European Innovations in China and Intellectual Property Rights

European Innovations in China and Intellectual Property Rights

Knowledge and technology transfers from European companies to China and intellectual property rights issues

Nowadays, the search of resources, efficiency or new markets has become a major part in companies’ activities. It is all the more important for Western Multi-National Companies (MNC) that had poorly involved the last decades due to markets saturations and high competitions level. According to Drucker (1993): “The basic economic resource is no longer capital, nor natural resources, nor labor. It is and will be knowledge”. Furthermore, the world is lately changing and is now more complex than ever before. The global economy is shifting from a world where the United-States were leading international transactions towards one that is dominated by several heterogeneous states. Emerging countries in Asia or South America have offered new opportunities abroad for those firms through Foreign Direct Investment (FDI) or Merger and Acquisitions (M&A). But one country has quickly emerged and now overtakes all the others: the Popular Republic of China (Bostock, 1996).

With its 1.3 billion inhabitants, China represents the most attractive place to go to do business and foreign entrepreneurs have flocked in with the hope of huge profits made quickly. But lately, many problems came out and helped them realise that doing business in China is not as easy as it seems: Labour Rights, reliance on the network (called “Guanxi” in Mandarin), culture shock, etc. Even some of the biggest MNCs sometimes failed because of such reasons. China is changing fast but is still an underdeveloped country, many reforms are still in progress and one tends to forget China is not at the same stage of development as western countries.

Thus, one of the current hardest issues for European companies that wish to establish or expand their business in the Middle Kingdom is the protection of Intellectual Property Rights (IPR). Indeed, the Chinese legal system is weak and does not guarantee an integral security against abuses: Counterfeits are commonly produced and sold in China through markets; patents, trademarks and copyrights are poorly protected even when it went to Chinese courts after a fight. The aim of this project is to use some European firms as models to show that different kinds of issues exist when it comes to Intellectual Property Rights in China and explain how they have or have not succeed to win the struggle. By using some well-known European MNC in different sectors of the economy, this essay will stipulate that no production is safe regarding le legal system in China. Logically this would bring to think that the lack of security represent a loss of benefits for companies which may well become reluctant to go to China. That is why some scholars have argued that Intellectual Property Rights disadvantages flows of knowledge and so limits creations and innovations.

However, thanks to technology transfers that FDI from western countries bring, China sometimes breaks the rules of Intellectual Property Rights to use this new knowledge to create its own product and then to develop its economy without the help of foreign companies. As Fiona Murray and Scott Stern (2006) maintain: “Intellectual Property Rights may inhibit the free flow and diffusion of scientific knowledge and the ability of researchers to build cumulatively on each other’s discoveries”. In this case, it implies that the weak legal system in China offers an opportunity to the country: to be able to take advantage of European goods to create new ones and adapt them to their own needs.

Consequently, it seems difficult to evaluate the direct impacts that the weak legal system in China has on foreign countries. That is why this project will focus on the following question: To what extent does weak Intellectual Property Rights in China influence European companies’ business and innovations in this country and how has it been improving lately? In order to answer this, different parts will be reported. First, an overview of the legal system in China will be presented in order to understand the lack of laws and protection for foreign companies. Then, the second part will discuss theories about Intellectual Property Rights and will assume that a lack of protection is not necessarily a bad thing for innovation and economies. Finally, some case studies of European MNC will be detailed and explained to determine what the most common mistakes are, that foreign companies do when doing business in China and what are the usual solutions they have to win the battle of Intellectual Property Rights.

At a time when companies cannot only rely on technology anymore to achieve success, their need of knowledge and innovation is growing in order to differentiate themselves in markets which are more and more saturated. In addition, Multinational companies invest an increasing amount of money into research and development (R&D) centers based in emerging countries, especially China. The need of a strong IP protection system is effectively becoming vital for any companies in the world in order to maintain its competitive advantage. The specific case of European companies facing Intellectual Property problems in the Middle-Kingdom is no less than the perfect example to understand how formal legal system of IP works and why does property rights battles may occur between developed and emerging countries.

Overview on IPR

IPR, what are we talking about?

In order to discuss intellectual property rights infringement in China, one must first understand the concept. Indeed the principle of intellectual property rights can refer to a large panel of work. To quote Landes and Posner (2003, p.1): “By “intellectual property” we mean ideas, inventions, discoveries, symbols, images, expressive works (verbal, visual, musical, theatrical), or in short any potentially valuable human product (broadly, “information”) that has an existence separable from a unique physical embodiment, whether or not the product has actually been “propertized”, that is, brought under a legal regime of property rights.” In other words, it can include almost everything new made by man.

However, this essay focuses on the economic aspect of intellectual property rights and consequently, it will only be based on some specific notions of trade: trademark, copyrights and patents.

Trademark: refers to the slogan, word, picture or symbol which represents a brand, a company or a product with respect to the legal registration system (Compact Oxford English Dictionary, 2010).

Copyrights and patents both are explained by the “intangible property” that is the result of creativity (Compact Oxford English Dictionary, 2010). Patents usually refer more to design whilst copyrights protect anything else: brochures, catalogues, websites, etc. They are both particularly good indicators of innovation in a country (Sun, 2003; SIPO, 2002).

A weak legal system may have negative impact on the efficiency of the economy and its capacity to guarantee security to investors to attract new capital and ideas. From the point of view of the owner of the idea, an ineffective legal system will mean a loss of benefit from the sales of this idea as well as a disadvantage in the sense that a competitor will be able to copy this idea without having to pay the costs of it (Landes and Posner, 2003).

It is all the more an important issue in the case of knowledge transfers from a company to another: in the last few decades, the amount of joint-ventures concerning Chinese firms rose and the flows of information from a country to another as well. This makes copies possible to any other company in the market if badly protected. In a nutshell, “A property right includes both the right to exclude others and the right to transfer the property to another” (Landes and Posner, 2003).

