Dr. Jörg Schwartz, email@example.com
BEIJING and WASHINGTON – A report on China’s so-called indigenous innovation policy, recently issued by the
US Chamber of Commerce, accuses the country of abusing its huge market by forcing
foreign companies to transfer their intellectual property to Chinese competitors.
The Chinese view, however, is that the indigenous innovation-related efforts are
aimed at cultivating markets for both domestic and overseas products.
In an interview published by the Beijing Review, economist Qi
Jianguo says that “every country is trying to get its economy back on track
with incentives following the financial crisis.” He compares the Chinese initiative
to US efforts to revive local manufacturing with renewable energy and smart grid
technologies using preferential policies such as permanent research and development
tax credits. He also stresses the importance of becoming more independent of manufacturing
by acquiring advanced foreign technologies for assimilation, improvement and reinvention.
The US group, however, sees the indigenous innovation effort as
a “massive and complicated plan to turn the Chinese economy into a technology
powerhouse by 2020 and a global leader by 2050.” The strategy was first launched
in 2006 with the publication of the National Medium- and Long-Term Plan for the
Development of Science and Technology (2006-2020). In November 2009, China’s
Ministry of Science and Technology, National Development and Reform Commission and
the Ministry of Finance jointly issued the Circular on Promoting the Accreditation
of New Indigenous Products, complemented by accreditation application procedures.
Included was a list of products that would be given preferential
procurement status by the country’s government agencies, accounting for roughly
$70 to $130 billion a year across a wide range of industry sectors. The initial
rules stated that, to be included in the catalog, products must contain intellectual
property developed, owned and registered in China, therefore basically excluding
non-Chinese companies in the fields of computer, software, telecommunications and
green technology from doing business with the Chinese government.
After a lot of international criticism, these rules were somewhat
softened in April 2010 when the Ministry of Science and Technology, the National
Development and Reform Commission and the Ministry of Finance jointly released a
new circular relaxing key points on intellectual property rights (IPR) so that companies
do not need to own the product’s IPR (such as patents) but can instead hold
a license to use the IPR in China – to enter the cumbersome accreditation
process for government contracts. In other words, although the products must still
be manufactured in China, the foreign partner no longer has to transfer all the
relevant IPR to the local partner or joint venture.
US companies argue that the rules are intended to force them to
partner with Chinese companies and turn over technology and intellectual property
to them. Only by doing so would they qualify to sell to Chinese government agencies.
However, transfer of technology is common practice when doing business with China,
according to a patent attorney at a Western multinational company who spoke on condition
“When doing business with China – as well as various
other emerging countries – as a company, we are often forced to set up a local
joint venture rather than doing business directly,” the attorney said. This
opens the door to leakage of IPR and know-how, and different strategies to prevent
it come into play – although in most cases, this turns out to be difficult.
Even if the JV [joint venture] only gets licenses for the local market, such as
China, the technology is effectively handed over to the local partner, e.g., via
staff training. Following this, the attorney said, “it is not uncommon that
the JV breaks up and the partner then becomes a competitor and uses the know-how
against us, initially in developing countries where patent protection does not apply,
and eventually (after expiry of the patents) even competing with us in our home
Acquiring foreign technologies is an explicit intention of China’s
policymakers, according to Qi Jianguo. While the gap between Chinese and overseas
technologies has narrowed, more and more foreign investors are inclined to establish
wholly foreign owned enterprises instead of joint ventures to prevent technology
from “leaking.” He foresees that these foreign investors will soon form
a firewall between their own businesses and China’s national industries. Under
these circumstances, China could face a technological deficit.
The chamber report says that China has created a decent IPR legal
regime on paper but that enforcement all too often appears to be deliberately weak.
Since joining the World Intellectual Property Organization in 1980, China has created
the laws and tools necessary to have respectable IPR protection, working closely
with the European Patent Office in particular. However, enforcement can be an issue.
As a result, even within China, infringement claims are not always
easy to pursue, particularly against government-owned entities, say Western companies.
But “China will further strengthen IPR protection, including that of foreign
companies, exactly because we encourage homegrown innovation,” a Chinese official
said, according to the international news agency AFP. On the other hand, new laws
passed in 2009 make it easier for domestic retaliation by Chinese companies facing
overseas IPR lawsuits from foreign competitors.
This is another reason why the US group says that the policy is
“considered by many international technology companies to be a blueprint for
technology theft on a scale the world has never seen before” and adds that
it is a signal that the pretense of goodwill is gone. Somewhat rhetorically, the
report concludes that “the belief by foreign companies that large financial
investments, the sharing of expertise and significant technology transfers would
lead to an ever-opening China market is being replaced by boardroom banter that
win-win in China means China wins twice.”
Those trying to bridge the gap, including Dieter Ernst, a fellow
in economics at the Honolulu-based East West Center, say that a more multilateral
approach must be taken toward improving cooperation with China on innovation policies.
“I strongly feel that it is time to move beyond the current patterns of rivalry
between the US, the EU and Japan in this regard,” he writes.
At present, all three of the trilateral economic powers are trying
to convince China to adopt parts of their policies and regulatory systems aimed
against the other trading partners, providing China with opportunities to use “divide
and conquer” tactics. The same applies for the company faced with the question
of whether to give up its technology in return for market access. The “if
I don’t do it, someone else will” argument, combined with the prevailing
short-term view (up to the next quarterly results) of Western businesses, seems
to predominate. The Chinese government, however, seems to think differently and
is taking a long-term view.