Taorui Guan*
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As the United States and China compete ever more intensely for technological primacy in fields ranging from artificial intelligence to semiconductors, patent systems have emerged as an important factor shaping both nations’ trajectories. In the United States, patents function largely as market-based tools to incentivize private R&D and guide competitive innovation. In contrast, China has instituted a distinctive “coordinated patent regime,” weaving patents into a multi-layered framework of public subsidies, procurement preferences, tax measures, and regulatory advantages. This approach treats patents not merely as exclusionary rights but as mechanisms that channel both market forces and government resources, aiming to strengthen innovative capacity on a systemic scale.
Drawing on a comprehensive study of China’s legal statutes, official policies, and available empirical studies, this Article systematically examines how the coordinated patent regime operates. Compared with the conventional market-based patent system, China’s approach might be a more effective remedy for well-known market failures because it reduces early-stage barriers to innovation, guiding inventors across the “valley of death,” while strengthening overall policy coherence. However, it also carries intrinsic risks. Overreliance on patent counts and the bundling of multifaceted incentives can skew resource allocation, encourage superficial or low-value patent filings, and dampen disruptive technological breakthroughs. The fact that the system’s very strengths — such as top-down support and integrated governance — risk producing patent thickets and weakened market signals, raises questions about its capacity to maintain genuine inventive momentum.
Ultimately, these institutional choices hinge on how effectively China navigates the vulnerabilities of state resource allocation. If misapplied, the coordinated framework might transfer public-sector inefficiencies into the market domain, distorting the patent landscape rather than energizing it. In response, China faces two main reform options: “decoupling,” which reduces government-led incentives in favor of a more market-oriented approach; or “upgrading,” which retains existing structures but reinforces quality controls, evaluative metrics, and transparency. The implications of this study transcend the contexts of the US and China. They offer insights for jurisdictions worldwide that aspire to harness patents more effectively — whether through purely market-oriented approaches or through more integrated frameworks — to spur transformative innovation in an increasingly competitive environment.
Introduction
Rivalry between the United States and China increasingly turns on questions of technological and innovative capacity,1 with both nations vying for leadership in fields such as artificial intelligence, semiconductors, and biotechnology.2 Far from a narrow contest over scientific prowess, this competition implicates broader choices about how societies generate, protect, and deploy valuable knowledge. Intellectual property systems,3 particularly the patent regime,4 have therefore emerged as a focal point in these debates. American policymakers repeatedly underscore their belief that patents lie at the core of economic growth, national security, and technological leadership,5 while a growing body of evidence indicates that China is rapidly increasing the volume and sophistication of its own patent filings.6 The recent assessments of organizations such as the Information Technology & Innovation Foundation (ITIF) warn that China could soon rival or surpass the United States in high-value innovation outputs.7 In this charged milieu, patents — and the institutional arrangements that govern them — are more than legal artifacts: They represent crucial tools for advancing and securing each nation’s broader strategic and economic objectives.
Against this backdrop, the United States and China have adopted markedly different philosophies regarding the structuring of their patent regimes. The U.S. model, long grounded in market-oriented logic, treats patents largely as mechanisms for encouraging private-sector R&D, and for disseminating technical information.8 In contrast, China has developed a more comprehensive system, which leverages patents as pivotal nodes for orchestrating both state- and market-driven incentives.9 This hybrid framework — here termed a “coordinated patent regime” — channels public subsidies, procurement advantages, tax breaks, and regulatory preferences through patent ownership, cultivating an approach that entwines market forces with substantial state involvement.10 This presents a fundamental alternative to the predominantly market-driven regimes of Western economies.
Equally important, China’s patent framework embodies a systemic perspective that integrates innovation incentives across multiple institutional domains.11 Official policy statements from the central government echo this approach, emphasizing “comprehensive” or “coordinated” intellectual property management,12 and calling for tighter linkages among fiscal, procurement, regulatory, and other policy tools to spur technological progress.13 For example, China’s National Intellectual Property Strategy Outline underscores the need to “deploy fiscal, financial, investment, government procurement, industrial… policies” in tandem in order to foster patent creation and use,14 while the “14th Five-Year” National Intellectual Property Protection and Utilization Plan emphasizes the imperative of “systemic coordination.”15 These official pronouncements reflect a broader recognition — present in the scholarly discourse on “policy mixes” — that effective innovation governance demands more than isolated interventions.16 As Borrás and Edquist contend, aligning multiple policy instruments allows governments to address the complex problems of the innovation system,17 while Wieczorek and Hekkert note that this kind of strategy might better address “systemic weaknesses” at the innovation system level, providing a new policy rationale that replaces the older approach that merely addresses the neoclassical market failure.18 China’s coordinated patent system represents an institutional experiment rooted in this systemic ethos, one that aspires to unify diverse incentives but must also navigate the entanglements and uncertainties that such unification inevitably generates.
Existing literature has examined facets of China’s patent landscape — particularly issues of patent protection19 and enforcement20 — but has not engaged in a comprehensive, in-depth analysis of how China orchestrates its patent law and policy in parallel with fiscal, regulatory, and industrial measures to form a coordinated patent regime. Scholars have addressed coordination in innovation policy, yet have often confined their discussion to the combination of procurement and other policy tools,21 without exploring how patents might synchronize with broader instruments. This gap is increasingly salient in light of data showing China’s rapid increase in patent filings and its potential impact on global innovation.22 Some critics point to shortcomings, such as questionable patent quality or overemphasis on numerical goals,23 while others note the country’s growing technological influence on strategic industries.24 Understanding the institutional and policy approaches behind these results matters both for China-watchers and for policymakers worldwide, including those in the United States who advocate a “national, coordinated innovation policy system.”25 By illuminating the logic and mechanisms of China’s coordinated patent regime, this study offers insights not only into how one major economy structures its innovation policies, but also into the broader debates about whether — and how — to integrate patents with other policy levers for sustained technological growth.
This Article conducts a thorough investigation of China’s coordinated patent regime, situating it within comparative law and economics frameworks, and informed by intellectual property scholarship, law-and-development theory, and institutional economics. In Part I, the paper scrutinizes the Anglo-American patent paradigm, tracing its evolution as a market-oriented model that grants inventors temporary exclusive rights to spur technological progress.26 It examines how this traditional U.S. approach, while adept at mitigating free-rider problems and promoting private-sector R&D, largely operates in a decentralized environment where consumer demand and competitive pressures determine a patent’s value.27 This section also points out that conventional liberal market economies typically rely on patents as market-based incentives, even while deploying ancillary policy mechanisms like tax credits or prizes in a largely parallel fashion, without institutionally integrating these mechanisms into the patent framework.28
Part II shifts the focus to China’s coordinated patent system, mapping its institutional contours, and examining the policy tools that align patents with an array of state-driven measures. Drawing on legal provisions, empirical research, governmental directives, and detailed policy documents, this section demonstrates how patents function as central nodes linking fiscal support, procurement preferences, regulatory benefits, and tax relief.29 It reveals how such multifaceted incentives — ranging from direct subsidies for patent filings to favorable tax treatment — reflect a deliberate, top-down strategy that intersects with local experimentation. The result of this approach is a complex policy bundle in which patents serve not merely as instruments of market reward but also as gateways to a suite of state-backed resources, forming an integrated framework through which to cultivate China’s technological development.
