“The good news is China interested in IP, and the bad news is that China is interested in IP.” This proposition is proved by some of the recent reports on China’s IP environment particularly the 2016 China Business Environment Member Survey by the US-China Business Council, European Business in China Position Paper 2016/2017 prepared by the European Union Chamber of Commerce in China and the Global Innovation Index 2016, (GII) which was prepared by Cornell University, INSEAD and WIPO.
The Good News
As for the goods news: for US China Business Council Members, intellectual property enforcement has slipped overall to the eight-ranked slot for USCBC members doing business in China. The top challenge is competition with Chinese companies in China. IP enforcement has, in fact, slid from the number two slot (2014), the number four slot (2015) to number eight. Still, IP concerns remain highly important for the tech sector, which lists IP in the number four slot, but also includes many “quasi-IP” issues in its top 10: innovation policies (number 2), government procurement ( 5 ), antitrust (7 ), standards (8) and cybersecurity (9).
The GII also singles out China’s improvements in IP. For the first time this year, China became a “top 25” innovative economy in the GII. It is the first middle income country to do so. China’s rise is attributable to a number of factors, several of them IP related: the country has a particularly high number of R&D-intensive firms among the top global corporate R&D spenders. China has had top scores in indicators such as patent applications by origin, utility model patents, high-tech exports, global R&D companies and research talent in business enterprise (see chart, below). While some of these indicators are of questionable value (such as numbers of utility model patents), the GII report recognizes many of the steps China has taken towards improving its innovation and IP environment.
The Bad News
There are several important issues that the EU Chamber suggests China needs to address: procedural reform in the courts and improvements in administrative enforcement; addressing the problems of counterfeiting for OEM production in China and what constitutes infringement domestically; improving trade secret protections when workers leave an employee; insuring the availability of provisional measures addressing higher barriers to obtaining High and new Technology Entity Status through removal of a global exclusive licensing approval option; and greater coordination and clarification of standards in IP-related antitrust investigations (amongst others).
One area of bad news shared by both the Chamber and the GII: The GII scored intellectual property payments according to a formula as a percentage of total trade. China came out below its overall rank at 72nd place, while it ranked number 1 in high tech exports (p. 199). While the GII did not draw any specific correlation between the two, this is further support to me that China is a “remarkably underlicensed economy.”
One reason for this disproportionality between licensing payments and high tech exports is the discriminatory provisions in China’s Technology Import/Export Regulations. These regulations require that a foreigner indemnify a Chinese licensee against third party infringements and that the licensee own all improvements to the technology, while a Chinese domestic licensor can freely negotiate other terms. As the EU Chamber notes, these regulations they “not only interfere with the needs of Chinese and foreign companies for effective technology trade mechanisms but also contradict the provisions of the Contract Law on technology transfer contract.”
These concerns are not only directed to foreigners extracting IP ‘rents’ from China. The ability to negotiate contractual terms is critical to developing flexible international networks for innovation through negotiated sharing of risks and benefits. The GII recognizes the increasing importance of such international collaboration to China and that “the Chinese innovation system is now densely connected to sources of expertise everywhere.” (p. 93). The report also notes that Chinese companies had “the 7th largest foreign footprint of all countries with 178 R&D centers set up or acquired outside China by year end 2015.” (p. 125). These unbalanced provisions can also affect bilateral science and technology cooperation by requiring that a Chinese party owns any improvements to technology that is licensed to it, or is indemnified against infringements by reason of use of this technology. A recent report by the Government Accountability Office regarding clean energy cooperation between the US and China noted that “The U.S. Patent and Trademark Office has identified a potential discrepancy between Chinese law and the bilateral U.S.-China Science and Technology Agreement upon which the IP Annex to the CERC Protocol is based, according to U.S. Patent and Trademark Office officials. These officials stated that the potential discrepancy is related to ownership of any improvements made to IP licensed between U.S. and Chinese entities….” ( p. 2).
It is time for China to create a more level playing field in technological collaboration for foreigners licensing to China by removing these discriminatory provisions that treat foreign and domestic licensors differently.