Is China taking shortcuts to high-tech leadership?

Dr. Jörg Schwartz, [email protected]

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 of anonymity.

“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 markets.”

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.