China Apprentice

“If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of everyone, and the receiver cannot dispossess himself of it.” - Thomas Jefferson

Photo by Fatty Tuna

China is often admired for its vibrant variety of cuisine, a long and enchanting history, delicate ceramic, silk, and other cultural arts, not to mention, a vibrant street market of cheap copied DVDs, pirated software, and fake designer clothing. The dichotomy of rich cultural heritage based in Confucian and Daoist doctrine paired with an almost flagrant neglect for characteristically “western” values for intellectual property rights (IPR) can surprise the unassuming visitor. The fakes, the poor product quality, and an apparent disregard for IPR make foreign governments and businesses unsure of China’s innovation potential. Understanding the past, present, and future of China IPR is key to successful business in China.

Foreign media consistently overwhelms the international community with impressive statistics of China’s growth. That growth is enthusiastically fueled by continual investment from the world’s multinational corporations in the new “socialist economy with Chinese characteristics.” Depending on the source, China’s GDP growth hovers at just a fraction under 10% year-on-year – a record for a country’s development by almost any standard. The so-called “gradualist-reform” inspired by Deng Xiaoping’s famous Southern Tour in 1992 and subsequent opening of the economy that led to China’s eventual inclusion in the World Trade Organization in 2001 has attracted a frenzy of foreign direct investment and an overall global rush to enter the China market. Annual factory growth, though slowing in recent months, holds steady at around 17% while export growth hovers around 20-30% . It wasn’t long before the world recognized China would become the “factory of the world”. The technical competitive advantages of companies opening facilities in China rolled in on waves of technology and intellectual property transfer. Literally millions of China’s poorest citizens were trained to operate all manner of machinery in order to manufacture anything the world ordered.

The more Gucci pocketbooks and James Bond movies China’s workers manufactured, the more local people realized they might like one or two themselves. After all, a fake Rolex from one of the original Rolex factories really didn’t seem so different from the real thing sold for thousands times the price in downtown London. Fakes and counterfeit products are good export moneymakers too. In fact piracy and counterfeiting has been consistently on the rise since China took the title from Taiwan, Russia, and Southeast Asia. The Geneva Chamber of Commerce claims that 7% of all global trade is counterfeit goods. Estimates put foreign firm’s losses at $20 billion annually with two out of five companies losing more than 20 percent of their local revenue sometimes reaching as much as $150 million annually. And this isn’t just fake CDs and DVDs. Half the motorcycles sold in the China market are imitations of Japanese Yamaha and Honda. 97% of 1300 synthetic medicines produced in China are copies. High-technology items, such as microprocessors, are knocked off as well, modified to accommodate pirated components in video game consoles or computers thereby creating a value-chain based on piracy. There’s often no way to reliably tell if a product is real or not. Of course, most people probably wouldn’t be surprised to know that the “US-based Business Software Alliance claims that 96 percent of China’s software is illegally copied.” A CD of software on the street sells for less than a dollar and legitimate stores are virtually nonexistent. The processes for mitigating the mass IPR problems are weak at best. It can take five to six years in China to successfully remove a bad-faith trademark that violates IPR. Counterfeit products take up valuable Chinese domestic market share and are also aggressively exported overseas creating a real problem for both Chinese and foreign companies trying to leverage corporate intellectual property in China.

Historical Origins of IPR and Approaches to Innovation

The western economic system that has been adopted around the world protects against the usurpation of what multinational companies regard as an exclusive right to reproduce, distribute, or perform certain works. The concepts of copyright, patent, and trademark, the three primary forms of intellectual property, are relatively new (from a global historical perspective) western developments. The first legal codification of a concept resembling modern copyright law was enacted in 1474 as part of the Republic of Venice. The first mention of the word “copyright” was in 17th century England with a law that protected “the creative products of authors, artists, and singers.” The US constitution mentions intellectual property protection in Article I, Section 8, Clause 8, stating “the Congress shall have power . . . to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” The first international agreement on intellectual property protection was included in the Berne Convention signed in the 1880s but was “largely inadequate” in protecting international IP interests. The first codification of enforceable international law was the Uruguay Round negotiations of the General Agreement on Tariff s and Trade (GATT) (now the WTO), 1986-1993, with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

