China: China's Indigenous Innovation Policy and its Effect on Foreign Intellectual Property Rights Holders

Last Updated: 10 September 2010
Article by Peng Heyue

From the end of last year, King & Wood has received regular requests from a number of foreign enterprises for advice on China's 'Indigenous Innovation' Policy. These firms are concerned that the new policy will either force the transfer of their IP rights to China or will influence their business operations in the Chinese market by limiting their ability to compete with local domestic firms.

'Indigenous Innovation' is a national strategy put forward by the Chinese government for the purpose of promoting the development of technological innovation in domestic firms, eventually leading to the ownership of their own core IP rights. Due to large volume export processing, China has long been labeled with the moniker 'The World's Factory', yet Chinese enterprises are primarily engaged in low added-value, high-waste manufacturing, and the core skills of production remain out of reach for many domestic firms. It is from this background that the new "Indigenous Innovation" policy was proposed.

In February 2006, the State Council issued both "The Guiding Principles of Program for Mid-to-Long Term Scientific and Technological Development (2006-2020)" and a notification about a number of accompanying policies on the implementation of the above program, requiring that 'improving indigenous innovation' be made the most important aspect of all science and technology related work and that the promotion of 'indigenous innovation' be carried out through tax incentives, financial support and technological investment.

The most eye-catching provision details plans for the acceleration of 'indigenous innovation' through government procurement. The 'Accompanying Measures' stipulate that correlating government departments must both set up systems for the authentication of new 'indigenous innovation' products and create a list of these products. Those products listed will be treated preferentially during government procurement.

In December 2006, the Ministry of Science and Technology, National Development and Reform Commision and the Ministry of Finance issued "Methods for Determining the National 'Indigenous Innovation' Products (Trial)" stipulating the norms and procedures by which 'indigenous innovation' products can be recognized. In November 2009, the three government bodies jointly administering the policy, according to the "Methods for Determining...", drafted and issued "2009 Explanatory Report Regarding the National 'Indigenous Innovation' Products". The products of six high-tech industries were recognized as products of 'indigenous innovation', namely computers, telecommunication installations, modern office equipment, software, new energy, and energy saving products. In other words, only the products of abovelisted high-tech industries are involved in the question of preferential treatment during government procurement.

From the first announcement in 2009, the determination of 'indigenous innovation' products has been followed closely both in China and abroad. The fourth item regarding the condition of the IP rights of new products in the "2009 Explanatory Report" has led to widespread debate:

"...(2) A product's IP rights and the condition of rights and interests are clear. Products have 'indigenous innovation' IP rights when: the applying enterprise, through technological innovation, owns IP rights according to Chinese law or is a Chinese enterprise, state-run institution or citizen who has IP rights or IP usage rights which are not restricted by foreign institutions or individuals.

(3) The product posseses its own trademark, namely the applying institution has the proprietary rights to the product's registered trademark. The products' marketing trademark must have be registered in China, and can not be restricted by related foreign products...."

The "2009 Explanatory Report"'s fourth provision retains the IP property rights related requirements stipulated in "Methods for Recognizing" while at the same time adding the two requirements underlined above.

Foreign enterprises believe that this provision confirms their longstanding fears. The IP rights of Multinational corporations are usually first acquired abroad, and due to concerns about China's present ability to protect IP rights, are rarely transferred to the Chinese WFOE or JV subsidiary. If it is necessary, foreign parent companies will obtain permission for their IP rights to be transferred to their Chinese subsidiaries but the permission agreements usually all have limiting conditions. Very rarely is a foreign-invested enterprise completely free of restrictions regarding the rights of use originating from a foreign parent company's IP rights. Although the documents themselves suggest that foreign-invested companies can also apply for recognition of 'indigenous innovation' products, because these firms are unable to meet the conditions listed above, foreign-invested enterprises will be excluded for the USD 10 billion per annum Chinese government procurement market.

After the issue of the "2009 Explanatory Report" while one side, foreign enterprises, successively raised doubts about the abovementioned provisions, the other, the Chinese government, over several different occasions clarified that the 'indigenous innovation' policy would treat foreign-invested enterprises equally without any discrimination.

On April 10, 2010 the Ministry of Science and Technology, the Commision for Development and Reform and the Ministry of Finance jointly issued the "2010 Notification Regarding the Development of Determining 'Indigenous Innovation' Products (Draft Seeking Opinions)". The scope of recognition in 2010 was equivalent to that of 2009, and the 6 high-tech fields determined the year before remained the same. Yet when compared with 2009, the requirements for 'indigenous innovation' IP rights set out in 2010 were greatly relaxed. The second provision of the

"2010 Notification" reads as follows:
"...2. The applying institution legally enjoys the undisputed domestic IP rights or the right of use for the product through its own technological innovation or the permission of another institution.

3. The applying institution legally holds the exclusive rights or right of use to the products registered trademark in China...."

The "2010 Notification" suggests that provided the applying institution enjoys the IP right of use, and that there is no issue or dispute about that right, then the conditions are met for classification an 'indigenous innovation' product, and that the issue of control over these rights will not be considered. Even if the right of use is restricted by the foreign parent company, it will not influence the application for 'indigenous innovation' qualifications, thereby eliminating the obstacles to application for recognition of 'indigenous innovation' products by foreign-invested enterprises.

So far, however, the three government bodies jointly administrating this policy have yet to release an official notification for 2010 regarding the recognition of products of 'indigenous information'. In addition, the 2009 national list of products of 'indigenous innovation' is still unpublished, and therefore, it is still necessary for foreign-invested enterprises to closely follow the progress of this policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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