IP and Innovation in China Essay Example

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    Law
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    Undergraduate
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IP and Innovation 17

IP and Innovation in China

IP and Innovation in China

Introduction

How China is performing domestically in innovation due to IP.

China has been able to make its industrial processes more innovative, a factor that has made it one of the most competitive economies in the world. Patents, copyrights and trademarks have a vital impact on innovation because they help owners of intellectual property gain recognition and rewards from their inventions. Intellectual property rights laws in China differ greatly with those enforced in other parts of the world. However, the country’s legal systems have not been able to deal with intellectual property violations done by many firms in the country. The IP laws which are enforced in the country have gained a lot of attention from various foreign and local firms which have sought to understand implications they are likely to experience by operating in the Chinese market.

China’s Innovation and IP

Since 2008, the Chinese government has been involved in efforts to make its economic sectors more competitive globally. In the past, the country lacked clear IP laws to protect innovations and inventions created locally and abroad. This issue has discouraged some foreign firms from setting up operations in the country because they have felt that poor enforcement of crucial copyright and trademark laws erodes the quality of their brands. Changes being made in intellectual property laws have been designed to ensure indigenous innovation proceeds at a faster rate than in the past. The government wants to empower local firms to compete favourably with other international firms that operate in the country.1 As a result, this has made it possible for many local firms to take advantage of favourable policies that shield them from foreign competition by multinationals that operate in the country. Indigenous innovation policies which have been put in place by the government intend to create an environment that nurtures local technical skills and competence centres.

The IP laws as enforced in the country give more preference to a firm or individual that registers his patent or copyright first in China before entering the market. This allows such a firm to overcome various legal issues that may make it difficult for it to succeed in the local market. Multinationals that seek to create new products have to comply with intellectual property laws that are practiced in China to compete on the same level with local firms.2 Legal measures have now shifted to enforcement of IP laws in various local industries to protect firms that operate in the country whose copyrights and trademarks are locally recognised. However, many firms’ research and development divisions prefer to register their patents in their home countries first, before patenting them in China. In many instances, this proves costly because such firms are likely to become victims of IP infringements done by various counterfeiting firms in the country.

Before new IP rules were introduced in 2009, copyright infringements and other IP violations were rampant in China. Western corporations found it difficult to challenge copyright violations of their products in the country.3 However, the Chinese government’s accession to the TRIPS agreement has made it change its approach towards various intellectual property issues that affect different industries in the country. The challenge still remaining is that few business men have adequate knowledge about how IP laws in the country work and this makes it difficult for them to protect their firms from various IP violations. There are also large syndicates of copyright infringers who manufacture and produce counterfeit products that are either sold locally or abroad. The most pirated products in the country are proprietary software programs which are reproduced and marketed as genuine products in different markets.

The pirating of various digital products is done due to various loopholes that exist in Chinese trademark laws. For instance, companies that do not use their trademarks in any profitable manner cannot claim damages for any infringement carried out by other unauthorised parties on their products. Trademarks which are well known in other parts of the world cannot be legally recognised as valid legal products by the Chinese government, if they are not registered in the country. This stifles innovation and makes it difficult for a firm to get motivated to produce new products targeting different consumers in various market segments in the country. This also discourages business firms that have operations in different countries across the world from investing in research and development processes.4 A reduction in R& D activities stifles innovations and makes it difficult for firms operating in China to produce products that are innovative and satisfy the needs of customers in different segments.

Some business firms are not well versed with Chinese intellectual property laws and how they are enforced. Chinese IP laws do not give a clear separation between the R&D system in the country and evolving IP laws enforced in various sectors in the country.5 As a result, IP strategy is more synonymous with technological transfer and knowledge sharing, which has been used as the main form of innovation in the country. Foreign business firms need to change their approach to their IP interests in China by taking note of various legal issues that govern their operations. They need to register their copyrights, trademarks and patents in China to ward off any infringement by other counterfeit syndicates that operate from the country. Many western countries have used strong intellectual property laws to encourage competitiveness in their economic sectors. Therefore, they have improved their approach to various IP issues that govern their economies.

