China’s Innovation Challenge: Intellectual Property Rights Reform

EMILY LIN evaluates the success of recent reforms to China’s intellectual property rights regime and discusses future roadblocks to indigenous innovation.

As China progressively shifts away from an export-based, growth-centric economic development model, indigenous innovation will play a critical role in determining the trajectory of growth in upcoming years. Initially, China’s growth has been spurred by low-value production of goods made for export, typically using technology and inventions that are imported from abroad to drive the production process. However, the central government has shifted its national priorities to promote a more sustainable, long-term growth model that centers around indigenous innovation and domestic industries. Although there are many facets to creating a suitable innovation climate, intellectual property rights are one of the key areas of improvement that can drastically change the incentive structure of domestic firms to value innovation and R&D. China’s success in encouraging domestic innovation will heavily depend on its ability to implement national intellectual property strategies on the local level, cater to the specific differences in regional economies and industries, and successfully build a judicial system that is impartial and consistent when evaluating intellectual property law.

History of China’s Intellectual Property Rights System

China’s intellectual property rights system evolved alongside the changing trajectories of economic growth following the Reform and Opening period in the 1970s. Following the Cultural Revolution, intellectual property rights regulation was essentially abolished or replaced with legal frameworks from the Soviet Union that deemphasized intellectual ownership over new innovations and ideas for the sake of the collective. As a result, the three branches of patent, copyright, and trademark law had to be built from the ground up after Deng Xiaoping established the Four Modernizations in the fields of agriculture, industry, defense, and science and technology. IP rights began to emerge as a way to bring China to international standards in order to attract foreign investment, enterprises and imported technology. The sudden shift from an ideologically driven political economy to one centered around rapid economic growth meant that early versions of China’s patent, trademark, and copyright laws were “legal transplants” of an existing system of Western intellectual property law, rather than a specific system that catered to the needs and business climate of China’s domestic markets.

After signing the Agreement on Trade Relations with the United States in July 1979, China established its first trademark law and patent law in 1982 and 1984, respectively, since it was legally bound by the agreement to protect IP rights even though it did not have the judicial capacity to do so. As international pressure grew, the focus became primarily centered on developing a substantive system of copyright law rather than patent law, since US firms were concerned with IPR protection as their products entered China’s growing domestic market, particularly in the movie, music, and software industries. This is reflective of the bilateral trade relationship between the two countries at the time since China was mainly a production hub for US firms rather than a center of innovative capacity. In addition, the growth trajectory of the 1970s emphasized the speed of economic growth over sustainability, leading to the proliferation of China’s domestic manufacturing as it produced low-value, export-based goods for foreign markets. As a result, intellectual property rights mainly protected foreign technologies and enterprises looking to produce and sell goods in China, rather than encouraging and protecting indigenous innovation.

This framework of IP laws began to shift in the years leading up to China’s accession into the WTO in 2001 as China’s central leadership wanted to foster a more competitive and fair domestic business environment that would allow China to secure a place in the WTO and regain its position as a competitive player in the global economy. The “millennium amendments” in 2000 began with modifications to China’s patent law, which were made to meet the standards of the Agreement on Trade-Related Aspects of Intellectual Property Rights signed by members of the WTO. The legal reforms helped to establish private property rights in China’s mixed-market economy, respect for the rule of law, and a standardized process for handling IP infringement cases in the judicial system. 

In the mid-2000s, China’s central leadership began promoting domestic innovation as a central tenet of its future economic trajectory as fears of falling into the middle-income trap became more prevalent in policy discussions. As a result, policy initiatives were released that clarified China’s changing national strategy toward IPR protection and its growing dedication to improving the implementation of IP laws. The first document, the 2006 National Long-Term Scientific and Technology Development Program, did not solely focus on intellectual property rights reform. It was crucial in drafting a comprehensive national strategy that would transform China into an innovation-driven economy from an export-led economy by 2020.

Later in 2008, the State Council published the Outline of Intellectual Property Strategy which provided a detailed framework that features areas of potential improvement for China’s IPR regime, focusing on four key areas of creation, utilization, protection, and administration of IP rights. The document drew attention to the CCP’s desire to modify its legal system to address the specific economic, technological, and cultural interests of China’s market participants rather than merely transplanting an existing body of IP law from developed nations with existing IPR regimes that only served to meet international standards on paper but was ill-equipped to handle patent violations within China’s markets in practice. Furthermore, the IP Strategy Outline indicates that China’s leadership is not content with only improving the protection of intellectual property rights but is also interested in developing legal reforms that will also drive the expansion of domestic innovative capacity. These reforms encourage future collaboration between domestic firms, foreign enterprises, research institutions, and universities to develop new technologies that would push China to the forefront of technological change.

