In 2006, the state Council Leading Group on Science, Technology and Education, chaired by Premier Wen Jiabao established a 2006-2020 National Plan for Science and Technology Development, which stressed increasing the number and quality of intellectual property (IP) registered in China.
The effort has two basic prongs: encourage the development and registration of new IP developed in China by indigenous Chinese people and encourage outside firms to develop and register IP in China.
Since then, China has offered tax breaks for research centers locating in China, reduced IP filing fees, offered free legal advice for those looking to register new IP, recruited research personnel and entrepreneurs and set up a government procurement preference program for indigenous IP.
Four years later, as China’s economy hums along and the developed world sags, multinational corporations (MNCs) are feeling the heat. Their basic fear is that IP registered in China could be a heavy price to pay, if it is the price of access to China government procurement program. The idea being that if the IP is not protected, it could be used against the company not only in China but the rest of the world.
On Nov. 15, 2009, the Chinese government issued Circular 618, requiring companies to register their indigenous products by Dec. 10. A firestorm of comments mostly by MNCs, Chambers of Commerce and Embassy Trade Departments followed. The result was a new comment period was established.
The international side is now focusing on trying to exact concessions through China’s reapplication to the World Trade Organizations (WTO) Agreement on Government Procurement. Acceptance in the Program, which would allow Chinese companies to compete for government procurement business of member signatories.
Some things to think about.
Interestingly, none of the firms who took the tax breaks given for bringing in and registering new IP and products and/or taking the lucrative benefits received for locating advanced research facilities have given them up and left in a huff. To the contrary, according to the 2010 China Business Climate Survey conducted by AmCham China, optimism about China is at the highest levels since 2008, with 82 percent of respondents expressing either “more” or “slightly more” optimism about their future in China. Twenty-eight percent of the businesses saw China as their No. 1 foreign direct investment (FDI) priority, while 49 percent listed it in their top three.
Fifty-eight percent of the firms are now producing in China for the domestic market. Only 28 percent felt that their business had been negatively impacted by Chinese indigenous innovation policies, while 55 percent had never heard of the policy.
What seems to escape many is that we may be missing the point. For instance, in terms of IP rather than looking pessimistically at this, maybe we should be cheering. China’s lapses in protecting foreign IP is tied to their ambivalence about a system invented by foreigners and until recently 90-percent owned by foreigners. As China acquires more intellectual property, it is more likely that their new vested interests will create stronger and more vigorous protection and enforcement.
In terms of China’s acceptance into the WTO’s Agreement on Government Procurement, perhaps we should be more concerned about the potential long-term effects rather than seeing it as a short term tool to exact access to the Chinese government. China’s acceptance could potentially displace local suppliers with more competitive Chinese suppliers. While this might be welcomed over the short run by revenue starved local, state and national governments, it could have a chilling effect on local firms and employment and therefore long-term tax revenues.
So what does “indigenous innovation” mean? One way of looking at it is, it is an example of the type of policies which will be created when developed and emerging economies compete. Ironically when we were competing with Europe in the late 1800s it was about logistics, technology and resources and little has changed since then. “Indigenous innovation” policies under other names were used then to advance national interests and it is hardly surprising they are being used again today. From the business point of view you should study these changing tides and find a path that works for your business. For instance, if I was currently doing business with the governments in the developed world I would be looking carefully at where I need to produce and/or source to stay competitive.
I wish to acknowledge Matt Beyer from Powell Tate China for bringing this issue to my attention through his China Matters summer newsletter.
