Innovation and IP in China
Introduction
In the past 10 years, the international press has been paying more and more attention to changes in China, and especially its fast growing economy. Due to a cheap labour force and its currency policy, China has astonished friend and foe by catching up with the rest of the world in only 25 years time. Last month, statistics recorded a growth of industrial profits of 29.1% in the first eight months of this year, compared with 23% in the whole of last year. The foreign trade surplus reached USD15.3 billion in September, the second highest figure in the first three quarters. It is expected to reach USD158 billion in 2006, setting a new record. China’s National Bureau of Statistics estimates economic growth could reach 10% this year, two percentages points higher than the government’s goal. The World Bank forecasts 10.4%.
Still, along with this encouraging development of China’s economy, problems arise when it comes to manage this success in a way it benefits the whole Chinese society. The Chinese Academy of Social Sciences (CASS) predicts the income gap will continue to widen this year, as the per capita income of farmers is expected to grow 6%, while urban residents may expect a rise of 10.5%. On the international level conflicts arise due to dumping practises. This month the EU imposed a largely contested anti-dumping tariff on Chinese leather shoes. Along with the import into the EU of Chinese textile, handbags, CD’s, DVD’s etc., IP related problems arise due to the import of fake goods. The problem of counterfeiting and piracy is not only an export related problem, it is also a domestic problem. An estimated 15 to 20% of brand products sold in China are fake. Foreign companies, having brought in new technologies into a joint venture, encounter problems in enforcing their IP rights in case of infringements. The lack of protection of IP and the lack of respect of IP rights is indeed a frequently uttered complaint by the international business community in China.
This article will be a brief investigation into the perceived lack of respect for IP rights in China. First, it will dig into China’s ancient and recent history and touch on its most influential philosophy, Confucianism. This will give us a better understanding of the aforementioned problem. Second, it will set forth the legal issues of IP in China, and it will clarify what causes the current perceived lack of legal protection. Third, it will give a view over China’s concrete recent achievements in the field of innovation. Fourth, it will suggest a possible solution of the problem in the future.
History and Philosophy
1. Imperial Administration
Nowadays, the common understanding about Mainland China among Westerners is built by the communist revolution which put Chairman Mao in power in 1949. Little is known about the flourishing ancient dynasties, reigning China for more than 4000 years. This was caused by the perfect isolation from the rest of the world, which was China’s main foreign policy for many centuries. However, in the current so-called communist society, the ancient heritage of legends, songs, fairy tales and epic poems – the hero’s are not seldom celebrated on typical Chinese holidays – is still having a deep impact on Chinese society. In the same way, the imperial style of reigning the ancient Chinese society, serves as a blueprint for the Chinese society nowadays. To make a career in ancient times, scholars had to pass exams in which the spotless reproduction of ancient writers and thinkers, was the only guarantee for success. When the Han writing was introduced during the Han Dynasty as the standard writing for the whole empire, the foundation was laid for an educational system that stressed the imitation of characters: character after character, day after day. Each stroke of a particular character had to be drawn in the right way, and each character according to the right stroke order. This has affected the educational system until this very day.
2. Confucius and Mao Zedong
Apart from the imperial administration, one should not forget to mention the ancient teacher Confucius, whose writings can without any doubt be considered to be the most influential on Asian morality and ethics. In the fifth century BC, Confucius sought a way to organize the, at that time, chaotic Chinese society, in order to restore peace on earth. His answer was the creation of a holistic universe, in which man had to live in harmony with the cosmos, this means to live in harmony with the hierarchy in the society. The respect for parents, ancestors, traditions, and - relevant in our case - teachers, becomes the central pillar of the harmonious society. When we have a quick look at philosophy in the West, we get a totally different picture. Although Plato has given birth to philosophy in the West, his pupil Aristoteles immediately responded to his doctrine by pretending: ‘Plato is a friend, but the truth is a better friend’.
From 1966 till 1969, Chairman Mao will try wipe out the Confucian society in a frenzy of revolution and class-struggle during the Cultural Revolution. However, the same idea comes back. Imitation of what already exists, not creativity or innovation, is promoted as the only way to become a better communist. On top of that, any claim of property, not to mention intellectual property, was denied.