With the new importance of international trade and the increasing number of foreign investments in China, it is obvious that intellectual represent a growing issue. Not only is it one on the domestic market, but since China is exporting most of its manufacturing goods, it also is an international problem. But how has it happened? In order to understand the economic context in which intellectual property battles are now taking place in the whole world, it is essential to understand the new challenges of the knowledge era.

Changing business world
The world of business has changed lately and is still moving fast towards news models. It is no longer ruled by the United-States, but is now a complex place where every single country is highly interdependent with others. Many problems have risen lately which have become global concerns: a growing population to feed, wars, pollution, etc. They all are a threat to social stabilities in different states (Castro Laszlo and Laszlo, 2002; Bostock, 1996). To find solutions and face these challenges, the way of dealing with information has changed and today more than ever before, companies need to get the best out of global knowledge flows. This knowledge economy has brought new business perspectives since companies’ biggest asset now is its employees, suppliers, R&D partners and the ideas and knowledge they all carry with them. Every single new technology, communication, techniques depend on human discoveries and the ability to share them in order to stimulate each other works and thought while protecting them from copy (Kirby and Cox, 2006). This is in this context that IPR find their utility and legitimacy. Furthermore, if the world has been global for a long time, the mobility of people is a new aspect of globalization and the most key determinant of the knowledge society. Ideas are not stuck anymore in only one country but move within the whole world (Saxenian and Weber, 2007).

Consequently, it is not sufficient enough to have IPR protection in only one country or region, but it is now indispensable to protect ideas and innovation all over the world, especially in emerging markets such as China, India, Brazil, etc. But differences of interpretations may occur between countries and economic conflicts are common, which become political ones. It is then essential to appreciate efforts and progresses made by theses developing countries regarding IPR while understanding which cultural aspect lead their decisions. In the case of China used in this essay, Confucianism culture is obviously at the heart of such establishment of a legal system for IPR.

European history with IPR

As the European Union is constituted by several member states, it is very difficult to analyze the general views of Europe as a whole on IPR. Europe is an old continent with a large history while the European Union is an organization that has been created from the 1950s. Consequently, European views on IPR will be simplified for this section.

European countries such as Germany, France or Great-Britain, have been economically developed for centuries. It is then logical that these countries were the starting point of Intellectual Property Rights and appeared more than 4 centuries ago. Although Europe has always been famous as being the continent of equity among individuals and Human Rights, when the first system of protection was created, it favored the upper-class of the society by establishing a price to pay to use ideas. Thus, a huge majority of the population did not have access to knowledge and education.

The development of IPR was then chaotic and each country was in charge of its own market: countries were more or less protecting particular industries depending on their need and they were taking example on one another to upgrade their legal system, usually with France at the lead. Later, they even decided to harmonize more or less their IPR systems but to keep a very formal legal system about it (Khan, 2002).

Nowadays, Europe is a model in the world for its efficiency when it comes to protect the ownership of an idea or innovation. But due to its past history and cultural roots of individualism, the region is often deserted by scholars and scientists that are looking for more knowledge flows to stimulate their work. Besides, there are still some sectors which lack of clear and efficient protection, especially with the new virtual era of internet. Again, the protection of ideas is a priority for governments while the transfer of knowledge is put aside.

Opening-up and IPR’s history in China

In 1979, the opening-up policy launched by Deng Xiaoping allowed foreign investments in order to help Chinese economic growth (Gamer, 2008; Naughton, 2007). It was a first for the Middle-Kingdom that used to be self-sufficient and closed. To quote Sun (2006): “Before 1978, there was no patent law in China; and technologies were developed primarily by government laboratories and then were transferred to the Industrial sector for free”. Plus, the Chinese economy was mostly based on state-owned enterprises which did not care about innovation since projects were allocated only by the government. The country lacked of motivation for any research of technological progress. Obviously, because of this situation the country had a weak legal system which did poorly protected private novelty and the implementation of IPR had to be built from scratch.

Flows of capital from other countries quickly rose over the years and the establishment of an intellectual property law regime became urgent. According to the National Bureau of Statistics of China (2007), between 1979 and 1984, the total number of foreign projects was 3841 for a value of 281.26 million dollar. In the only year of 2006, there were 41485 projects with an amount of 2046.63 million dollar. Most of them were at first oriented towards the manufacturing sectors and did not have any innovative sense. That is why the formal IPR system of China has been built very slowly during the first year of the opening-up process.

In only three decades, China has attracted about 10 percent of the total amount of investments made in the world (OECD, 2000; Tong and Wong, 2008). Through the years, Western companies have established their business in all the different sectors of the economy with a majority of them in manufacturing production (Carney, 2008; National Bureau of statistics of China, 2007). Indeed, the cheap work force of China was its competitive advantage and western countries were able to do economies of scales that are profitable for their business. With its world highest industrial growth rate of 17.3% annually, the country rapidly become known as the “workshop of the world” (Guthrie, 2006). At that time, one of the only ways to enter the Chinese market for a foreign entrepreneur was to set a joint-venture with one of the Chinese local company.

In case of Mergers and Acquisitions or joint-ventures, technology transfer may occur and those kinds of negotiations have to be done before concluding the deal. Unfortunately, the fact that the Chinese legal system is weak a lack of discussion about shared technologies may have dramatic consequences (Anon a, 2009). Indeed, Chinese local companies usually do not have enough technological skills to produce the same range of goods than western companies: because of their poor quality, it is rare than domestic firms really become a threat. However, with the lack of IPR protection, Chinese enterprises can simply copy their foreign counterpart to take advantage of their creativity or know-how. The final product may not be as good as the western one, but it will be cheaper and sold both on the Chinese market and abroad (Beach, 2004). It implies that regarding either loss of benefits or unfair competition, Intellectual Property Rights are a very controversial subject in China as it may bring not only economical issues but also political tensions.

