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23 July 2018

How to lose the innovation arms race

A report released last week by the Center for Advancing Innovation and PatSnap shows the US and the EU are falling behind on the number of patents filed.

Author: Thierry Heles, editor

Brazil may not be the first country that comes to mind when thinking of nations that are good at turning patent applications into granted patents, yet a report published last week by the Center for Advancing Innovation, a non-profit that aims to accelerate tech transfer, and intellectual property analytics and management platform PatSnap put the south American country on a list with four other more or less likely candidates – China, Singapore, Israel and India – for demonstrating the most patent effectiveness between 2005 and 2015.

The Innovation Arms Race 2018 report is bad news for the US and the EU, which both appear to be losing the game. The US had already lost its leadership in global patenting metrics and the report predicted that the country would lose its leadership across all key performance indicators by 2029, according to the report.

Ray Chohan, senior vice-president for corporate strategy at PatSnap, explained that “despite recent obstacles to globalisation, innovation continues to become more relevant to technological progress, and in return – economic progress.

“While the west has – to a significant extent – pioneered technological breakthroughs in the past, it is being held back by legacy processes and technology when it comes to innovation and turning it into economic gain. Much of the growth and efficiency we are seeing in R&D in Asia-Pacific is being supported by companies leveraging new technologies and processes with the aim of streamlining their R&D investment.”

Indeed, the money going to research and development activities across the world continued to increase – as Rob Lowe, chief executive of innovation management software producer Wellspring Worldwide, recently also noted in a keynote speech at the UIDP26 conference, the global annual market for R&D dwarfed everything else, with even alcohol and tobacco only accounting for $120bn. The Innovation Arms Race 2018 report put the figure at $2.19 trillion in 2018.

Yet money does not equate success. The returns on R&D expenditure, the report stated, had actually decreased by approximately 65% over the past three decades.

While not all research and development can lead to a usable product or service, the fact that near 65% produced no economic value whatsoever is worrying.

Part of the problem was a declining ability in the western world to turn R&D into effective patents. Despite the fact that the number of applications remained high, the US and the EU had both been struggling to turn these applications into granted patents. Both sides of the Atlantic experienced negative or almost no growth rate in this aspect over the past two decades – getting left behind by the aforementioned Brazil, China, Singapore, Israel and India.

The report looked at the UK separately from the other EU countries (the only one of the member states for which it did so), but it was similarly bad news for Great Britain and Northern Ireland. In 2015, both the UK and the US produced only a respective 576 and 611 patents per $1bn of research expenditure. The rest of the EU (872) found itself slightly ahead – being more cost-effective than China (812) but less than Russia (1,032). That does however mean that, when combining the UK and EU figures, the EU is faring better – though still only makes it into third place.

Despite the bad news for its European neighbours, Switzerland led the pack with 1,977 patents granted per $1bn of expenditure. South Korea recorded 1,562 patents and landed in second place.

Notably, China and Singapore were catching up fast – they achieved respective compound annual growth rates of 10% and 18%, catching up quickly with the current leaders.

China, the report forecast, would outpace the US by 2025 for R&D expenditure and patent grants, with India, Israel and Singapore expected to experience the highest growth in patents granted through 2035.

This, too, proves that more money does not guarantee better outcomes. The US was actually spending twice as much as the UK and the remainder of the EU on research relative to gross domestic product (GDP), but was failing to generate any GDP growth from its investment.

Interestingly, policy dynamics in the western world were not to blame, the report stated. Indeed, competing nations saw an increase in the number of patents granted by American and European patent offices.

The report blamed the fact that the US and the EU were unwittingly prioritising quantity over quality, incentivising scientists to apply for patents even if their research may not be of a high enough quality. The patents that were granted were often not commercialised due to a lack of resources and failed research was not publicised, meaning the same mistakes were made over and over again.

The report cautioned against simply reacting with more investment – there was no lack of cash going into R&D in the US or the EU as its figures showed. Instead, gross domestic expenditure on R&D needed to be spent more efficiently to generate more innovation.

How that could be done was beyond the scope of the report, but some statements hinted at a possible solution: increasing commercialisation resources. There is hardly a point in producing patents for patents’ sake when inventions are left to gather dust in an archive.

Rosemarie Truman, founder and chief executive of the Centre for Advancing Innovation concluded that “the US licenses only 0.3% of federally funded inventions out. If we could get 1% more inventions out a year, the value at stake is $1.5 trillion to the US economy alone.”

And you could justify a lot of commercialisation activities with a $1.5 trillion return. It seems almost incomprehensible that decision-makers in the west are not bouncing on such numbers.

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