The impetus behind these laws and the origin of the philosophy of intellectual property is thought by some scholars to be founded in a Lockean theory put forward by the French philosopher, John Locke, in his Second Treatise of Government. Adam D. Moore posits that the right to intellectual property lies in whoever can defend having “original acquisition” of a piece of property. Locke says, “For this labor being the unquestionable property of the laborer, no man but he can have a right to what that is once joined to, at least where there is enough and as good left for others.” Moore proposes that protection of intellectual property should follow a pareto proviso that “permits individuals to better themselves so long as no one is worsened.” In other words, authors, writers, inventors, etc. should have a right to control the use of their property to the extent that neither themselves nor others are harmed by such control.

John Locke may have been one of the earliest western minds to conceive the concept of intellectual property but the Eastern world also experienced a similar yet divergent emergence of the concept. The Wenzong Emperor was the first recorded ruler in China to “prohibit unauthorized reproduction of items that could be used for prognostication.” He specifically “sought to control information related to time and astronomy” as well as “the Classics, legal pronouncements, official histories, answers to civil service examinations, maps” and other censorship such as pornographic material and politically or religiously suspect materials in order to maintain the state’s exclusive authority. The Qing dynasty created the first formal copyright law providing “comprehensive copyright protection.” Unfortunately this was never realized due to the Japanese invasion and the ensuing struggle between the Nationalist and the Communist parties. The Cultural Revolution eventually dismissed any sense of copyright policy in the Chinese government and also effectively limited most sources for national intellectual talent.

While the reasons for promoting early intellectual property rights may have been different in the West and the East, one giving the author the property right to his work and the other transferring that right to the state, IPR is historically undeniably important around the globe. Regardless of who is granted the rights to control a new idea, the inspiration and motivation to innovate is a fundamental human characteristic. Hofstedt was one of the first western minds to identify four enlightening yet controversial “dimensions of national culture” outlining the differences between the collectivism in Chinese society and the emphasis on individualism in western societies. This may explain part of the cultural reasons for Chinese society’s innovation capacity despite the state’s control over individuals’ new ideas. China was, in many ways, historically far more innovative than the west. Various inventions can be attributed to Chinese society even centuries before counterparts in Europe would conceive similar ideas. The compass, kite, seismograph, rain umbrella, bronze, and even the number zero as a place in mathematics would be used in China well before they were discovered in Europe.

The Chinese have been no strangers to invention. However, creative thought among the masses was significantly stifled. The emperor and ancient leaders often saw new ideas as a threat to their divine rule. Even so, the Chinese people were no less creative in coming up with inventions that would significantly change society. The Chinese achieved amazing developments despite being relatively cut off from the western world. “The ethnocentric character of the traditional Chinese state was disinclined to borrow new technology from overseas.” Many great thinkers, if not members of the royal class, were criticized and even punished for their inventions, while a few famous Chinese inventors were encouraged with promotions and special government incentives. In 105 AD, Cai Lun invented the process for making paper thereby setting the stage for the basis for copyright of printed works that would follow over a millennium later. However, innovators like Cai Lun were in the minority. The virtue of independent thought in China did not have the same freedom it did in Europe. In fact, the leader of Chinese creative thought, Confucius (Kongzi) identified himself as a ‘‘transmitter’’ and editor of earlier materials, not as an innovator.

Since Confucius’ day, profit had been seen as characteristic of ‘an inferior person’ (xiao-ren) who acts out of self interest and not principle … merchants are at the bottom of the social status scale … a view of knowledge as something to be recovered rather than discovered led to innovation being concealed as rediscovery and thus to the devaluing of the role of innovation in improving society. Despite many important Chinese inventions, the protection for individual innovation has never been the same as in the West.

