"Each United Concerned,
According to the requirements of the State Council concerning the implementation of national intellectual proeprty strategy, in order to support domestic applicants who submit patent applications in foreign countries, and protect their own innovations, recently the State Intellectual Property Office will cooperate with the Ministry of Finance to finance special funds for patent applications in foreign countries. To implement the spirit of the State Intellectual Property Office, our Office sets up a working group which is led by the director in charge, and composed of Industry Promotion Department, Patent Administration Department, and Zhongguancun Intellectual Property Promotion Office. The working group shall be responsible for organizing applications submitted in Beijing for special funds for financing patent applications in foreign countries."
The Beijing Intellectual Property Office received applications from intermediary service organisations for intellectual proeprty from October 9 to 11, 2009 and from enterprises in Beijing from October 15 to 19, 2009.
Allowed Or Not?
Is such a patent subsidy prohibited? China is a member of the World Trade Organisation (WTO). The Agreement on Subsidies and Countervailing Measures (SCM) is an integral part of the WTO Agreement which should distinguish between subsidies that distort trade and those that do not and it sets out rules for trade actions. Article 1 SCM gives a definition of what a subsidy is: financial contribution by or at the direction of a government or any public body within the territory of a Member and benefit a regional recipient. According to article 2 SCM A measure is a subsidy within the meaning of the SCM when it has been specifically provided to an enterprise or industry or group of enterprises or industries.
If articles 1 and 2 SCM are positive, then article 3 SCM state that there are two categories of subsidies: prohibited subisidies: continguent on export performance and those that are contingent on the use of domestic over imported goods (red light) and actionable subsidies (amber) and non-specific non-actionable subsidies (green light).
Article 8.2 (a) SCM states which subsidies are green lighted: "assistance for research activities conducted by firms or by higher education or research establishments on a contract basis with firms if the assistance covers not more than 75 per cent of the costs of industrial research or 50 per cent of the costs of pre-competitive development activity.
Article 8.2 (b) SCM provides the conditions under which assistance to disadvantaged regions within the territory of a Member given pursuant to a general framework of regional development and non-specific can be given.
Gutterman was looking at patent subsidies for US companies:
"Green light subsidies are considered the least trade distorting subsidies and are not subject to trade action. It is not clear why R&D subsidies are considered as such. It is conceivable, however, that a patent acquired via a federal subsidy and subsequently registered in a foreign country would have the distorting effect of preventing the competition of other companies from the manufacture or importation of the product, therefore injuring the domestic industry since the latter would be impeded from the manufacture of the patented procedure. Some authors argue, however, that such subsidies are indirect and have only faint effects in the market." Gutterman, Alan, 'Innovation and Competition Policy', Kluwer Law International, 1997, pg 389 .
Members with a GNP per capita of less than US $ 1,000 per year which are listed in Annex VII to the SCM Agreement, are exempted from the prohibition on export subsidies. China is not part of this list.
Members in transition to a market economy have a seven-year period to phase out prohibited subsidies. So even if this rule applied for China, that period is over.
Smart Or Not?
Even if supporting Beijing companies with patent subsidies does not distort trade, the question is whether this is a smart policy. Is the government best positioned to allocate funds to Chinese companies that want to have foreign patents? It is highly unlikely that the government can forcast the commercial feasibility of inventions better than the companies who might be better in tune with their export markets. If companies think they can export an invention, they will take the risk and file for patent applications abroad. Governments are likely to misallocate funds to the wrong inventions. I would have liked to ask the late Milton Friedman's opinion on this.