The value attached to IP are eroded by China’s image as a low cost production destination offering cheap labour and raw materials to various manufacturing industries based in the country. There are regulatory inefficiencies which make it possible for several counterfeit firms to have a strong presence in the country. Efficient low cost manufacturing helps unscrupulous local firms to access designs and products of various global brands which are replicated and sold in various markets as genuine. These firms do not take time to come up with their own products because their owners are not interested in investing more money in R&D processes which do not guarantee short term profits.6 Most of these firms are not registered which allows them to produce such products without any scrutiny from government authorities. As a result, the original trademark’s value in the market becomes eroded and it cannot compete on the same footing with other products in the market.

The development of Chinese industries and economy has mainly depended on technology transfer programs between foreign firms and their local subsidiaries.7 This has enabled some counterfeiting firms to acquire privileged information about high value designs and processes which allows them to replicate similar products. Reverse engineering programs which are used by such firms enable them to pirate product designs which are then used to manufacture complete products. These practices have hampered innovations efforts in the country because many local firms have not invested in high quality R&D systems to help them develop their own products and processes. Some multinational firms have opted to operate in other countries which have more open IP laws that conform to global standards and legal practices. Other countries in the region such as South Korea and Japan have more competent IP systems that give adequate protection to both local and foreign firms.

A competitive country that seeks to develop its economic sectors needs to implement and enforce strict IP laws. A country that lacks strong IP laws cannot introduce value added processes in its local industries because the virtues of patience and hard work are not valued by many business people. Some firms have poor corporate cultures that drive them to maximise their profits in the short term without focusing on the long term implications of their malpractices. In the long term, this creates poor business conditions in a country which discourage foreign firms from establishing their operations there. The indigenous innovation policies introduced by the Chinese government are likely to be counter productive in the long term.8 Chinese firms that have benefited from relaxed IP laws in their country are likely to face difficulties when they attempt to enter other foreign markets to sell their products there.

There is a lot of attention that is directed at IP violations in China by foreign firms due to weak laws that encourage some firms to continue doing so. As a result, local Chinese innovations are likely to suffer from poor publicity abroad, especially in those countries where consumers are highly conversant with various IP laws.9 This makes it difficult for such firms to create their own brand identities that can compete favourably against some of the world’s best known brands in various consumer markets. Such products are also likely to lose their appeal easily because they do not have strong processes that make them sustain strong relationships with consumers in various markets. The Chinese government needs to nurture a culture of respecting IP laws and practices to make more business firms aware of challenges they are likely to expose themselves to if they fail to comply. More awareness needs to be done to encourage more firms to follow strict rules in their operations.

Driving Forces behind Innovation in China

There are various factors which have stimulated innovation in different economic sectors in China. The free market economic system has encouraged some firms to improve the quality of products they offer in the market. As a result, more firms seek to stand out in their respective markets because they are better placed to understand various factors that are related to local economic conditions. These firms have taken time to understand the needs of their consumers in different markets, a factor that has encouraged them to improve their internal production capacities. More firms in the country have put in place effective systems to make them more competitive in their chosen industries.10 Their focus has shifted towards sustaining their competitive advantage in their respective industries by building strong relationships with their clients. As a result, this has made some firms to produce strong brands that satisfy consumers’ demand in various market segments.

Changing market conditions have also stimulated innovation in China. More consumers in the country have become aware about high quality products that are sold into the market.11 As a result, poor quality products do not have longevity in their respective markets because they are not able to sustain long term brand attachment in consumers. This has made more consumers in the country to opt for high quality products which are able to satisfy their needs and expectations. Some business firms have realised the importance of investing in high quality R&D systems to boost internal quality and performance. As a result, such firms have been able to come up with products that are suited to specific market needs and expectations. This has boosted their performance because they are able to compete effectively against other firms in the market.

The government has been working hard to stimulate various industrial sectors to improve their internal and external processes to become more competitive globally. As a result, there is an increase in specialisation in China, a factor that has increased the productivity levels of local business people. Some companies use a small team of talented, highly skilled employees to produce various industrial goods by using advanced production techniques. As a result, several firms in the country have specialised production divisions that deal with specific components of a product before they it is assembled in one location. 12 The final assembled product is then exported or sold into other markets within the country. Therefore a business firm does not need to be technically competent in all aspects of production to manufacture a product. This approach has allowed various industrial sectors to depend on each other by sharing their expertise in various production processes.

