Feeding the Meme: Yet Again, China’s Indigenous Innovation Policy

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This is a familiar topic to regular readers of China Hearsay, but it’s back in the news because of further complaints from US industry, reported on in a Wall Street Journal article.

As you might recall, the governments of US and China reached an agreement on reforming the “indigenous innovation policy,” which requires companies that wish to participate in certain government procurement programs to have ownership of China-based intellectual property rights. The US criticism was that this would force a foreign company to either innovate here in China or transfer technology here after the fact.

After reading the Wall St. Journal article, it looks to me like they are  piggybacking off testimony given by the US China Business Council (PDF file) to the House Ways and Means Committee last month. Fair enough, and the USCBC testimony was actually fairly balanced.

The article, however, follows the “China’s official policy is to steal our technology” meme a bit too much for me, drawing on different parts of China policy to paint a picture of a vast government scheme at all levels to pilfer foreign tech. The main objection reported on is that China might be reneging on a deal it made with the US over de-linking some of the indigenous innovation policies from government procurement programs.

Multinationals are again complaining to U.S. trade officials about a problem they thought was resolved months ago. When China’s President Hu Jintao met with President Barack Obama in January, he agreed to cancel rules that required foreign companies to design their products in China if they hoped to sell to the government—essentially a forced technology transfer.

[ . . . ]

“At the provincial level, funny that they haven’t yet gotten the word,” says an executive with a large U.S. technology company. He adds that he met recently with a number of companies operating in China and none had seen significant change on the ground.

The suggestion is that the Central Government has made certain commitments but is failing to implement them.

To be fair to the writer of the article, there is a disclaimer in there to the effect that it might be too early to tell whether this failure of implementation has been done on purpose or whether the new policy has just not yet filtered down to local officials.

On the other hand, the suggestion is made that if the government were really serious about this, it would be “cracking heads” and getting local officials to toe the line immediately.

Is it too early to tell? Absolutely, and while I sympathize with US technology firms that have to deal with the situation on the ground as they currently find it, one needs a lot of patience to do business here.

I find it ironic that the Journal article starts with the very well known proverb that “The mountains are high, and the emperor is far away” in order to point out that Beijing is saying one thing while the provinces are doing another. The other way to look at this proverb of course is that the Central Government is not a monolith that is able to micromanage everything out in the hinterlands.

For what it’s worth, many times over the past decade when an important new piece of legislation has been passed that has benefited my clients, my colleagues and I have had difficulties with local officials “catching up” with respect to implementation. If we’re lucky, the officials are open to being educated about a new law; if they are obstinate, then we have simply had to wait until new guidelines have filtered down from on high.

If this new agreement was made in January, then there’s been very little time for implementation, particularly given the holiday schedule in the first quarter of the year. The obvious answer is that this is no conspiracy, but rather a time lag.

So, difficult as it may be, everyone needs to take a deep breath, relax, and give this a little time.

But I also have another problem with the Wall St. Journal article, which says that the indigenous innovation policy is merely one part of China’s overall industrial policy, which is the real threat to US business:

The list is long: new patent laws that could make it easier to seize foreign innovation; the setting of standards that require products to be re-engineered to meet Chinese specifications; national-security initiatives that give preferential treatment to Chinese companies in several industries; limitations on market access for U.S. services companies; continued weak enforcement of intellectual-property rights.

OK, hold on right there. China does have an aggressive industrial policy, but let’s not exaggerate here. To say that the new amendments to the Patent Law, for example, make it easier to seize foreign innovation is ridiculous. There are provisions on compulsory licensing, but China has never used these, and there is no reason to believe it will do so in the future in order to “steal” foreign technology.

Market limitations for service companies? China made certain promises when it entered the WTO and has, for the most part, kept those with respect to market access. Some sectors remain closed, but most of those were not included in that list of promises in the first place.

Are there remaining problems with IP enforcement in China? Of course, but to say that weak enforcement of IP is part of China’s industrial strategy is going too far. One can say that there are inadequate resources for enforcement, or that the government simply has not placed a high enough priority on the problem, but to say that weak IP infringement in general is a deliberate strategy to steal foreign technology? I can’t sign off on that for a number of reasons, chief among them being that more Chinese firms are the victims of IPR infringement than are foreign enterprises.

Remember that the indigenous innovation policy was an attempt by the government to provide incentives for domestic companies to create technology and IP. This is the keystone of China’s industrial (and economic) strategy. Problems arose and, as far as we know, bilateral negotiations have solved at least some of those. To roll this type of incentive program up with other problematic issues here to suggest that this is the driving force behind China’s industrial policy is simply not accurate.

3 responses on “Feeding the Meme: Yet Again, China’s Indigenous Innovation Policy

  1. pug_ster

    In terms of GPA, I don’t see China’s “indigenous innovation policy” as a sticking point any different than the US’ Buy American Act, American Recovery and Reinvestment Act or anything similiar to this.

  2. Anon

    Ah…a perennial classic in US-China bickering. You’re right to emphasize the non-monolithic reality of the Chinese gov’t. That continues to be one thing that a lot of commentators fail to realize. But, is it really “too early to tell?” As you have pointed out several times on this blog, funny business surrounding IP, particular the IP of foreign companies, has been a reality in the Chinese business environment for decades. True, commitments related to the “indigenous innovation” campaign are relatively young, but “indigenous innovation” as a separate policy label is only the most recent manifestation of a problem that has persisted for decades, despite enormous growth in resources and capabilities related to enforcement.

    Also, regarding the compulsory licensing article in the Patent Law, it’s true and probably good that it has never been used. I think some people are concerned because of explicit language in other policy documents, e.g., the Intellectual Property Rights Strategy, emphasizing that the CL exception SHOULD be applied in the context of the new law because it was essentially useless under Patent Law II. Only time will tell, I guess…

    I would also argue that the treatment of intellectual property is very much a deliberate part of China’s industrial policy, though I guess there needs to be a distinction between generally “weak” IP laws, and IP laws that are very deliberately applied in order to achieve outcomes that create the appearance of “weak” IP laws…In fact, the latter could probably be described as “strong” IP laws, just not strong in the way that foreign businesses would like them to be.