How China Became Leader in Intellectual Property
Aug 11, 2020

How China Became Leader in Intellectual Property

Over the past decades, China has established a serious resolve to enforce an effective IP rights regime and to bring the system in line with other developed countries' systems. Less than 40 years ago, the concept of IP rights was unheard in China, but nowadays China has become the world's top patent filer, surpassing the US!

From a produce-and-copy economy, China has evolved into one that is focused on high-quality development. The growth and development of technology, innovation, and registered IP by China have surprised the world! Steve Blank[1], the father of the lean startup movement and the creator of the customer development method, interpreted china’s progress as “The Sleeper Awakens”.

According to the latest figures from the World Intellectual Property Organization (WIPO) in 2019 [2], the IP office of China now accounts for 46.4% of patent filings and more than half of the global trademark (51.4%) and industrial design (54%) filing activity. With 58,990 applications filed in 2019 via WIPO’s Patent Cooperation Treaty (PCT) System, China surpassed the United States of America (57,840 applications in 2019) for the first time.

Meanwhile, by legal reforms and stronger enforcement mechanisms, many of the issues raised by foreign companies operating in China have already begun to be addressed. China’s State Intellectual Property Office has made great efforts to improve the quality of China’s IP rulings.

Since 2014, China has opened specialized IP courts and tribunals in Beijing, Shanghai, and Guangzhou, training attorneys and judges in technical cases.  In spite of all these progress in structuring  IP protection, China still needs to strengthen its IP right, increased transparency, to reach higher efficiency and accountability

 

Background of China's  Leading Role in IP Protection

It is simplistic to assume that the increase in the number of patents, innovation growth, and development of intellectual property have been only the result of the Chinese government's focus on the IP sector. These all are the results of years of the foundation for economic growth, and policies for which the Chinese government has planned since four decades ago.

In fact, the current position of China in the world is the result of changes and evolutions, not in economic institutions only, but also in patterns of social mobility and interaction, social value, and even more fundamentally, in the restrictive ideologies that laid the foundations of communism. The role of leaders in creating these progress and creating visions, and continuing to achieve goals, is inevitable and what has led China to its current position.

Mao Zedong, the founding father of the People's Republic of China, pointed out more clearly that, “the Communist Party of any country and the thinkers of any country must create new theories, write new books and have their own theorists” [3].

Deng Xiaoping who is known as Architect of Modern China and gradually rose to power and led china through a series of far-reaching market-economy reforms had a famous dictum: “hide brightness, cherish obscurity”!In the late 1970s, Deng began the process of “reform and openness”, participating in a series of reforms that over three decades, provide revolutionary change.

In the late 1970s, Deng began the process of “reform and openness”, participating in a series of reforms that over three decades, provide revolutionary change.

Dong’s inheritors, after decades of following his dictum, have realized that maintaining economic growth and political stability on the home front will come not from keeping their heads low, but rather from actively managing events outside China’s border which resulted in lunching “go out a strategy [4]. This strategy designed to remark global norms and institutions.

The evolutional view was a subset of what may be called the “engagement” school [5]. This engagement school argues that although China is directed by a communist party that puts itself above the law and does not want to be bound by internationally recognized rules, such engagement is necessary to be structured as it pushes China toward the economy grows. 

Regarding the engagement strategy, openness to international trade and investment has been fundamental to Chinese economic transformation over the past four decades. Within this relatively short time, China has profoundly changed the way it engages with the rest of the world.

The development of domestic markets (a key element of Chinese reform has been significantly enhanced by integration into international markets via trade, investment flows, technology transfers, people-to-people exchanges, and the spread of knowledge.

China has achieved remarkable success in the 40 years since its reform and opening-up began in 1978. Before its transition from a planned to a market economy, China was one of the poorest countries in the world [6]. It's per capita gross domestic product (GDP) in 1978 was just US$156 (less than one-third of the average for sub-Saharan African countries, which was US$490 in the same year). However, since then, dramatic changes have occurred in China. The annual GDP growth rate averaged 9.5 percent from 1978 to 2017. China currently is an upper-middle-income country, with a per capita GDP of US$8,640 in 2017 measured by market exchange rates.

