Technological Decoupling? The Impact on Innovation of US Restrictions on Chinese Firms

Industry Investment Rating - The report does not explicitly provide an investment rating for the industry [1][2][3] Core Findings - US sanctions on Chinese firms, particularly those listed on the Entity List, significantly reduce the quantity and quality of patent outputs, primarily due to decreased collaboration with US inventors [3][9][11] - Firms with higher initial patent stocks or in sectors with smaller technological distance to the US are less affected by the sanctions [12] - Sanctions in specific technology fields lead to a decline in patent output for both Chinese firms with US collaborators and US firms with Chinese collaborators [3][14] Recent Trends in Chinese Patenting - China's patent applications surged from fewer than 140,000 annually in the 1990s to nearly 1.6 million by 2022, with 120,000 patents filed abroad [20] - The share of patents filed by Chinese applicants in the USPTO increased from 0.2% in 2000 to 7.2% in 2022 [7] - The quality of Chinese patents has improved, with the proportion of top 1% cited patents granted by the EPO, USPTO, and PCT increasing from 0.2% in 1998 to approximately 8% in 2020 [21] Impact of US Sanctions on Chinese Firms - Inclusion in the US Entity List reduces the total patent applications of sanctioned firms by 9.9% and quality-adjusted patents by 14.0% [41] - Sanctions significantly discourage international patent applications, particularly in high-technology fields [41] - Firms with prior US collaborations experience a more pronounced decline in patent output, while firms without prior US collaborations see a slight increase [55] Spillover Effects on Non-Sanctioned Firms - Negative spillover effects are observed for non-sanctioned Chinese firms operating in the same technology fields as sanctioned firms, with a decline in total, international, and high-tech patenting [67] - Firms in downstream technology fields experience a decline in patent output, while those in upstream fields see a modest increase [15][72] - US firms with prior Chinese collaborations also experience a significant decline in patent activity following sanctions [75] Mechanisms Behind the Impact - Collaboration with US inventors is positively correlated with Chinese firms' innovation output, more so than collaboration with inventors from Europe or advanced East Asia [11][49] - Sanctions lead to a reduction in US collaborations for Chinese firms, particularly those with prior US collaborations, while increasing collaborations with advanced Asian economies [52][55] - Domestic innovation capacity, such as higher initial patent stocks and reliance on domestic knowledge, mitigates the negative impact of sanctions [56][60] Conclusion - US sanctions negatively impact the innovation output of targeted Chinese firms and other firms in the same technology fields, primarily through reduced US collaborations [76] - The sanctions may encourage domestic innovation in upstream sectors but hinder innovation in downstream sectors [15][76] - The long-term effects of these sanctions on Chinese firms' innovation output may be mitigated by China's increasing innovation capacity [79]