Differing Views on IPR in China

In modern times, western businesses and governments, spearheaded by US government lobbying and the TRIPS agreement, continue to push the developing world to abide by intellectual property laws. Western powers encourage foreign governments to enforce those regulations creating legal systems that protect not only foreign but domestic intellectual property. Though the Chinese government officially agrees with and supports these policies, evidenced by a recent history of local and national efforts to create legislation for upholding and enforcing intellectual property protection, there are still two schools of thought regarding IPR in the developing world.

Western multinationals generally agree that IPR “is a necessary ingredient for ensuring cultural wealth in our societies.” International organizations tend to agree. The Global Economic Prospects Report published by the World Bank in 2002 reported that “across the range of income levels, intellectual property rights are associated with greater trade and foreign direct investment flows, which in turn translates into faster rates of economic growth.” The American Chamber of Commerce in China believes that “promoting cultural development, fostering innovation and growth, and protecting public health and safety are all commonly held goals.” Theoretical reasons for enhancing IPR worldwide are regularly emphasized in the scholar community and media. An argument most often heard is that a developing country like China should enforce IPR in order to protect its own citizens from the negative impacts of copied and pirated goods. At the same time, this also advances foreign business’ interests by giving them more access to local markets and preventing export of cheaper imitation products to home markets.

Businesses in China are reminded to abide by IPR for many reasons. Counterfeit goods can be harmful or toxic posing a risk to domestic health and safety. Promoting IPR protects domestic creative industries like music, art, folklore, traditional knowledge, and other indigenous culture. In September 2007, China experienced a problem with product quality when a local factory manufacturing toys for US corporation, Mattel, was discovered to be using lead-based paint thereby posing a health risk to consumers. Product health problems leading up to this incident involved other faulty products such as toothpaste, salmon, soy sauce, pharmaceuticals, pet food, etc. Though not all of these are related to IPR violations, they are making Chinese businesses realize that protecting the image of Chinese brands and quality of manufacturing is important.

As Chinese businesses and state corporations become more innovative and gain technological advantages, they are realizing it will be important to protect those ideas. In particular, the Chinese space industry, biotechnology sector, and even symbols marketed for the Olympic Games are in China’s interest to protect. There are some Chinese businesses that are interested in using IPR to protect domestic industry so the market is not overrun by foreign goods. China’s national government is interested in leveraging IPR to make a case for censoring online content such as pornography and other illegal publications controlled by the State Administration of Radio, Film, and Television. The American Chamber of Commerce believes “China’s senior-most leadership recognizes the importance of IPR as both a bilateral issue and as a measure of reaching its goal of creating a more innovative and technology-driven society. The challenge will be for China to find ways to better enforce IPR protection at all levels of society.” In fact, officially China’s government agrees and is in line with the Chamber’s goals. The State Intellectual Property Organization (SIPO) echoes the central government’s 11th Five Year Plan in stating, “IP is now the core element of a country’s competitive capacity, an important means of upgrading productivity and increasing the added value of products, the competence advantages of individual enterprises and a route to widening market share.” IPR receives the highest government support in China. At the National Conference on Science and Technology in January 2007, Premier Wen Jiabao proclaimed, “IPR protection is an important issue and we must repeatedly stress its vital role. IPR protection is of great significance in encouraging independent innovation and optimizing a favorable environment for innovation and invention, and is also beneficial to reducing international IP conflicts.

