China Pushing Forward With IP Protection

Intellectual property protection has recently become a hot topic in China, as numerous Chinese industrial executives, legal scholars, and government officials have begun to collaborate on how to strengthen the country’s IP protection. A driving force behind this collaboration is the need to further stimulate and safeguard the country’s continuously growing economy. The Chinese central government in Beijing, in conjunction with various provincial governments, has predicted that IP protection would be an indispensable and necessary component in guaranteeing the country’s economic growth for decades to come. As a result, China’s Patent Law has begun its third round of changes since its promulgation in order to further balance private and public interests.

According to the Chinese patent office, the amendment of the Chinese Patent Law will be a major revision since its purposes include boosting enthusiasm in innovation, simplifying the patent examination procedures, and improving the patent protection in China. In addition, the amendment may create special rules to provide protection for China’s biological and genetic inventions. For example, the revised Chinese Patent Law may require patent applicants to disclose the origin(s) of biological and genetic resources in their inventions. The Chinese National People’s Congress is expected to announce the revised sections of Chinese Patent Law sometime this year and the amendment should be completed by 2008.¹

The central government in Beijing promotes and encourages government branches to reform their IP practices to be more in line with the international standards. Consequently, various local governments, particularly in the areas of special economic zones, have started to set up local IP departments, or IP work groups, to monitor and implement protection. In addition, non-profit industry associations, such as the China Semiconductor Industry Association, have taken the lead in promoting IP protection and, on occasion, providing IP-related services across the nation.

Another reason for enhancing IP protection is to comply with international concerns. Recently joining the World Trade Organization (WTO), China is motivated to provide IP protection to fulfill its membership obligations. According to the Commissioner of the State Intellectual Property Office, the new round of revisions of the China Patent Law will reflect certain changes necessary to meet the challenges from new developments that occurred after China joined the WTO.

For example, the Chinese government is even considering an IP specialized court system, similar to those in Europe and Japan.

Over the years, numerous international legal scholars and experts have addressed the issue of China’s IP and claimed that any substantial change in protection will likely depend on economic needs. Like other societies, when a country evolves from being under-developed, it normally goes through phases of piracy, which are followed by understanding and, ultimately, respecting IP. The driving force behind these changes is often associated with political and economic needs. Since China’s economy has consistently grown for the past 25 years, it has absorbed the growth and is expecting it to continue. To maintain the current pace of the gross domestic product (GDP) growth rate, new technology is required to maintain current industries and venture into new ones.

According to the Chinese National Bureau of Statistics² (CNBS), China’s GDP has been growing at an approximate annual rate of 9.5 percent for the past 25 years, and it should continue to grow approximately 8 percent annually for the next 15 years. The statistics also indicate that the growth rates across industries vary. For example, the growth rate in manufacturing is higher than in agriculture. Even within manufacturing, some sectors expand more quickly than others, depending on the technology requirements. For instance, for the past five years, the growth rate for the semiconductor industry (or IC industry) has been approximately 40 percent annually. To maintain this pace, large R&D investments will be needed to generate new technologies. Without strong protection, it is difficult to secure any substantial investments in technology. At a recent IC conference in Xian, China, the speakers praised recent IP protection improvements compared with previous efforts. The conference also indicated that patent applications filed by Chinese IC companies are less then 10 percent of the total applications filed in the country last year and only 2 percent worldwide.³ The current IP protection is not adequate for the amount of IC-related products sold worldwide. As China’s IC market further expands internationally, potential litigation in the United States, especially patent infringement and 337 ITC actions, has raised concern. While IC companies want to further expand market share, the importance of the interdependency between IP protection and future growth is still not fully comprehended by the companies.

Technology transfer from overseas companies to China is a channel for acquiring advanced technology. Many international companies would like to take advantage of low labor cost, an abundance of young engineers, and favorable investment policies. A roadblock to smooth technology transfers is IP protection. Common questions often asked by the technology owner are how to protect the owner’s IP rights and how long the owner can reap the benefit of the protection before being pirated. The concern over technology transfers protection is a contentious issue. As a result, many technology transfers have failed, even after years of marathon negotiations.

Recognizing that acquiring leading technology from foreign companies is difficult, China is also moving forward with developing and innovating technology domestically. Large investments have been made in China’s technology sectors over the past decade. Several science parks and special economic zones with favorable treatments and policies have been established to facilitate innovation. Such facilities are suitable for housing R&D centers that are open to foreign companies and investors. Again, IP protection becomes an issue when foreign companies want to have R&D centers in these facilities. Existing R&D centers in China have required months of negotiations, sometimes excruciating and contentious, over IP matters prior to companies committing to the move into China. Many other companies would like to establish their R&D centers to China but choose to stay on the sidelines mainly as a result of IP concerns.

In the process of moving from low- and mediantech to high-tech products, China has created some inventive ideas in the manufacturing sector. For example, China has the capability to manufacture sophisticated mechanical components for automobiles and airplanes and advanced electronic components for computer and gaming products. However, the majority of the Chinese companies seem to overlook the value of protections and still believe it is not worthwhile to spend their scarce resources on IP protection. Realizing the lack of appreciation for the IP value by the Chinese industry community, the Chinese patent office, legal societies, and industry associations are actively educating local Chinese companies and inventors. Some local governments even provide monetary incentives to develop IP programs. In fact, many inventions have been created from research institutions, such as those in the universities, and companies in the science parks.

Ever since reform began in 1978, the central government in Beijing has favored technology and innovation. In addition to promulgating various favorable policies and plans to encourage innovation, it also devotes resources to establishing environments that facilitate R&D. Since the early 1990s, the Chinese government has established a number of science parks, notably Beijing Zhonguancun Science Park and Shanghai Zhangjiang Hi-Tech Park. Hong Kong Science & Technology Parks, established last year, is the latest of such parks that are sprouting up all over China. One purpose of these parks is to combine government and private funding for research and development, and a number of innovations have resulted.

Science parks welcome all types of entrepreneurs, scientists, and companies (like the early stage of technology incubators in the United States) as long as they intend to develop new technologies. Science parks have been very successful platforms for incubating new companies and have attracted a number of cross-border technology companies, such as Cadence, Micron, Sony, SAP, and Roche, which are in Shanghai Zhangjiang Hi- Tech Park. These R&D centers and science parks will be another driving force in the maturity of China’s IP system. In fact, there have already been some positive results. Chinese companies collectively filed approximately 2,000 US patent applications in 2004, which is only 3 percent of the applications filed by Japanese companies, but it is an approximately 80 percent increase over the previous year.⁴

According to the Chinese patent office, more than over 400,000 Chinese patent applications were filed in China in 2005.⁵ Japan is the foreign country that filed the most Chinese patent applications in China, and the United States is ranked third after the European Union. Apparently, companies that filed enormous numbers of Chinese patent applications, such as Matsushita, Samsung Electronics, Philips, and Sony, believe that the Chinese IP protection will be there when these pending applications are granted as patents. Solely relying on the US patent portfolio may not be sufficient to maintain the competitive advantage for some US-originated companies because of the growing Chinese market. For example, some Chinese markets have already grown a considerable size, such as wireless communications networks, cellular phones, and flat-panel displays. As such, a carefully planned China IP strategy is highly desirable for all global companies, whether they are located in the United States or overseas.

China has begun to make efforts to push forward with IP protection, which it will likely tailor to its own economic and political needs. It will be up to us as to how we can most effectively work in conjunction with these efforts for the benefit of all.