While China has become a manufacturing giant, it has remained an intellectual property midget. Regardless of the sector — biology, information or material technology — multinational corporations continue to dominate when it comes to intellectual property, including patents issued. The Chinese government, however, realizes the importance of fostering technological development at home. A&S China Best Buys delves into the history of technological development in China as well as examining government efforts to assist companies in their efforts.
Following the initiation of China's economic reforms in the late 1970s, the nation experienced an unprecedented economic boom, developing as much in 20 years as it took some advanced countries 100 years to achieve. Despite this, its reliance on OEM project work has meant that the fruits of technological innovation have passed it by. In addition, since the 1980s, developed countries have engaged in tough negotiations with developing ones to ensure that the intellectual property held by companies in the former are protected.
Regrettably, home-grown technological development has lagged across a wide range of fronts in contrast to the prowess of international players. In China, the number of patent applications from foreign companies increases by 5,000 per year; this is three times the rate of domestic companies. In addition, of the 2,000 patent applications made by Chinese companies abroad every year, only 300 are actually approved.
As if this were not bad enough, independent intellectual property held by Chinese companies is quite limited with most, in fact, nothing more than improvements made on existing technology. Naturally, the best kind of intellectual property is inventions. Again, unfortunately for China, only 37 percent of its total patents at the end of 2004 were for the same.
The list goes on. There are little more than 2,000 Chinese companies (0.03 percent of the nation's total) with independent intellectual property. In fact, 99 percent of Chinese companies have not even applied for patents and only 40 percent have registered trademarks. Suffice it to say, there are few famous brands.
Finally, service inventions (those developed by research staff but held by the companies that they work for) account for only 35.8 percent of the total patents in China, down from 39.9 percent in 2004. In developed countries, service inventions may constitute up to 95 percent of the total.
Enter the Government
On March 28, Premier Wen Jiabao pointed out at a conference that China has not only to develop advanced technologies, but also to innovate. Core technology, he said, cannot be acquired via technology transfer; it needs to be done at home in China.
This follows a similar effort by the Ministry of Science and Technology, which signed an agreement with Guangdong Province and Shenzhen City to hold an annual Innovative China Forum in Shenzhen. The platform has been designed to promote development of innovation. The three parties will help companies compete in overseas markets and assist them with patent infringement law suits, anti-dumping legislation and trade discrimination.
High-tech industries, by their very nature, are knowledge, talent and capital-intensive. Intellectual property is the fruit of these efforts, and is the underpinning of future success. The Chinese government, therefore, views independent development of native high-tech industries with their own intellectual property as crucial to national competitiveness and economic security.
Possession of patents can also stave off anti-dumping legislation. Since 1978, more than 600 anti-dumping investigations were launched against Chinese companies. Examining the cases, it was determined that most of the products involved were at the low end without independently held technology.
Economic restructuring is also required. China, like other nations, must upgrade to foster the development of high-tech industries. China's President Hu Jintao underlined the government's commitment to such efforts in March.
Enhancing innovation and speeding technological development, he said, will promote the emergence of a new economy.
No Easy Row to Hoe
Though China's high-tech industries have contributed much to economic development, the road to accumulating intellectual property is not an easy one.
First, awareness of patent rights is not extensive, even among high-tech industries. Poor protection of intellectual property has limited development. Most companies struggle to set up effective R&D teams.
Nor do Chinese companies understand how to manage intellectual property. So, while China has equivalent research and development levels as the U.S. when it comes to superconductors, it has only a fifth of the patent applications in this field.
Another factor is that the very parameters that have ensured Chinese success in cost-effective manufacturing play against it when it comes to developing intellectual property. Patent applications, unlike OEM product commercialization, involve lengthy, expensive procedures that require long-term strategies that management at few Chinese companies has the expertise or willingness to adopt.
Naturally, Chinese innovators choose to maximize their interests and benefits. As the patent process involves great risk and expense, most of China's scientists and technicians prefer to publish papers instead. Government incentives have had little effect on changing their behavior.
As has been mentioned, poor protection of intellectual property had had a major effect on disincentivizing innovation. While Chinese government officials may rail against strong-arm tactics of developed nations, the simple fact remains that patent infringement hurts its companies, too, as well as retarding its technological development. The Chinese government must do more to implement a system of legal protections and public education campaigns.
China also suffers from poor talent management; team building is an alien concept among managers who have often taken pride in Machiavellian divide-and-conquer or zero-sum techniques learned from a misguided understanding of Sun Zi's Art of War. Cutting innovators out of their justly deserved rewards is hardly going to foster loyalty to the company The Chinese government is also going to have to do much more to familiarize its companies with relevant intellectual property laws in other nations. This is doubly important as Chinese businesses step up efforts to export.