Last week, China hosted the World Economic Forum’s Annual Meeting of the New Champions, often referred to as “Summer Davos,” in the port city of Dalian.
At this prominent global gathering on science, technology, and innovation, Chinese Premier Li Keqiang emphasized the strength and importance of entrepreneurship and innovation in China. He cited that 14,000 new companies are registered daily in China, and pointed to the World Intellectual Property Organization’s 2017 Global Innovation Index, where China ranks 22nd overall and 1st among middle-income economies.
This image of China as an emerging global leader in entrepreneurship stands at odds with China’s common stereotype as a land of copycats and intellectual property thieves. Infamous examples include fake Apple stores in Chinese cities like Kunming and Shenzhen, designed to imitate authorized retail locations so closely that some employees even thought they were working for Apple. In the automotive industry, the Chinese Landwind X7’s appearance is virtually indistinguishable from a Range Rover Evoque, while Chinese manufacturer Chery’s QQ was modeled so closely off of the Chevrolet Spark that their doors were even interchangeable.
So how can these two competing views of Chinese innovation be reconciled?
The answer lies in the gradual strengthening of Chinese intellectual property rights (IPR) over the past three decades.
Before 1985, China had no patent law at all. But since then, China has embraced the importance of intellectual property for its economic development. As Michelle Lee, the recently departed U.S. Undersecretary of Commerce for Intellectual Property, astutely noted, China “[doesn’t] want to be the low-cost manufacturer of other countries’ inventions, competing on low-wage labor. They want to be the innovative country. To do that, you need to respect IP rights. This is a matter of national self-interest for them.”
To encourage innovation, local Chinese authorities went so far as to provide cash subsidies of up to $4,500 to patent recipients. As a result, China became the top patent filer in the world in 2011. It then surpassed all other countries as the top patent issuer in 2015, with over 350,000 patents issued that year alone.
IP enforcement in China has also experienced a major transformation. Chinese courts heard over 130,000 IPR cases in 2014, a 20 percent increase from the year prior. In response to this increasing volume of IP litigation, the Chinese government established three specialized IP courts in Beijing, Shanghai, and Guangzhou. Since their creation, these three courts alone have heard more than 30,000 cases.
As a point of comparison, the United States heard less than 12,000 patent, trademark, and copyright cases in total for all of 2016 (or less than 10 percent of China’s total IP-related litigations in 2014).
The development of China’s IPR judicial infrastructure shows no sign of abating. Four new IP tribunals were established earlier this year, and Chinese leaders are considering the formation of a national IPR appeals court.
China has also continued to update and strengthen its IP laws. Last year, it issued its fourth amendment to the Chinese Patent Law, increasing the limit for potential statutory damages five-fold and adding a range of enforcement provisions.
The expansion of Chinese IPR enforcement has resulted in a number of major international victories. Earlier this year, New Balance prevailed in court to shut down several Chinese “parasite brands,” which copy foreign brands but use slightly different names protected by Chinese trademarks. For example, New Balance competes in China with brands like New Boom, New Barlun, and New Bunren. In this case, New Balance received an injunction against five Chinese manufacturers, which were then fined $250,000 after violating the injunction.
Michael Jordan, after struggling for four years in Chinese courts, won a victory last year that granted him the rights to his Chinese name, Qiaodan. The decision reversed a lower-court opinion, and stopped a Chinese sporting goods company from using the name to promote its merchandise.
This shows positive momentum on trademark rights in China, given the difficulties that foreign companies often had defending their product names and logos. In 2011, Chinese courts rejected Apple’s claim to own the iPad trademark in the country, forcing Apple to pay $60 million to the Chinese firm that owned it in order to proceed with the introduction of the iPad 2 in China. In 2013, Heineken failed to block what it claimed was an infringing name registered by a Chinese sewing machine company.
But increasingly, foreign firms are now seeing Chinese courts as fair arbiters for IPR disputes. A Santa Clara University School of Law study found that from 2006 to 2011, foreign patent owners won 70 percent of Chinese patent infringement cases brought against local firms. When the global law firm Rouse extended the time range to 2014, they found that this foreign success rate in getting Chinese courts to defend their patents against local infringement actually increased to approximately 80 percent.
China is also now seen as a more favorable venue for IP litigation because of the speed of its judicial process. Beijing’s IP court concluded cases within 125 days on average, compared to 18 months in Europe. In the United States, the median time-to-trial alone is 2.4 years for patent litigation, according to a study by PwC.
While China has made substantial progress to protect and promote intellectual property rights, it still faces a number of challenges. Items originating from China and Hong Kong still represent over 85 percent of the value of all infringing and counterfeit items seized by U.S. Customs, with a total estimated MSRP value of over $1.2 billion.
China also has major issues with trade secret misappropriation, according to the U.S. Trade Representative’s 2016 report on China’s WTO compliance. “Most troubling,” it states, “are reports that actors affiliated with the Chinese government and the Chinese military have infiltrated the computer systems of U.S. companies” to steal IP data and provide commercial advantage to Chinese enterprises. In 2014, this led to the indictment of five Chinese military hackers by the US, but significant progress in stopping these actions has yet to be made.
In total, counterfeit goods, pirated software, and stolen trade secrets are estimated to cost the United States between $225 billion and $600 billion annually, according to a report this year from the bipartisan Commission on the Theft of American Intellectual Property, co-chaired by former Ambassador to China Jon Huntsman.
As with many issues in China, the status of Chinese IP rights defies one-dimensional stereotypes. While IP infringement is no longer tolerated with impunity in China, the country also still has progress to make in updating IP laws and strengthening enforcement.
Overall, through a mix of market incentives and political pressure, China appears to be emerging as a global IP leader. And with senior Chinese leadership continuing to support IP rights at conferences like “Summer Davos,” the cultivation of entrepreneurship and intellectual property in China shows no signs of slowing.
Jason Zukus is a joint degree Master of Business Administration and Master of Public Policy candidate at the University of Chicago Booth School of Business and Harris School of Public Policy.