Uniformity/Innovation/Rent Seeking State incentivized patents fail and lead to rent seeking – China proves

Another challenge to this semi-decentralized model is the potential for efficiency losses due to local legal experimentation, an issue that is particularly [*300] relevant in China. In the context of local competition, local patent laws often incorporate two types of measures. Firstly, local governments use their own finances to fund businesses applying for patents. For instance, Article 4 of the Fujian Patent Law stipulates, "The local people's government should increase funding for the promotion and protection of patents, raise funds through multiple channels, and use them to support patent applications."261 Secondly, local governments make patents a primary consideration when granting financial benefits to businesses, such as government funding, preferential access to government procurement, and tax benefits. For example, Article 12 of the Fujian Patent Law dictates that "government procurement and other purchases using fiscal funds shall give priority to the purchase of patented products under equal conditions."262 Businesses engaged in innovative activities and keen on obtaining patent protection undoubtedly find these measures attractive, as government financial support at the application stage reduces the cost of patent acquisition, while financial benefits granted on the basis of patents can put companies in a financially advantageous position compared to their competitors.

However, research shows that the implementation of these two types of measures can encourage businesses to engage in rent-seeking behavior. With no or minimal investment required to apply for patents, businesses might apply for patents for non-innovative, low-quality technologies.263 Some applicants, in order to secure government supportive funding for patent applications, even divide a single application into multiple ones.264 Studies indicate that the practice of local governments subsidizing patent applications has led to a decrease in the patent quality.265 This not only results in a waste of government financial and human resources at the application stage266 but also leads to increased administrative costs [*301] for subsequent patent management.267 For companies wishing to enter the innovation field, navigating a dense thicket of low-quality patents can also lead to waste of resources that they could otherwise have used for innovation.

The resource wastage caused by government funding for patent applications may be exacerbated by local governments' heavy reliance on patent signals for fiscal resource allocation,268 even when overall patent quality is not high.269 Empirical studies show that local governments focus mainly on the number rather than on the quality of patents to determine tax benefits and financial subsidies.270 But, as Clarisa Long points out, signals from patent numbers are ambiguous, do not necessarily reflect a company's innovative capabilities, and are subject to manipulation.271 A local government's overreliance on these signals might cause it to be misled. Moreover, these measures can produce distortion effects. Research shows that firms have overinvested in activities to obtain patents that attract government funding, resulting in the misallocation of resources that should have been directed toward production.272 In addition, these measures might also distort market competition. For example, the Fujian Patent Law requires the government to prioritize the purchase of patented products.273 However, being covered by a patent does not necessarily mean a product is of high quality. Low-quality products with patents might squeeze out high-quality, unpatented products in the competition for government procurement. In sum, while the involvement of local governments in constructing the patent system can foster institutional experimentation and innovation, institutional innovation is not cost-free. After all, a new rule does not necessarily mean a good rule. The benefits of institutional [*302] experimentation and innovation are partially, and hopefully not entirely, offset by the costs of experimentation failures.