Criticism of Weak IPR Protection and Limited Reform Progress

It is important to address the most prominent strains of criticism directed against China’s slow-moving efforts to change its intellectual property rights climate, which delineates the significant difference between de jure and de facto law. Most criticisms argue that China’s legal reforms, particularly following its WTO accession, satisfy international requirements for de jure law in protecting intellectual property rights but are not sufficiently enforced de facto on the local administrative level. Traditionally, most international critiques of China’s intellectual property rights regime from the West fall on a spectrum of three broad frameworks highlighting political, cultural, and structural reasons for the lack of change. The political framework argues that China’s lack of progress in reforming IP rights is due to the central government’s lack of desire to change the status quo and posits that Beijing is ignoring its own laws when it comes to regulating intellectual property rights violations. This camp of scholars, journalists, and critics suggest that China’s legal IPR framework is mostly rhetorical and only exists to meet the requirements of the WTO agreement on paper in order to avoid sanctions from other international trade partners. In this framework, the central government is assumed to be a homogenous unit that has the potential to enforce its own IP and patent laws but chooses not to do so for the benefit of domestic firms. However, this framework is narrow-sighted and overly simplifies the politics of legal reform to a top-down process that is dictated by the elite members of the central government. It fails to explain the motivation for China to devote such a significant amount of resources into developing IPR infrastructure and reforming a judicial system in order to handle the increasing caseload from both foreign and domestic firms. Lastly, most political critiques assume that the central government acts as a solitary unit when deciding national IP strategy with one solidified opinion about the direction of IP law reform when in reality, there is a significant debate between various bureaus and leading small groups over the optimal next steps.

The second framework attributes the lack of intellectual property rights protection to cultural reasons originating in China’s Confucian traditions and its experience under a centrally planned economy where innovation was discouraged. This framework errs on the side of cultural exceptionalism in arguing that it is the general populace who inherently lack a “cultural” understanding of intellectual property rights, making it difficult for the central government to enforce its IP laws since market participants are incentivized to sidestep IPR protections for financial profit. Although this may have been the case in the early years of reform when there were no legal precedents or experience in dealing with IPR infringements, this no longer applies in recent years since the CCP has taken on a major initiative to raise public awareness about intellectual property rights. It is part of a larger campaign to encourage individuals to report instances of counterfeit goods production and sale and mostly targets lower-value production agents such as small street vendors and shop owners. However, the cultural argument for weak enforcement of IPR regulations falls short since it is difficult to draw a clear causal connection between the cultural understanding of IP rights and its lack of enforcement.

In addition, a 2009 cultural competence survey assessing knowledge of IPR in Guangdong and Beijing revealed that the most developed economic regions in China are also centers of high counterfeit activity. Respondents were found to have a basic understanding of the importance of protecting IPR to economic growth but continued to purchase counterfeit goods due to the cheaper prices. As a result, cultural arguments for China’s weak enforcement of its IP laws often overstate the role that culture plays in hindering IPR reform and draws responsibility away from the central government to instigate policy reform by placing the burden of ignorance on the public.

Lastly, the third framework of criticism focuses on structural reasons relating to China’s political economy and judicial systems when analyzing the difficulties in IPR reform in recent years. The main argument attributes the problem largely to China’s political makeup and the incentive structures faced by local cadres in prioritizing economic growth over all other policy initiatives. Moreover, China’s top-down system of governance grants significant freedom to local officials in interpreting how to implement the national intellectual property strategy, leading to significant regional and industry variations in applying IP law. As a result, intellectual property infringements are not fairly evaluated since cracking down on counterfeiting factories and businesses would mean lower tax revenues, fewer workplaces, and fewer opportunities to receive bribes from local business owners. The nature of China’s political system shifts accountability away from local officials to abide by patent, copyright, and trademark laws decided at the elite level since they are only evaluated on their ability to encourage economic growth and employment in their region. In addition, the cadre rotation system removes all incentive to enforce policies that would be economically beneficial in the long-run, since local officials are promoted and judged based on their ability to strengthen the local economy in the short-run.

The structural framework of criticism offers a more nuanced perspective than either the political or cultural frameworks in indicating a potential area for drastic improvement that can be achieved by the central government. Future steps to enhance IPR enforcement may focus less on the particular details of legal statutes and precedents and more on reforming the general incentive structure of local officials to prioritize innovation and increase the competitiveness of local industries rather than on rapid economic growth.