As China did not have any previous experience or knowledge about how to establish its property rights system or property rights, it created a special organization for enforcing it: the State Intellectual Property Office of the Popular Republic of China (SIPO). Founded in 1980, its goal is to work the enhancement of the Chinese legal system and to help the cooperation between countries. The European Patent Convention (EPC) of 1973 has been the model on which China took its inspiration to create its own IP system (Cooke and Mayes, 1996; Christie and Gare, 2008).

In 1984, China implemented its first Chinese Patent Law and this step has been seen as one of the most significant steps of the Chinese reform process (Sun, 2006). The goal of the Chinese government through this legal improvement was to favor knowledge flow so innovations in the country. Indeed, Chinese officials realized that “economic development must rely on technological progress; and technological efforts must be oriented to economic growth” with science and technology being the drivers of this growth. In order to favor the commercialization of innovation, the patent law allowed individuals to get royalties by selling their creations (Song, 1997).

Trademark: China, unlikely the European Union decided to apply the rule of “first-to-file” for trademarks: it means that the first person that register with the Popular Republic of China Trade Mark Office own the mark. The problem resides in the fact that if a trademark with the name of your company has already been register, you do not own the mark of your own company. It case of conflict, it is extremely costly, difficult and long to obtain cancellation of the false trademark (Baldwins, 2005; European Union, 2010).

Patent: According to the article 19 of the Chinese Patent Law: “Any foreigner, foreign enterprise or other foreign organization having no habitual residence or business office in China applies for a patent, or has other patent matters to attend to, in China, it or he shall appoint a patent agency designated by the Patent Administration Department Under the State Council to act as his or its agent” (SIPO, 2002). These Chinese patents protect exterior design for an affordable price and are usually granted within roughly 8 months. Since October 2009, companies can now register up to 10 more or less similar designs with only one application (European Union, 2010). Residual issues still appears with such patents law as the time of application process of several months if often too large to guarantee a fast protection of design, especially if a company changes often its design panel. Finally, in order to attract innovation in the country, the Chinese established the obligation of “absolute novelty” which impose that the new registered patent has not been previously register in any other country in the world, with a further “Convention priority” of 12 months. This obviously is one of the main reasons why European companies are complaining about unfair competition.

Copyrights: China automatically grant copyrights, though it is possible to register in order to enforce the copyrights against infringers. In case of infringement of copyrights, there are two ways of dealing with it: either with the People’s Court or with the National Copyright Administration (European Union, 2010).

In addition, China decided to establish the same length for IPR as most of the other country in the world: 10 years for both trademarks and patents (Baldwins, 2005; European Union, 2010). From a general point of view, China is working in close relation with other regions in the world and especially the European Union, which is more than glad to take part in such implementation and changes. That is why, to promote European Companies interests, this organism is in partnership the European Patent Office (EPO). Indeed, the latter is in charge of training Chinese staff and to facilitate flows of information (EPO, 2009).

By establishing such institution and regulations to deal with Intellectual Property Rights issues in the country, the authorities show their will to do their best to fight against the problem to use western models to create their own. But this obviously takes time since China starts from scratch in this sector. However, China was expected to fill the gap to reach the level of developed country very quickly; some authors would even say too quickly, as most of the requirements imposed by the WTO have been fulfilled on time (Torremans, Shan and Erauw, 2007).

China’s accession to the WTO
In 1994, came out the TRIPS (Trade-related Aspects of Intellectual Property Rights) from the GATT (former WTO institution) to all its members. China by wanting to become part of the WTO had the will to enhance its legal system by joining international conferences and programs against piracy. This treaty has helped to harmonize regulations and objectives in the pursuit of better Intellectual Property Systems among members of the GATT and hence to reduce conflicts and tensions between them (Christie and Gare, 2008). At the time, China was not yet an official member of the GATT but participated in the discussion for putting in place the TRIPS agreement. Consequently, even though China was not a full member of the international organization, it devoted the 1990s to implement laws and regulation that were included in the Treaty. In a way, China made the TRIPS agreement its model to cope with intellectual property rights (Zheng, 1998; Torremans, Shan and Erauw, 2007).

Eventually, China joined the WTO in 2001 after years of efforts from Chinese authorities to reach a suitable level of development (Yang, 2004). Thus, it helped the country to catch even more FDI and ask it to upgrade its legal system (Lardy, 2002). Indeed, requirements for the intellectual property rights legal system got highest (UNCTAD, 2002; OECD, 2004). Consequently, in 2002 China overtook the US as the first recipient of FDI for a total of US$52.74 billion.

Still, Intellectual Property infringements are costly as not completely solved. The recurrent problem with China lies in its own administrative system: it has two levels that sometimes go one against the other. Indeed, local authorities from time to time try to take advantage of the system to favor their region. It means when they have their own choice to make about legislation, they do not have the same budget and do not move at the same speed. For instance, Shanghai definitely has more money to finance any Intellectual Property Rights related project and is much more likely to do it as it is one of the main regions recipients of FDI in China. On the contrary, a pirate firm based in another region will bring to the local authorities the same benefit than a legal one. In a region where very few foreign companies set up their businesses, the local government will not be ready to upgrade the legal system and to promote Intellectual Property Rights protection as it would mean a loss of revenue for it. To quote Lieberthal (2006): “Only the creation of incentives for local officials to rigorously enforce national laws and regulation will enable China to deal with this problem effectively. This, however, would require a fundamental change in the local political economy that China’s WTO implementation has thus far failed to yield.”

Much progress has been made in the last three decades by Chinese officials and the respect of intellectual property rights in one of the main priority of the government. Regularly meetings and institutions created only for this purpose which developed new laws and regulations to enforce Chinese legal system (Anon b, 2009). One thought that China’s accession to WTO would solve all the problems related to Intellectual Property Rights, but it seems like China is facing structural issues that hinder quicker progress. And this is a situation that most of the richest countries in the world, and especially the US, are not ready to accept.