A different opinion exists stating that the TRIPS agreement and the forced adoption of western standards for IPR is unfair toward developing countries. “The basic problem with enforcing intellectual property rights in China is not legal or based on stages in economic development, but arises from intellectual and cultural dissonance … a consensus among educated modern Chinese that intellectual property rights as currently defined by the West or as imposed on developing countries, are unjust.” Put plainly by a study at the RMIT University in Australia, “local officials explain the rationale for IP piracy thus: . . . people are poor . . . making RMB200 per month. Now a bunch of foreigners want me to protect their Gucci handbags, I couldn’t care less.” Not only native Chinese hold this view, though. One such perspective is put forward by Marci Hamilton in her research that argues three things must exist in order for TRIPS to be effective. The adopting nations must learn to espouse the western ideals of individualism, reward, and commodification (meaning creators are not the primary distributors). She and other scholars believe that these concepts can be contrary to traditional Chinese cultural norms claiming, “TRIPS imposes a Western intellectual property system across the board.” The leaders of technological innovation in the past decade, US, Japan, and Germany, in a way have created a monopoly on their knowledge and are now anxious to fervently protect it using IPR. “There is a kind of OPEC of knowledge in which a few rich countries have a great deal of control over how and where books are published, the prices of printed materials, and the nature of international exchange of knowledge.” Certain industry organizations, such as the Recording Industry Association of America are viewed as wanting to “stifle foreign innovation, maintain technological hegemony, and exploit non-Western organizations.”

Looking at IPR from a purely economic perspective where the efficiency of all global markets is the goal, an optimal solution would be a system that provides the “aggregate incentives for innovation to inventors throughout the world.” Grossman and Lai analyze the economic efficiency of having universal standards worldwide and find that any combination of policies “that provide the proper global incentives for R&D” would be the best method. “Harmonization of patent policies is neither necessary nor sufficient for the efficiency of the global IPR regime.” Grossman and Lai present a simple economic model for determining a particular country’s ideal IP policy by balancing deadweight loss with consumer surplus.

Innovation in China

It is undeniable that increased future innovation is a goal not only of the Chinese government but also of foreign multinationals. Whatever form China’s IPR takes, one thing is agreed upon for sure - encouraging innovation is a desirable direction for Chinese businesses. Considering the domestic human resources available and the mere statistical probability for new ideas, Chinese innovation potential is a global competitive advantage that China cannot afford to ignore. Most scholars seem to agree that “rights should only be granted where there exists a demonstrative relation between profits that depend on IP protection and the finances necessary to support effective R&D.” Going back to the Lockean principle which essentially says, “no harm, no foul,” scholars, policy makers, and multinationals may all want to consider trying to find the Nash equilibrium where all players benefit. The differences in IPR approaches between western and Chinese corporations may not be so much about whether to encourage global innovation but rather who benefits from such innovation. “Elimination of intellectual property protection does not reflect a different conception of intellectual property so much as a countervailing social policy” A political buzz-word among the Central Planning Committee is “scientific development” to promote a “harmonious society”. It’s no surprise that innovations spurred by scientific development should somehow contribute to creating that harmonious society. Whereas in western society, the individual is empowered to strive for inventions with the promise of personal gain from those inventions, the Chinese objective behind protecting IP is “to rapidly develop social productive forces, promote overall social progress, meet the needs of developing a socialist market economy and expedite China’s entry into the world economy.” This is a decidedly different approach towards attaining the same goal – increased innovation.

All IPR disagreements aside, innovation strategy is important for businesses operating in China whether they are foreign, domestic, or a mix of both. “Technology innovation is of vital importance for firms to survive and develop in a market under intense competition.” Until now, Chinese innovation strategies have only been marginally effective. In China’s planned socialist economy past, “innovation, to the extent that it happened, was dictated from above, with specialized research institutions put to work on projects assigned priority by the upper bureaucracy.” The problem with this approach was that innovation was very much pushed from above rather than pulled by the needs of the people or consumer market demand. Joint ventures were China’s quick-fix to the vast technology gap the socialist system created. In the still tightly-controlled state-owned enterprise sector, China struggles to encourage innovation. “The government artificially created the open market for the Chinese SOEs by introducing competition and regulations, but leaving the SOEs structure and managerial process with little change, would not automatically result in more innovation initiatives of the SOEs.” However, through multinational cooperation in companies such as Guangzhou Honda and Toyota and Beijing IBM, technology was successfully transferred. Bringing China up to speed on high-tech processes and manufacturing standards was just part of the battle. Now firms are competing to optimize their innovation strategies in China.

