Innovation is widely seen as the engine of future economic growth and wealth creation. With this in mind, policymakers around the world seek ways to encourage and incentivise innovation and reward innovators.

How to encourage and incentivise the right kind of innovation? Innovation for innovation’s sake isn’t necessarily valuable or even particularly beneficial.

To put it another way, not all innovations are created equally – so can government-backed incentives encourage innovations that are actually useful and of high quality?

In 2006 the Chinese government launched a nationwide campaign to develop an “innovation-oriented” society, aimed at moving China’s economy from being a manufacturing powerhouse to the next stage of value creation.

Increasing spending on research and development (R&D), rapid advances in technology and China’s growing linkages with other global economies were all factors that would help to support this effort.

In order to spur the process along, the government campaign introduced an incentives policy to reward domestic Chinese firms for indigenous innovation, based on the number of patents they produced.

The result has been a surge in Chinese patenting. Data from the World Intellectual Property Organization (WIPO) showed that by 2012, China had overtaken the US in terms of the total number of patents filed domestically.

But how novel are these innovations?

In a study published in the Academy of Management Journal[1] we found that for Chinese state-owned firms in particular, the sharp increase in quantity of patents resulting from the policy actually led to a reduction in quality of the patents.

This puts into question the effectiveness of government or state-led efforts to promote innovation through such incentives.

For our study we looked at data between 2000 and 2012 on all Chinese domestic patents and the governance information of publicly listed state-owned firms. This covered the period for six years before and six years after the innovation incentives policy was introduced.

In particular, we wanted to focus on how the corporate governance of different firms affected their production of patents in response to the government’s pro-innovation incentives.

What we found was that whilst the total number of patents produced by firms increased sharply after the 2006 policy change, significant variations emerged between firms.

Drilling deeper we found that the firms that suffered most from personal interests produced the largest numbers of patents but with the least novelty, comparing the periods after and before the policy change.

[1] Jia, N., Huang, K.G.* and Zhang, C.M. (2019). Public governance, corporate governance and firm innovation: An examination of state-owned enterprises. Academy of Management Journal, 62(1): 220-247.