Personal Investing
Jonathan Wright, Fidelity Personal Investing 27 Apr 2017 04:35pm

China the innovator

SPONSORED FEATURE: World Intellectual Property Day is a day set aside to promote the role that intellectual property rights - patents, trademarks, industrial designs and copyright - play in encouraging innovation and creativity
Caption: Look east for innovation

Global intellectual property applications are growing steadily. Looking at the most recent data available from the World Intellectual Property Organisation (WIPO) for 2015, the number of patents, utility models (a type of patent but with shorter protection terms), trademarks and industrial designs filed globally all increased. For patents and trademarks, this represented the sixth consecutive year of growth.

The world is certainly innovating. But what’s most interesting is where in the world these patents are being filed. According to data from WIPO, in 2015, across each of the four categories - patents, utility models, trademarks and industrial designs - Asia received the highest number of applications producing 61.9% of all patent applications worldwide.

Which Asian country received more patent applications than anywhere else? You guessed it, China.

In 2015, China received 1.1 million patent applications (up 18.7% on the previous year). That’s almost as many applications as Japan, the Republic of Korea and the US combined. The US follows in second place with 589,410, a rise of only 1.8% on the previous year and almost half the number China submitted.

This move to the East further emphasises China’s evolution from being the world’s factory of cheap products to an innovator in its own right. It is also a result of investing heavily in research and development (R&D). In 2014, R&D in China was the equivalent to 2.05% of its gross domestic product in 2014, up from 0.57% in 1996, according to data from Unesco.

However, as any inventor knows filing a patent doesn’t guarantee wealth for them or the country in which they live. In our increasingly globalised world, if the invention is successful it doesn’t necessarily mean it will be produced, marketed and sold in the country where it was conceived.

Look at the back of any iPhone and you’ll see ‘Designed by Apple in California. Assembled in China’. The growing number of patents filed in China could mean new innovative products coming on stream that are both invented and manufactured in the country. Or maybe designed in China and assembled wherever it may be more cost effective?

But it’s the quality of the new patents that really matters here. A high proportion of emerging market patents are “process orientated” which mean they are patents linked to the manufacture of other people’s products, such as widgets that make it more efficient to assemble a smartphone.

While they have a role in boosting the manufacturing process, these patents are not of the same significance as filing something as ground-breaking as the first smartphone.

For investors what’s interesting here is the direction of travel. More than 100 years ago when the legendary inventor, Thomas Edison filed over 1,000 patents in his lifetime, these were filed in the countries that were the major economies of the time - the US, UK, France and Germany.

As the balance of power shifts and emerging markets gain more traction, it should be no surprise to see more innovation coming from developing markets.

According to PwC research the world economy could more than double in size by 2050 due to continued technology-driven productivity, with emerging markets on average growing around twice as fast as the advanced economies.*

More interestingly, six of the seven predicted largest economies in the world in 2050 are currently emerging economies. Three of those are in Asia - China, India and Indonesia.

The role innovation will play in facilitating this transition is becoming patently clear (pun intended).

Our Select 50 features six funds in the Asia and Emerging Markets category. Find out more on the Select 50.

* Based on gross domestic purchasing power (GDP) measured in purchasing power parity (PPP) terms. This method adjusts for price level differences across countries, providing a better measure of the volume of goods and services produced.

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