US report on China’s indigenous innovation slammed

The report, which was published in November last year, said that foreign companies see China’s indigenous innovation policies as “potentially reducing business opportunities in China’s fast-growing economy”.

“I am disappointed with this report,” said Benjamin Bai, a partner at Jones Day in Shanghai. He described the document as “full of mischaracterizations and factual inaccuracies”.

China’s so-called indigenous innovation policies are part of an effort to increase the level of domestic scientific and technological innovation.

At the end of 2009 a policy to prevent companies that hold IP outside China from winning government contracts caused controversy.

According to the near 200-page report, the Chinese government is encouraging local innovation through policies in government procurement, technical standards, anti-monopoly and tax.

The report states: “Many observers agree that the Chinese government is actively using government procurement contracts to create a market for the products of Chinese companies and to foster a general acceptance of Chinese brands over foreign brands.”

But Bai claims that the report contains many errors. For example, Bai highlights one error in section 5-11 with a sentence that reads, “Under the new draft, it appears that products must reflect indigenous innovation by complying with unspecified ‘national industrial and technology policies’ and must be locally researched and developed, including licensing of IP usage rights in China, with the R&D led by a Chinese entity.”

The draft referred to is a set of revised rules published in April by China’s National Development and Reform Commission, the Ministry of Science and Technology, and the Ministry of Finance after foreign companies and organisations criticised two previous circulars promoting indigenous innovation. Bai points out that the draft does not require products to be “locally researched and developed, with R&D led by a Chinese entity”.

“There are more than 2,000 R&D centres set up by multinational companies in China, so most multinationals can qualify under the draft and are not necessarily disadvantaged,” said Bai, who also explained that the latest revisions allow accreditation for products based on IP that have been licensed for use in China from overseas.

For a multinational company selling a product in China that is protected by IP owned by an offshore parent company, there already is or should be a licence from the parent company to the Chinese subsidiary. This means that there are ways for multinationals to comply with the draft.

“Multinational companies should adjust their IP strategies for China to maximise their participation in the economic growth. Staying on the sideline and crying foul is a sure way to lose out on the China market,” he warned.

The report overlooks a very important notice, the Administrative Measures for Government Procurement on Initial Procurement and Ordering of Indigenous Innovation Products, said George Chan, a consultant at Rouse in Beijing.

The notification, which came out in 2007 and has been in force since 2008, mandates government agencies looking to make initial purchases of newly developed products to give priority to indigenous innovation products that are not yet competitive in the market, but are in line with the national economic development policies of the Chinese government.

­­­­­­­­­­­­­­While the report acknowledges “some signs of improvement in IPR enforcement, especially with respect to courts in major cities,” Chan said it underplays some of the positive developments surrounding the IP regime in China.

“The judgments being issued by Courts in second and third tier cities are much more comprehensive and the analyses of the facts and law are much more detailed,” said Chan.

The report, which was produced at the US Senate Committee on Finance’s request in April, also finds China’s “lack of coordination among government agencies, insufficient resources for enforcement, local protectionism, and a lack of judicial independence” as road blocks to effective IP enforcement and identifies copyright infringement, particularly internet piracy, as increasing problems.

The second report, China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the US Economy, which will analyse the extent to which the US economy is impacted by China’s indigenous innovation policies, will be provided to the Committee by May 2.