Part III offers a balanced assessment of how China’s coordinated patent regime operates, outlining both its benefits and its drawbacks. On the one hand, this hybrid strategy might be more effective than conventional, market-oriented patent systems at closing well-documented market gaps, such as the so-called “valley of death” that obstructs the path from laboratory discovery to commercial product. By aligning multiple policy instruments, China’s approach fosters a more cohesive set of incentives that guide inventors from initial research to market entry.30 On the other hand, the same mechanisms that strengthen these channels can also produce unintended consequences. The layering of public subsidies and procurement preferences risks encouraging superficial filings and weakening the informative function of patents to signal true innovation potential.31 Equally significant, these state-provided incentives can inadvertently create “patent thickets” that hinder subsequent innovation and dampen out-of-the-box technological breakthroughs by favoring incremental advances linked to official targets.32
Part IV then situates China’s coordinated patent regime in a wider theoretical context and evaluates potential pathways for reform. Drawing on economic and policy frameworks — from institutional economics to principal-agent analysis — it posits that China’s experience compels scholars and policymakers to rethink the ways in which the government’s patent regime interacts with its overarching governance strategies. The incorporation of state-incentives into market-based mechanisms might bring the inherent limits of the state into the marketplace, weakening its effectiveness in resource allocation.33 Against this backdrop, the discussion posits two potential reform paths. A “decoupling” scenario, which would peel back the state-driven incentives built around patents, returning the system to a more market-oriented model.34 This approach could lessen administrative distortions and stimulate investment rooted in genuine market demand.35 Alternatively, an “upgrading” scenario would preserve the link between patents and governmental support but tighten quality standards, improve evaluation metrics, and heighten transparency, aiming to mitigate rent-seeking without relinquishing the underlying institutional coordination.36
In offering a richly documented and theoretically rigorous account of China’s coordinated patent system, this Article contributes to multiple fields of scholarly inquiry. First, it expands the scope of patent law theory by revealing a previously overlooked dimension of patents as institutional “bridges” that link market forces with state-led strategic direction, challenging the traditional view of patents as purely market-based incentives.37 Second, it enriches the study of innovation policy by, for the first time, systemically demonstrating how patents can integrate with other policy tools — such as subsidies, procurement preferences, regulatory benefits, and tax incentives — to create a comprehensive framework for mobilizing innovation, thereby advancing the understanding of policy synergy and its challenges.38 Third, it broadens the literature on how latecomer countries can adapt their patent systems to overcome structural hurdles, offering practical lessons for other states seeking to strengthen their innovation ecosystems.39 Finally, by comparing features of China’s approach with the largely market-based Anglo-American model, the discussion enriches comparative institutional analysis, thereby enhancing the theoretical frameworks used to analyze divergent innovation systems.40
I. The Conventional Approach to Patents: The Market-Based Model
The U.S. patent system exemplifies a market-oriented strategy for promoting technological progress. At its core, it grants inventors time-limited exclusionary rights,41 enabling those who succeed in developing valuable inventions to recover research and development costs, and earn a return proportionate to market demand.42 This arrangement rests on the conviction that innovation flourishes in a decentralized environment where competition,43 rather than centralized planning, guides the direction of technological change. Within this framework, the market — manifested through consumer preferences, competitive pressures, and investor judgment — ultimately determines a patent’s value.44 While the United States also employs an array of ancillary measures, such as R&D grants, tax incentives, and prizes, to address specific market failures and foster certain areas of research,45 these operate largely in parallel to the patent system, rather than as integrated components of it.46 As a result, they do not fundamentally alter the market-driven character of patent incentives. Instead, these supplementary instruments remain comparatively light in touch and scope, allowing patents to remain the market-based mechanism that channels private initiative toward inventive activity.
A. Patents as Market Mechanisms
The conventional Anglo-American tradition views patent law primarily as a market-oriented mechanism designed to incentivize private investment in innovation by granting inventors a temporary right to exclude others from practicing their inventions.47 As Kenneth W. Dam, the former Deputy Secretary of the Treasury, once observed, patent law “creates property rights in order to allow a market system to function.”48 This foundational insight captures the essence of patents as instruments that enable inventors to recoup their research and development costs through the market,49 rather than by relying on state direct intervention. Under this model, patents promote innovation not because the government can identify or command desirable technologies, but because it defines and protects enforceable property interests that inventors can trade, license, or otherwise leverage in competitive markets.50 The basic logic is straightforward: By providing inventors with a time-limited monopoly, patents create a window during which they can charge higher than competitive prices or secure strategic advantages in the market, thereby ensuring that successful innovators reap sufficient returns on their investments.51
From an economic perspective, the legitimacy of patents as market mechanisms derives from the theory of public goods and the “appropriability problem.”52 Knowledge, unlike ordinary commodities, is non-rivalrous and non-excludable: Multiple users can benefit from an idea without depleting it, and absent legal protection, others can freely imitate and profit from an original invention without bearing the initial R&D costs.53 Without a mechanism for preventing uncompensated free-riding, private investors might underinvest in innovation, fearing that imitators will erode their returns.54 Patents address this risk by granting inventors exclusive rights, allowing them either to commercialize the invention themselves without imitation or to license it to others at a premium.55 Yet, as Buccafusco and Masur emphasize, “owners of IP can only realize these profits if individuals are actually willing to purchase their products and services,” illustrating that the true value of a patent hinges on consumer demand in the market.56 Economist Steven Cheung similarly notes that a patent’s value ultimately depends on the “marketable product” that stems from the underlying invention,57 implying that while the state defines the legal parameters of patent, the market itself determines the economic return.58 Put simply, with the patent system, the government furnishes the legal scaffolding for invention, but market forces dictate which ideas ultimately succeed — and at what price.59
Beyond their function in creating incentives, patents also serve critical informational roles.60 By requiring detailed public disclosure of technical information in exchange for exclusivity, the patent system builds a readily accessible repository of knowledge.61 This disclosure minimizes duplicative research and development, reduces costs for subsequent innovators, and promotes cumulative innovation.62 Additionally, patents can act as signals in technology markets.63 Investors, collaborators, and competitors often rely on patents as credible indicators of a firm’s technological capabilities which reduces information asymmetries and guides resource allocation toward promising ventures.64 This signaling function can be especially salient in fields like venture capital, where patent portfolios help inform investors of the startup’s potential before committing investments.65
In practice, patents operate as market-shaping mechanisms in diverse ways across industries and technologies.66 For example, in pharmaceuticals—where R&D costs are high, development timelines long, and imitation easy—patents are central to securing a return on risky investments.67 In contrast, in rapidly evolving sectors like software and semiconductors, patents can function more strategically as bargaining chips for cross-licensing or as defensive shields against litigation, rather than as tools for outright market exclusion.68 This heterogeneity highlights the adaptability of the patent system and underscores the difficulty of applying a one-size-fits-all approach to varied innovation landscapes.69
Admittedly, the market-based patent system faces significant challenges. Some commentators highlight its limitations in bridging the so-called “valley of death” in commercialization. While patents protect novel inventions and promote disclosure, they often fail to capture the risk, cost, and expertise necessary to bring an invention from prototype to market.70 Some scholars, such as Ted Sichelman, have argued in favor of mechanisms that specifically address commercialization barriers that complement the current patent system.71 Further, critics contend that market forces might undervalue technologies with significant positive externalities, such as technology aimed at addressing climate change,72 since private returns cannot fully reflect the resulting social benefits.73
Despite these critiques, the foundational logic of a market-based patent system remains largely intact and influential. Over time, patent law has continually proven to be remarkably adaptable, evolving through case law, legislative reforms, and industry practices. The United States, for example, has gradually refined its doctrines governing patentable subject matter, non-obviousness, and infringement remedies so that they better calibrate incentives, and ensure a workable balance between exclusivity and access.74 In addition, private ordering mechanisms—such as cross-licenses, patent pools, and standard-setting organizations—have emerged to mitigate transaction costs that today’s intricate patent system poses.75