Innovation strategies come to life in corporate research and development. High-tech industries especially, such as medicine, aeronautics, electronics and communication, and computer and office equipment, benefit heavily from R&D technology innovation. R&D in China ranges from independent internal R&D to completely outsourced technology transfer with middle ground combining both in what is called cooperative R&D. In 2002, Chinese companies were not very good at innovating using any of these techniques. Only 22% of companies could make their own technological innovations and 21% of business could only imitate foreign products and technology. Jiangsu Little Swan Group Company was one such company that was able to innovate successfully using technology transfer. Leveraging strategic alliances and reorganizing their business strategy to focus on specialization, LSGC used successful innovation in a lead product to fund the company’s development of secondary products.

With the improvement in domestic IPR policy and enforcement, companies in China will have great potential to be successful sources of innovation. Many factors contribute to China’s innovation advantage. To begin with, China has a huge source of untapped intellectual talent. With improvements in education and investments in scientific equipment, China’s young engineers and scientists can have the human resource power equivalent to an entire developed country’s population. The strategic alliances already in place in many industries in multinational R&D centers is an enormous source of knowledge. Take, for example, the pharmaceutical industry. Though now nearly all of China’s pharmaceutical industry manufactures generics, AstraZeneca, Eli Lilly, GlaxoSmithKline, Novartis, Pfizer and Roche have all recently or soon plan to set up R&D centers on the mainland. Chinese government programs such as the National Natural Science Fund, the Torch Program, the 863 High-Tech Program, and the Five-Year Plan are all in place to support innovative advancements in what China views as its niches in the pharmaceutical industry – biotech and traditional chinese medicine – two new and relatively unexplored avenues for innovation. Because China’s infrastructure was so far behind the developed world’s, Chinese companies now do not need to waste money upgrading old technologies and lobbying the government to replace legacy systems. Industries such as the wireless phone network are not bogged down by land-line systems and old standards. China is rapidly investing in the latest 4G technology and creating a high-tech culture that depends on innovation in this new direction.

China’s “guanxi” business culture is another advantage for innovation. A web of overseas Chinese contacts, the “sea-turtles” as they are referred to back home, hold Ph.D. positions in universities and companies around the world. That talent is slowly making its way back to the new land of opportunity. “Some 200,000 researchers in biotech R&D in China and a previous “brain drain” of scientists is being reversed.” Technology innovation is also facilitated by new business process reengineering in Chinese companies. Chinese researchers at Zhejiang University are already exploring new innovation approaches using a novel concept they coin “3-全” (3-quan) a tri-dimensional innovation model that emphasizes “innovation in all technological and non-technological elements (strategy, culture, organization, institution, and market).” Companies such as Haier with an consistent annual sales increase of 78% over the past 17 years, Hua Wei, Baosteel, Alibaba, etc. are likely already leveraging many of these distinctive China advantages.

IPR Impact on Businesses in China

There is no doubt that innovative talent is about to explode in China. The biggest multinational corporations are investing in it and betting on it. The number of trademark filings in China has been higher than in any other country for several years … The World Intellectual Property Organization (WIPO) reported China had 173,327 invention patent filings in 2005, thereby making the Chinese patent office the third busiest after Japan and the United States … In 2006 the number of invention patent filings increased another 21 percent to reach 210,490 invention patent filings.

While matching China’s IPR to that of western standards may not be the ideal means to continue to promote this innovation, a certain level of IPR must be in place and enforceable in order for individuals AND society to be properly motivated to innovate and share their ideas. Urgent to protect national interests, US policy is quick to pressure China to fully uphold the TRIPS agreement. America all but forgets how a few short centuries ago it was resisting British attempts on behalf of Charles Dickens to prevent illegal reproduction of his famous works. Despite resistance on China’s part and many last minute brokered deals before the clock chimes imposing US trade sanctions, the Chinese government is progressing toward compliance on the TRIPS agreement.