Pressure and new challenges
Pressure from powers such as the US, Europe and even USSR forced China at the time to adapt as fast as it was possible (Mertha, 2005). Developed countries are indeed very impatient and wait to see changes in the country. They rush China in its process and do not hesitate to use their power through the WTO to express their discontent. For example on the 10th of April 2007, the United-States with the support of European Union and other countries, complained about some laws put in place by China and organised a meeting to force China to tighten the rules. By doing so, they imposed their will on China that does not really have the choice but accept as the pressure is too high (WTO, January 2010).

Recently, all the progress has been made in the mainly in the manufacturing sector, in order to protect products, designs, and technologies. International companies can now enter the country knowing they will be more protected in case of conflicts, though they still have to stay very careful. This already represents a huge step forward for China which is becoming stricter in its policies to fight against such infringements.

In the meanwhile, another kind of piracy was born in China and spread quickly: the intangible industry, such as for instance the film sector. Indeed, in order to protect its own market, China only allows a very small amount of foreign work to penetrate the Chinese market. Consequently, if some foreign movies are stealing and downloading on a Chinese websites like the famous American one “Youtube” (the equivalent website in China is “Yukou”), the authors cannot complain about their rights. As noted by Maskus (2000): “Concentrated patent (pharmaceutical) and copyrights (software and recorded entertainment) interests exert more influence on global policies through their national trade authorities”. That is why the Chinese website decided to help western companies by trying to protect them as well (Anon c, 2009).

Thankfully for western companies, building an economy oriented towards innovation is the new goal of the Chinese government (Varum, Huang and Gouveia, 2007). This decision is the following of the East Asian way of development stipulated by Akamatsu and its “Flying geese paradigm”. According to it, Japan is the “first goose”, which means the economic model used by most of the other Asian countries such as the Four Tigers (South Korea, Taiwan, Hong Kong and Singapore) and later by China, Indonesia, Malaysia and so on (Kojima, 2000; Low, 2006; Sasuga, 2004). The idea of China becoming an innovative economy is not new and is from the Japanese idea that a sustainable economic growth has to come from a technological and innovative economy. Therefore, the Chinese government has declared the Decision Regarding Reform of the Science and Technology System from 1985 (Chen and Shih, 2005). This promulgation basically consisted on setting government objectives and funding provided to set in this policy. For example from 1999, China started to transform some science and technology institutes into business enterprises. Some of them were then integrated into state-owned enterprises. Links between universities and governments also increase to favor the development of new field of research and create a high-technology economy.

The acquisition of new technology was not enough for China to reach a suitable level of development. Many other key points are still important such as the energy industry, power industry, infrastructures transportation and telecommunications. China has been well aware of this and invested huge amounts of money in every sectors: for instance in 1996, China borrowed US $4.2 billion to the World Bank to finance 27 projects to complete the construction of national transportation structure such as the highway network. As well, China has pushed universities to invest into technology and to become the heart of the innovation program. Nowadays, among the best universities in the world, many of them are Chinese and it would have been impossible 10 years ago (US News, 2010).

Creating a scientific policy to push the country’s innovations is a very delicate step for China as its legal system still does not guarantee a complete protection of Intellectual Property Rights. However, every single country can appreciate how much efforts China deployed to create a more or less effective legal system in such a short time (Torremans, Shan and Erauw, 2007). But in order to complete its transformation, the country will have to increase the protection of its scholars if it wants to encourage creation of new projects and innovation.

Theoretical view of IPR

Any analysis of the Intellectual Property Rights environment in China cannot be done without first having understood theoretical concepts of IPR. Consequently, the first paragraph of this section will be devoted to the usual economic arguments of why were Intellectual Property Rights created and why they are still mandatory nowadays. Then the second of the section will view and explain some theories which stand for a weaker legal system for Property Rights or even, a non use of IPR at all. These concepts will be the base to stipulate pros and cons of Intellectual Property Rights when it comes to European Companies going to China in the next section of this paper.

Usual theory: the legitimacy of IPR

The usual way of thinking about Intellectual Property Right is that the need of protection is legitimate and formed the basis of its legal system. This view is shared by a significant amount of scholars and many theories came up to justify the positive impact of such law implementations (Murray and Stern, 2007; Kitch, 1977; Hellman, 2007).

First of all, it is not logical to see another individual getting the same benefits than you do by copying the idea you have spent time, energy and money on. Furthermore, as every time it is easy to earn some money at very low marginal cost, the number of plagiarist increases quickly. Thus, it is to be said it is unfair for the inventor and it leads to huge loss for him since other individuals will collect benefits from his work. Intellectual Property legislation exists to allow the owner of the idea the right to have the monopoly of this idea, which is normal as he found it, and even to receive royalties from people that want to use it and thus has to pay for this right (Lander and Posner, 2003; Sun 2003).

In the case of a company developing a new product, before starting to actually produce this good, the company will look at the legal system in the country. If Intellectual Property is not well protected and that the competitors are likely to copy easily the new product, the company may not finally sell it on the market as the competition would rapidly bring prices down. The marginal cost would be too high, which means the costs of invention would not be entirely covered (Lander and Posner, 2003). In a nutshell, time and money invested to find this idea will never see any profits back from it and this becomes a pure waste of resources for the company.

Finally, some scholars have stipulated that formal IPR facilitate the commercialization of knowledge and help to create a new “market for ideas”. By doing so, the introduction of IPR, and especially patents, provides incentives for research investment, and this will consequently attract new highly qualified entrants on this market into new research field. Then, the commercialization of that knowledge is facilitated by the protected environment offered by IPR and relational contacts occur more easily between potential partners: individuals, scientific organizations, universities and industries (Murray and Stern, 2007; Kitch, 1977; Hellman, 2007). The stronger link between these participants will encourage creation, innovation and change in a controlled and safe economic context which will reassure companies. Positive externalities and benefits for all the stakeholders will be higher than without IPR system.

The need and use of Intellectual cannot be put aside and is an obvious determinant in developed economies. It creates a safe environment which allows searchers, universities and companies to interact with one another easily without having to fear infringement of IPR and loss of benefits. In addition, investors will be more likely to provide incentives and budget to scientist project if they know the environment is secure. It is especially the case when it comes to foreign investors because they are not used to foreign country legal conditions and they would tend to feel more comfortable with a country which offers the same range of guarantee about IPR than their home country.