 

Success Main Factors

Although the transformation needed for developments purpose were designed by the wise leaders and their policies, However, some element estimated to have more impacts in china's success toward its economic growth;

 

  • China's Specific Comparative Advantages 

When China started to develop, did not have normal comparative advantages in the priority industries at that time. In 1953, 83.5 percent of the labor force was employed in the primary sector. Given China’s endowment structures and income level (China’s per capita GDP, was only 4.8 percent of that of the United States) did not possess a comparative advantage in these industries, which were extremely capital intensive.

For development purposes, the china government tried first to use administrative measures to mobilize and allocate resources to priority industries and give protection and subsidies to the nonviable firms by distorting the prices of capital and other inputs. Although some significant achievements happened, e.g,. test nuclear weapons in the 1960s and launch satellites in the 1970s, however, resources had been misallocated, the incentives were distorted and the labor-intensive sectors in which China had a comparative advantage were depressed [7]. Thus, by the 1970s, although China had established most of the modern industries of the day, it remained a poor country with more than 80 percent of its population employed in agriculture.

Only after 1978, with the reform and opening-up, China starts to develop the sectors and could able to use its comparative advantages which were labor-intensive light manufacturing[7]. China’s labor costs were low and so were competitive in domestic and international markets. Earning high profits in the light manufacturing sectors, China quickly accumulated capital, paving the way for its industrial upgrading.

The accumulated labor surplus provided a potential comparative advantage in the production of labor-intensive goods and services. The demographic dividend [the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older)] would magnify the benefits. Linked with open international trade, this could have driven high-speed economic growth.

However, using its own comparative advantage was not the only factor that led China's Success in its way toward a fast development. To implanting its institutional reform, China adopted its own political economy which had significant influences on China's success. 

 

  • Autonomous Government 

In the book of “china’s 40 years of reform and development (1978-018) [7], having an Autonomous government (no bias government that only could represent the interests of a minority in society) was considered to be one of the keys and main elements of China political economy. The government has a significant role in implementing plans and policy and develop and realizing the visions. Therefore an autonomous government can explain why the central government is willing to adopt pro-growth economic policies over the longer term.

 A politically more equal society can produce an autonomous government more easily because the ruler does not have to worry about any group or an alliance of groups overthrowing his or her rule. If we apply the above analysis to China, we see that China’s relatively equal social structure and the nature of the Communist Party of China (CPC) helped produce an autonomous government.

A politically more equal society can produce an autonomous government more easily because the ruler does not have to worry about any group or an alliance of groups overthrowing his or her rule.

 

  • Decentralization

Moreover, appropriate monetary decentralization as one another key element of political economy was implemented to motivate local officials to take the initiative to develop the economy, while a meritocratic promotion system overcomes the negative effects of decentralization, such as regionalism and corruption.

 

The more Important Policies applied by China Regarding IP Protection

Openness to international trade and investment has been integral to Chinese economic transformation over the past four decades. Within that relatively short time, China has profoundly changed the way it engages with the rest of the world.  Among economic policies toward this achievement,  following policies seems to have more impact in developing China's IP Policies: 

 

Foreign direct investment (FDI)


Foreign direct investment (FDI) has been one of the most significant characteristics of China’s economic reform and opening up to the outside world.  Although such investment also had the risk of binging capitalist influence into China, since they opted for engagement policy and openness, they accepted the risk. This was the china’s fundamental shift in Communist Party thinking from ‘class struggle’ towards ‘socialist economic construction’ and, even more significantly, the urgent demand for economic development greatly facilitated the initial changes to China’s FDI.

China’s FDI policies since 2001 have placed greater emphasis on consistency and conformity with international rules [8]. Moreover, search for foreign capital seemed to be inevitable in that time (the late 1970s) and the political endorsement of inward FDI was justified by the necessity of getting recovery from the economic disruption caused by the Cultural Revolution.

