It is no secret China, as part of national strategy, is steering its economy from “Made in China” to “Invented in China”. But how far down the road is China? Is China on a path to becoming a truly innovative country? Thomson Reuters recently published a report titled CHINA’S IQ (INNOVATION QUOTIENT) TRENDS IN PATENTING AND THE GLOBALIZATION OF CHINESE INNOVATION, which helps answer these questions by examining recent patent filing, litigation and globalization trends in China.

According to the report, China has by far the largest annual volume of published invention applications compared to other major patenting countries. In 2011 it overtook the U.S. and Japan in volume of published invention applications, and in 2013 China had about 300,000 more invention applications than its closest competitor (this amounted to a 16.3% increase over the prior year). The Thomson Reuters report projects that China’s annual volume of invention applications will grow to over 900,000 by 2018, as compared to relatively flat growth by other countries. While we agree the high-growth trend for Chinese patents will continue for the foreseeable future, we are not convinced it will be at the level projected in the report. A slowdown may occur as patent policies are adjusted and the focus turns to patent quality over quantity.

Regardless of growth rate, the fact is Chinese companies file LOTS of applications domestically, AND FOREIGN COMPANIES SHOULD TAKE NOTICE! The Thomson Reuters report shows about 80% of the invention applications in 2013 originated from China, with the disparity between domestic- and foreign-originated applications growing each year since 2007. We have cautioned foreign companies for years about this trend and the need to establish their own Chinese patent portfolios to avoid finding themselves at an IP disadvantage in this market or being a victim of patent hijacking.

But Chinese companies’ international filings are nowhere as robust as their domestic filings, and they need to get their foreign filings at levels more on par with the innovation-led countries like the U.S. and Japan. The report shows that while the absolute number of Chinese inventions filed abroad has grown from 13,005 in 2008 to 33,222 in 2013, the proportion has remained flat at about 5.3%. Compare this with the proportion filed abroad for the U.S. and Japan at over 50% and 30% respectively. More and more Chinese companies have global aspirations, but without a proper international patent portfolio, they will face a huge IP disadvantage when operating in the major foreign markets.

A discussion of patenting trends in China would not be complete without discussing patent quality and the perception (okay, reality) that China has an unusually high volume of low-quality patents. We agree with the report that this “may in part be due to the substantial use by Chinese inventors of the utility model and design patent options that exist” (such applications do not undergo substantive examination), but other reasons exist for the phenomenon, including patent policies that reward based on volume of applications alone, filing procedures that do nothing to verify inventorship, and patent agents who file bad applications. The Thomson Reuters report concludes that “[t]he data seems to point to the increasing importance and quality of Chinese invention patents, at least in the high-tech area of data processing”, but we think the jury is still out on this—time and more data will tell.

Innovation can be measured not only by patent filing trends but also by patent enforcement trends. The Thomson Reuters report notes that the number of patent infringement cases accepted by the People’s Courts has more than tripled from 2006 to 2013. The report also notes that foreign patent plaintiffs have a 75% win rate against Chinese defendants versus a 63% win rate for domestic plaintiffs. This, of course, tells only part of the story, but it is generally consistent with our experience.

We believe the trends highlighted in the report are attributable in part to the National IP Strategy, established by China’s State Council in 2008, and subsequent administrative and legal developments, including the new Patent Law promulgated in 2009. This is not surprising as China’s economic and legal progress is determined largely by central government policy. We are looking forward to being along for the ride with our clients as China continues its drive to become a truly innovative country.