China has created various government agencies whose sole responsibility is getting a hold on IPR. The central government created an Action Plan on IPR Protection 2007 detailing legislation, enforcement, trials, institution building, publicity, training and education, international exchange and cooperation, advancing IPR protection in business, services to right-holders, and thematic studies. In the country’s 11th Five-year Plan, the government appears fully committed to the importance of developing an effective IPR system. It states, “we must study and follow carefully the development trend of international IP in full consideration of China’s reform, the development strategy to build an innovation-oriented country, reviewing our work from higher standards and dedicate to our work for even greater progress than before.” In addition to the steps taken and planned, the government has made significant progress in enforcement in the last several years. “More than 1.81 million pirated CDs and DVDs were seized in a production factory in Guangzhou, capital of south China’s Guangdong Province on March 17, 2007, in the largest single crackdown on CD and DVD piracy in the country’s history.” Previously disconnected government agencies are starting to work together to approach enforcement with a concerted effort. In May 2007, six virtually independent government offices cooperated to pursue one of the more difficult areas of IPR enforcement, Combating Sales of Pirated and Illegal Publications by Street Peddlers and Unlicensed Operators. 18 government agencies partnered to support an IPR summer crack-down campaign and several IPR Publicity Weeks. Cooperative exchange of personnel with various international agencies such as WIPO, WTO, and APEC is also increasing.

Despite all the rhetoric, the regulations, and the new legislation, there are still problems with Chinese IPR protection and innovation. Just over half of all the US companies that list IPR protection as a top five business challenge say that it has either stayed the same or gotten worse despite all the recent government efforts. There are several political characteristics that make China IPR particularly challenging. China is composed of hundreds of thousands of small, family-run businesses that are virtually impossible to monitor. There is sophisticated clan-centered organized crime that learns the loopholes of new regulations and regards IPR as just a normal cost of doing business. Furthermore, though China is centrally controlled, it is divided into hundreds of interconnected bureaucratic bureaus that run on their own systems with their own regulations. Frequent lack of coordination among departments results in minor enforcement penalties that could be much larger if multiple crimes were identified. Enforcement also takes an unreasonable amount of time. “Enforcement of remedies in legal disputes either lack authoritative support or take years to actually impose.” Partly due to a distributed, disconnected bureaucracy, there is widespread official corruption. China rates 58th of 98 countries on the Global Corruption Index. Fiefdoms develop with local party leaders at the top who obscure transparency and lack coordination. “U.S. companies frequently report inconsistent, or even conflicting, policies and requirements among national level ministries, as well as from provincial and local-level officials.” A non-independent judiciary and a general sentiment of “the heavens are high and the emperor is far away” allows leeway to local jurisdictions in implementation and enforcement of centrally-mandated IPR.

There are significant barriers that China must overcome to create an effective IPR system. Yesterday’s IPR may not be ideally suited to dealing with today’s business climate. Commonly available technology and the internet provide for ease of reproduction, dissemination, and storage. As a Grateful Dead songwriter candidly explains, “IP cannot be patched, retrofitted, or expanded to contain digitized expression anymore than real estate law might be revised to cover the allocation of broadcasting spectrum.” The number of Web sites with illegal content in China is expanding. Concentrated enforcement efforts fail to suppress an ever-expanding underground network of piracy and counterfeit operations. Furthermore, many of the arguments for developing countries to adopt IPR in China just don’t hold true. Economists proclaim that a solid IP system will attract foreign investment. But attracting FDI in China hasn’t really been a problem over the past decade. They also say that strong IPR is important for national employment. But China is setting world records with the number of new jobs it creates for its citizens every year. Just about the only argument that China takes seriously is the need to protect its domestic innovation. As production costs rise and quality cuts fail to bring any significant returns, businesses in China will have no choice but to protect innovation.