The government has taken bold steps to improve various financial laws that have an impact on business performance.13 As a result, ownership and business registration laws have been reformed to encourage new firms to enter various industries to compete with more established firms. This situation has encouraged entrepreneurs to take advantage of favourable business environment conditions to improve the competitiveness of their products in the market. This encourages them to use their skills more effectively to produce goods and services that are able to serve specific market segments which have unique needs and expectations. China’s innovation model is mainly short term secondary innovation that guarantees business firms more financial benefits. Therefore, many business firms in the country are not interested in long term R&D plans that do not guarantee good short term returns in their operations.

The short term approach to innovation in the country is a result of the dominance by large state owned enterprises which are under the tight grip of the central government. Small business start ups in the country find it difficult to compete on the same level with these giant state owned enterprises and this makes them resort to short term innovation strategies. They prefer to improve existing products and technologies rather than investing their time and finances into long term R&D activities whose results are not certain. The business environment in the country has a lot of risks for small firms which find it difficult to get adequate venture capital to start or expand their operations.14 Many business firms shun long term high risk investments that are likely to expose them to major losses due to unfavourable market conditions in the country.

In some local industries, home grown innovation is continuing to grow and this is likely to be beneficial to the country in the long run. There are many patents which are being sought by various firms and entrepreneurs locally in specific industries.15 This has stimulated local economic conditions in the country because there are several foreign and local venture capitalists willing to finance innovative ideas that are likely to bring positive rewards in the short term. Even though innovative drives have mainly focused on secondary product improvement initiatives, there is an increase in the number of local patents being registered in the country. As a result, there are stronger collaborations between various stakeholders in the industry. Some financial firms have also become more flexible and they are willing to finance new market ideas that are likely to be viable in the long term.

Capital markets in the country have registered improved performance in recent years. The country’s main stock exchanges have been receiving more than 150 new firms every year, and this has made more people confident about the long term viability of financial markets. There are various financial products which have been introduced to encourage investors to take advantage of various opportunities in the economy. 16As a result, the country has witnessed an increase in the number of investors willing to channel their funds to innovative financial services that guarantee them good returns after specific periods of time. There is a wider range of investment products which investors are able to choose from which encourages them to be more astute in their financial decisions, a factor that has brought them positive results. Local stock exchanges are growing at a faster rate because many firms have experienced positive growth in revenues.

Some industrial zones in the country have been sending both private business owners and public officials to other countries to learn more about innovative practices that can make the country’s economy more competitive.17 For instance, some of these officials have gone to Singapore to learn new ideas about free trade ports, shipping systems and financial systems which have made Singapore one of the most successful economies in the Far East. As a result, some bureaucratic processes that slow down business activities in China are going to be reformed to encourage local entrepreneurs in the country to register their businesses. The China Securities Regulatory Commission has introduced a raft of measures intended to reduce the time it takes for a business to get registered in the country. This news has been received positively by many new firms because in the past, they had to wait for more than six months before they got approval for financing their businesses.

The country has also introduced financial reforms to enable more business firms to improve their operations. The government has introduced new policies that encourage small business firms to participate actively in the local economy. As a result, these firms have differentiated their products and markets to make them more focused and efficient. 18There are industrial collaborations between different sectors of the economy which encourage business firms to depend on each other to improve their own competitive ratings. For instance, many logistic firms have instituted value additions initiatives that are intended to make them stand out in their respective industries. High quality customer service has become one of the most differentiating factors in the market place which business firms rely on to increase their competitiveness.

The government has also encouraged local higher learning institutions to focus more on science ad technology research plans to enable them come up with new innovative products. The government has also encouraged private sector players to create new models of innovation that are aimed at solving various challenges faced by low income earners and beyond.19 This enables such business firms to reduce high costs associated with inefficient market distribution channels which end up pushing up their costs of doing business processes. Therefore, large business firms in the country have managed to improve their distribution and supply chain processes to make them more responsive to market needs. The government has also set up different centres of excellence in various technological sectors to nurture and develop talents of young Chinese graduates. This is intended to make them better prepared for future challenges they are likely to face in their careers.

