Intellectual Property Rights Protection in China: Challenges

Introduction: China's IP Rights Landscape

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 navigating the patchwork of laws and often fail to win judgments large enough to serve as a meaningful deterrent to IP infringers.

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 economic outcomes. In addition, China is in a position to influence the intellectual property rights protection regime for the entire world in the coming century. China should therefore take a lead role in developing intellectual property rights standards — not only for its own benefit, but for the benefit of the entire developing world. By strengthening existing laws and 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.

With the Chinese economy growing at approximately 8% per year on average, Western companies are eager to establish 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 baseline in 1978 of virtually no intellectual property rights protections, China has made strides toward building a credible IP protection regime. It is in China's interest to bring its intellectual property rights protections in line with Western standards — not only by upgrading the laws on the books but by improving the caliber of enforcement mechanisms. China needs to undertake specific policy steps to improve the quality of its intellectual property rights protections.

Legislative Development Since 1978

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 more comprehensive laws and increased attention to enforcement, there has been a rise in the number of intellectual property rights cases brought before Chinese courts (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 there. These laws have gradually been upgraded to the point where they nearly match Western standards. Kshetri (2009) argues that China's move toward Western standards is ill-understood because there has been little study of the factors driving these changes. He notes that the influence of foreign actors has been a significant motivating force behind China's evolution of its intellectual property rights regime. When China joined the World Trade Organization in 2001, it needed to make changes to its regime to bring it into 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 external pressures that have led to the current situation, in which China has adopted de jure intellectual property rights protections broadly similar to those found in Western countries, while the laws are not enforced with the same level of effectiveness as they are in the West.

Economic Case for Stronger IP Protections

By strengthening IP protections, China can expect positive economic outcomes. The changes the country has made to this point have already been shown to correlate with improved import stimulation, especially with respect to knowledge products (Awokuse & Yin, 2009). In particular, Awokuse and Yin demonstrated that foreign investors from 38 countries have cited improvements in China's intellectual property rights regime as an incentive for entering the Chinese market. By strengthening intellectual property rights protections further — especially by improving enforcement standards — China can enhance knowledge transfer into the country. By studying the issue in aggregate, the authors produce a more compelling argument than any individual anecdote can offer: they examined FDI flows from 38 countries and found a positive correlation with stronger IP protections in China. The stronger those protections are, the more comfortable foreign investors will feel investing in China, bringing 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 view, arguing that many of the changes to China's system derive from external pressure — such as WTO accession — rather than domestic initiative. Within China, there is not nearly as much enthusiasm for harmonizing intellectual property rights protections with the West.

China is also in a unique position to shape new world norms with respect to intellectual property rights protections. As the largest emerging economy, China is looked to by other developing nations to take a leading role in supporting their collective interests. At present, however, China has shown little interest in assuming that leadership role. Instead, it maintains a patchwork of national and regional statutes to govern intellectual property rights protection. This patchwork is so complex that it is difficult for Chinese businesses to understand, let alone foreign firms (Yao & Rao, 2009). This complexity makes it difficult for China to take a leadership position on intellectual property rights protections globally, because there is no unified domestic regime to serve as a starting point.

Conclusion: A Path Forward for China

By improving both the IP protection laws on the books and the mechanisms to enforce those laws, China would gain valuable foreign direct investment. This would include high-value FDI that would result in technology and knowledge transfer — outcomes that would benefit domestic firms as well. The barriers that restrict inbound foreign direct investment therefore harm not only foreign firms but also Chinese domestic firms, by restricting their access to crucial knowledge and technology.

Instead of maintaining the current restrictive regime, China should take a lead role in developing intellectual property rights protections that serve its own domestic interests while also setting an example for other emerging markets. To accomplish this, China must not only strengthen the laws that are on the books but also significantly improve their enforcement, bringing them up to Western standards. By doing so, China can continue to grow at a rapid pace by encouraging more foreign investment, especially in the key knowledge industries of the future.

References

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