Suggestions for Improving China IPR Protection

What are some remedies to enhance China’s IPR and improve innovation? In addition to current efforts by international organizations and the Chinese government, there may be several methods to mitigate some of the current problems and improve Chinese IPR for companies operating in China. In addition to further government transparency and standardization, many agree that the secret to increased IPR in China lies in enforcement. Though the sheer number of SMEs operating in China is daunting, China certainly has no shortage of the human resources for enforcement. Proper enforcement depends on employing thousands of people to actively seek and investigate IPR violations. With the establishment of local offices, China is already on the way to decentralize some of the enforcement effort.

Employing a cadre of enforcers, China needs to focus on the big fish, the illegal operations that are capable, like one recently-discovered organization, of producing 300,000 pirated disks in one night. These highly-organized and professional operations are the main source for many smaller storefronts. When these operations are discovered and found liable, they must be appropriately punished. Fines are not enough. These operations regard monetary penalties as just a cost of doing business. Effective enforcement requires criminal measures like that in Taiwan where “circumventing anti-piracy measures” is a crime punishable by up to one year in prison.” These operations must be completely shut down and prevented from resurfacing in modified forms. Virtually all Chinese cities have an entire district devoted to sale of pirated merchandise. These brick-and-mortar districts should not just be monitored and patrolled by SIPO personnel. They should be completely shut down and thereby forced to relocate operations elsewhere. Districts inevitably start to form again but it will take consumers time to learn about new areas. There should be a system in place to reward those who provide information about the larger operations to the government enforcers – a monetary reward equivalent to a percentage of the value of the seized merchandise could sufficiently motivate a network of informants.

Chinese IPR enforcement should learn from sanitation control methods. To crack down on sanitation problems, China requires restaurants to be registered and inspected for quality and cleanliness standards. Upon discovering districts where these procedures are not followed, the government does random inspections. Using trucks packed with riot-gear-weilding enforcers, the government quickly confiscates any restaurant property in a flurry of excitement and confusion. “India has successfully adopted what they call the “Anton Pillar” order along with other means to fight piracy. The “Anton Pillar” order allows for the appointment of court receivers to search and seize suspected counterfeit property for custodial purposes without any prior notification to the alleged perpetrator.” Surprising vendors and illegal businesses like this is very effective in curbing the sanitation problem. A similar technique is being applied in IPR enforcement. In 2006, over 30 million pieces of trademark-violating products were seized resulting in almost 400 million RMB in fines and 263 criminal liabilities. Efforts like these should be increased.

Online, the solutions are similar. Owners of indoor markets where hundreds of vendors sell pirated goods should be severely punished for “facilitating” those illegal activities. The same situation can also exist on the internet. Similar to the MGM v. Grokster case in the US, if a technology provider induces its customers to infringe copyrights, it should be held liable for that infringement. The facilitators of the online networks should be held highly liable for infringements using their systems. This can allow industries to start policing themselves. Korea has gone so far as to unequivocally state that “only performers and phonogram producers themselves can transmit their performance or phonograms over the Internet or other networks.” Empowering businesses to defend their IPR is also important. The government should develop further financial assistance to aid companies that cannot afford to protect their brands.

Effective education for both sellers and buyers is also essential. Consumers need to understand the health and safety risks of buying potentially defective and harmful counterfeit products. Health authorities are the ideal conduit for disseminating consumer safety information. Innovation, of course, starts young. Children need to understand the value of creating new ideas and inventing new concepts to improve society. “Human resources will drive China’s transition to an innovation society. Currently, the shortage of talent is the number one non-regulatory challenge facing AmCham companies.” The government’s scientific development initiatives already support this idea. IPR education should start early too. At China’s top universities, schools run entire servers that are dedicated for storing illegal music, movies, and software. An unofficial poll at one of China’s elite university MBA programs showed that nearly 100% of the students did not know it was illegal to upload and download copyrighted music on the internet. China’s main search engine, Baidu, even encourages such illegal behavior and is currently in litigation. Copying an entire copyrighted textbook on any Chinese college campus takes just a couple hours and costs less than 10 USD. China’s youth must first be taught that IPR is important and then live in academic environments that reflect that importance.