B. Patents and Other Innovation Incentives
Although patents stand at the center of innovation policy, they rarely operate in isolation.76 Given the complexity and diversity of innovative activity, no single policy mechanism can effectively correct all market failures or promote technological progress at every stage.77 Advanced economies like the United States have assembled a portfolio of complementary policy measures — including R&D tax credits, direct government funding, and targeted innovation prizes — that work in parallel with the patent system.78 These additional instruments can address market failures or specific phases of the innovation lifecycle that elude patent regimes.79
Among these supplementary tools, research and development (R&D) tax credits have proven to incentivize innovation effectively.80 Qualifying firms may offset a portion of their qualified R&D expenditures against their tax liabilities, thereby lowering the initial costs and risks of undertaking innovation.81 In the United States, businesses can claim an R&D tax credit of 6-8% of qualifying expenses incurred by developing new products or intellectual property; eligible small or new businesses can accrue offsets against payroll tax up to $250,000 annually or $1.25 million over five years.82 Unlike patents, which primarily reward success after an invention emerges, tax credits stimulate earlier-stage research, particularly in high-risk or foundational areas where payoffs can be distant or uncertain.83 Empirical studies, including those by Hall and Van Reenen, consistently demonstrate that R&D credits tend to induce additional private investment on invention84 at a one-to-one basis.85 Other research suggests that tax incentives also generate positive spillover effects at other technologically related firms.86 Some jurisdictions have even experimented with “patent box” regimes that confer favorable tax rates on income derived from patented technologies; these initiatives may encourage the commercialization and retention of IP-intensive activities in addition to invention.87
Direct government funding constitutes another critical pillar of innovation policy.88 Institutions like the U.S. National Science Foundation (NSF) and the National Institutes of Health (NIH) devote substantial resources to scientific research. Specifically, grants channel public funds into areas that are less amenable to private investment—such as fundamental physics89 and high-risk technologies90 —and fields with significant positive externalities like climate-related innovation.91 Direct support can complement the patent system in complex ways. Empirical work by Pierre Azoulay and his co-authors shows that NIH-funded research contributes indirectly to commercial innovation: while less than 10% of NIH grants directly result in patents, over 30% produce research cited by them.92 Thus, publicly funded science builds foundational knowledge that enhances private-sector R&D and extends the reach of the patent system.93 However, the relationship between subsidies and patenting is not always linear or purely additive. As Guellec and Potterie show, moderate subsidies can crowd in private R&D by reducing firms’ R&D costs and uncertainty, whereas poorly targeted or overly generous funding may displace business-financed R&D and crowd out investment..94 The policy implication is careful calibration to avoid inefficiencies and preserve complementary private effort—for instance, by tying awards to additionality and performance in favor of across-the-board grants.
Innovation prizes, though less structurally integrated into the U.S. innovation ecosystem, attract increasing interest as a complementary or alternative mechanism to patent regimes.95 Unlike patents, which award temporary exclusionary rights, prizes confer monetary rewards upon the achievement of specified technological objectives.96 Notable examples include the Defense Advanced Research Projects Agency (DARPA) Grand Challenges97 and the Ansari X Prize for private spaceflight.98 Proponents argue that prizes can steer innovation more directly toward socially valued goals, while avoiding the deadweight losses associated with exclusive rights.99 Nevertheless, the uncertainty inherent in the innovation process, combined with the difficulty of aggregating dispersed technological information, can complicate both the design and implementation of prize-based systems.100
Government procurement policies, though not always framed as innovation incentives, have played a critical role in catalyzing technological advancement.101 Defense-related procurement in the United States, for example, supported the early development of essential general-purpose technologies — computers, semiconductors, and the internet — by providing stable initial markets.102 More recently, programs like the Small Business Innovation Research (SBIR) initiative integrate procurement with broader innovation goals by reserving a portion of federal R&D budgets for small, high-tech firms.103 By 2019, the SBIR program had led to the issuance of 70,000 patents, the establishment of nearly 700 public companies, and around $41 billion in venture capital investments.104 By creating a reliable initial demand for new products, these procurement programs reduce uncertainty for private innovators and spur investment in further development105— an approach that some research, including studies by Paul Geroski, suggests might be more effective than direct subsidies, particularly for technologies in earlier phases of the product life-cycle.106
The interplay between patents and these diverse policy instruments can be intricate and context dependent. As Hemel and Ouellette have documented, the U.S. government simultaneously employs multiple innovation incentives, including grants, prizes, tax benefits, and patents, reflecting the complexity of the portfolio.107 In some instances, these tools work in tandem. For example, in the pharmaceutical context, the Bayh-Dole Act integrates federally funded research with patent-based rewards, while programs such as Medicare Part D combine proprietary pricing with partial government subsidies, resulting in a mixed system in which market forces, public funding, and partial cost-sharing jointly drive innovation and influence access.108
Nevertheless, these various policy mechanisms typically operate in parallel to the patent system.109 Patents, tax credits, subsidies, and prizes each target specific market failures, but lack the integration that a comprehensive overarching framework would provide.110 Critics have pointed to the fragmentation that this approach can produce, arguing that more coherent and coordinated policy bundles might better harness the synergies among different instruments.111 As Borrás and Edquist emphasize, “innovation policy instruments must be designed carefully and on the basis of an innovation system perspective,” forming coherent policy mixes tailored to the complex problems of innovation.112 They contrast this systemic approach to the reality that “in the everyday process of policy-making, many instruments are developed as a mere continuation of existing schemes, or with poor consideration of the expected effects,” underscoring how a lack of system-based thinking can undermine the effectiveness of innovation policies.113 Given this complexity, effective innovation policy might demand a dynamic, system-based approach that prevents the unending proliferation of separate mechanisms, and mitigates negative interactions among different instruments.114 This perspective resonates with Mariana Mazzucato’s concept of “mission-oriented” innovation policy, which advocates assembling robust portfolios of policy tools guided by clear societal goals, rather than relying on ad hoc, piecemeal interventions.115
II. A Coordinated Approach to Patents: The Market-State Hybrid Model
China’s patent system exemplifies a more systematically coordinated approach116 — one that diverges from the market-driven paradigms associated with the US.117 This systemic emphasis on intellectual property is articulated in, and further reinforced by, China’s recent policy pronouncements and strategic initiatives, which underscore the value of integrating diverse institutional components to foster more comprehensive reforms. For instance, in the CCP Central Committee’s Decision on Further Deepening Reform and Advancing Chinese-Style Modernization, government authorities highlight “the transition from piecemeal experimentation and incremental breakthroughs to broad-based, systematic integration,” with the aim of establishing “an efficient, comprehensive intellectual property management framework.”118 As a reflection of this philosophy, China uses legislative reforms and policy initiatives to interlace patent rights with a broad set of state-backed incentives — from direct funding and procurement preferences to regulatory support and tax relief — thereby forming an integrated framework of mutually reinforcing measures.119 Within this framework, patents function not merely as instruments that provide incentives to motivate innovation activities, but also as strategic hubs for coordinating multi-layered governmental support. From the innovator’s perspective, patents no longer promise only market-driven returns; they also unlock tiers of governmental backing, merging private and public rewards into a dual-source incentive structure.
A. Patent and Government Funding
A defining characteristic of China’s coordinated patent regime is its deliberate, system-wide linkage between patent rights and government funding. Through a range of legislative and administrative measures — particularly at the provincial and municipal levels120 — Chinese authorities have integrated patents into a broad constellation of financial supports, including direct grants, commercialization subsidies, and risk-sharing mechanisms.121 These policies seek to ease the steep financial hurdles facing firms that engage in costly and uncertain research and development (R&D),122 mitigating initial outlays and fostering more predictable flows of capital.123 Government funding thus elevates patents from mere instruments of market exclusivity to strategic levers for securing public-sector support.
