China's new strategy puts intellectual property first

Out-Law Analysis | 22 Oct 2009 | 4:38 pm | 3 min. read

OPINION: Businesses hoping to make a mark in China are about to face a very new version of a very old problem. If they don't adapt soon they could face the unusual prospect of being taught a lesson in intellectual property protection from Chinese companies.

Chinese business has not had the most comfortable relationship with the intellectual property rights of foreign businesses. But, suddenly, Chinese Government and industry are turning to IP as a major driver, not inhibitor, of economic growth.

There is a clear policy shift in China with regard to innovation and IP. Rather than viewing IP as an exploitative Western advantage, China now considers IP a major national policy priority.

About a year ago, China's cabinet, the State Council, issued the National Intellectual Property Strategy Outline (the Outline) which characterises IP as an engine of China's future development, essential for its international competitiveness and for building an 'innovative country'.

This official enthusiasm has been adopted elsewhere in government. Of China's 31 provincial level governments, 13 have promulgated their own IP strategies and corresponding implementation regulations.

Add to that the Supreme People's Court's March 2009 'Opinion on Implementation of the Outline' and the adoption of the Third Amended Patent Law – which came into force this month – and what you have is a major revision of policy on IP.

So what does this new policy say? The Outline orders various branches of the government to take certain specific measures to "foster a culture of IPR protection". It recognises for the first time that private enterprises are to be the principal force for innovation, IP generation and utilization, and provides incentives to private enterprises for IP creation and exploitation.

The incentives are powerful, and go well beyond simple tax breaks. There is direct investment in private companies' research and development, there are subsidies through government procurement efforts.

One region, Jiangsu, has specified that every county must establish a special-purpose fund to aid patent application filing, promote the utilization of patented inventions, train patent professionals, and support the growth of IP service companies.

Jiangsu will establish venture capital funds with government money to invest in the commercialisation of patented technologies and has ordered governments at or above the county level to subsidise interest payments or guarantee loans used for technology transfer.

Why is this happening now? The most obvious reason is that China now has a strong need to protect its own IP rights. It has ambitions to convert its economy from one based on manufacturing and imitation to one based on innovation. For this, it needs the protection that IP brings.

The result is that China is becoming a formidable IP rights powerhouse. The number of patent applications filed by Chinese entities surpassed Europe in 2005, Korea in 2007, and is projected to surpass Japan next year, and the US in 2011.

China also became the most litigious country in 2005 for IP cases, surpassing the US. Foreign companies should be prepared to face substantial new global and domestic competition from the growing output of China's increasingly well-subsidised and well-supported IP generators.

So what should foreign IP owners do? This shift in policy could cause them some difficulties, but handled well it could also present them with opportunities.

First, companies need to reform their own practices. Many foreign companies forego routine IP protection measures in China, such as applying for patents, because IP protection was not effective.

That has to change. Foreign companies should view China as a significant market for their products and services, and should protect themselves through diligent IP procurement, protection and enforcement, as they would in any significant market.

Foreign companies must change their attitudes. They must no longer be afraid to transfer their technological crown jewels to China for fear of losing them to Chinese counterfeiters or infringers.

China has an inexpensive yet high quality pool of talent from which to draw people to conduct research and development. Companies that depend on innovation should be carrying out development here, now that the risk of losing vital IP is significantly diminished, if appropriate measures are taken.

More importantly, innovative foreign companies may also benefit from China's new IP promotion policies, because under its World Trade Organisation commitments, China must treat foreign entities on no less favourable terms than its own residents. Thus, foreign invested enterprises should be equally eligible to take advantage of China's new IP incentives.

By Dr Kening Li, a partner in the Shanghai office of Pinsent Masons, the law firm behind OUT-LAW.COM, and head of the firm's intellectual property team in China.