There are more linkages between universities and various private and public organisations. This has made it possible for students from universities to acquire both practical and theoretical knowledge related to their specific areas of expertise. These linkages have been created to correspond to prevailing cultural conditions in the country to ensure they are aligned to the country’s long term development plans.20 China’s business practices encourage collective thinking and collaboration to achieve excellence in different sectors of the economy. This is mainly related to local cultural influences which many professional Chinese managers rely on to make decisions in their firms. Since cultural attitudes encourage personal relations, some Chinese firms have integrated their operations with those of foreign firms which has allowed them to acquire valuable competencies that have improved their internal capacities. There are more Chinese citizens who have worked in different countries abroad and they have used their exposure abroad to improve local innovation systems in local firms they work in.

How TRIPS Has Affected Domestic Chinese IP Laws

Chinese IP laws have been witnessed a lot of reforms in the last four years, even though these reforms have not satisfied some western companies and their governments which have invested heavily in the country. 21 The Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) is a framework that is meant to monitor and give guidelines about how countries should implement and enforce laws related to intellectual property rights. The government has realised the importance of a uniform system of regulating IP issues in the country and has instituted reforms intended to make local industrial sectors more competitive. China’s membership in the World Trade Organisation has made it take note of various factors that are related to intellectual property rights in various economic sectors. The TRIPS agreement advises countries to put in place similar regulatory standards to regulate intellectual property issues to ensure fairness for all countries in international trade.

In the past, China did not take active measures to weed out cross border infringements of intellectual property rights by firms in the country. The open door policy introduced by former Chinese president Deng Xiaoping made it possible for the country to borrow technologies and ideas from other parts of the world to stimulate local economic growth and performance. The first comprehensive law on intellectual property rights in China was made part of the country’s constitutional order in 1982.22 However, the previous intellectual property regime recognised works that conformed to socialist principles which were used to guide different aspects of economic growth in the country. As a result, many western firms found it difficult to operate in China because local IP conditions did not favour them.

The US and other nations blocked China’s application to join the WTO on the premise that the country’s intellectual property standards did not conform to other standards practiced in other countries. The government agreed to TRIPS in 1999 and proceeded to amend its patent, copyright and trademark laws two years later. However, social and cultural attitudes which are observed by many local business firms have made it difficult for the country to enforce TRIPS agreements locally. Countries that have ratified TRIPS are given freedom to determine the most appropriate method to implement the provisions of the agreement within their legal systems. As a result, China has used some of the provisions in the agreement to put in place favourable indigenous innovation laws to make local firms more competitive in their operations.23 Since formally ratifying the TRIPS agreement, China has carried out various reforms to ensure local business practices in the country conform to high quality WTO legislations.

The country has not readily provided information requested by other members to show that it is doing all it can to crack down on intellectual property violations done by various firms locally. The US and Japan have been highly critical of the indifference shown by the Chinese government regarding copyright and trademark infringements in the country. China has declined to provide any information as enshrined in article 63 of TRIPS. The article requires all countries party to the agreement to provide information about administrative and judicial decisions they have enforced in their jurisdictions related to different IP laws.24 Since 2006, the Chinese government has preferred to use bilateral agreements with the US to resolve any disputes between them regarding intellectual property rights. The government has worked towards making more people in the country aware about the impacts of copyright infringements and the damage they do to legitimate business organisations.

As a result, the Chinese government has put in place measures to encourage public participation about various intellectual property issues occurring in the country. Training programs, international collaborations and reporting of intellectual property crimes, are some of the measures implemented by the Chinese government to reduce incidents of copyright infringements in the country. There are several centres where people or firms that have witnessed copyright or trademark violations of their products can report offenders in.25 The country has also participated in the WTO dispute resolution system as a complainant against other countries which have violated principles outlined in the TRIPS agreement. Some WTO members argued that disposal systems used by the government for counterfeit products that infringe on copyright laws as established was not sufficient. For instance, the government upon confiscating of such products removed their trademarks and this made it easy for them to be sold illegally through black market channels.

The government has also found itself on the defensive regarding some copyright laws which fail to satisfy its censorship laws. The Copyright Law amended in 2010 had a different approach and they intended to harmonise copyright laws with those observed with other countries that are party to the TRIPS agreement. In essence, the amendment still gives the Chinese government power to ban or edit electronic or published content to shield its public from consuming unapproved materials.26 The customs department’s power to auction products found to have infringed on various copyright laws enforced in the country has been severely limited. However, this restriction only applies to counterfeited imported goods. For exported counterfeit products, the customs department has the authority to destroy goods that are found to infringe on copyright laws before they are taken to their respective destinations.