In practical terms, numerous local governments subsidize the cost of filing patent applications.124 Since the issuance of the National Medium- and Long-Term Plan for Science and Technology Development (2006–2020), local authorities have introduced performance metrics into their innovation policy frameworks.125 Many regions have established dedicated funds that partially or fully cover patent application expenses.126 These funding models vary, ranging from full coverage of documented costs to fixed-sum subsidies, to reimbursement up to predetermined limits.127 For example, in Baotou, applicants receive a fixed subsidy of 5,000 yuan (approximately $700) per granted domestic invention patent, and 10,000 yuan (approximately $1,400) per granted international invention patent, subject to certain ceilings.128 In addition, maintaining a patent for over a decade entitles the owner to a further 1,000 yuan (approximately $140).129 Such arrangements contrast sharply with the user-pay norms prevalent in many market economies, effectively lowering entry barriers and encouraging a broader range of innovators to engage with the patent system.130
Beyond initial filing costs, policymakers have introduced funds explicitly designed to promote the commercialization of patented technologies.131 For instance, Jiangsu Province established a dedicated patent implementation fund132 that provides at least 200,000 yuan (approximately $28,000) to eligible projects,133 covering expenses related to equipment procurement, prototyping, external collaborations, and expert consultations.134 Similarly, Shandong Province’s government implemented a program that promotes environmental-friendly development, providing up to one million yuan (approximately $140,000) to universities and research institutes that aim to commercialize patents in key strategic areas.135 By converting patents into passports for accessing public funds, these measures transform what might otherwise be merely exclusionary rights into gateways to financial and developmental support. This reorientation augments the economic value of patents, and encourages firms to move toward effective technology deployment.
These policy innovations especially benefit small and medium-sized enterprises (SMEs), which often struggle to obtain capital from traditional financial institutions.136 By linking patents to various forms of fiscal assistance, local governments help firms to surmount early-stage funding gaps, making it easier for them to invest in further R&D, refine prototypes, and navigate the path from lab to market.137 This shift can have pronounced effects on the overall innovation ecosystem, fueling a continuous cycle of technological advancement and commercialization.138
China has also pioneered the use of patent-based financing mechanisms that more directly integrate intellectual property into investment and lending practices.139 Government-led intellectual property funds draw on both public coffers and private capital,140 creating mixed-investment vehicles that support promising patent-intensive ventures.141 At the same time, policies encourage the development of patent pledge financing, wherein patents serve as collateral for loans.142 To mitigate the risks that lenders take, local authorities offer risk compensation and interest subsidies to incentivize financial institutions to accept patents as collateral. For example, Hunan’s government established a 65-million-yuan (approximately $8.9 million) risk compensation fund, compensating banks for up to 45% of the losses that they incur from patent-backed loans.143 Studies indicate that patent pledge financing and related policies enable firms to acquire equipment for innovation144 and bolster enterprise-level R&D investments,145 fostering a vibrant innovation environment.146
In sum, China’s patent-and-funding nexus marks a strategic redefinition of the traditional boundaries between intellectual property rights and government support. By treating patents as conduits to both public and private resources, policymakers lower barriers for inventors and entrepreneurs, accelerating the transition from laboratory breakthroughs to commercially viable products.147 This synergy exemplifies the core logic of China’s coordinated patent regime, which deliberately mobilizes public resources to create tangible technological development.
B. Patent and Procurement Preferences
China’s coordinated patent regime ties patents to government procurement policies in a clear and documented manner, leveraging public-sector purchasing power to support patented technologies. Numerous local laws and regulations require procurement authorities to give priority to products incorporating patented inventions.148 For example, Article 19 of Xinjiang region’s local patent law states that when quality and price are comparable, “government procurement should prioritize the purchase of patented products and related services.”149 By giving patented goods preferential access under comparable quality and price conditions, these policies cultivate a critical mass of public demand, reduce market risks for patent holders, and foster the economies of scale and learning needed to advance early-stage innovation.150
In addition, several local governments have established so-called “first-purchase” measures to promote newly developed patented products.151 For instance, Article 15 of Shenyang’s local patent law calls on government procurement agencies to be the first to purchase emerging domestic technologies, thereby helping firms secure initial buyers for novel inventions.152 Such initiatives address a core limitation of traditional patent systems: while patents confer a right to exclude (and can signal technological merit), they do not create early customers or guaranteed demand, so private buyers often hesitate to adopt unproven technologies. By ensuring a baseline level of demand through public-sector orders, these local regulations not only encourage patent-intensive enterprises to invest in research and commercialization, but also help build essential production capacities, which can accelerate the development and adoption of emerging technologies.153
Moreover, local authorities place heightened emphasis on products that embody “indigenous intellectual property.” By favoring domestically developed patented technologies, the Chinese government seeks to fortify national innovation strategies aimed at augmenting domestic technological capabilities and reducing reliance on foreign creations.154 For example, Taiyuan’s local patent regulations explicitly require that, when government agencies seek to procure high-tech equipment and products, they give priority to the domestic firms holding independent IP rights.155 In the context of intensifying geopolitical and technological competition, these policies assume strategic significance: They ensure that local firms, especially those pursuing cutting-edge advancements, benefit from stable initial demand from the public sector. In doing so, the measures not only bolster indigenous high-tech industries but also advance broader national objectives, such as achieving technological self-sufficiency and reinforcing long-term innovation capacity.156
Some localities combine procurement preferences with government funding mechanisms to create cumulative incentives that support development from the R&D phase through market entry. For example, Article 12 of Baotou’s local patent law stipulates that once patented products developed with the assistance of government funding meet the technical criteria of procurement agencies, they should receive priority in government purchasing.157 This layered approach not only helps innovators overcome early financial obstacles, but also lowers barriers to entry in public markets after R&D is complete. By reducing both the financial and the market-access hurdles that emerging technologies face, such cumulative incentives ameliorate a key limitation of traditional patent systems, namely, the lack of connection between the grant of an exclusive right and the practical challenges of commercializing novel products.158
By offering a dependable early customer base, government procurement can encourage innovators to undertake higher-risk R&D projects that might otherwise struggle to gain traction. For fledgling or resource-limited enterprises, a government contract serves as a credential that can reduce information asymmetries and bolster credibility with prospective investors and commercial partners. Although procurement preferences do not guarantee lasting market success, they can generate a positive signaling effect:159 An early purchase order from a recognized public buyer can enhance consumer and investor confidence, facilitating subsequent market penetration and growth.160 Research indicates that government procurement policies can enhance a company’s ability to attract private investment, an especially important benefit for SMEs, which often find it difficult to persuade investors of their long-term growth potential.161
C. Patent and Regulatory Benefits
One of the most distinctive aspects of this regime is the systematic integration of patents into regulatory frameworks that extend well beyond conventional intellectual property protections. Under this model, patents serve not merely as tools of market competition or legal shields for inventions, but also as conduits for accessing a wide array of regulatory benefits. Through crafted policies, the patent system influences career trajectories and enterprise qualifications, transforming patents into multifaceted instruments of innovation governance.162
At the individual level, the intersection between patents and professional advancement illustrates how patents have taken on greater significance in China’s innovation ecosystem.163 The professional title system, a state‑administered framework, plays a pivotal role in recognizing qualifications and achievements across specialized fields such as engineering, the natural sciences, and the medical sciences.164 Higher-level titles confer distinct advantages, including better employment prospects, enhanced opportunities for promotion, and increased earning potential.165 Many enterprises and public institutions tie professional titles directly to salary, with senior titles ensuring significantly higher compensation.166 Moreover, professional titles symbolize official recognition of an individual’s expertise, elevating their social standing and reputation.167
These state-issued designations traditionally depended on factors such as educational credentials, years of work experience, technical expertise, and ethical conduct.168 In recent years, however, the central government has shifted its focus toward concrete achievements, including practical outputs and innovative contributions.169 Because professional titles function as the state’s core system for evaluating and managing technical personnel, they directly affect career advancement, remuneration, and institutional standing—which makes the growing emphasis on patents in title evaluations especially consequential.170 Within this evolving framework, patents have become a critical benchmark of contributions and outputs.171 Many provinces and municipalities now require human resource evaluation bodies to consider patents in professional title assessments.172 For example, Jiangsu Province’s local patent law explicitly states that “relevant units should consider the patent inventions and designs of inventors and designers as one of the bases for professional title evaluation.”173
In some cases, jurisdictions have introduced “fast-track” mechanisms that allow candidates who possess a significant number of high impact, granted patents to bypass standard requirements, such as advanced degrees or lengthy work experience, and secure senior professional titles more swiftly.174 Guangdong Province, for instance, permits engineers who lack certain formal qualifications to seek promotion to senior engineers if they have obtained at least one invention patent that yields substantial economic and social benefits.175 Similarly, Shandong Province has developed a “fast track” for professional title promotion, using authorized invention patents as a key criterion.176 This practice has enabled 245 individuals to obtain provincial-level professional titles in the field of new functional materials engineering, including 12 senior titles and 97 intermediate titles.177
The implementation of these policies has, in several instances, substantially increased the importance of patents for an individual’s career development, giving researchers and technologists an incentive to focus on patentable outcomes. However, this can have mixed consequences. On the one hand, it might encourage scientists, engineers, and other technical professionals to engage more actively in innovative research, and to seek patent protection for their work, thus fostering a more innovation-oriented culture within the institutions that employ them. On the other hand, the emphasis on patent counts might inadvertently prioritize quantity over quality,178 nudging professionals to pursue easily patentable but less groundbreaking inventions.