The ideas were introduced by Deng Xiaoping immediately after his return to power in 1978, and China’s economic reforms were launched later that year. The idea Deng’s idea was to introduce and acquire advanced technology and management methods from foreign countries. The idea further developed to allow inward FDI into China’s domestic economy.  FDI was also a means of better applying China’s resources (labor-intensive light manufacturing) in the absence of domestic capital, while it could provide valuable experience of modern economic management skills.

 

WTO Membership

Accession to the World Trade Organization (WTO) became a priority for China due to the position that membership brings. WTO membership indicates that China is a growing economic power in the international community. And as a member of the WTO, China has the opportunity to take part in the development of international rules on trade in the WTO.

In particular, since China’s accession to the WTO, its foreign trade has achieved rapid growth and transformation. Incorporation into international production networks and global value chains has resulted in China evolving into a global manufacturing and trade center, hence, contributing to its rapid economic growth. In the five years following accession, Chinese inbound FDI flows grew at an annual average of 22 percent (compared with 4 percent in the five years prior) and China became significantly more open to foreign investment than most countries at a similar level of development.

 

WTO Membership Impacts on China's Commitment to protecting IP Rights  

China’s WTO membership meant the introduction of an independent judicial review and, for multinationals in China, a dispute resolution mechanism with the opportunity for appeal [9]. Membership also put external pressure on competition and industrial policy reform, as well as intellectual property rights and enforcement [8].

After joining the WTO, China has implemented its commitments in various ways: Tariffs and non-tariffs barrier; Trade-related investment measures;  and Trade-Related intellectual property rights (TRIPS). For consistency with the WTO Agreement on TRIPS, China’s copyright, trademark, and patent laws were amended in 2001 to ensure national and MFN treatment for foreigners was consistent with the TRIPS agreement. Minimum law enforcement standards for the protection of intellectual property rights were set up. However, the IP area remains an area of real dispute with the United States, Europe, and Japan!

 

China's IP Protection Challenges 

From the perspective of many international companies, China’s membership in the WTO considered a double-edged sword. As China is one of the fastest-growing economies over the last decades, conducting business there is very attractive for foreign firms. However, due to “china’s early development history, this mentality has formed amongst many companies that a significant portion of  China’s economy is based on counterfeiting and the violation of most intellectual property laws known to the Western world. Consequently,  foreign firms usually find themselves competing with cheap, low-quality imitations of their goods. This dilution compromises a foreign company’s market share and destroys the goodwill for those products that depend on reputations for good quality. In some cases, especially in the pharmaceutical product area, counterfeiters of name brand products are placing the health of consumers at risk [10]. The US Department of Commerce in 2006 estimates that companies lose between the US $20 billion to the US $24 billion annually because of global piracy [11] and China estimated in 2006  to be a  source of 60% of all pirated goods in the world [12].

 

The US Department of Commerce in 2006 estimates that companies lose between the US $20 billion to the US $24 billion annually because of global piracy [11] and China estimated in 2006  to be a  source of 60% of all pirated goods in the world [12].

 

Practice over the past four decades and more has shown that the Chinese government has made arduous efforts to protect IPR. Although China has achieved a noticeably great improvement in IPR protection, a complete IPR protection system could not be established very fast as it has taken the developed countries several decades and even over a century to attain.

 

China Efforts to Strengthen IP Protection

The occurrence of IP infringement and lack of transparency are the main issues In protecting IP right in China, but shreds of evidence have revealed that many improvements have taken place, especially within the past three decades, and the progress in amending IP relating matters are as fast as China’s economic development.  

The following milestone was reached in strengthening IP judicial protection and creating a bright future for IP rights in China [13]

  • In June 2008, China’s Outline of the National Intellectual Property Strategy issued, “strengthening the judicial protection system” and “ensuring the leading role of judicial protection of IP rights” were identified as priorities in implementing the national IP strategy.
  • At the end of 2014, three IP courts were set up in Beijing, Shanghai, and Guangzhou to creatively explore a specialized IP adjudication system with Chinese characteristics. This development received a very positive response from the public and the international community.
     
