China's intellectual property rights protections have come a long way since 1978, but there remains room for improvement. While the de jure situation with respect to protecting intellectual property rights approaches Western standards, the enforcement or de facto situation is less encouraging. Western companies have a difficult time enforcing the patchwork of laws and often fail to win judgments significantly large to serve as a deterrent to IP thieves.
There is a strong case for improving the intellectual property rights regime in China. Stronger IP protections are correlated with higher flows of inbound foreign direct investment (FDI). Stronger IP protections are also correlated with superior domestic outcomes. In addition, China is in the position to influence the intellectual property rights protection regime for the world in the coming century. Thus, China should take a lead role in developing intellectual property rights not only for its own benefit, but for the benefit of the entire developing world. By strengthening the existing laws and by enforcing them more aggressively, China can improve its economic outcomes and set the tone for a new intellectual property rights regime for the 21st century.
You Didn't Make That: Protecting Intellectual Property Rights in China
With the Chinese economy growing at 8% per year on average, Western companies are eager to get a foothold in this vital consumer market. Yet, many companies are hesitant because they fear losing their intellectual property rights, leading to low-cost knockoffs and outright counterfeits. As of now, those protections are inadequate for the needs of both Chinese and Western businesses. Starting from a point in 1978 of not having any intellectual property rights protections, China has actually made strides to build a credible IP protection regime. It is to the benefit of China to bring its intellectual property rights protections in line with Western standards, by not only upgrading the laws on the books but by improving the caliber of the enforcement mechanisms. China needs to undertake specific policy steps to improve the quality of its intellectual property rights protections.
Sepetys and Cox (2009) argue that China "has been moving its intellectual property rights regime closer to those found in many more developed nations." As a result of having more comprehensive laws and an increased attention to enforcement, there has been an increase in the number of intellectual property rights cases brought before the courts in China (Sepetys & Cox, 2009). Damages, however, remain paltry compared with what would be awarded in similar cases in the West. To Western firms, this conveys the impression that the Chinese government does not take IP rights protections seriously. As a result Western companies still approach the market with caution, fearful of losing their intellectual property rights.
China's intellectual property rights laws have improved significantly since the country first opened its market in 1978, when the Western concept of intellectual property did not exist in the country. These laws have gradually been upgraded to the point where they nearly match Western standards. Kshetri (2009) argues that China's move to Western standards is ill-understood because there has been little study of the factors that have driven these changes. He notes that the influence of foreign actors has been a significant motivating factor for China in changing its intellectual property rights regime. When China joined the World Trade Organization in 2001 it needed to make some changes to its regime to bring it in line with international standards. In 2007, the United States initiated dispute settlement proceedings at the WTO over deficiencies in China's intellectual property rights protection regime (Kshetri, 2009). It is these pressures that have led to the current situation in China, where the country has adopted de jure intellectual property rights protections similar to what might be found in Western countries, but the laws are not enforced with the same level of effectiveness as occurs in the West.
By strengthening IP protections, China can expect positive economic outcomes. The changes that the country has made to this point have already been shown to be correlated with improved import stimulation, especially with respect to knowledge products (Awokuse & Yin, 2009). In particular the authors demonstrated 38 countries that foreign investors have cited improvements in China's intellectual property rights regime an incentive for them to enter the Chinese market (Awokuse & Yin, 2009). By strengthening intellectual property rights protections further, especially by improving enforcement standards, China can improve knowledge transfer into the country. By studying the issue on aggregate, the authors come up with a more compelling argument that one individual anecdote can offer; they studied FDI flow from 38 countries and found that it was correlated positively with stronger IP protections in China. The stronger the intellectual property rights protections are, the more foreign investors will be comfortable investing in China. This will bring about positive economic outcomes for the country in the future.
China's current infrastructure for guaranteeing intellectual property rights protections is inadequate for China's role in the global economy. Dreyfuss (2009) notes that many emerging economies lack the political will to make changes to their intellectual property rights protections. Kshetri (2009) supports this theory in his argument that many of the changes to China's intellectual property rights protection system derive from external pressure such as China joining the World Trade Organization. Within China, there is not nearly as much enthusiasm for harmonizing intellectual property rights protections with the West.
China is in a unique position to shape new world norms with respect to intellectual property rights protections. China is the largest emerging economy and as such is looked to by other emerging economies to take a leading role in supporting the collective interests of emerging economies. At present, however, China has shown little interest in taking a leadership role, and instead still has a patchwork of national and regional statutes to govern intellectual property rights protection. This patchwork is complex to the point where it is difficult for Chinese businesses to understand, much less foreigners (Yao & Rao, 2009). This patchwork makes it difficult for China to take a leadership position in the world with respect to intellectual property rights protections, because there is no unified regime within the country to serve as a starting point.
The complexity of China's intellectual property rights regime, combined with the inadequacy of enforcement, creates a barrier to foreign direct investment. Keupp, Beckenbauer and Gassmann (2009) note that foreign companies cannot rely on the legal system in China to protect their intellectual property rights. Many companies simply do not report or seek legal remedies for intellectual property rights violations. Instead, they resort to a number of de facto strategies to protect their intellectual property. Quan and Chesbrough (2010) support this argument, noting that companies have been forced to take "dramatic action" to protect their intellectual property when entering China. These actions have included keeping critical intellectual property out of the hands of Chinese partners, or making the intellectual property in question so complex that it cannot be easily replicated (Keupp, Beckenbauer and Gassmann, 2009). However, Awokuse and Yin (2009) note that if companies did not need to resort to these methods, imports would be stimulated. Better intellectual property rights protections, therefore, would stimulate the import of knowledge-intensive products and therefore both foreign direct investment and knowledge transfer into China.
When the current intellectual property rights protection regime creates a barrier to investment by knowledge industries, China's domestic industry is harmed as well. Indeed, strengthening China's intellectual property rights regime will enhance the development of domestic industry. When inbound foreign direct investment is reduced, this reduces total knowledge and technology transfer opportunities (Awokuse & Yin, 2009). Not only do firms stay out of the Chinese market, but when they do enter many foreign firms take steps to prevent their Chinese partners from gaining access to critical intellectual property (Keupp, Beckenbauer and Gassmann, 2009). This harms Chinese industry -- evidence from the agricultural industry shows that Chinese farmers experience superior outcomes when in areas where intellectual property protections are higher than in parts of the country with weaker intellectual property protections (Hu et al., 2009).
Some critics, however, point to a few issues with the idea that China needs to further upgrade its intellectual property rights protections to meet Western standards. The first is that China has come a long way in thirty-five years (Kshetri, 2009); for China to achieve Western standards so quickly is simply not realistic. The problem with this view is that accepts the status quo -- something the global business community does not -- and that it sets no time frame for improvement.
A second criticism of the criticism of China's IP protection regime is that the world's intellectual property rights protection protocols will eventually shift away from the current, Western-centric standards (Dreyfuss, 2009). China has the opportunity to be at the forefront of that movement, given its influential status among developing nations. It can only be a leader, however if it carves its own path today. If it follows Western policies, it…