How do patent subsidies drive SMEs to patent? Evidence from China

It is agreed that the patent explosion in China results from diverse forms of government funding and subsidies, especially patent subsidies. This study explores how patent subsidies have promoted the patenting propensities of small and medium-sized enterprises (SMEs) in China. Patent subsidy policies provided limited financial support but sent signals to create prospects of obtaining policy surpluses by filing patent applications. This study provides empirical evidence of the signalling effect by showing that innovation-inactive SMEs and SMEs in patent-free industries filed inframarginal patent applications. Ex-ante subsidy policies offered stronger signals than ex-post subsidy policies. However, after a pro-patent culture was cultivated, SMEs were impervious to a decrease in patent subsidies and did not effectively perceive messages of strengthening patent quality from further policy changes. The signalling effect suggests effective policies for promoting patent applications in a weak patent regime that does not reward patents through the market. By contrast, it also accompanied distortion effects, indicating the policy’s failure to reduce the transaction costs associated with SME adapting to the patent regime.