  • In July 2016, the Supreme People’s Court laid down China’s fundamental policy on IP judicial protection underlining the primacy of the judiciary, strict enforcement of the law, differentiated measures, and proportionality.
  • In April 2017, the Supreme People's Court issued the Outline of Judicial Protection of IPR in China (2016–2020), which identifies targets in eight areas, including the creation of “an IP court system with a regional perspective”, better rules governing evidence and more reasonable compensation for damages. The document also introduces 15 measures, including improvement of the jurisdiction system, reform of the technical fact-finding mechanism, and special research on procedural law for IP litigation.
  • In February 2018, the Chinese Government issued its Opinions on Several Issues Concerning Strengthening Reform and Innovation in the Field of Intellectual Property Adjudication, the first document on reform and innovation in the field of IP rights adjudication.
    These Opinions represent an important step in reforming and modernizing IP adjudication in China. They are a blueprint for the foundation of a modern, authoritative, optimally resourced and highly efficient IP judicial system that will ensure that China’s IP judicial team is in a position to address emerging IP challenges in the new era.
  • Introduction of the Foreign Investment Law (FIL)[14]  which came into force on January 1, 2020, indicates that those concerns are now being taken more seriously. The law promises to ban forced technology transfers, protect intellectual property, and allow foreign businesses to compete more fairly. This new FIL demonstrates a commitment to providing a more open and transparent business environment and can help China remain competitive among other alternative FDI destinations, particularly in the ASEAN region [15].

The FIL besides those various mentioned supporting regulations marks a new era for foreign investment where foreign-invested enterprises will be treated the same as domestic enterprises in many important respects, and new systems will come online to manage and service foreign investors with increased transparency, efficiency, and accountability. While there will no doubt be additional regulations and guidance forthcoming by the various authorities to further implement and perfect the new regime, the issuance of the FIL and these first batch of regulations and notices represent a momentous first step.

 

 

References

[1] Steve Blank. 2013; The Sleeper Awakens.
[2] WIPO Publications: World Intellectual Property indicator. 2019. 
[3] Mao, Zedong. 1999. The textbook of the political economy of the soviet union (Excerpt). In Works of Mao Zedong (Volume 8). 109. Beijing: People’s Publishing House.

[4] Economy C, Elizabeth (2010). The Game Changer: Coping With China's Foreign Policy Revolution. Foreign Affairs; Vol. 89, No. 6, The World Ahead (November/December 2010), pp. 142-152

[5] Bader, J. 2018. U.S.-China relations: Is it time to end the engagement? Policy brief. Brookings Institute

[6] Xiaodong Zhu, (2012); Understanding China's Growth: Past, Present, and Future; The Journal of Economic Perspectives; Vol. 26, No. 4 (Fall 2012), pp. 103-124

[7] Garnaut, R; Song, L; Fang, C (2018) China’s 40 Years of Reform and Development: 1978–2018. 

[8] Chen, C. (2011), Foreign Direct Investment in China: Location determinants, investor differences, and economic impacts, Cheltenham, UK: Edward Elgar. doi.org/​ 10.4337/​9781781001141.

[9] Armstrong, S. (2009), The Japan–China economic relationship: Distance, institutions and politics, Ph.D. thesis, The Australian National University, Canberra.

[10] Mixed Signals: Why China is Right and Wrong to Violate Intellectual Property Rights: https://www.wongfleming.com/intellectual-property-rights-in-china/
[11]Fishman, Ted C. 22 April 2005. US-China Economic and Security Review Commission. 27 February 2006
[12] Brilliant, Myron; Counterfeiting in China.” 18 May 2005. Cable News Network. 27 February 2006
[13] China’s commitment to strengthening IP judicial protection and creating a bright future for IP rights; https://www.wipo.int/wipo_magazine/en/2019/03/article_0004.html
[14] china's Foreign Investment Law and Related Regulations Mark a New Era for Foreign Investment in China; https://www.bakermckenzie.com/en/insight/publications/2020/01/new-era-for-foreign-investment-in-china.

[15] What’s Missing in China’s Foreign Investment Law?

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