The Structural Issues Behind China’s Intellectual Property and Litigation Enforcement

To sustain China’s economic expansion, a new strategy to promote innovation has risen to the surface but is drowning in ineffective top-down governmental structures, conflicting tradeoffs for short-term economic gain, and sizable disparities in IP litigation.

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When an economy seeks to innovate, the need to protect intellectual property (IP) is almost inseparable. IP can be defined as the creations of mind, designs, or creative work used in commerce. Without enforceable mechanisms to safeguard a company’s intellectual assets, promoting fair competition, accelerating SME (small-medium enterprise) growth, and distributing new products can be compromised.

Before the conversation of protecting IP comes into question, it’s crucial to understand why promoting innovation is essential to China’s geopolitical priorities.

With the declaration of the ambitious 2049 plan, China seeks to become a world power through its economic prowess. Primarily driven by a surplus of rural labor migrating to manufacturing sectors, China’s economy has consistently grown by 10% for three consecutive decades. However, China’s low-cost advantage and excess labor supply have been sharply declining, positioning their average manufacturing costs higher than developing countries such as Vietnam (0.38 USD per hour, as opposed to 1.08 USD per hour).

To maintain China’s competitiveness in the long run, a report from the 19th Party Congress reveals mission statements to achieve breakthrough innovations in key technologies before 2035.

Promoting innovation is only one side of the equation; companies must also be assured that their creative assets will be protected–namely through legal patents. As the Chinese government has set ambitious quotas for greater quantities of patents to be filed, local governors have become more concerned about pumping out legal licensing for the mere sake of more licensing–rather than ensuring the commercialized success of breakthrough inventions. China leads the world in patent filings but only reaches one-third of non-Chinese patent quality benchmarks. Regarding commercialization turnover, Chinese research institutions account for 7.8% of patent filings with a licensing rate of 2.8%. In contrast, US universities accounted for 4% of patents but yielded a licensing rate of up to 50%. To further highlight the technological gap, China suffered from severe bottleneck struggles in AI, semiconductor, and aircraft engine industries after the US gradually restricted high-tech exports.

Aside from the drop in innovative quality, what makes a patent valuable isn’t the license itself, but the confidence that it will be legally enforced if another actor decides to violate it. This concept becomes particularly concerning when evaluating China’s governmental incentive-based structures. Although many see China’s national government as a powerful, binding force that centralizes the country with strict enforcement, many scholars prefer to describe China’s systems as “fragmented authoritarianism.” After all, only so much can be done to micromanage over 41,634 town-ship-level governments. To ensure the competence of local officials, China maintains a complex structure of higher-ups to evaluate governors with two different benchmarks: hard and soft targets. Hard targets, such as economic growth, are binding and measurable, whereas soft targets, such as IP enforcement, aren’t. Not only is IP enforcement often seen as a secondary priority, but it can also conflict with the primary responsibilities that political officials are demanded to fulfill. Even the national government believes in adopting foreign technologies while remaining lax on IP enforcement to intentionally provide domestic firms with unleveled advantages–ensuring they avoid legal consequences or direct competition from international firms.

These sentiments are shared well beyond the central government, as a group of Chinese IP protection specialists from the Shanghai Pudong District claimed that, “China is still at the developmental stage of its economy” and “needs to adopt foreign technologies because China can’t enforce IP laws like the US can.” It’s concerning that it's not just the government that will pick and choose when the rule of law is upheld, but IP specialists themselves. Even if Chinese IP professionals wanted to initiate stricter enforcement, it’s unlikely they could exercise their authority.

Within China, agencies such as the National Intellectual Property Administration can only give recommendations to local patent offices, whereas local leaders are allowed to command binding orders. As previously established, local officials are most critically scrutinized for hard targets such as immediate economic growth. Though there may be an incentive to uphold a degree of IP protection, extending them as a consistent practice becomes challenging when it’s perceived as a tradeoff for more important priorities. When Chinese officials have to decide between maintaining their seat in office or sacrificing political power for IP enforcement, we can assume which priority is compromised for the other.

When IP disputes manage to go to court, the legal system provides, at best, subpar assistance to infringed companies. The average compensation for IP infringement cases in China (less than $13,000) is extremely low compared to developed countries–failing to compensate for the cost of the legal proceeding. Furthermore, a sizable lack of uniformity exists across IP courts throughout multiple jurisdictions: including Shanghai, Beijing, and Guangzhou. The lack of adequate legal compensation and consistent application of patent law raises significant uncertainty beyond the companies that have been placed at an innovative disadvantage. Investors want to put their money where they are confident a company’s intellectual assets will be protected and, if stolen, can rely on robust legal protection. These ideas aren’t merely hypothetical: one study from the international chamber of commerce quantifies that a 1% increase in the strength of patent protection correlates to a 2.8% increase in foreign direct investment.

While China attempts to accomplish breakthrough innovations, protecting them is equally important. By making structural changes to its leadership structures, economic priorities, and court systems, China can guarantee a level playing field as it extends its global influence. Otherwise, in the pursuit of rapid innovation, an aspiring “world power” may jeopardize it for everyone else.

Mridul Prasad is a first-year CLEG major in the School of Public Affairs. He is a Staff Writer for the American Agora.

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