Similar principles apply at the organizational level. Many localities rely on patent-related metrics to determine whether firms qualify as “High-Tech Enterprises,”179 “Specialized, Refined, Distinctive, and Innovative ‘Little Giant` Enterprises,”180 or other categories that confer privileged business status.181 For example, Article 8 of Qingdao’s local patent law explicitly includes both the quantity and quality of patents as criteria for certifying high-tech enterprises and enterprise technology centers.182 These certifications often unlock tangible advantages such as tax incentives, preferential credit access, and priority consideration in government support programs.183 In Shantou, Article 24 of the local patent law designates the possession of self-developed patented technologies as a key condition for recognition as a “leading industrial enterprise.”184 This status confers a range of regulatory and financial benefits, from priority in exhibition booths and streamlined customs clearance to easier participation in governmental projects. It also facilitates more favorable financing terms.185
By tying government incentives to patent holdings, China’s innovation governance system effectively recasts patents as “innovation credentials” for firms — intangible assets that signal technological capacity and invite supportive policy measures.186 In this environment, owning patents can help businesses mitigate uncertainties and gain access to strategic resources. Consequently, companies might strategically accumulate patent portfolios (i.e., bundles of related patents) not merely to secure market advantages, but also to bolster their reputational standing and benefit from institutional backing within China’s regulatory framework.187
This interplay between patents and government regulatory frameworks also extends to entities beyond private enterprises. Beijing tasked municipal patent authorities — together with the departments responsible for science, development planning, economic and information affairs, education, and agriculture and rural affairs — with establishing a patent-focused performance indicator system for various innovation actors, including enterprises, universities, research institutes, and social organizations.188 The results of these evaluations serve as a basis for official support or recognition.189 Likewise, Jilin Province’s patent law obligates county-level and higher government departments to incorporate key patent metrics into the evaluation of technology plans, state-owned enterprise performance, and the research accomplishments of government-run R&D institutions and universities.190 By embedding patent-related benchmarks within these review processes, policymakers can foster innovation in organizations that might not succeed using purely market-based incentives, thereby expanding the reach and influence of the patent system.
In essence, China’s patent-regulatory nexus enlarges the domain of its patent system from a market-based mechanism for protecting inventions to a powerful lever for shaping career paths, firm strategies, and institutional behavior. By rendering patent ownership an important criterion for professional recognition, preferential treatment, and resource allocation, the state is reshaping the innovation landscape so that patents function as keys that unlock a wide range of public benefits. While this strategy holds promise in galvanizing R&D efforts, it also raises important questions about how best to ensure that patent-based metrics accurately reflect meaningful innovation and do not inadvertently encourage superficial IP accumulation.
D. Patent and Tax Incentives
China’s coordinated patent regime extends beyond direct funding, procurement preferences, and regulatory benefits, integrating patents deeply into its fiscal policy framework. While European “patent box” regimes typically offer a single, preferential tax rate on income derived from qualifying patents, such as Ireland’s 6.25% rate on patent income, the United Kingdom’s 10% rate, Hungary’s 4.5% rate, or Cyprus’ 2.5% rate,191 China has adopted a more comprehensive system of patent-related tax incentives. Rather than conferring a single, preferential rate on patent-generated revenue, China’s policies address the entire innovation lifecycle, offering targeted relief at multiple stages.
At the R&D stage, the patent law of numerous localities allows for tax deductions and credits that account for both the uncertainties of innovation and its varying outcomes.192 For example, Article 16 of Jiangsu Province’s local patent law allows companies engaging in new technology, product, or process development to deduct 50% of their eligible R&D expenses from their taxable income if those expenses do not lead to the creation of intangible assets.193 If they do create intangible assets, firms may amortize them at 150% of cost. By adjusting the tax base in this manner, the policy not only compensates for failed R&D efforts, to some extent, but also enhances long-term incentives for successful innovations.194 In contrast to the uniform patent box rates at the commercialization stage commonly seen in the EU,195 this tailored approach might better align tax benefits with the inherent complexity and variability of R&D activities.
The tax advantages extend to the transfer and licensing of patented technologies.196 Take, for example, the local patent law of Xinjiang region, which stipulates that eligible income from patent assignments or licensing agreements can receive specified tax reductions.197 These measures facilitate a more active patent market by encouraging patent holders to sell or license unexploited technologies rather than leaving them dormant. The economic logic is straightforward: reducing the fiscal burdens related to IP transactions increases market liquidity, fosters knowledge diffusion, and enhances the chances that valuable but underutilized inventions will find commercial application. To prevent abuse of these incentives, certain local regulations, such as Article 14 of the local patent law of Zibo city, condition tax benefits on formal recognition of the underlying technology contracts, ensuring the integrity of these preferential treatments.198
China’s patent-related tax incentives also extend into the often-overlooked realm of intermediary services, where specialized brokerage firms and consultancies play a critical role in bridging information gaps and reducing the high transaction costs commonly associated with complex patent transfers.199 Recognizing that these intermediaries are pivotal to matching patent supply with demand, Article 16 of Jiangsu Province’s local patent law specifically grants value-added tax reductions on qualifying IP service income,200 lowering the rate to 6%,201 a substantial improvement over the standard 13%.202 This policy not only eases the fiscal burden on knowledge brokers, but also encourages their active participation in patent marketplaces, where they handle tasks like information matching, technology evaluation, and negotiation coordination. By breaking down transaction barriers,203 these intermediary agencies enhance the fluidity of patent transactions and help ensure that innovative technologies find right buyers, thereby fostering a more efficient, vibrant patent market.204
China’s incentives do not cease at the commercialization stage. Legal measures aim to integrate patent-related tax benefits with corporate income tax regimes to smooth the transition from an experimental technology to a fully marketable product. For instance, Article 17 of the Jiangxi Province’s local patent law provides tax concessions to enterprises that develop new products from their patented technologies.205 Article 11 of the Xinjiang region’s local patent law allows enterprises and research institutions engaged in the R&D of patented products to claim tax reductions on their expenditures.206 These measures recognize that transforming a patent into a commercially viable product often involves substantial costs and risks.207 By reducing the tax burden during these more expensive, high-risk phases of development, they help firms avoid running out of resources before reaching full-scale market readiness, thereby bridging the gap between promising prototypes and commercial application.
