Tech Transfer Regions: Asia

This month, Global University Venturing’s tech transfer report comes from the Far East. Since undergoing rapid industrialisation following World War II, the whole area has become a role model to emerging economies on how to catch up with the west. The Four Asian Tigers – Hong Kong, South Korea, Taiwan, and Singapore – have become beacons in how to rapidly develop economies. However, this report will focus on the biggest economies in the area, China and Japan.

China

By Gregg Bayes-Brown

In terms of technology transfer, China is a complicated and vast beast. On one hand, one pillar of the country’s incredible growth over the past few decades has been its insatiable appetite for foreign innovations. On the other, the rate at which China is securing patents is equally bewildering. In between, surrounded by a grey fog, is the subject of intellectual property (IP), and how both these inputs and outputs, and the questionable policing of global IP inside China, affects it.

In terms of transferring technology into China, the practice began in the 1980s when then leader of the People’s Republic of China (PRC), Den Xiaoping, began replicating programmes witnessed abroad. This included the practice of allowing foreign corporations access to China’s market in exchange for the technologies firms would bring in. In recent years, China has also been able to make a plea on moral grounds that foreign entities share technologies due to climate change, with the argument made by PRC leaders that China cannot be expected to meet carbon reduction targets without the technology to support the move to green.

The need to secure such technologies has been further underscored by reports highlighting the high cost in reducing carbon emissions in China whilst meeting the country’s energy needs. A report from Tsinghua University in 2009 suggested the country would need to invest $293bn in renewable energy by 2020 for China’s emissions to peak by 2030, while the International Energy Agency suggested the figure will be closer to $400bn. Either way, the pressure is on PRC leaders to secure technologies as cheaply as possible, and the stakes couldn’t be higher in their ability to do so. China has overtaken the US as the world’s greatest polluter, annually emitting over double the EU’s own emissions in carbon dioxide, and shows little in the way of slowing its emissions growth. At its current rate and pace, Chinese contribution alone could be enough to tip the scales towards the negative for billions around the world threatened by climate change.

Despite this energy-heavy growth built on foreign innovation, the Chinese have also overtaken the US not only in terms of pollution, but also in the volume of patents filed. Last year, China filed over 825,000 patents, a 26.3% year-on-year increase, and the third consecutive year with China at the top of the patent volume ladder after leapfrogging both the US and Japan in 2011.

Gan Shaoning, deputy director for State Intellectual Property Office, said: “The growth in patent applications shows that both individuals and enterprises are paying more attention to intellectual property protection by patenting their inventions. It also shows that our country is making great strides toward becoming an innovative economy.”

Driving this massive volume of patent filing is the PRC leadership’s innovation policy. Academics receive credit for each patent filed, with patents seen as more critical than producing research papers, and can also do so for free. Also, universities (and also corporates) also receive funding from the Chinese government in order to spur innovation, and the government uses the volume of patents filed as one of multiple measures to assess the success of its innovation drive. It’s essentially an innovation circle, with the government telling academics that funding and acclaim comes from patents, academics in turn handing over buckets of patents to their universities, the universities showing off the patents to the government, and the PRC leadership, convinced by the metric they set out to grow booming, release further funding for more patents.

However, despite the impressive numbers, do these patents qualify as actual innovation? A large chunk of Chinese patents filed, up to 80% by some estimates, aren’t innovation patents, but “utility-model patents”, otherwise known as ‘junk patents’. While the exact number of junk patents is hard to quantify, which can be small and ultimately pointless changes on an original design or products which will seem unlikely to succeed (such as an mp3 player built into a belt buckle), what seems clear is that the volume is built to impress, but does not necessarily ensure innovation success.

In fact, the size of China’s patent collection is becoming an obstruction to innovation to some, especially following a 2012 move by PRC leaders to pay the fees of any organisation wishing to file a patent in a foreign country. For example, there have been growing concerns in Australia, where patents are not subject to rigorous examination, about Chinese organisations filing there simply to take advantage of subsidies back home. This could lead to two potential issues in countries where Chinese patents are being offloaded. First, foreign patent offices could become swamped with junk patents, all for the benefit of organisations based in China. Secondly, if the volume of patents currently on China’s books were to move to foreign patent offices and be of worth but unused, it would present a major roadblock to innovation in those countries with China, as a country, becoming the largest patent troll (ie. Owner of IPs only used to chase infringement cases) the world has ever seen.

Discounting the idea that becoming a patent troll is the overall strategy, why are the Chinese aggressively pursuing patent numbers? The answer seems two-fold. While a significant factor in China’s economic boom, the country cannot remain the world’s factory floor, especially if it wishes to avoid the cataclysmic environmental damage already mentioned – a problem, it must be noted, that puts business conglomerates looking to cut manufacturing and staffing costs by relocating to China in the spotlight as much as the PRC leadership. For China to sidestep such a situation, the country needs to move from manufacturing into a research and development leader, and this aim is what’s at the heart of the Chinese government’s innovation strategy. Therefore, having a sizeable patent portfolio which is one part innovation ammunition, one part supporting evidence for innovation bragging, is an integral part to convincing others of China’s capability to invent, both internationally and internally.

