Innovation and IPR in China, Part II

The Tsinghua University campus in Beijing, China

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Innovation and the protection of intellectual property rights (“IPR”) go hand in hand, and are two topics that come up frequently in discussions about China. Tsinghua University is doing a study on the status of both in China and asked for my comments. Part I provided my answers to the first set of questions posed by Tsinghua. Following are my answers to the rest.

Tsinghua: Are there fundamental obstacles or things that are detrimental for this kind of growth (establishing these types of dominant global innovators and highly creative companies) in the current Chinese system?

Jack: There are a number of fundamental obstacles that are detrimental to the establishment of dominant global innovators and highly creative companies in China today. They include an education system that emphasizes rote memorization over problem solving through investigation and discussion; the lack of protection for intellectual property that robs inventors of the fruits of their inventions and therefore discourages innovation; and the lack of capital availability for new, private companies.

However, the impact of each of these inhibitors is diminishing. China is now taking steps to reform its education system, while at the same time, many more Chinese are being educated abroad, only to return to China to establish their companies. As more Chinese companies and individuals invent new products and technologies, IPR protection is bound to improve. And finally, capital is becoming more available to new companies. Renminbi denominated private equity and venture capital funds now supplement the early stage capital provided by the international firms; angel investing is starting in China; and in 2010, 347 companies went public in China’s A share market, up from 99 in 2009. Most of China’s initial public offerings in 2010 occurred on the SME and GEM boards in Shenzhen that are focused on providing equity capital to smaller companies.

Tsinghua: Many argue that the government system, laws, education, etc. are not conducive to foster this kind of innovation. Do you agree with their view?

Jack: Much has been written about the fact that China’s education system, which emphasizes memorization, tends to stifle creative thought. Also, as mentioned previously, there’s no question that spotty enforcement of IPR in the Chinese courts tends to discourage innovation.

While factors such as these are not conducive to developing an innovative economy, there is a more fundamental and powerful force at work that promises to more than offset these inhibitors. Namely, China is so large, and its industrialization is happening at such a rapid pace, that the country’s development is placing enormous, unprecedented strains on everything from global energy supplies, to supplies of all types of raw materials, to the environment. If China cannot find new ways to lessen these strains, it may be forced to dramatically slow its growth, a thought that is abhorrent to the country’s leadership.

In other words, finding new and more affordable ways to improve energy efficiency, for example, is not a matter of political correctness in the case of China — it’s a matter of life and death. If China cannot innovate, it can’t continue to grow. It’s that simple.

Tsinghua: Can China continue to improve its R&D capabilities while at the same time implement stronger policies for protecting intellectual property rights, or can only one of these objectives be achieved?

Jack: Improving China’s R&D capabilities and implementing stronger policies for protecting intellectual property go hand in hand. You can’t really have one without the other. Why should a Chinese company or a Chinese individual go to the trouble of inventing a new product, or developing a new technology, if they can’t be assured of receiving the economic benefits of that invention or technology?

Chinese companies are past the point of having to copy products or technologies in order to move to a higher stage of development. Chinese engineers are perfectly capable of developing products that are suitable for the Chinese market. Moreover, any know-how that is needed but doesn’t exist in China can be purchased. Chinese companies today have much more cash than when I first came to China, and are now able to hire the best people in the world and to acquire overseas companies as a way to gain access to needed technology.

Tsinghua: Do you think China will ultimately be able to implement policies that protect intellectual property rights that can satisfy multinational corporations?

Jack: Yes, I do believe that China will ultimately be able to implement, and enforce, such policies. China changes constantly, and in most cases, it changes for the better. That’s been my experience over the past 20 years, and all the trends point in the direction of better IPR protection.

For example, Chinese companies are innovating more and filing patents in the process. As a result, pressure on the government and the courts will increase in the years ahead to protect the IPR of not just the foreign companies, but the local companies as well.

Secondly, as Chinese companies expand outside China, they become members of the global community, and as such, are required to comply with global standards and rules, wherever their operations are located. One of the problems that multinational corporations face trying to combat IPR violations in China is the need to go through the Chinese courts for enforcement. When Chinese companies have more assets in the United States and other developed countries, the multinationals will gain an ability to address their grievances through the international courts as well.

Finally, China’s role in the global economy will only increase in the years ahead. With the country’s growing importance will come increased responsibility to be a model for other emerging countries. I’m confident that the Chinese leadership will recognize and take seriously the increased responsibility of global leadership.

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