How do patent subsidies drive SMEs to patent? Evidence from China

ABSTRACTIt is agreed that the patent explosion in China results from diverse forms of government funding and subsidies, especially patent subsidies. This study explores how patent subsidies have promoted the patenting propensities of small and medium-sized enterprises (SMEs) in China. Patent subsidy policies provided limited financial support but sent signals to create prospects of obtaining policy surpluses by filing patent applications. This study provides empirical evidence of the signalling effect by showing that innovation-inactive SMEs and SMEs in patent-free industries filed inframarginal patent applications. Ex-ante subsidy policies offered stronger signals than ex-post subsidy policies. However, after a pro-patent culture was cultivated, SMEs were impervious to a decrease in patent subsidies and did not effectively perceive messages of strengthening patent quality from further policy changes. The signalling effect suggests effective policies for promoting patent applications in a weak patent regime that does not reward patents through the market. By contrast, it also accompanied distortion effects, indicating the policy’s failure to reduce the transaction costs associated with SME adapting to the patent regime.KEYWORDS: Patenting propensitypatent subsidysignalling effectinframarginal patent applications Declaration of interestThis research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.Disclosure statementThe authors have no conflicts of interest to disclose.Notes1. e.g., The Tenth Five-Year Plan of the People’s Republic of China on National Economy and Social Development (promulgated by the 2001 Nat’l People’s Cong) (China).2. Beijing and Shanghai are municipalities, named as city level, but administrated as provincial level.3. Shanghai has a similar system for government grants and adopted this system for patent subsidies in 2017. Before 2017, the Shanghai government adopted a similar applicant-based hierarchy for conferring ‘pro-patent’ grants.4. The State Intellectual Property Office (SIPO) was renamed China National Intellectual Property Administration (CNIPA) in 2018.5. While this 2012 funding policy was reformed further in 2017, the two versions of the policies are consistent (Shanghai Intellectual Property Office, & Shanghai Municipal Finance Bureau Citation2017).6. According to the Patent Prosecution Pricing Guidelines (The Committee of China Patent Agency Citation2016), drafting a utility patent usually charges at least ￥4,000 yuan depending on the patent application’s size. Requesting substantive examination charges￥1,000 yuan, and responding to office actions usually charges￥2,500 yuan. Patent attorneys can adjust their price, but the service quality, such as searching for prior arts, is also relevant to the price (Beijing Guanhequan Law Firm Citation2016).7. Based on the data released by the CNIPA, from 1985 to 2015, utility patent applications were increasing in the two cities, but the increased rate of utility patent applications filed in Beijing (F = 0.08, χ^2(1) = 20.52, Prob.>F = 0.78) and Shanghai (F = 0.23, χ^2(1) = 22.1, Prob.>F = 0.63) did not increase to a statistically significant degree after the two governments undertook policies to subsidise and fund patent applicants in 2007. The comparison of means is through one-way ANOVA.8. The data of the 140 SMEs cover 13 industry sectors, including mining (n = 4), media and culture (n = 6), construction (n = 3), trade in wholesale and retail (n = 3), social service (n = 7), information technology (n = 53), manufacturing-electronic (n = 10), manufacturing-textile (n = 4), manufacturing-mechanical (n = 21), manufacturing-metal & nonmetal (n = 8), manufacturing-food & beverage (n = 1), manufacturing-petroleum, plastic (n = 11), manufacturing-pharmacy (n = 7), and manufacturing-printing (n = 2).9. The finance data are recorded from the consolidated financial statements. Thus, the patent data refer to the patent applications filed by both the parent company and the subsidiaries controlled by the publicly listed SMEs and disclosed in the annual reports of the SMEs. The subsidiaries could reside outside Beijing or Shanghai but file patent applications, which means that they could be affected by patent policies in other cities. On the one hand, the intercompany transactions such as filing patent applications, conducting R&D, and licencing patents to the parent company and its subsidiaries, are eliminated in the consolidated financial statements. On the other hand, these intercompany transactions are endogenous, and this is a drawback of the data source.10. The upper limit for defining SMEs varies by industry from (1) 300 to 2,000 employees or (2) ten to 2,000 million yuan (about $285.7 million) revenue.11. I1 represents the group of Zhongguan-Cun SMEs. I2 represents the group of Zhangjiang SMEs. I3 represents the pool of the total SMEs. F represents 14 industry categories, without finance.12. This study adopts the findings in Mansfield (Citation1986) about industries’ patent reliance, categorising that the industries of mining, media and culture, construction, trade in wholesale and retail, manufacturing-textile, and manufacturing-(packaging &) printing do not rely on patents and the industries of social service, information technology, manufacturing-electronic, manufacturing-mechanical, manufacturing-metal & non-metal, manufacturing-petroleum, plastic, and manufacturing-pharmacy rely on patents.13. Hanvon filed 31 utility patent applications in 2012 and 6 utility patent applications in 2013, suggesting a huge drop in filing patent applications.Additional informationFundingThis work was supported by the University of Science and Technology Beijing.Notes on contributorsRunhua WangRunhua Wang is Associate Professor at the University of Science and Technology Beijing. Her research interests are in the areas of intellectual property (“IP”), innovation policy and management, and law and technology. Her research employs empirical methods, law and economics theories, and comparative analyses. Between 2018 and 2020, Professor Wang was Empirical IP Fellow at Chicago-Kent. From 2016 to 2018, She worked at the University of Illinois College of Law as a Post-Doctoral Research Associate. Professor Wang received her LL.M. and J.S.D. from the University of Illinois College of Law.The author is grateful to Heitor Almeida, Alexander Boni-Saenz, Sarah Burstein, Graeme Dinwoodie, Michael Frakes, Suzy Frankel, Bronwyn Hall, Paul Heald, Jonas Anderson, Jay P. Kesan, Edward Lee, Time Liao, Nancy Marder, Peter Orazem, Greg Reilly, David Schwartz, Thomas Ulen, Peter Yu, editors and reviewers of RJDE, and the attendees at the Brown Bag Talk organized by University of Illinois Center for East Asian and Pacific Studies, the 2018 Annual Asia Pacific Innovation Conference (APIC), and the 2021 Intellectual Property Scholar Conference (IPSC) for their thoughtful comments and suggestions. All mistakes belong to the author.