It is with all these theoretical concepts that Intellectual Property Right systems of protection find all their legitimacy and interest for this essay. These principles will be applied to European companies in China in the next section of this essay to analyze which impacts lack of IPR in emerging countries have on MNC that wish to set their businesses in these markets.

The lack of IPR would be beneficial for an Economy

All the creations that are copyrighted and protected by Intellectual Property Rights are considerate private. No one except its owner is allowed to use them without a formal permission and any infringement is punished by the law. On the other hand, there also is the public domain of the intellectual property which refers to inventions which are no protected and thus, that everyone can use. They do not only refer to governments’ properties but are sometimes ideas or invention that could not be anything else than open to everyone. Indeed, as Lander and Posner (2003) point out: “It is difficult to imagine a system under which, for example, every possible combination of words, symbols, colors, and other marks of identification were owned, so that to launch a new brand one would have to buy a trademark”. Governments sometimes need to provide goods which can be used by the community: it implies, in that case, Intellectual Property protection is dispensable in order to maintain social equity and order.

The concept of being able to claim a right of property on an idea or invention is based on the idea that the creator is the only owner of this innovation. However, it is hardly considerable knowing that an idea rarely comes out from nothing: it is a cumulative process that is drawing up over time from other already existing realizations. Indeed, one needs to build one’s own work upon somebody else’s creation. Consequently it is difficult to estimate to what extent an intellectual property right is effectively the exclusive property of its owner. By following this logic, why should he be the only one having the monopoly of this idea whilst he also used other sources and he has not entirely created everything. The principle of copyright and gains coming from what users have to pay to use this invention is no longer valid since it gives an unfair monopoly to the owner (Landes and Posner, 2003).

In addition to this unbalanced situation, another one can be discerned. Indeed, the owner of the idea may have taken some inspiration in somebody else’s work to create his innovation. By using the Intellectual Property Right system, he wins the legal right to exclude other people from this idea: if they want to have access to it, they need to pay. This limit the flow of information and hence, the amount of resources available to other people that would potentially need it to come up with another innovation. To quote Murray and Stern (2007): “By its very nature, scientific knowledge is non-rivalrous so that the diffusion of that knowledge can serve repeatedly (and with little additional cost) as an input to future knowledge production and hence cumulative innovation”. Scholars that share this view think that by excluding other scientist from their discoveries, IPR impose a “tax” which diminish the flow of knowledge. It is a vicious circle which reduces considerably discoveries, as inventors, scientist or authors need each other works to stimulate their minds. Then, they would be able to invent something new that would help somebody else to form another concept and so on. Through this knowledge diffusion, several firms will benefit from the R&D activities undertaken by a single firm (Heller and Eisenberg, 1998; Sorenson et al, 2006).

Furthermore, it has been argued by Sorenson et al. (2006) that complex knowledge is not well diffused even through social network. Indeed, cumulative knowledge and background to fully understand this new innovation are needed and very few actors actually possess enough highly specific knowledge to be able to copy the innovation. The gap between each recipient and the source of the knowledge transfer will determine the understanding and adaptation of the innovation. In addition, it may not be possible for the recipient to absorb it at all or to benefit from it (Cohen and Levinthal, 1990). Even if the transmission channels are well spread and efficient, knowledge flows will be limited and complex innovation will not be copied by many individuals. In order to fit with their needs, competitors will have to adapt the knowledge to their own and to differentiate the product. Only simple knowledge will be universally and easily transferred though social networks, which will favor creations of new ideas based on this simple knowledge basis.

Innovation, Innovation, Innovation
Both of these IPR theories explained below, have the same fundamental goal: facilitating knowledge flows and promoting innovation within an economy. The question that these two opposite theories point out is not if Intellectual Property Rights are still useful, or if they should be removed from the legal system, but rather to what extent and how an economy should mix and match both of these theories to create its own protection system. Moreover, with the new changing business world and the rise of the knowledge society, protecting ideas and innovations are not enough, countries now wants to become flexible enough to attract scientists and becoming innovative power in the global scene. In any case and whatever the choice of a country will be, the goal is still unchanged: innovation is the top priority.

European Companies’ issues with IPR in China

Many sectors of the Chinese economy are in great expansion. MNC have to be careful not to rush into doing business in China. Many foreign companies, attracted by the impression that is an easy place to make high profits, sometimes forget to learn about the country before going into it. Negotiations are quickly discussed and the legal environment is not known enough to warn them to take more time in the pre-deal period. And often, when the infringement is done, it is difficult to go back and to solve the problem quickly. It is all the more true than western companies are most of the time confronted to domestic companies which are aware of the tricks in the country. This part will present the examples of some famous European companies in different sectors and will view the main issues they had or still have to face according to intellectual property rights in China.

Danone – Wahaha battle

Another French company had drawn the attention of Medias all over the world because of its so-called joint venture with the Chinese firm Wahaha: The Danone Group. This dispute has always fascinated readers as it is probably one of the best examples when it comes to failure in doing business in China. It proves as well that the Intellectual Property system in this country is far from being understood and in favor of foreign organizations, even if they are MNC successfully everywhere else (Anon e, 2008).

Set up in 1996, the joint venture included three separated companies which each hold part equity in the new group: the Hangzhou Wahaha Food Group (49% part), the Danone Group (25.5%) and the Baifu corporation from Hong-Kong (25.5%). But Danone and Baifu were both investing indirectly through another company from Singapore that they created, the Jinjia Investment. Wahaha was at time the main owner of the trademark and consequently barely paid attention to it (Anon f, 2007).