Compared to traditional patent box regimes, China’s framework for patent-related tax incentives offers three distinguishing features. First, it employs a diverse toolkit — covering income tax relief, value-added tax reductions, and super-deductions for R&D expenses — instead of relying on a single, preferential rate. Second, it adopts a context-sensitive, staged approach by tailoring specific tax benefits to different categories of entity and various phases of the innovation process, rather than focusing solely on the commercialization endpoint. Third, it provides developers with continuous support, from the earliest stages of research through technology transfer and eventual product launch. Taken together, these measures highlight the ways by which China’s tax policy weaves patent incentives into a broad strategy for spurring innovation, one that addresses not only market-ready inventions but also the upstream and intermediary phases.
III. Evaluation
China’s coordinated patent regime stands at the intersection of significant promise and equally significant risk. By tightly integrating patents with state-driven measures — from subsidies and procurement preferences to regulatory privileges — China has assembled a powerful mechanism for tackling market failures and enhancing innovation governance. Yet this very alignment raises fundamental questions about patent quality, resource misallocation, and the compatibility of such far-reaching interventions with global trade and IP obligations. The following analysis probes both the regime’s strengths and its structural vulnerabilities.
A. Merits
China’s coordinated patent regime offers a systematic approach to the institution of innovation,208 tightly coupling patent rights with an array of state-backed incentives to generate particular advantages. First, it addresses multiple forms of market failure more comprehensively than traditional, market-oriented patent systems. Conventional patent regimes excel at mitigating the appropriability problem by granting inventors temporary exclusive rights, yet they rarely guide technologies through the perilous gap between initial invention and commercial realization.209 As Ted Sichelman observes, the conventional patent system is limited in promoting commercialization of invention.210 The lack of resources leaves many innovations stranded in a so-called “valley of death.”211 In contrast, China’s coordinated model deploys layered government supports — from R&D subsidies and tax benefits in the early stages to procurement preferences and specialized financing tools at later phases — designed to lower barriers and mitigate uncertainties throughout the entire innovation lifecycle.
More concretely, at the R&D stage, these measures reduce upfront costs for innovators, particularly SMEs, alleviating capital constraints and enabling them to engage in early-stage research that might otherwise prove too risky.212 As projects advance, commercialization-focused policies come into play. For instance, numerous local regulations stipulate that government entities should prioritize the purchase of patented products that have recently entered the market, thereby offering innovators an initial, reliable customer base. Similarly, patent pledge financing and risk-compensation mechanisms — such as Hangzhou’s 30-million-yuan (approximately $4.1 million) IP financing risk compensation fund, which covers up to 40% of losses on patent-backed loans213 — help reduce financial uncertainty in the later stages of development. By coordinating these interventions, the system aims to respond to the complexities and bottlenecks that innovators face.
Second, at least at the level of institutional design, China’s coordinated patent regime exemplifies what Susana Borrás and Charles Edquist describe as a “policy mix” — an integrated set of innovation policy instruments tailored to address multidimensional needs.214 Drawing on the insight that policy instruments should be designed and combined to “address the complex problems of the innovation processes,”215 China’s framework embeds patents within a broader constellation of procurement incentives, financing tools, and tax measures. This structured alignment helps reduce the fragmentation commonly associated with stand-alone policies. By systematically weaving patents into various layers of its innovation policy, China offers an example of how a government can structure an instrument mix in a way that promotes technological development.
Third, China’s coordinated patent system can help solve “principal-agent” problems in public-sector innovation.216 These problems include situations in which the government (the “principal”) has different motivations or less information than the people or institutions (“agents”) doing the research and development.217 Because new technologies often involve technical uncertainty, it’s hard for the government to tell whether poor results stem from external factors (a “low exogenous state of nature”) or from agents’ misaligned incentives, insufficient effort, or misuse of resources.218 China’s coordinated regime employs patent-related metrics as a way to gauge performance. For instance, Gansu’s local patent law incorporates inventors’ patent holdings into both state-owned enterprise performance evaluations and the assessment of research productivity at universities and research institutes,219 while Liaoning’s local patent law views patent quality and quantity as key indicators for accrediting engineering research centers and key laboratories.220 By establishing such concrete standards, policymakers can reduce information gaps and enhance accountability in publicly funded entities.221
The same principle also applies to the distribution of government grants and project-based support, as some localities explicitly tie patent-related commitments to funding agreements.222 For example, Article 10 of Zhengzhou’s local patent law introduces a “staircase” mechanism in which government financing depends on an organization’s promise to file for patents.223 If the recipient fails to follow through, the local government can bar it from future support for three years.224 This deters moral hazard by linking patent commitments to ongoing funding eligibility, thereby encouraging recipients to maintain sufficient effort and resource allocation throughout the project’s duration, and ultimately strengthening overall innovation governance.225
Fourth, by coupling state-driven incentives with market-based rewards, the coordinated patent regime helps to cultivate a robust intellectual property culture. This is an achievement of special significance for emerging economies with historically weaker IP systems. Research suggests a positive correlation between the magnitude of patent subsidies and the development of innovation actors’ “patent awareness.”226 Empirical studies in regions such as the Pearl River Delta show that increased patent creation subsidies heighten entrepreneurs’ consciousness of the patent system, while patent commercialization subsidies reinforce their focus on the downstream application of protected technologies.227
These advantages are closely linked. By systematically targeting market failures, enhancing policy coherence, improving innovation governance mechanisms, and fostering an IP-conscious environment, China’s coordinated patent regime has established a new model of innovation governance. Although this system faces significant challenges — many of which the next sections will explore — it nonetheless provides fresh insights for countries seeking to strengthen their national innovation capabilities through a more integrated and strategically guided use of patent rights.
