Update: IAM reached out to Professor Can Huang, a co-author of the study, who has clarified that not all the deals analysed in the study are between different companies, as the data takes into account all the deals registered and published by the SIPO which includes within-group transactions. Huang therefore recommends the results be interpreted with caution until a revised version of the study is released.

Recent research into patent transaction modes – that is, the licensing, sale and internal use of patents together – in China shows that corporate decision-making in the country is being driven by most of the same considerations that pertain elsewhere; something that suggests that the Chinese patent market is more predictable and accessible than some would otherwise believe.

Released last month, To License or Sell: A Study on the Patent Transaction Modes in China examines how the patent quality, corporate patent strategy and corporate IP management structure affect the probability of patents being licensed or sold in China. Notably, by analysing a novel Chinese Inventor Survey Database, constructed by the State Intellectual Property Office (SIPO), the paper provides a quantitative measure of the impact of government subsidies on patent transactions.

The research finds that although better patent quality generally leads to a higher likelihood of an invention patent sale, both lower and higher quality patents are less likely to be licensed out than medium-quality patents. Meanwhile, quality had no effect on the transaction of utility model patents. It should be noted, though, that quality here is defined broadly, as the study uses the R&D cost of patents reported by companies that have participated in the Chinese Inventor Survey as a proxy.

That low-quality patents are the least likely to be licensed or sold should not come as a shock. Deals only occur following necessary due diligence and it makes little sense for would-be buyers to target intellectual property of low value. The paper also notes high associated transaction costs as another reason. For high-quality patents, the lower probability of being licensed out can be attributed to their strength, which grants rights holders significant flexibility and leverage. As the paper puts it, they can be seen as irreplaceable resources for companies in China. As a result, patents of medium-quality are the ones that exchange hands most frequently.

What also has to be factored into the equation is what drives a company’s patent strategies. Another takeaway from the study is that patents owned by firms with economically-motivated strategies (eg, patents used for cross-licensing, blocking competitors and protecting early-stage R&D) are less likely to be sold than to be kept for internal use. The sole exception here applies to utility model patents used for building out a portfolio – these are more likely to be sold.

On the other hand, patents acquired for administratively-motivated purposes (eg, for government subsidies or to qualify as a high-tech companies for tax cuts) are more likely to be sold or licensed to other parties. This is a noteworthy finding against the backdrop of China’s patent market, which has seen a surge in applications over the last decade with an estimated 30% increase in patent filing numbers having been credited to changes in government policy. Given the results, this is one area where low quality patents may shine for both buyers and sellers in the market – as quality has significantly less bearing when one is acquiring assets purely for the sake of government benefits or tax breaks.

The type and ownership of a firm can also be a further indicator: it was found that state-owned firms are less likely to license invention patents than domestic private firms, and foreign firms are more likely to sell their patents compared to domestic ones. That Chinese state-owned companies have to consider the preservation of social and economic stability on top of commercial gain – as opposed to foreign firms which can focus more aggressively on pure profitability – might explain this difference in patent transaction activity.

Finally, the study analysed how the manner in which IP management is structured can influence the probability of a firm’s engagement with patent transactions and licensing. If an invention patent is cared for by a specialised IP department under the general administration, legal or R&D department (which are the three departments many Chinese companies manage their IP-related activities under), it is less likely to be sold than to be kept for internal use. On the other hand, utility model patents managed by a specialised IP department are more likely to be sold off.

That many of the findings conform to expectations is interesting in that it suggests the Chinese patent landscape is not as unpredictable or inhospitable as some might have envisioned. With rational agents behaving as one would expect and decision-making being fuelled by familiar thought patterns, the Chinese patent market is clearly more similar to markets elsewhere around the world than many would give it credit for.

The study was conducted by Naubahar Sharif, an associate professor at the Division of Social Science at the Hong Kong University of Science and Technology.