The other use of the burgeoning patent portfolio is to assist in putting to sleep the notion that China’s policy for policing intellectual property has as many holes in it as a deep sea fishing net. China’s abuse of copyrights, intellectual property, and trademarks isn’t so much a problem in the country as it is part of the very fabric of the country. There are streets in China where you can order a Starbocks Coffee, Haagen Dezs ice cream, and then refill your wallet at the Standard Chertered bank. There are reports of fake Apple stores selling fake iPhones and iPads that are so convincing, even the staff believe they are working for Apple. In other places, you can find entire open air markets completely devoted to knockoffs.

What’s more, the knockoff economy doesn’t appear to be slowing. The International Chamber of Commerce expects the ever-growing value counterfeit goods, which also include chemicals and pharmaceuticals as well as consumer brands and electronics, to be worth over $1.7 trillion by 2015.

In some ways, China’s large patent portfolio could be seen as a way to address and legislate the problem by demonstrating
the country can handle such a huge volume on patents. From another angle, however, it could be argued that large parts of the patent portfolio are knockoffs themselves.

China is undoubtedly moving in the right direction with its innovation strategy, and its contribution is getting more and more difficult to ignore. This is a country after all which, after the US blocked its involvement with the International Space Station, went about setting up their own version, due to be in orbit by the end of the decade. However, while its dedication to churning out impressive statistics is a sight to behold, mere numbers and imitation does not necessarily translate into the transformative technologies and businesses that PRC leadership are undoubtedly seeking in order to transform their country.

In the infinite monkey theorem, it’s suggested that, given infinite time to hit out random keys, a monkey would eventually knock out the complete works of Shakespeare. But then, that’s an awful waste of both time and paper. Perhaps China would be better suited simply generating more Shakespeares.

Japan

By James Mawson

Last year, I wrote: “In university venturing, the trinity is often a combination of government officials, academic administration and business support, and in Japan the signs are promising that all three are coming together to support the latest signs of vigour in an economy moribund since the early 1990s.”

This was written after a number of corporations and universities set up venturing funds in the summer and ahead of my more recent trip to Tokyo for events hosted by the Japan Venture Capital Association (JVCA) and Hitotsubashi University, where I expected to learn more. The early signs are that, this time, the promised dawn of growth and revived entrepreneurial activity sought over the past two decades might be arriving.

Since the change in government a year ago, Japan’s Ministry of Education has been reforming its system to incentivise universities to boost startups as part of the government’s plan to ensure the business startup rate exceeds the closure rate and increases from 5% of all companies to 10% over the next 10 to 20 years.

A large part of the planned increase in startups is expected to come from universities and government research laboratories, the authorities said.

The ministry has agreed a $1bn investment programme for four universities – Tokyo, Tohoku, Kyoto and Osaka – to boost their startup rate.

While Tokyo and Kyoto have well-established university venturing units following 2004 changes in regulations to allow them effectively to incorporate and become independent, sources close to Osaka and Tohoku said they were exploring how to set up their own funds and collaborate more with industry.

The ministry’s plan follows a 2001 initiative, the Hiranuma Plan, that called for 1,000 startups from local universities in the three years from 2003 to 2005. This plan delivered 1,600 startups of which 0.7% reportedly floated on the stock market and 60% survived at least five years, albeit most added almost no net new employees.

But some university spin-offs have seen rapid growth, including University of Tokyo Edge Capital-backed PeptiDream, which recently floated with a $1bn valuation, Naked Technology, which was acquired by games group Mixi in September 2011, Phyzios, which exited in February after four years, and Tokyo University startup Euglena, which produces healthcare supplements and jet fuel.

Japan’s authorities are overhauling other tools to support startups. The Ministry of Economy, Trade and Industry said it had set up the Jump Start Nippon Project to build a venture ecosystem through a network of mentors and supporters, including venture capital firms, such as Globis Capital Partners, which has recently made an initial close of its latest fund; corporate venturing units, including Global Brain and CyberAgent Ventures; and university venturing funds, such as University of Tokyo Edge Capital.

The ministry said it also wanted to enhance the $20bn Innovation Network Corporation of Japan (INCJ), a government-backed organisation. The INCJ has set up a division to increase its venture investment, especially at an early stage, with decision-making on deals delegated from the ministry to the INCJ.

The INCJ has just hired Ken Yasunaga, former managing director at the JVCA, to run this division. Japan’s politicians also recently voted on a law to provide tax breaks of up to 80% for corporate venturing.

This is the latest of recent government-sponsored initiatives around the world, including France’s fiscal incentive scheme, which allows businesses to depreciate their minority participation in the capital of innovative small and medium-sized enterprises over a period of five years, and Turkey’s act that effectively allows corporations to deduct from their annual taxable income all the money they invest in a corporate venturing scheme.

Under Japan’s proposed Industrial Competitive Advantage Law, 80% of corporate venture investment through funds is deductible from taxable income.