B. Challenges
Notwithstanding its merits, China’s coordinated patent regime faces a series of systemic challenges that raise questions about its long-term sustainability and overall effect on innovation. The first and perhaps most pronounced concern stems from the risk that its incentive structures might produce distortions.228 By tying patents to government resources and preferential policies, the system risks prompting an influx of strategically-motivated patent filings.229 Several empirical studies confirm that the quality of patents is relatively low. For example, Dang and Motohashi found that local patent subsidy policies significantly increased application volumes but simultaneously reduced overall patent quality.230 Pan and Kou report similar effects, with subsidies contributing to the proliferation of low-value patents.231 Maintenance data point in the same direction: although invention patents carry a 20-year term, most expire within five years, only about 6% remain in force beyond a decade,232 and in 2014 approximately 90% lapsed for nonpayment of fees, with roughly 2% reaching full term.233 This data strongly suggest that many patents are driven more by policy-driven incentives than by genuine innovative activity.234
Second, the proliferation of lower-quality patents might contribute to the formation of “patent thickets” — dense clusters of overlapping intellectual property rights that complicate subsequent innovation.235 Innovators often pursue patents for strategic rather than purely technological reasons, resulting in an increasingly complex legal landscape.236 This trend not only places a heavier examination burden on patent offices237 but also raises transaction costs for innovators, who must allocate additional resources to patent searches and analyses to avoid infringement.238 When commercialization of products requires multiple permissions from separate patent holders, negotiations can become protracted and cumbersome. As a result, subsequent innovators can face a “patent assembly failure,” abandoning otherwise valuable R&D projects because securing the necessary licenses has become be too difficult.239 These challenges are especially significant in sectors where complex products rely on multiple incremental inventions, potentially hindering industrial progress and slowing technological upgrades.240
Third, the system’s signaling function may weaken, undermining efficient resource allocation. As Clarisa Long notes, patents have traditionally signaled an entity’s technical capabilities, guiding investment decisions.241 Yet when state-provided incentives artificially inflate patenting, raw counts may no longer reliably indicate innovative strength.242 In China, some firms prioritize meeting policy benchmarks, such as patent application quotas to access tax breaks or subsidies, over investing in meaningful R&D; in doing so, patents then risk becoming mere administrative token used to unlock state benefits rather than protect real technological innovation.243 The result can mislead both policymakers and market participants, creating a feedback loop of incentive gaming and misallocation of resources. A surge of low-quality patents may even prompt government support into areas with little genuine innovation, further distorting the innovation ecosystem.244
Fourth, these distortions might harm the long-term cultivation of innovation capabilities.245 In a conventional patent system, the main driver of patent value lies in the technology’s utility and commercial appeal.246 But under the coordinated model, the pursuit of government incentives can overshadow responsiveness to market demand, weakening the market’s role in steering technological development.247 Empirical indicators lend credence to these fears: Although China’s patent filings have soared, patent-intensive industries account for only about 11% of GDP, far below the United States’ 35% and the European Union’s 39%.248 Moreover, a 2017 CSIS report found that China’s patent-licensing income was roughly 1.5% of that of the U.S.249 Taken together, these figures suggest that China’s expanding patent volume does not necessarily translate into comparable economic returns or high-quality innovation output.250 Some observers argue that China’s explosive growth in patent numbers has not been matched by comparable advances in innovation, highlighting persistent gaps in critical “bottleneck” technologies251—areas of technological weakness and dependence—that continue to constrain China’s ability to climb higher on global value chains.252
Fifth, the coordinated system raises questions regarding China’s commitments under international trade and IP agreements, particularly the national treatment principle.253 Empirical studies note that local patent subsidy policies often restrict eligibility to locally registered firms or residents.254 For instance, Shanghai enforces stringent criteria favoring local entities. Jiangsu adopts a relatively broader approach, but both limit subsidies to domestic applicants.255 Such geographic limitations might conflict with China’s WTO obligations or other treaty-based commitments that require equal treatment for foreign entities.256
In sum, while China’s coordinated patent regime offers a novel strategy to promote innovation by orchestrating both state and market incentives, it also faces significant structural concerns regarding long-term sustainability and overall effectiveness. Recognizing these potential challenges is crucial for any comprehensive assessment of this model and its capacity to mobilize resources to achieve technological breakthroughs.
IV. Implications
China’s coordinated patent regime offers both a powerful policy toolkit and a cautionary illustration of how linking patents with broad-based state support can simultaneously address key innovation bottlenecks and introduce new systemic strains. Far from a purely technical matter, these institutional arrangements reflect deeper questions about how society provides incentives for knowledge creation, commercializes discoveries, and structures long-term innovation capacity. This Part considers two structural crossroads: how China’s model might transmit state-allocation weaknesses into market mechanisms, and whether the country should decouple patents from government incentives or refine it through systematic upgrading.
A. Transmission of State-Allocation Weaknesses into Market Mechanisms
China’s coordinated patent regime is emblematic of a broader, state-driven approach to innovation—an approach that has yielded significant achievements in targeted sectors,257 as the rapid development of the high-speed rail and the deployment of the BeiDou Navigation Satellite System exemplify.258 This model, characterized by concentrated resources and top-down coordination, has proven effective in achieving rapid technological advancement within established paradigms.259 Building on these achievements, China has now embarked on a novel experiment in innovation governance through its coordinated patent system, attempting to use patents as a linchpin through which to orchestrate a diverse array of innovation motivations. By intertwining governmental incentives with market forces, policymakers hope to overcome certain blind spots inherent in market-based frameworks. However, this same structure can import the weaknesses of state-directed resource allocation into mechanisms that normally rely on market signals—such as the patent system—particularly because breakthrough innovation depends on complex, dispersed knowledge that centralized processes struggle to aggregate and evaluate.
The limitations of state-directed resource allocation in the realm of innovation manifest themselves most acutely in the collection and processing of information.260 Several key concepts from economics and organizational theory illuminate this challenge. Hayek’s “knowledge problem” underscores why central coordination, while excelling at channeling resources toward specified tasks, often struggles to nurture unpredictable, disruptive discoveries.261 The knowledge that groundbreaking innovation requires is often tacit, dispersed, and context-dependent, making it difficult to aggregate and utilize effectively through centralized mechanisms.262 Christensen’s theory of disruptive innovation reinforces this point, demonstrating that creation frequently emerges from the fringes of the market.263
These theoretical insights find practical expression in the operational challenges that China’s coordinated patent system faces. One recurring obstacle arises from government’s tendency to oversimplify innovation objectives, which is a direct response to the government’s limited capacity to gather and interpret the detailed, context-specific data that is necessary for effective resource allocation.264 Following the central government’s issuance of the National Medium- and Long-Term Plan for Science and Technology Development (2006–2020), many localities embraced straightforward performance metrics,265 ranging from annual growth targets for invention patents to fixed quotas for per capita patent filings.266 These quantifiable indicators, while easy to track and communicate,267 do not reliably capture the depth, quality, or real-world impact of the underlying research.268 Consequently, measuring success by numerical patent thresholds elevates quantity at the expense of genuine technological advancement.269
The reliance on simplified metrics extends to the procedures employed at the local level. In many jurisdictions, patent subsidy applications face only minimal oversight. In Chongqing, for example, applicants need only submit basic fee forms and receipts; there is no requirement that they substantiate the technical merit of their inventions.270 While it reduces administrative burdens, this streamlining inadvertently creates avenues for rent-seeking behavior. Innovators might be tempted to divide one invention into multiple patents, or to make marginal tweaks to previously disclosed technologies simply to inflate their patent counts and secure subsidies, rather than to protect genuinely novel advancements.271
Limitations of the government’s capacity to evaluate the merit and value of patents effectively further compounds these systemic issues. The principal-agent problem, a core concept in institutional economics, helps explain this challenge. When the government (the principal) delegates the task of innovation to firms and researchers (the agents), information asymmetry and misaligned incentives can lead to suboptimal outcomes; multitask settings amplify this problem, as Holmstrom and Milgrom point out.272 When performance metrics focus on easily quantifiable outputs, like patent counts, they inadvertently divert effort from less measurable but equally crucial activities,273 such as basic research or the development of market-driven innovations that are difficult to patent. Government officials often lack the specialized expertise to distinguish truly innovative, market-relevant technologies from administrative placeholders designed merely to meet policy targets.274 The empirical studies of scholars such as Yang and Rui reveal how “pseudo high-tech enterprises” exploit these knowledge gaps, siphoning off benefits intended to reward genuine invention.275
Taken together, these information and enforcement limitations weaken the connection between patent activity and genuine technological progress.276 Attaining a more balanced approach requires refining evaluative criteria so that qualitative and contextual indicators, such as the technology’s viability, potential impact, and actual commercialization results, carry weight alongside raw patent counts. It also requires that policymakers develop the expertise to distinguish substantive innovations from those that exist chiefly on paper. Without such reforms, the regime risks perpetuating a cycle in which localities chase patent metrics to satisfy administrative mandates, diverting attention and resources away from the kinds of research that fuel transformative breakthroughs.
