments set GDP targets that discourage, rather than encourage, high-risk investments in R&D, which are, of course, the hallmark of major technological breakthroughs elsewhere in the developed world. There are also suggestions that more than 50% of all Chinese patents are foreign innovations, applied for by Chinese companies for the sole purpose of litigating against the foreign innovators in China.

Another area that appears to present difficulties for the Chinese patent system is the Government’s subsidy scheme, which rewards foreign companies that transfer patent ownership to Chinese companies. It has been suggested that this scheme discourages foreign companies doing business in China and may even amount to a violation of the World Trade Organisation’s TRIPS Agreement (which, among other things, prohibits discrimination between domestic and foreign entities when affording IP protection).

The EUCCC Report makes over 50 recommendations to overhaul the Chinese patent system. These include reforms to the patentability and examination rules (which currently exclude most bioscience and genetics technology from patentability), audits of the various incentive programs, and allowing more foreign companies to get a piece of the government-funding pie without having to transfer patent ownership to Chinese companies.

It’s not at all clear whether the suggestions of the EUCCC will be adopted by the Chinese government, but the review confirms that China is intent on increasing its status as an inventive nation.