This brief introduction to Chinese history and philosophy is particularly relevant for the traditional perception of innovation and IP. It explains why, in general, Chinese businessmen do not consider counterfeit as a morally wrong act. According to the Confucian doctrine, the inventor or company who is holding a patent on the copied technology, should be honoured for the reason that his particular technology is worth of being copied. In the next part we will see how the recent economic and international developments are changing this perception of innovation and IP drastically.
Legal framework for IP
1. International commitments
When Deng Xiaoping opened up China's market for foreign investment in 1978, there was no legal basis for a claim on intellectual property. In no time, Chinese government adopted the Trademark Law, the Patent Law and the Copyright Law. With China’s accession to the WTO in 2000, the legal IP arsenal had to be brought in accordance with internationally recognized standards as elaborated in the TRIPs. As a consequence, China disposes of a highly advanced legal framework for the protection of IP. Moreover, the legal framework is constantly subject to amendments and expansion. In 2003 the State Council issued the PRC Regulations on Customs Protection of Intellectual Property Rights, and in 2004 the General Customs Administration issued the Implementation Measures of the PRC Regulations on Customs Protection of Intellectual Property Rights. This year Chinese government will draft or revise 17 laws related to trademarks, copyrights and patents.
This means that the lack of legal provisions cannot be the reason for the aforementioned problem of lack of legal protection of IP. However, the legal framework might be present, but the enforcement of intellectual property rights is Achilles’ tendon. Only 4 % of the goods entering or leaving China can be physically checked at the borders. The rate of physical checks on exports is even lower because many of them are exempt from customs duty. In case an infringement has been settled in court, fines may be imposed. However, the imposed fines are often too small to deter infringement effectively. As mentioned before, entrepreneurs consider those fines as a mere consequence of doing business, rather than a punishment for a morally wrong act.
In order to enhance the enforcement of IP rights, the Chinese government has already taken many initiatives. In 2004 the PRC Supreme’s People Court and the Supreme’s People Procurate jointly issued the Interpretations on Several Issues of Concrete Application of Laws in Handling Criminal Cases of Infringing Intellectual Property (the New Interpretations). The New Regulations lower thresholds for the prosecution of IP crimes, especially that of offending actions of infringement on trademarks and copyrights. The New Interpretations also introduce accomplice and cumulative punishment in the conviction of IP crimes. In the field of Trademark Law, The State Trademark Office has recently decided to give public access to the trademark database, which means a big step forward in terms of prevention of trademark infringements. In terms of legal enforcement, there have been two important precedents. Beijing’s famous Silk Street Market was convicted in April for selling fake products. In Shanghai a Carrefour supermarket unwittingly sold fake Louis Vuitton handbags a supplier had bought from a street vendor at 49.9 yuan (4.94 euro) while the real bags retail for 9,000 yuan (891 euro). The court ordered the bags to be removed from the shop and compensation to be paid by Carrefour. These two cases of conviction will enhance the public awareness of the problem.
2. Protection of domestic IP
One could argue that the construction of a legal framework and the improvement of its enforcement procedures, are only resulting from China’s international commitments due to its WTO membership. However, in several cases, China is increasingly stakeholder in the solid protection of IP, for example in the field of technology transfer agreements. It often occurs that a foreign party transfers technology to a Chinese counterparty in the course of a partnership or a joint venture. It is common practise in technology agreements that the transferor tries to restrict the use of the subject technology. However, if the transferor imposes excessive restrictions, the agreement risks to distort competition. For this reason agreements imposing prohibited restrictions or unreasonable restrictions, will be held void and thus unenforceable according to the Regulation of Administration of Import and Export of Technology (the Technology Regulations). According to the Technology Regulations, to restrict licensees from improving, or owning or using improvements of the subject technology will be considered as an unreasonable restrictive clause. The licensor must also give performance warranty, guarantee of completeness, non-defectiveness, ability to achieve technical objectives provided for in the contract. The licensor must further warrant that it is the lawful owner or licensee with right to transfer of licence such technology. One could argue that the rules can be circumvented by applying foreign law to the agreement. However, contracts that do not comply with mandatory PRC law (such as provisions containing prohibited or unreasonable restrictions) are not enforceable against a Chinese party in China.
The Technology Regulations indicate that Chinese IP owners are more and more aware of the fact that an IP portfolio constitutes a business asset for their company in a global business strategy. Relevant here is the so-called Viagra case: twelve Chinese pharmaceutical companies jointly challenged in court the validity of Pfizer’s Viagra patent.