Problems started to appear two years later, when Danone bought out Baifu parts and thus controlled 51% of the Wahaha joint venture. For the first time, a Joint-venture between a Chinese company and a foreign one was not as a majority owned by a Chinese firm. This takeover made by Danone took the Wahaha group by surprise as they did not expect that situation when the deal was concluded, and they even had the impression that the French company planned it from the very beginning (Anon f, 2007). As the Chinese newspaper China Daily reported (AFP, 2007): “Danone’s bid on Wahaha jeopardises a national brand and threatens the nation’s economic security”. The Chinese felt attacked on their market and did not appreciate the French company’s behavior which led to even more problems.

Indeed, when the joint venture was formed, the Hangzhou Wahaha Food Group was a state-owned organization; in 1998 it had become a private one. Because of its rancor toward Danone and its new status, the Chinese company decided that it owned the trademark and that it has to fight to take it back. This is how Danone’s battle in China regarding to Intellectual property rights in China started in an hostile environment againt them.

The trademark for the transfer of the Wahaha brand in the joint venture had actually never really been allowed by the Trademark Office. In fact, the only authorized license was deposed in 1999 but was not complete and the trademark was still owned by the Wahaha state-owned company. The Trademark Office gave the following explanation: “the trademark belonged to the state and Wahaha Group did not have the right to transfer it to a private company”. However, the amount of money that the Jinjia corporation paid for the trademark at the conclusion of the joint-venture was RMB500 million (US$66.1 million) in cash, much more than the appraisal of RMB100 million (US$13.2 million) initially made for the Wahaha trademark. The Wahaha group only participates by giving its name to the joint-venture and agreed not to use this name anymore for any of its independent society. But by owning the Trademark license without putting some money in the joint-venture, the Wahaha Group did not respect its obligation and nothing had been done to solve this problem. A license contract for the use of the trademark had been signed in 1999 by both parties to solve this issue (Anon f, 2008).

In addition, when Danone became the main shareholder of the trademark after buying out the Baifu’s parts, it did not control any decisions in the joint-venture. The Chairman of the Wahaha Group, Zong Qinghou, was in the head of management activities in the joint-venture and ran it as its own business. It implies that the joint-venture looks exactly like a traditional Chinese company with no sign of western ideas and practices: for instance, recruitment was made by a member of Zong’s family. Even so, the joint-venture rapidly became one of the most successful on the Chinese beverage market with a 15% market share.

Danone only had a role in the board of directors but was not directly involved in the joint-venture activities. That is why in the year 2000, Zong created several new companies with the trademark Wahaha but which were not linked to the Joint-venture. In fact, they were in partnership with another company controlled by Zong’s daughter and wife. Those companies sold the same product to the same retailers as the joint-venture and were in direct competition with it on the market. Eveything was managed by Zong who devided the benefits between the JV and the non JV companies. Thanks to this, he became one of the richest men in Asia. In 2005, Danone discovered the trick and order Zong to give the money back to the French company for its 51% parts in the non-JV companies, as they were under the trademark Wahaha; Zong simply refused whereas those non JV companies violated both the trademark and the JV agreements (Perkowski, 2008).

The French company and the Chinese were not able to negotiate and to find a compromise, so they decided to take an arbiter. Actually, several actions took place from 2007. In May 2007, Danone went to Stockholm for arbitration as one of the clauses of the JV agreement stipulated but no solution was found (Anon h, 2007). So in June of the same year, Danone sued in California State courts the company of Zong’s daughter, Zong’s wife and some of the non JV companies. The purpose of this action was that Danone wanted all those companies to stop using the trademark Wahaha, as the original agreement was stipulated it. Zong quit his place of chairman of the JV when he heard for the lawsuit. The Wahaha group went to another arbiter who declared that the license agreement was empty as illegal at the time it was made for avoiding Chinese law requirement. In 2008, Wahaha won again after a decision from the Hangzhou Intermediate People’s Court: the ownership of the JV trademark fully goes to the Wahaha group. (Anon f, 2007)

The complexity of Danone’s story in China still amazes journalists and professional. After the Court’s decision in 2008, everybody thought that Danone would stop fighting and will retire from the Chinese market. However, it seems like the French company would like to agree on another deal with its Chinese partner (Anon f, 2007). So the end will have to be waited for, but now, The French MNC does not keep a good memory of its Chinese experience.


L’Oreal is one of the most famous French MNC in the world and has established its business in China for 14 years. Though the firm is very successful in the Middle-Kingdom, it seems like it has nevertheless been the victim of the bad system of intellectual property protection of the country. Indeed in 1999, The MNC wanted to implant its Chinese trademark for Vichy and the translation in Mandarin of the latter, Weizi: they both were approved by the Trademark Office under the State Administration for Industry and Commerce (SAIC). However, in 2000 another person named Liao had seen his trademark for a brand also called Weizi confirmed. It was a violation of L’Oreal intellectual property rights. Since then, it has been a constant fight that lasted for 10 years (Bao, 2009).

At first the Trademark Office decided in 2002 that the two trademarks were different enough (product and appearance) to allow them both to exist. It means L’Oreal was not considered the only owner of this brand and lost the first round in this judicial battle. But a MNC such as L’Oreal does not so easily give up and started a 6-years long investigation to defend its rights. Unfortunately in 2008, the same answer from the SAIC came up: Liao’s trademark was still considered separated from L’Oreal’s one and Liao was in his own rights to use it the way he wanted.

Determined to fight against Liao, L’Oreal sued his company in a Beijing Court, which have one more time ruled Liao in his rights in 2009. The French MNC has not yet answered to that decision, but it seems like it is not the end of L’Oreal’s nightmare with Intellectual property rights in China (Anon d, 2009).


Volkswagen, as many other well known brands such as Audi, BMW and Mercedes, is a German Car Maker which has become very successful company all around the world. From a general point of view, the European car market is mature and count a large number of car maker. Both in Europe and the United-States, the consumer market is saturated and there were not so much room left for improvement and new opportunities. Although, when China opened its doors, most of these European companies saw the potential of new consumers, especially because the car market was almost none in 1978. Volkswagen started its negotiations as soon as the opening-up was launched, and in 1984 it became the first foreign company entering the Chinese market (Lee, Fujimoto and Chen, 1994; Tian, 2007). It established a 50:50 equity share joint venture with the Shanghai Automotive Industry Corporation Group (SAIC) and it quickly has become one of the most profitable companies in China by selling average priced and good quality cars to the Chinese middle-class (Yabuki and Harner, 1999).

