Reducing China’s IP Trade Deficit

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If all you have is a hammer, then everything looks like a nail, yes?1 A corollary to that famous aphorism is that if your job has to do with IP rights, then every problem can be solved by more rigorous IP protection. Consider this:

A Chinese commerce official on Monday called for creating indigenous brands to reduce China’s alarming trade deficit in intellectual property.

At the Intellectual Property Rights (IPR) Forum in Beijing, Ministry of Commerce official Wu Guohua noted China spends a large amount of funds on foreign intellectual property every year, adding that to create indigenous brands is imperative to China.

Wu said despite China’s surplus in commodity trade, the nation suffers a huge deficit in services trade, with royalties and license fees being the second largest cause of the services trade deficit in 2009.

In 2009, China’s services trade deficit stood at $29.6 billion — 1.6 times the 2008 level — of which $10.6 billion was royalties and licensing fees payments to foreign companies. (Xinhua)

The rest of that particular article is a discussion of the link between innovation and the protection of IP rights. There is no question about the need for a strong IP protection regime in developing countries. If the return on invention and branding is too low (due to piracy), then investments simply won’t be made.

Additionally, we all understand that China wishes to “move up the value chain” and produce high ticket items with larger profit margins. This is the motivation behind the “innovation society” reforms.

But to posit that lack of IP protection is the main reason why Chinese brands and technology are weak is quite a stretch. Many have written on this subject before, and I don’t want to reinvent the wheel. Suffice it to say that when folks write about this issue, IP protection may make the list of reasons why tech companies are not at a higher level of development in China, but other factors are even more important. For non-tech “big brand” enterprises, IP protection may be way down the list in terms of expansion difficulties.

These factors include a lack of relevant business experience (i.e. Chinese companies are not that old), product quality problems, difficulties obtaining expansion financing (SMEs), and alarming corporate governance practices.

If IP protection was immediately ratcheted up in China in a huge way, would firms here all of sudden make huge breakthroughs in technology, become marketing geniuses overnight, and greenlight financing that was previously unthinkable? Probably not going to happen.

Faced with all these challenges, many of which have no public sector solution, it is somewhat comforting to think that everything will be better as long as the IP system is tightened up a bit more. Sounds nice, but IP protection is no panacea for what ails Chinese enterprises.

  1. Attributed to Abraham Maslow, although the exact wording varies considerably. []