Intellectual Property Rights Reform in China

Over the past decade, Chinese firms have received mounting criticism over their alleged infringement on the intellectual property (IP) of multinationals. In 2019, one in five members of CNBC’s Global CFO Council stated that their companies had been victims of IP theft by Chinese firms. The same year, the U.S. Department of Justice issued several high-profile indictments against Chinese companies for allegedly misappropriating technology from the U.S. While commercial espionage often garners widespread press coverage, less attention has been paid to reforms ongoing in China’s domestic system of IP enforcement.

In 2019, the Supreme People’s Court established its first IP Court of Appeals and inaugurated dozens of provincial-level IP tribunals. In its first two years of operation, the IP Court issued over 4,000 verdicts, encompassing all classes of IP infringement, from trademarks and patents to copyrights and unfair trade. Suits increasingly involve not only domestic disputants, but international plaintiffs as well. In one case, Honda Technology Co., Ltd. v. Chongqing Hengsheng Group Co., Ltd., the Court set a strong precedent against the theft of multinational trademarks. The following year, the State Administration for Market Regulation (SAMR) released a document entitled, “Intellectual Property Law Enforcement Action Plan,” also known as “Iron Fist,” which laid out guidelines to strengthen trademark protections on emerging E-commerce platforms. Going forward, the 14th Five-Year Plan delineates further reforms to support China’s bid to become an “intellectual property rights great power” (知识产权强国).

According to data from Haseltine Lake Kempner, the annual number of civil IP arbitrations in China rose from 30,626 in 2009 to more than 280,000 in 2018. As early as 2005, Chinese courts had reportedly litigated more cases of IP infringement than any other country.  The growth in IP arbitration is not surprising given that domestic patent and trademark applications have also swelled in recent years (Figures 1 & 2). By 2012, China became the top recipient of patent applications, having since outnumbered the next top recipient, the United States, by a factor of three.

Figure 1.

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Figure 2.

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Regulatory reform in China has not gone unnoticed by the international business community. According to the U.S.-China Business Council’s 2020 Member Survey, the majority of respondents stated that the quality of IP protection in China remained the same or improved in each of the last nine years. International recognition, however, only explains part of the story behind China’s ongoing legal reforms.

Officials recognize that strong IP enforcement can have a stimulative effect on innovation. For years, legal specialists in China have puzzled over the fact that the country’s IP ecosystem remains “large but not strong” (大而不强). Despite the uptick in domestic licensing, China continues to import significantly larger sums of IP goods and services than it exports (Figure 3). Unless the government makes efforts to strengthen IP rights, it is thought that companies will forego the long-term, capital investments necessary to generate technological breakthroughs.

Figure 3.

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As China’s workforce begins to shrink and its investment-led growth exhibits diminishing returns, productivity gains will become an increasingly important source of growth. Unfortunately, recent indicators speak to the difficulty of transitioning from factor-led to productivity-led development. Since the Global Financial Crisis, total factor productivity (TFP) growth in China has decelerated from an average of 2.8 percent before the crisis to just over 0.7 percent in the decade since. To sustain China’s unprecedented development, firms will need to improve the efficiency with which inputs are utilized, a process that will undoubtedly require technological innovation.

This is why the government has become so gung-ho about intellectual property reform. Unless the regulatory system protects hardwon research and development, firms may choose to freeride on the innovations of others, leading to a productivity loss throughout the broad economy.

On the other hand, property rights that are too strict can also disincentivize innovation. Innovation economists find that productivity tends to exhibit an inverted U-shaped relationship with respect to IP stringency. While intellectual property laws facilitate innovation on the close end of the curve, in countries with weak enforcement, when applied too broadly, IP laws can inadvertently insulate incumbents from competition. As a result, industries are liable to lose the competitive dynamics that so often give rise to higher-quality products at ever-lower costs.

In retrospect, it is clear that imitation and emulation have been cornerstones of China’s explosive economic growth. From markets like bikesharing to food delivery, copycatting is a feature of China’s economy, not a bug. Kai-Fu Lee, in his latest monograph, documents this process of mutual learning and, in some cases, outright theft that facilitated the development of China’s early technology ecosystem. From Baidu to Alibaba, many of China’s most disruptive firms emerged in an environment of loose IP protection, one that incentivized rapid technological applications over original research and development. Emblematic of this dog-eat-dog era, Tencent’s “super-app,” Wechat, rose to prominence for its ability to assimilate several existing products into one platform, rather than its ability to develop any one new product or service.

Today, the very same dynamics of mutual learning that characterized China’s early technology ecosystem may now be under threat from increasingly stringent IP enforcement. While the international business community may laud China’s ongoing reforms, increasingly stringent IP enforcement could ultimately prove more harmful than good. Slower innovation in China would dampen economic dynamism around the globe.

 

All views expressed are of the writer and do not represent that of the sino-sphere.com

Nathaniel Sher is a Research Assistant at Carnegie-Tsinghua Center for Global Policy