However, it did not prevent Volkswagen to be the victim of IPR infringement in China, quite the contrary. A motorcycle company from Shanghai registered in 2002 a Chinese trademark which is pronounced the same way as the German company. The later has recently found out and sued the Chinese Group to court, which has decided that the two marks being on the same industry could confused consumers and ordered a court decision. Volkswagen is now waiting for the court decision that will decide if its rights prevail or not (Anon i, 2010).

This case study is just an example of IPR infringement in the automotive market and most of the other European Carmaker have also experienced issues with regards to the protection if their ideas or brands (Vijayenthiran, 2007; Anon i, 2010). As Frost and Sullivan maintain (2006) that: “the counterfeit vehicle parts and components market in China earned revenues of $11.53 billion in 2004, with estimates to reach $44.74 billion in 2011”. Furthermore, the European Union determinates that between 5 and 10 percent of car parts for replacement in the market are counterfeit (International Chamber of Commerce). These numbers help to understand the impact that the lack of IPR system in China can have on a specific industry and the economy as the whole. The car industry being in China one of the pillars of the economic growth, the amount of loss in this industry is dramatic both for foreign entrepreneurs and locals. But more dramatic, the norms of health and security are not respected in the case of counterfeit parts and consumers may be in direct danger.

Recent trends
Danone, BMW and L’Oreal are not the only European MNC which has failed to deal with intellectual property laws in China. On the contrary, most the foreign companies that set their business in China have or will have to deal with at least one problem regarding IPR in China. Although, it would be logical to think that through years, the number of intellectual property rights infringement in China is decreasing as foreign companies are now well aware of the weak legal environment and have many example of failure. But as Liu Guizeng (Bao, 2009), a senior specialist of trademark in Beijing said: “In recent years, an increasing number of foreign traders got involved in patent and trademark lawsuits, many of whom lost in translation”, it means it is far from being the case. There are several reasons that may explain this situation.

Firstly, the number of foreign companies that ask for patents and trademarks in China is constantly rising. Indeed, western firms wants to take advantage of the cheap labor offered by emerging countries and now move their R&D departments in such countries: the 500 world richest companies now have 98 R&D facilities in China (The Economist, 2010). These laboratories will have to register patents and copyrights to protect their discoveries and because of the lack of protection in China, the percentage of issues with property laws goes up. Then, Chinese domestic firms realized that consumers from the Chinese middle-class buy more and more foreign brand to imitate the western way of consumption. Thus, domestic producer will try to name their brand like famous foreign ones to attract clients, especially in cosmetic where European companies are very successful. Finally, in Confucianism culture, there is a lack of creativity due to cultural roots. So Chinese naturally tend to copy everything easy to imitate without really trying to innovate (Li, 2009).

In addition, the government still plays a huge role in the economy of the country (Anon g, 2007) and is very protective. As seen in the Danone case, the Chinese government does not allow any foreigner to have a total liberty on what it is doing. For this reason, intellectual property in China has to take this into consideration. Although, all the institutions have direct links with the governments and this is why, when a company (especially a foreign one) has trouble with the Chinese law, it is really difficult for it to solve the problem in a quick way (Tian, 2007). Even though the number of state-owned enterprises have fell due to privatization lately, the Chinese government is still at the heart of the economic development of the country.

Analysis and views on IPR

Theoretical concepts on IPR are similar all around the global. Either if the country is for a formal and strict system of protection, or if he wants a more flexible legal environment, the two theories explain in the ??? part are universal and can be applied to any economy.

On the other hand, what is different from a country to another is its culture and how it has an impact on its way of doing business. Consequently, the point of view of a country about IPR will depend of its particular need and expectations of what the legal system should cover: this obviously is linked with the cultural roots of the country. It has been called by Seadle (2002) “the soft side of copyright” and has been explained by what goes beyond the court, especially cultural influences over IPR comprehensions and expectations.

China is receiving help from Europe to build its legal system of IPR. However, the two regions do not have the same cultural background at all, and it is unsure they have the same goals regarding Intellectual Protection laws. That is why, economical and political misunderstanding issues may occur since both countries have their own way to view IPR.

European views on IPR
Countries in the western world have been qualified by Hofstede (2009) of “individualist” such as “the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family”. Effectively, European countries are individualistic and look after their own interest first before seeking for the common peace. They put the ownership protection of an idea before the attraction of innovation in the region: the legal system is so formal than sometimes there is not enough flexibility to allow scientist to innovate properly as it has been stipulate in the previous part of this essay. In addition, when the European Union is not strong enough to control nationalism, the result for the community is more likely to be negative. Even though most of the European countries separately and good legal systems for IPR, all together they were not efficiently able to deal with a common policy and harmonization of IPR. They worked out though European institutions to address this problem.

Europe is now a model all around the world regarding IPR system. Consequently, one may hypothesize that Europe wants to expand its system in other countries without trying to understand different cultures and point of view: this is why sometimes political tensions may occur. It has already been the same with Human rights and the Dalai-Lama visits on the continent (Anon j, 2008). Effectively, Europe wants to moralize what is done in China and badly seen in its region, especially because China is still a developing country and hence viewed but China consider that it is its internal affairs and so it is none of anybody else’s matter. On the other hand, China is using its economic power to deal with such political problems.

Finally, successful European MNCs in other regions of the world are used to set their businesses in emerging countries. This implementation is usually done without any major issues and that is why they tend to forget that the Chinese culture is very different from their own. It implies that the way the Chinese approach IPR is completely different from the European one. The three cases studies used in this essay particularly point out this problem. Besides, the lack of strong protection of IP obviously emphasizes the problem of misunderstanding between countries. European companies going to China, especially the well known MNCs which often believe that their reputation will save them from being copied, should pay attention and focus much more on protecting their ideas and brand.