Recent developments in innovation
1. Official statements
President Hu Jintao, Prime-Minister Wen Jiabao and other top officials have recently launched their “National Medium and Long-Term Programme for Scientific and Technological Development (2006-2020)”. The plan targets China’s current dependency upon imported technology by increasing the budget for research and development from its current 1,23 % of GDP to 2,5% by 2020. Besides this programme, statistics show an increased activity in the field of innovation and R & D. The State Intellectual Property Office (SIPO) is already doing overtime granting patent applications. An increasing number of these applications are filed by Chinese companies.
On October 12 at the 8th China Hi-Tech Fair in Shenzhen Vice-premier Wu Yi expressed that ‘China is building a resource-conserving and environment-friendly society and an innovation-oriented society and will vigorously develop the technological renovation industry so as to increase its self renovation capacity and promote economic structure readjustment and change of growth forms’.
2.Scientific achievements
Concrete initiatives have been taken in thermonuclear sciences. China recently tested a superconducting thermonuclear fusion device which in the future may be used in fusion reactors to produce clean and almost unlimited energy. The device is called the Experimental Advanced Superconducting Tokamak and is generating plasma which eventually could be used to build such a fusion device. American scientists were invited to cooperate with Chinese scientists at the Institute of Plasma Physics in Hefei.
In the field of High-Tech sciences an internet network of the next generation based on IPv6 connecting 25 universities in 20 cities has received an acceptance certificate. Several telecoms operators are expected to launch IPv6 trial networks before the end of the year.
In September, a new dehydrogenation mechanism for LiBH4, a new hydrogen storage material, has recently been developed by CAS scientists and scholars from the University of Nottingham (UoN), showing a promising future for its onboard applications. With very high hydrogen storage capacities, LiBH4 is widely recognized as an ideal fuel carrier for future vehicles and has become a hot issue in the materials science since years ago. However, the reaction conditions of its dehydrogenation and rehydrogenation, the superior temperature and pressure needed for instance, have long been a headache for scientists.
3. Information exchange and international cooperation
In the past few years many initiatives have been taken to facilitate exchange of information on innovation in order to better commercialize innovation throughout the country. In 1995 the Northern Technology Exchange Market was created to serve as an information platform for technologies. In 2001 the International Technology Transfer Center was established, soon to be followed by Shanghai Co-Way International Technology Transfer Center.
There is also an increased interest of the Chinese government in international cooperation in technology transfer. This month the EU-China science & technology year was launched. There are 130 joint research projects. Two of the major cooperation projects are the experimental thermonuclear reactor (ITER) and the Galileo satellite project. In September Vice-premier Zeng Peiyan and the Belgian government signed an agreement on nuclear technology cooperation.
Although Chinese IP owners intend to be protective when it comes to overseas technology transfer, it is to be expected to see more opportunities in this field in the future. Chinese companies that have developed R & D activities, will seek for valorisation and commercialisation of their technologies. It goes without saying that it is in their own interest to seek for licensees or transferees on a worldwide scope. On the other hand, technology transfer opens up great possibilities for innovation. A team of young Chinese engineers that comes up with a new and promising idea but lacking a specific kind of technology invented by a foreign research institute, can save a lot of valuable time by considering a technology transfer.
Towards a new China
To consider China as a passive player in the global knowledge economy, would be a big error of judgement. China is confident to fulfil its international ambitions and therefore realizes, much more than any other developing country, that stress has to be laid on innovation, and, as a consequence, on the establishment of a solid and sound protection of IP. In the 21st century, the prosperity of a nation will depend on its scientific achievements, rather than the faith in traditional industries.
The Olympic Games in 2008, to be hosted by Beijing, might be a first test. As China will be the centre of attention, it will have a chance to present itself as a dynamic and innovation-oriented country, willing to live up to its international trade commitments. However, I am convinced that China doesn’t need the Olympic Games to prove this. Due to China’s international ambitions, it is clear that it is willing to adopt and enforce international recognized IP rights standards. Although there might still be a problem with respect to the enforcement of IP rights, recent developments show that Chinese companies are increasingly gaining interest in relying upon an efficient enforcement procedure system. Many are sceptical of this idea and say that this will take many years. But the way China is building up a new country at this very moment and making this huge progress at a tremendous speed, with the knowledge that, only 30 years ago, a vast majority of the Chinese people was living under dramatically poor conditions, tells me that the best is yet to come.
Mattias Debroyer,
20th of October 2006
