By Arunkumar Rajan, Quantitative Researcher/Strategy Portfolio Manager, AXA IM Core – part of BNP Paribas Asset Management
Company patents are a compelling investment research resource, offering comprehensive information about a firm’s capability for innovation. These rich and complex datasets can be both a valuable indicator of future growth potential and a useful tool for investors in making asset allocation decisions. Presently, emerging markets are leading the innovation drive, highlighting the potential for attractive investment opportunities.
Among the key factors driving company growth and transformation, arguably the most important is innovation. Innovation can be across all sectors, business models, geographic regions, and customer bases.
How a company innovates can provide insight into future performance, helping investors improve their assessment of its potential. When a firm innovates or invents, it will often file a patent to protect its legal rights to that idea. The patent dataset is consequently a compelling research resource. It offers comprehensive information on a company’s innovative activities, which can serve as a valuable indicator of future success.
The patent dataset we use covers over 37 million entities, containing millions of pages of detailed filings, with each patent averaging around 50 pages.
Processing such an immense volume of complex textual data presents significant computational challenges and requires leveraging recent breakthroughs in computing power to efficiently read, analyse, and extract meaningful insights. The advent of large language models (LLMs) enables us to interpret and evaluate a company’s innovation level relative to its peers, transforming what would have been an otherwise insurmountable data processing task into a feasible analytical process that can help in making investment decisions.
Here, we look at the number of patent filings, focusing on the macro perspective.
China overtaking the US
Exhibit 1 illustrates patent filings in emerging markets versus developed markets as a percentage of the total each year. It illustrates how innovation has shifted towards emerging markets.
Exhibit 2 depicts patent filings by the US and China as a percentage of their combined total. During the early 2000s, the US was dominant, but in the 2010s, China began filing extensively. Today, China accounts for approximately 80% of the combined filings between the two countries, reflecting a significant change in the innovation landscape.
From Exhibit 2, it is evident that the US alone cannot compete with China in patent activity, so in Exhibit 3, we explore whether the US and Japan or European countries could together overtake China in terms of patent filings.
Exhibit 4 shows patent filings by each country as a percentage of the total filings by year. The chart illustrates how China has significantly transformed its patent landscape, particularly through technological advancement, and now dominates the number of new filings each year. Japan, on the other hand, shows a steep decline in filings, possibly due to the maturation of the domestic market and a shift in corporate research and development investments. The US has maintained its level of innovation, while the share for Germany and France remains low.
Investment implications
For investors, the primary message is the growing significance of China and other emerging market countries in driving innovation. China has caught up and exceeded the West in patent filings, highlighting the potential for groundbreaking developments and attractive opportunities for returns in the region.
India, by contrast, lags due to a combination of factors. These include the lack of sufficient manpower to process patents, low private sector research and development spending, a largely service economy, as well as a stricter patentability criterion. India’s Patent Act has higher bars for patenting than the West in order to prevent ‘evergreening’ (a practice that can delay generic competition) and to protect the public interest. The impact is particularly visible in the pharmaceutical and software industries.
As countries continue to support the commercialisation of their innovation pipeline, there may be yet greater gains to be had in emerging market economies.
While evaluating the volume of patent filings provides a useful measure of innovation, we can also assess the uniqueness and quality of innovation relative to peer companies. Using a proprietary model that combines LLMs with graph theory, we try to identify innovative firms poised for significant growth that have the potential to become the market leaders. The tool can highlight investment opportunities and offer valuable insights for asset allocation decisions across markets.