Chinese views on IPR
Most of the Asian countries and particularly China are based on Confucianism principles which refer to the whole set of values from harmony, hard work and obedience to leadership, hierarchy and face. In other words, this culture shared by most of the Asian populations constitutes the starting point of their societies and behaviors, as well as their business environment. Indeed, many scholars have claimed that the rapid growth of the East Asian countries is due to the association of both Confucianism and western technologies (Hofstede and Bond, 1998; Lasserre and Schütte, 2006; Kasper, 1990; Zhu, 2000). One of the main aspects of Confucianism is the harmony between individuals to keep peace and stability in the community (Tu, 1996), which means governments and population will do all they can to maintain such peaceful relations within the country. Even if this theory is not enough to fully understand the “Asian Miracle”, it gives a good overview of the main drivers of this development in East Asia which are strong values and technology transfers. The landscape for the future establishment of the IPR system in China is set: Asian populations are influenced by Confucianism principles to rule their life and their understanding of laws.

In China, Confucianism is stronger because of the historical past of the country linked with communism and its concept of equity among the community. To quote Wei Shi: “It is a mainstream point of view that Chinese cultural and philosophical history and Confucianism in particular provide a pervasive and unconscious influence on their comprehension of, and commitment to, intellectual property laws.” In the Middle-Kingdom and due to Confucian culture, collectivism and harmony in the community are more important than individualism (Low, 2006). It means that even if a behavior of an individual is ethically wrong, as long as it is beneficial for the society as a whole, it is not consider such an issue: it is collectivism.

Besides, some of the Confucianism principles are ambiguous when it comes to ethical behaviors which are seen important in the west. The Chinese sentence: 窃书不算偷 (qiè shū bú suàn tōu) can be literally translated in English by “to steal a book is an elegant offence”. It implies that copying is not considered as an Intellectual Property infringement in traditional Chinese Confucianism culture (Wei Shi, 2008). Thus, even in the modern Chinese society, counterfeit and copying are still not entirely considered as problems for the Economy. As explained and shown in the cases studies, the Chinese local company do not hesitate to copy, because in their culture it is not considered as a bad thing.

This misunderstanding of the western concept of IPR in China goes even beyond the previous issue. Indeed Hofstede and Bond (1991) commented that: “What is true or who is right is less important than what works, and how the efforts of individuals with different thinking patterns can be coordinated toward a common goal”. In the case of China, the common objective is clearly defined as being the economic development of the country, the Chinese government being at the center of this process (Stiglitz and Yusuf, 2002). It has been called by Perowski (2008) “Economic nationalism”. Furthermore, this nationalism is often represented when looking at foreign companies issues in China. For instance in the cases studies, none of the three companies won in the Chinese Courts against a local company, and it is rarely the case. Chinese people will naturally protect their own interest first and the well being of their country and of is inhabitants.

Consequently, even though the wish of China is to be well integrated in the global arena by upgrading its legal system, it will always put in first priority its development and its interest on top of its agenda. Such a behavior cannot be tolerated in the actual economic world, as if all the countries would act like this, the principle of globalization itself would not be convenient anymore. With the countries getting more and more interdependent, the Chinese way of seeing IPR does not fit with global expectations dictated by the WTO.


The world has changed and now more than ever before, the main competitive advantage of companies and states is now knowledge, and by extension innovation. The use of IPR for the economy of a country cannot be denied and formed the basis of a stable and secure business environment needed to protect ideas and innovation as well as attracting investors and scientists to carry on the R&D work. However, the lack of flexibility of formal IPR systems may sometimes diminished knowledge flows and knowledge transfers, which means that the most important source of ideas and innovation is decreasing and do not favor interactions between entities, and thus do not help to create more inventions and theories, or to adapt them to consumers needs.

Views on IPR differ from region to region in the world, and it is obvious that the European and the Chinese points of view could hardly be more opposite. The European one is based on the pure and formal protection of ideas and knowledge whilst the other one put innovations as the driver for economic growth even if it sometimes means infringement of IPR systems. Furthermore, cultural aspects have their large influence on people’s expectations of IPR system. Individualism and Collectivism both imply that people will not react the same way in a particular situation, and this obviously explain why there are so many misunderstanding and problems when it comes to IPR with European companies setting up their business in China.

Yet, despite their two different views, the two regions are working in close relations to enhance the Chinese legal system. The two regions are economically interdependent and they both have to learn from each other. But they both seem not willing to give up on their principles and it is still very unlikely that they will find a common ground. Consequently they each have done and will have to do some compromise to deal with the problem. Europe has to learn to be more flexible to allow more R&D and knowledge flows within the region. China has to upgrade its legal system and to learn not to break the rule if it wants to be taken more seriously in the global trading scene. In addition, it has been postulated that “it is in the nature of innovation to feed upon itself. Innovation in the emerging world will encourage, rather than undermine, innovation in the rich world” (The Economist, 2010). It is a virtuous circle that will be beneficial for everybody, if everybody agrees to play the game of globalization.

Finally, for now, it is still European companies that help Chinese ones to acquire more knowledge, technology and innovation. It is then logical that nowadays western regions complain about the lack of IPR in China. However, with the Chinese economy growing to a fast rate never experienced before, it will be soon the European companies that will learn from the Chinese. It is all the more true that the Chinese plan is to become a technological superpower (such as India) in the next few years, and the Chinese government is pushing investment in new-technologies industry and management techniques to reach this goal. When the shift will be done, will China restructure completely its legal system to behave like Europe is doing today to protect ideas rather than pushing for innovations? Will it carry on this way to stay on the top? Will it share with Europe through technology transfer as Europe is doing today with it?

Either European or Chinese: we are all humans; we naturally are keener on learning from others than to teach to other people what we know. The limit between protecting and sharing ideas is blurry and delicate to determinate, as each country will be one day in the other side than today.


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