In addition to trying better to meet the WTO’s requirements through the TRIPS agreement, China might also consider adding elements to its IPR regulations that reflect China’s unique situation. As discussed previously, universal application of IP laws may not be the most effective for global innovation. Current “difficulties might well lead long term to a revision of the definition of intellectual property rights, modifying some of the recent developments which are most inconsistent with Chinese culture.” Though the western world would probably object to many of the following suggestions because they are not in line with TRIPS, they may be more in line with the Chinese society.

Collective management of rights is a new technique that is being used in the western world. It allows innovators to license the rights to their ideas to groups of people at a time, say a distribution company or an online music business. Some product patents do not necessarily embody the spirit of promoting innovation. Patents are intended for innovative creations, not final products. The essence of the patent should capture the innovation of the product, not the product itself. Considering China’s advances in biotech, certain product patents such as life forms should be carefully considered. Proponents of “free software” like Richard Stallman, suggest that IPR as applied to software should be eliminated. He claims there is enough creative motivation by software programmers and so much duplication in software patents that software patents may not be effective in promoting innovation. In addition, China already has an established research grant system but this system should be more market-based to provide the necessary environment for appropriately focused innovation.

Recommendations for Foreign Businesses in China

Foreign companies considering operating in China or even those already there should carefully consider the Chinese IPR situation. To protect IPRs in China, a company needs to adapt a flexible strategy that depends on subtle rather than demanding approaches. A company’s IPR strategy needs to be flexible enough to consider many possible IP protection and exploitation outcomes. Likewise, the same IP strategy must have elements that respect the unique characteristics of the Chinese culture, social, and economic environment.

Research at the University of St. Thomas in Minnesota looked at the different approaches by Japanese and American companies in protecting IPR. Using recent IPR court cases such as Cisco v. Huawei and Toyota v. Geely as examples, the research team recommends that western companies adopt a Japanese “adaptive persistence” strategy in pursuing IPR in China. They recommend four techniques for implementing this strategy. Research at the RMIT University in Australia mentions that “alliances of various types also allow companies, organizations and other stakeholders to share best practice in reducing IP piracy and articulate common concerns with a united voice to the Chinese leadership.” Overall, the western approach to IPR protection needs to shift. The common “direct strategy disregard[s] the repercussions of the Chinese losing face … The USA should try new methods of protecting its IPR in China. With a mix of new approaches, the US Government and US companies will be much better off in the long run.”

It is important for foreign companies to have reliable local advice and information regarding the changing IPR climate. Before moving overseas, foreign companies should do due diligence to identify pirated or similar products in the market. It is important for foreign companies to register all their IP rights in China before starting to operate. Using local experts, companies should constantly monitor the market and try to catch IPR violations early. Resolving disputes outside of the courts is preferable in China since the judicial system often weighs in favor of local companies “abused” by wealthy multinationals. If going to court is absolutely necessary, the civil courts are preferable for resolving disputes. Realizing that Chinese companies and organizations may not agree that western IPR standards are necessarily the best for Chinese society is a first step in protecting IPR in China.

China is anxious to become an innovative contributor in the world economy and to the overall harmoniousness of the global society. This paper looked at the different origins of IPR in the west and east and the effects on a country’s innovation capacity. Despite the differences in reasons for implementing IPR protection, both western and Chinese businesses agree that the future depend on increased global innovation. The implementation of the western version of IPR protection may not be the best approach for China. However, Chinese innovation requires a certain level of domestic IPR protection and enforcement to be efficient. This paper analyzes the current scenario and gives some suggestions for achieving better IPR in China. Realizing that China is still in the process of developing a reliable IPR system, western companies operating or planning to enter China should adopt unique strategies that best reflect the changing situation. Through international cooperation, businesses worldwide can support the future of innovation in China.

References

American Chamber of Commerce White Paper 2007, American Chamber of Commerce Shanghai, www.state.gov

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