Innovative Output in China

We study the explosive growth in Chinese domestic patenting over the period 2000-2018 from the point of view of a global knowledge production function. When new knowledge production is global, subsidies to patenting increase the number of patent applications, but cannot increase the real number of innovations. Using the rest of the world as a benchmark, we estimate the expected number of applications that "should'' have been filed in China, based on macroeconomic innovation determinants (population, income, researchers and R&D). We find that, by 2018, China's residents filed about 1.4 million applications, while its underlying fundamentals predict about 212,000 applications -- total inflation of more than 500%. After computing a domestic patent "deflator,'' we investigate the extent to which domestic patent inflation extends to China's patenting abroad, where we find an inverse relationship between the propensity to export and patent quality. We investigate applications and exports in the telecommunications sector, where despite a higher-than-average export propensity, both the growth rate and the average quality of patents have fallen over the past decade. Finally, after calibrating our results, we find that the increase in the aggregate quantity of Chinese patents is associated with a corresponding reduction in quality, to only about 19% of the quality of an unsubsidized sample. These offsetting quantity-quality effects do not increase aggregate innovation, but increase the aggregate value of domestic patents by about 24%. In short, reports of the Chinese takeover of the world's innovation systems are greatly exaggerated.