Nurturing Respect for IP in China

Why should multinationals doing R&D in China be pleased that a Chinese firm recently sued an American company for patent theft? Because it suggests that Chinese businesses are gradually acknowledging the importance of intellectual property rights. China is attractive as an R&D site because of its increasing supply of top talent and the low cost of doing research. By the end of 2004, there were more than 600 R&D centers in China built with foreign investment. But in the minds of many global executives, the Chinese market is synonymous with the disrespect, and sometimes theft, of intellectual property. For example, piracy of computer applications, while a serious problem everywhere, is particularly widespread in China, where an estimated 96% of the software that is in use has never been paid for. Pulling out of the vast and booming China market isn’t an option for most companies. Moreover, faced with effective reverse engineering, foreign firms have found that attempts to keep sensitive technologies out of China or to use traditional IP protection mechanisms are all but futile. The best approach, in the long term, is to invest in improving local attitudes toward IP by stimulating innovation within Chinese partner firms and letting those partners participate in the gains that stem directly from locally generated knowledge. The shared gains then become incentives for protecting proprietary knowledge. It’s important to foster the creation of a network of local partner firms that respect other companies’ choice to keep knowledge proprietary. Eventually, such a group may become the kernel of an entire business culture that respects IP. Microsoft has followed this strategy, pledging $750 million to the Chinese State Development Planning Commission for training engineers and for setting up regional software colleges that develop talent and foster entrepreneurship. Philips, which runs 15 Chinese R&D centers employing more than 900 people, uses an open-innovation strategy that involves extensive R&D collaboration with suppliers, customers, and other partners. The company cooperates closely with, and transfers knowledge to and from, Chinese companies, R&D centers, and universities in fields ranging from medical technology to environmental products. Philips also has established three IP academies, which bring Chinese scholars to the Netherlands and send Dutch experts to China in a program designed to exchange knowledge about intellectual property. These and other efforts are starting to have an effect. In 2005, more than 4.8 million patent applications were filed in China, up nearly 35% from 2004, according to the Chinese government. The U.S. Patent and Trademark Office reports that the patents granted to companies of Chinese origin nearly doubled between 1998 and 2005. The result of all those patents is that Chinese corporations themselves are seeking to enforce intellectual property rights. The Chinese company we mentioned that sued an American firm is Netac, a Shenzhen-based maker of flash drives. In 2006, it took PNY Technologies to court in the United States, claiming that PNY had infringed a U.S. patent, thus hurting Netac in the $2 billion U.S. flash drive market. Foreign corporations doing business in China should not abandon their attempts to enforce intellectual property rights in the short term. But in the long term, multinationals must help generate respect for IP by working with Chinese partners to build technical and business knowledge, an understanding of the value of intellectual property, and competence in using IP properly and effectively. If Chinese and foreign organizations continue to make a concerted effort, the IP environment in China will improve considerably in the next ten years.

Nurturing Respect for IP in China

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