NEW YORK, November 1, 2010 - China is poised to become the leading producer of patents, but despite government incentives, obstacles to indigenous innovation remain, said Gordon Orr, Chairman of McKinsey Asia, speaking at Asia Society New York on Monday.

According to Orr, increased investment in Research and Development (R&D) is partly behind the rise in the number of patents, papers, and citations of papers coming out of China in the last few years. This year, the government aims to invest 2 percent of GDP in R&D, up from just 1.2 percent in 2004. If they meet that target, that spending will account for 12 percent of R&D spending worldwide.

Speaking with Council on Foreign Relations Senior Fellow Adam Segal, Orr also attributed the increase in Chinese output to a government paradigm shift toward innovation. Historically, the Chinese have played "catch up" with technology, but Orr said today "the government's role has become more sophisticated and nuanced and focused on market creation."

Not all government interventions have been wholly positive, however. Orr explained that the vast number of patents now being filed is also a product of an incentive structure that does not necessarily reward inventiveness. Patent officers earn bonuses based on the volume of patents they register. Company employees who produce patents can be rewarded with a city hukou (residence permit). Companies that produce patents can be eligible for tax breaks. As might be expected, the quality of patents filed is not always high.

"Even by Chinese standards, only about one-quarter of patents are considered inventive," Orr said. "The quality does range from the world-class to the awful."

Despite the imperfect system, Orr sees many reasons to be optimistic about Chinese innovation, particularly with regard to intellectual property rights (IPR). Orr said that a positive development has been in the number of IPR lawsuits filed by Chinese companies against other Chinese companies. In his opinion, Chinese companies will be the drivers behind expanding the enforcement of Chinese intellectual property law.

Orr said that Chinese innovation will peak when Chinese companies learn to leverage market scale and manufacturing scale.

Segal, on the other hand, remained more pessimistic. He described what he observed as a cultural preference toward being the boss, which he said inhibits young engineers and scientists from building long-lasting business ventures. He cited a Chinese proverb he frequently heard among young entrepreneurs:

"It's better to be the head of a chicken than the tail of an ox," he said.

Reported by Mollie Kirk