B. Diverging Paths for Development: Decoupling or Upgrading
As China’s coordinated patent regime grapples with information-processing challenges, incentive distortions, and the broader tension between centralized direction and decentralized innovation, it stands at a crossroads. On the one hand, decoupling patents from government-driven incentives would reduce the state’s direct influence over which technologies developers pursue and how these evolve, reverting to a more market-oriented framework.277 On the other hand, upgrading the current system — through tighter quality controls, better evaluative metrics, and enhanced governance — would retain the existing linkage between patent rights and state support, while refining it to reduce undesirable outcomes.
1. Decoupling
The first prospective path, which this section explores, would sever the explicit connection between patents and government benefits, moving the system toward a more classical, hands-off approach. This proposal draws on the longstanding concern that layering government subsidies, procurement advantages, and performance quotas on top of the patent system can distort market signals and encourage rent-seeking.278 Empirical research by Liu Xuefeng and Zhang Xiao indicates that overly generous government interventions can create “abnormal profit spaces” that precipitate a regression in innovation capability.279 By reducing the state’s direct influence on innovation priorities, this approach seeks to restore the role of the patent system as a market mechanism to identify and reward technological advancements.
In practice, decoupling could involve multiple reforms. First, local authorities might eliminate or significantly reduce patent-application and patent-authorization subsidies. Second, government procurement and funding policies could shift away from prioritizing patented products as such, and focus instead on inherent technological and commercial merits, an approach that might discourage innovators from filing patents solely to unlock preferential treatment. Third, performance evaluations for officials, universities, and enterprises would cease to emphasize patent-related numerical goals.280 This scenario would limit the state’s role to creating an enabling environment: maintaining robust IP enforcement, funding technology trading platforms, and clarifying legal standards for patentability. In essence, market demand — measured through genuine commercial uptake — would become the main arbiter of a patent’s value.
Recent policy announcements start to point in this direction. Since 2021, local authorities have begun abolishing application subsidies and plan to phase out authorization-stage subsidies by 2025,281 following CNIPA guidance emphasizing “high-quality development” over quantity.282 The directive also calls for “shift of emphasis toward high-quality development and correcting the overemphasis on quantity.”283 Some provinces and cities have also established technology trading centers aimed at encouraging patent transactions grounded in market needs rather than administrative quotas,284 although there is little empirical evidence to show that such centers substantially improve the efficiency of patent transfer. Moreover, the broad array of state-driven incentives still exists, as does the reliance on patent counts for setting policy goals.285 In other words, official policy has signaled a shift away from patent filing subsidies, but it has neither fundamentally dismantled the larger incentive infrastructure nor retreated from the use of quantitative benchmarks as a cornerstone of innovation governance.
It is also worth noting that such a reversion would depart from the official rhetoric emphasizing the integration of innovation incentives, as reflected in central policy directives. For example, the National Intellectual Property Strategy Outline underscores the coordinated use of financial, procurement, and industrial policies to accelerate the creation and utilization of intellectual property.286 Similarly, the State Council General Office’s Special Action Plan on the Transformation and Application of Patents (2023–2025) advocates the promotion of intellectual property exploitation with “integrated legislation.”287 Thus, while China’s government has taken incremental steps to reduce patent subsidies and refine its patent-related programs, it has shown little inclination to abandon the fundamental logic of fusing patent rights with broader resource allocation measures.288
2. Upgrading
The second path envisions a systematic upgrading of China’s current framework, seeking to refine, rather than abandon, the tight connection between patents and state incentives. This approach reflects the belief that a coordinated patent system, if managed judiciously, can channel resources toward genuinely useful technologies, without succumbing to the oversimplified metrics that the decoupling scenario seeks to avoid. Instead of dismantling the institutional ties between patent rights and public support, policymakers would introduce stricter quality controls, more nuanced evaluation mechanisms, and heightened transparency to mitigate rent-seeking and overreliance on patent counts.
Upgraded measures could begin with more stringent scrutiny for patents seeking state-backed benefits, elevating the thresholds beyond baseline patentability standards.289 Several localities are already moving in this direction by experimenting with differentiated criteria. For instance, Jiangsu Province has at least one funding program that insists on “high commercialization potential and sound market prospects” before granting subsidies.290 Hunan’s approach further refines this logic by distinguishing between patents that have undergone partial commercialization and those that remain prospective, providing proportionate funding appropriately tailored to each category.291 To address information asymmetries further, local authorities might integrate independent expert panels into their review processes, tying financial awards and procurement preferences to patents that exhibit verifiable social or economic value.292 More robust verification processes, such as requiring documented economic gains or authenticated endorsements from industry experts, could ensure that public support aligns with genuine societal demands. In principle, such an upgraded system would harness the state’s strategic vision without letting raw patent tallies eclipse the deeper pursuit of transformative innovation.
Yet even a significantly retooled framework cannot fully overcome the knowledge problem that Friedrich Hayek described.293 Innovation-related knowledge remains scattered and tacit, and no central authority, however well-intentioned, can fully grasp the subtle, emergent contours of innovation.294 Moreover, these enhanced rules might still distort market signals by rewarding inventions that match state priorities rather than the genuine demands of potential technology users. Still, upgrading offers a realistic middle ground for a government reluctant to relinquish the integration of patents with other innovation-incentivizing measures.
In sum, China’s government must choose between these two paths. Decoupling would roll back the state’s ambitious blueprint for coordinated innovation and reset the patent system to a more classical market-driven paradigm, at the cost of relinquishing much of the strategic guidance and pooled resources that have characterized recent industrial policy. Upgrading, in contrast, promises to fine-tune the existing model in ways that minimize inappropriate incentives and improve evaluative rigor, while preserving the synergy between patents and state-backed initiatives. But this cannot fully resolve the tension between top-down management and decentralized, market-based discovery.
In negotiating this fundamental crossroads, China stands to influence not only its own trajectory toward high-tech development, but also the evolving global conversation about how best to nurture meaningful, transformative innovation in an era of intensive technological competition.
Conclusion
China’s coordinated patent system represents a deliberate effort to bring innovative activity under a more unified institutional design. Unlike the predominantly market-driven U.S. framework, in which patents primarily function as vehicles for private-sector R&D and knowledge dissemination, China’s approach integrates patents into a broader matrix of both market-oriented and governmental incentives. Patents thus become more than exclusive rights that reward inventors; they serve as conduits linking government funding, procurement benefits, tax relief, and regulatory support in pursuit of robust innovative capacity. By placing patents at the intersection of fiscal and regulatory measures and market forces, this system aspires to reduce the inefficiencies that often hinder the transition from invention to application.
This analysis shows both the distinctive benefits this approach offers, while also exposing its structural challenges. On the one hand, aligning government resources with patent rights can help bridge gaps that typically stymie early-stage research and development, particularly for smaller enterprises. It can also facilitate deeper coordination among policy tools, thereby minimizing fragmentation and laying a more coherent groundwork for sustained technological progress. Yet the same mechanisms that intensify patent creation can also encourage filings of marginal quality, limit the genuine signaling function that patents provide, and risk creating dense clusters of overlapping rights. These issues become more pronounced when the system evaluates patent counts as performance measures, which undermines the original purpose of stimulating meaningful innovation.
This study highlights the ways by which consolidating patent-based incentives with governmental support can produce both promising outcomes and unintended inefficiencies — especially when weaknesses in state-level resource allocation carry over into the marketplace. At present, China must choose between “decoupling” its patent regime from public incentives and shifting toward a model rooted more firmly in market signals, or “upgrading” the existing framework through stricter quality controls, more refined evaluation metrics, and enhanced transparency. These decisions have practical ramifications for China’s technological trajectory. They also enrich the broader discussions about the interplay between state support and market-based innovation. By demonstrating how patents can function as institutional linchpins within broader reform agendas, this Article offers new perspectives on how different regimes — and potentially other jurisdictions — can shape policies to cultivate technological growth.