Conclusion

The Chinese government is making more efforts to change local business attitudes towards intellectual property rights. Even though some of its patent, trademark and copyright laws do not deliver the desired results, it is doing all it can to crack down on IP violations by various business firms. Since 2002 when China became a member of the WTO, the government has made significant achievements in complying with various stipulations under the TRIPS agreement. There has also been an improvement in the quality of local Chinese innovations which are projected to become more valuable in the next decade.

Bibliography

Breznitz, Dan and Murphree, Michael, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China, (Yale University Press, 2011).

Don Harpaz, Marcia, ‘Sense and Sensibilities of China and WTO Dispute Settlement’ (2010), 44

Journal of World Trade 1155.

Dutfield, Graham and Suthersanen, Uma, Technology, Progress and Prosperity: A History of
Intellectual Property and Development, (Palgrave Macmillan, 2012).

Guthrie, Doug,
China and Globalization,(Routledge, 2012).

Ji, Wenhua and Huang, Cui, ‘China’s Experience in Dealing with WTO Dispute Settlement: A Chinese Perspective’ (2011), 45 (1) Journal of World Trade1.

Liegsalz, Johannes, The Economics of Intellectual Property Rights in China,(Springer, 2010).

Rentocchini, G. and Manchala, S., Intellectual Property Protection: Problems and Prospects for China, (Grin Verlag, 2010).

Schiappacasse, Mikhaelle, ‘Intellectual Property Rights in China: Technology Transfers and

Economic Development’ (2004) Buffalo Intellectual Property Law Journal 164.

Stafford, Edwin R., Hartman Cathy L. and Liang, Yin, ‘Forces Driving Environmental Innovation Diffusion in China: The Case of Greenfreeze’ (2003), 46 Business Horizons 47.

Sun, Yifei, Von Zedtwitz, Max and Simon, Denis Fred,
Global R & D In China, (Routledge, 2013).

Torremans, Paul, Shan, Hailing and Erauw, Johan, Intellectual Property and TRIPS Compliance in China, (Edward Elgar Publishing, 2007).

Yu, Peter K.,
Intellectual Property and Information Wealth: Issues and Practices (Greenwood Publishing Group, 2007).

1
Dan Breznitz, and Michael Murphree, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China, (Yale University Press, 2011).

4 Johannes Liegsalz, The Economics of Intellectual Property Rights in China, (Springer, 2010).

6
Mikhaelle Schiappacasse, ‘Intellectual Property Rights in China: Technology Transfers and Economic Development’ (2004) Buffalo Intellectual Property Law Journal 164, 167.

7 Ibid., 173.

8
Peter K Yu,
Intellectual Property and Information Wealth: Issues and Practices (Greenwood Publishing Group, 2007).

10
Yifei Sun, Max Von Zedtwitz and Denis Fred Simon, Global R & D in China, (Routledge, 2013).

12 Edwin R Stafford., Cathy L. Hartman, and Yin Liang (2003), “Forces Driving Environmental Innovation Diffusion in China: The Case of Greenfreeze,” Business Horizons, 46 (March/April), 47, 49.

13 Ibid. 52.

14
Doug
Guthrie, China and Globalization,(Routledge, 2012).

17
Graham Dutfield, and Uma Suthersanen, Technology, Progress and Prosperity: A History of
Intellectual Property and Development, (Palgrave Macmillan, 2012).

20 Ibid.,

21
Marcia Don Harpaz, ‘Sense and Sensibilities of China and WTO Dispute Settlement’ (2010), 44 Journal of World Trade 1155, 1156.

23
Wenhua Ji and Cui Huang, ‘China’s Experience in Dealing with WTO Dispute Settlement: A Chinese Perspective’ (2011) 45 (1) Journal of World Trade1, 3.

25
Paul Torremans, Hailing Shan and Johan Erauw, Intellectual Property and TRIPS Compliance in China, (Edward Elgar Publishing, 2007).

26 G. Rentocchini, and S. Manchala, Intellectual Property Protection: Problems and Prospects for China, (Grin Verlag, 2010).