Emerging markets file more patents than the west

The number of patent applications filed by emerging market countries has overtaken those filed by the developed world for the first time.

The 12 leading EM nations applied for 1.49m patents in 2015, outstripping the 1.48m in developed market countries, according to figures from the World Intellectual Property Organisation, collated by Comgest, a Paris-based asset manager, as the first chart shows.

The figures are a far cry from 2004, when the 12 emerging market countries, which account for the vast majority of developing world filings, made just 372,000 applications, 29 per cent of the 1.3m made by the advanced world.

“This signals the dawn of a new age of innovation as EM economies start to shake off their image as purely centres for low-cost manufacturing for companies in developed markets,” said Emil Wolter, co-head of Comgest’s global emerging markets team.

The surge in emerging markets has been led by China, where 1.1m patent applications were lodged in 2015, according to the WIPO data, a 745 per cent rise from the 130,000 of 2004, ahead of South Korea, with 214,000 applications.

A number of other emerging nations have also seen strong growth, albeit from a low base. Turkey saw 5,841 applications in 2015, a rise of 537 per cent since 2004, with Vietnam up 252 per cent to 5,033 and India 161 per cent to 45,658.

In contrast, Japan has seen applications fall by a quarter over the same period (to 319,000), while those in Europe have risen just 16 per cent (to 520,000). Even though the US has seen more rapid growth of 65 per cent (to 589,000) overall, the developed world has seen its annual tally rise just 17 per cent since 2004.

“There has been a very sharp rise in the the number of emerging market filings,” said Mr Wolter. “Significant catch up has taken place, as developed markets have stagnated over recent years and China and a number of other countries have just exploded.

“Some East Asian countries are blowing the doors off, the benefits of education are really coming through. [Venture] capital invested in early stage businesses and ideas in emerging markets is exploding.”

The patent pattern is reflective of the trend that has seen information technology rise to become the largest single sector in the MSCI Emerging Markets Index, accounting for 24.5 per cent of stock market capitalisation, up from 16 per cent at the end of 2004 and well ahead of the 16.4 per cent of the developed-world heavy MSCI All Country World Index.

Many emerging market countries have significantly increased their spending on research and development in recent years, with R&D in China equivalent to 2.05 per cent of its gross domestic product in 2014, up from 0.57 per cent in 1996, according to data from Unesco. South Korea saw a rise from 2.24 per cent to 4.29 per cent over the same period, double the world average of 2.15 per cent.

Chinese companies such as Baidu, Huawei, Tencent, Didi Chuxing and Alibaba have forced themselves onto a list of the world’s 50 smartest companies compiled by the MIT Technology Review, alongside Coupang of South Korea and Nigeria’s Africa Internet Group.

China also accounts for more active trademarks than any other country, some 10.3m, according to the WIPO.

However, despite the undoubted progress made by many emerging markets, there are reasons to question the quality of some of the region’s technological advances.

Jonathan Woetzel, a Shanghai-based director of the McKinsey Global Institute, a think tank, argues that China still has a “quality gap” with the developed world in terms of patents and other indicators of innovation, albeit a gap the country is likely to close given its spending on education and research and its annual output of around 30,000 science and engineering-based PhDs.

In the interim, he believes some of the raw data being produced may overstate China’s technological progress.

For instance, in the field of artificial intelligence, Chinese research papers were cited in academic journals 2,124 times in 2015, almost twice the 1,116 of the US, in second spot.

However, the bulk of the Chinese references were “self citations”, made by the journal in which the paper appeared. Once self citations are stripped out, American papers are still cited more often, although China is not too far behind, as the second chart indicates.

Mr Wolter agrees that Chinese patent applications still tend to be lower quality than those in the developed world. In particular, he says that a high proportion of emerging market patents are “process oriented” — concerning the manufacture of a product or the materials used in it — which tend to be less prestigious or valuable than the actual product-based patents more common on the West.

“Taiwan has a lot of [process-oriented patents] as they manufacture other people’s products. Hon Hai [Precision Industry] have a huge number of patents, mostly to do with how you can put the iPhone together and assemble stuff in the most efficient way. It’s useful, but compared to actually inventing the iPhone it’s not comparable at all,” he said.

Moreover, some countries are still lagging well behind, such as India, whose patent applications were just 4 per cent of those of China in 2015, despite a comparable population.

“In absolute terms, 45,000 filings really doesn’t look impressive given the size of the country. That illustrates the challenge facing [prime minister Narendra] Modi in taking away an awful lot of privileged rent-seeking positions and encouraging more competition, which is typically what you need to inspire innovation,” Mr Wolter said.

Nevertheless, he lauded the innovation of the likes of Safaricom, the Kenyan mobile telecoms operator, which pioneered the M-Pesa mobile money platform; Discovery, a South African insurer, which is using big data and behavioural nudges (such as rewards for keeping fit) to cut the cost of insurance; and Hikvision, a Chinese security equipment provider whose surveillance algorithms “are the best in the world”.

Despite this, the feed-through from rising innovation in emerging markets to stock market returns may be less than clear cut.

Recent research by Citi found an inverse relationship between patent growth and market performance in a range of EM countries since 1998. China in particular has seen rapid growth in the granting of patents but equity market returns way below those of countries with far slower patent growth, such as South Africa, Peru and South Korea.

Furthermore valuations, measured by price-to-book value, are lower in EM countries that spend a higher proportion of their GDP on R&D.

“The market doesn’t seem to want to pay for R&D, preferring to have profits now,” Citi concluded.

Mr Wolter accepts that investment in R&D “may not help you over one, two or three years with the share price performance,” but believes “it can help you sustain your profit growth over the longer term”.

“If you take the long-term view and invest in R&D, this tends to be the way to improve your lead over the long term,” he argues. “Companies that do that tend to raise the barriers to entry and move ahead of the competition.

“The return on these type of investments is not immediate, it’s like education. It’s a way to get rich slowly over the long run.”

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