Trading places

Correction to this article

ONLY five years ago, most of the expensive bits and pieces inside a typical Apple iPod came from Japan. Today an autopsy of the iPad reveals that nearly all the important components come from South Korea and Taiwan. In such a short time Japan's dominance of Asia's technology industry has been eroded by its neighbours.

Between 2006 and 2009, the number of patent applications in America, Europe and South Korea largely held steady. But filings in Japan sank while those in China soared (see chart). If the pattern holds, more patents may be filed in China this year than in Japan for the first time, putting China in striking distance of America. It is an astonishing reversal. As recently as 2000, Japanese patent filings were four times greater than China's.

Patents are a crude but useful measure of innovation. The change shows that Chinese inventors are developing a stake in intellectual-property protection, which is welcome. And because national patents protect the technologies of foreign firms too, the trend reflects how global companies are ploughing into China as a market and a manufacturing base. Even Japanese firms have increased their patent filings in China but decreased them at home.

Moreover, Chinese firms are forging into foreign markets. In 2008-09 Japanese geeks filed for 4% more “international patents” under the Patent Co-operation Treaty, while Chinese nerds filed about 30% more than the previous year, according to a recent report by the World Intellectual Property Organisation (WIPO). That said, the Japanese can take some solace from a far better success rate in having patents granted and in their patents being more frequently cited by other patents.

The economic crisis caused many firms to cut R&D spending. In 2008-09 many Japanese companies, including Sony, Sharp, Toyota and Toshiba, slashed their research budgets by 10-20%. However, Chinese firms such as Huawei and ZTE, which both make telecoms equipment, increased their R&D spending by 30-50%. China's domestic research-spending is now poised to surpass Japan's in purchasing-power terms.

An example of Japan's R&D lethargy is Hitachi, its third-largest company with some $100 billion in sales. Hitachi habitually invests 4% of sales in R&D, explains its boss, Hiroaki Nakanishi. Yet this budgetary straitjacket is oblivious to market demands and it risks missing opportunities. Nevertheless, Mr Nakanishi says that he is satisfied with the approach. By comparison, Samsung, South Korea's biggest conglomerate, plans to spend almost twice as much on research in absolute terms this year. Last year Samsung's profits exceeded those of all nine of Japan's big electronics firms combined.

Much of China's push for patents comes from government policy. The country's firms pay foreign companies more than $10 billion in licensing and royalties annually, and that amount has been growing at 20% a year. Home-grown technologies are a way to avoid such costs and compel foreigners to license Chinese technology. It also enables Chinese firms to improve the terms of their licensing arrangements with foreign companies.

One of the most pronounced changes in the nature of innovation is the dramatic internationalisation of R&D, says Sacha Wunsch-Vincent, an economist at WIPO. In 1990 less than a tenth of international patent applications had a foreign co-inventor; today a quarter do. However, Japan remains woefully insular: only 4% of Japanese applications include a foreign co-inventor (for American filings, the figure is nearly 40%).

Japan still has the largest number of patents in force, at 1.9m in 2008, compared with 1.4m for America and a mere 134,000 for China. However, the countries where the greatest number of foreign patents are legally based are Barbados, Luxembourg, Liechtenstein and Ireland, notes the OECD. These patents mostly belong to Western firms seeking to reduce the tax they pay on licensing revenue. It is one innovation that OECD governments would like to make obsolete.

Correction: We originally misstated the number of filings Japan and China had made under the Patent Co-operation Treaty, and also wrote that America had 14m patents in force, rather than 1.4m. Sorry. These were corrected on October 3rd.