Success of Recent Legal and Structural Reforms

In the last decade, China’s central government has tackled the problem of intellectual property rights protection from both structural and legal initiatives in an effort to standardize and streamline the process of filing for IP rights and litigating against IPR infringements. One significant policy action was taken to establish specialized IP courts across the country, with the first three specialized IP courts established in Beijing, Shanghai, and Guangzhou in 2014 followed by the creation of another 18 specialized tribunals by 2017. These courts have exclusive jurisdiction separate from local courts, actively addressing the problem of judicial local protectionism that was apparent in earlier years. An empirical study in 2014 comparing the impact of local protectionism on decisions made by traditional local courts to those made by the specialized IP courts concluded that in a traditional, basic court, the winning rate of local firms was statistically higher than that of non-local firms (38.4% compared to 25.9%). This effect was stronger in regions with high-profiting industries and can be explained by the fact that the divisions of regional courts’ jurisdiction directly corresponded to the divisions of administrative regions, allowing local governments to influence court decisions to support the region’s economic growth. The regional variation and lack of coordination on local administrative levels is a primary area of concern for China’s leadership since the creation of a standardized and impartial judicial system that is independent of political influence is key for encouraging innovation from domestic firms.

These specialized courts feature experts familiar with the intricacies and complexities of IP law and are better equipped to streamline decisions based on new advancements. In the past, IP rights holders would have to navigate between civil and administrative courts, accumulating high legal costs and spending a significant amount of time navigating bureaucratic barriers. However, the creation of these specialized courts has streamlined the IP judicial system, reducing the average adjudication time for cases tried in IP courts to less than 50 days and the average time for simple patent cases to 3-4 months. A recent news article interviewing Shen Changyu, the head of China’s State Intellectual Property Office (SIPO) revealed that in 2018 alone, 288,000 cases relating to intellectual property rights were tried in the newly created tribunal courts, which was a 41.8% increase from the previous year. Additional statistics from SIPO revealed a 5.6% increase in patents filed by domestic firms, which was 3.6% higher than the increasing rate from the previous year, showing a positive correlation between the streamlined patent approval process and invention patent applications.

In regard to specific improvements made in reforming IP laws and their enforcement, the office of the Inter-Ministerial Joint Meeting for Implementation of IPR Strategy was established in 2008 to coordinate efforts between 28 ministries and departments. Each ministry is responsible for drafting a recommended policy strategy that sets industrial and regional guidelines for local governments to use when reforming patent, trademark, and copyright law enforcement. These highly specific targets and recommendations have been instrumental in creating more localized interpretations of the national strategy that will further protect indigenous innovation, encourage R&D, and increase statutory damages for IPR infringement. Lastly, efforts have been made to incorporate education on intellectual property rights into school textbooks, encourage academic research on copyright and IP law, and increase state-sponsored funding for IPR training for enforcement officials and company IP departments. 

During the 2008 reforms to patent law, the central government introduced the absolute novelty standard as a way to discourage firms from abusing patent law for financial gain.  In the past, firms filed a high proportion of utility model patents compared to invention patents, which protects use rights for incremental improvements made on an already existing technology. As a result, these lower-value innovations were crowding out more drastic invention patents since firms would have to dedicate extensive time and funds to constantly checking for new technology patents in their field. The revised Patent Act made it mandatory for applicants to abandon their earlier utility model patent in order to apply for an invention patent and introduced stricter measures for what constitutes as a “novel” invention.

The updated system of using specialized courts, as of 2015, redirect patent law violations to intermediate tribunal courts in capital cities of each province, which reduces the impact of local protectionism on influencing a court’s decision. In addition, efforts have been made to build a body of case law that would serve as precedent rather than relying on the traditional civil law system that was primarily based on statutes and decisions made by the Supreme People’s Court that would be passed down and applied at the local level. In 2017, the Supreme People’s Court further strengthened this initiative by issuing an opinion stating that lower courts must take similar preceding cases into account when making a ruling. This collection of Guiding Cases is continually expanded with new rulings on common or novel IPR infringement cases, further improving the independence and reliability of IP courts in following the rule of law. 

Conclusion

China has come a long way in reforming its legal and policy environment to better protect intellectual property rights with efforts in recent years focusing on creating a more robust legal framework that can handle the rising surge of patent applications and IPR-related cases from both domestic and foreign firms. As it has transitioned from an export-based manufacturing economy to one based on domestic services, technology, and industries, the IP policy environment will play an instrumental role in incentivizing domestic R&D by both public and private institutions. Although there has been a remarkable improvement in delivering consistent and reliable legal rulings on IPR-related cases, future challenges for China’s IPR strategy will focus on ways to better increase transparency within the regulatory system. Additionally, it will be more helpful for future revisions to IP law to be driven by feedback and interests of IP rights holders and innovating companies to better address international complaints rather than be driven by top-down policy directions from the central government. China’s recent efforts to improve intellectual property rights protection domestically shows a significant shift from relying on imported technology and innovation to prioritizing domestic innovation, but the challenge of creating a reliable and robust system of IPR protection will be paramount to the success of its new economic growth trajectory.

Emily Lin can be contacted at emily.lin@yale.edu.

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