Patently False

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For the global investor and lender, it will always be a case of caveat-emptor, or knowing what you’re paying for. If you choose to pay too much, or allocate too much capital toward something or someone, you’re committing a risk-taking mistake a priori. Your envisioned “margin” or the return is much more at risk than you think, or wasn’t really there in the first place. And so, buyer beware in this complicated world, where high ideals are extolled but where sharp elbows and dissembling abound.

And so, we advocate once more for due-diligence and a weighing of the evidence, when risk-takers consider opportunities. When one considers where the net marginal “value add” is, one should be reasonably sure about it – or at least acknowledge what you don’t know and risk mitigate, accordingly. The human proclivity, though, is to follow the fashion – to imitate others and to follow the crowd. While we are capable of being rational it’s not a default setting, we are emotional creatures, too – that’s where the Efficient Markets Hypothesis (EMH) folks may be in the dark a bit.

So, investors and lenders, being human beings and being subject to human emotion and human nature, may find themselves prompted by compelling memes and shibboleths (for example, “the US is in decline” motif is found and bruited in some editorial circles and is in some instances a popular one). These can shape investment decision-making and behavior, just as you might suspect a powerful meme would. The more diligent approach, however, would entail asking questions: For example, is the US actually in decline? If so, is it declining uniformly or are there areas that are fortifying while others may be enervating? Might the US actually be strengthening? What, in fact, do we mean by decline?

Research and innovation catalyze investor interest – and by extension, emotion, since a proven track record for both implies prospects for the development of new products and markets that can offer out-sized returns.  Being able to gauge who might be more innovative, and who may be comparably less so might provide an edge in the investment selection process.

The internet data portal Index Mundi offers a comparative country data set on the rate of national resident patent filings as measured on an annual basis.  The raw data cited in the portal at first seems quite revealing. Resident patent filings in China soar above comparable country totals as of 2020. China’s predominance, as measured in this statistic, takes on an accelerating momentum starting in 2010, forming almost an exponential curve of annual totals increasingly outpacing previous year levels.

According to Index Mundi, resident patents filed in China amounted to 1,344,817, while the US and Japan trailed much further behind, posting respectively at 269,586 and 227,348 for patents filed in 2020. The exponential curve witnessed in China would on its face indicate a sheer blossoming of technical innovation and product development.

Make no mistake, China has indeed become an industrial power and technology player in the global marketplace – a development with its roots in Deng Xiao Ping’s efforts in market reform dating back to the late nineteen seventies. That said, the nominal significance of China’s patent filing statistic for 2020 is subject to re-assessment.

Another useful data portal, one set out by the Canada-based CIGI (the Center for International Governance Innovation), highlights the lack of comparability between the Chinese tally and the statistics generated for other countries regarding patents. CIGI comments on this in a 2021 article:

“It’s not necessarily the high numbers of patent filings, however, that turned China into a global patent powerhouse. The rapid increase of patent filings, including the PCT applications (that is, Patent Cooperation Treaty recognized patents, administered by the World Intellectual Property Organization-WIPO), was to a large extent a result of a great leap of patent applications boosted by subsidies of governments at all levels and spurred by the central government’s quantity-first and subsidy-driven instructions to improve China’s patent level. Instead of being innovation-driven, most of China’s patent applications are driven by other motives, such as seeking government subsidy or job promotion, reputation building for individuals or universities and institutions, or acquiring certification as national high-tech enterprises.”

(See the article by Alex He, “What Do China’s High Patent Numbers Really Mean?”, from The Centre for International Governance Innovation (CIGI); April 20, 2021; https://www.cigionline.org/articles/what-do-chinas-high-patent-numbers-really-mean/)

Again, we emphasize that China has indeed become a substantial industrial power and high technology country. It’s just that the devil lurks in the proverbial details, if investors and lenders are to understand how innovation and technology are developing throughout the global economy.

In this same CIGI article, the authors expand further:

“Furthermore, except for invention patent, the other two types of patents in China (utility model and industrial design patents) are not calculated in the scope of “patent” at WIPO and in most countries. The high percentage of China’s filings and grants in these two kinds of patents did not add too much credit to China. Between 1985 and 2020, 81–89 percent of the patents granted in China belonged to utility model and industrial design, and only 11–19 percent of the granted domestic patents belong to invention patents, which is the key indicator to evaluate the level of science and innovation in a country.”

 

Just so. Data comparability along with the nature of official statistics and their filing should be top of mind for any investor or lender contemplating capital commitments anywhere. Otherwise, capital may be lost in translation.

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