Intellectual Property Rights and Economic Development in China

Author:Keith E. Maskus, Sean M. Dougherty, and Andrew Mertha

    This chapter is adapted from a longer version that was prepared for the Southwest China Regional Conference on Intellectual Property Rights and Economic Development, held in Chongqing, September 15-18, 1998. This paper was written while Dougherty was doing fieldwork in China for the MIT Science and Technology Initiative. He is now with the Organisation for Economic Co-operation and Development.

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I Introduction

After a long period of rapid economic growth and significant structural change, the Chinese economy increasingly makes use of advanced production technologies, as demand shifts toward higher-quality goods and services. Furthermore, Chinese enterprises place growing emphasis on developing brand-name recognition, a reputation for quality, and product innovation. In such an environment, the provision and enforcement of intellectual property rights (IPRs) take on considerable importance as framework conditions for promoting further economic development. Failing to support an adequate IPR regime could act as a drag on future growth. In an era of substantial and ongoing structural reform in Chinese enterprises, it is important to establish incentives for the development and expansion of businesses in high-growth sectors, such as information technology, entertainment, plant genetics, and biotechnology, and to support innovation in Page 296 consumer products, such as processed foods, clothing, and household goods. Properly structured, IPRs help achieve these goals.

At the highest levels, the Chinese government recognizes the need for a workable IPR system. This recognition is spreading among modern Chinese enterprises, which likely suffer the largest losses from trademark and copyright infringement in the economy. Chinese enterprises also are aware that their access to frontier foreign technologies depends to a growing extent on IPRs. Thus, significant economic interests are emerging in favor of a stronger system.

In response both to this change and to considerable external pressure, China is undertaking a dramatic reform of its intellectual property laws. Since 1990, China has revised and updated its laws covering copyrights, trademarks, patents, and trade secrets ("anti-unfair competition" laws) and has adopted protection for integrated circuits. China has also enacted protective systems for plant varieties and pharmaceutical marketing rights. However, China has yet to establish protection for geographical indications, which specify particular locations at which a product such as wine is made. Beijing has joined nearly all major international IPR conventions, including the Paris Convention in 1984, the Madrid Protocol and the Washington Treaty in 1989, the Berne Convention and the Universal Copyright Convention in 1992, the Geneva Phonograms Convention in 1993, and the Patent Cooperation Treaty in 1994. It also is a member of international agreements on the classification of patents and trademarks and the deposit of microorganisms (see La Croix and Konan 1998 for further details).

China must make further revisions in order to conform to the requirements of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in the World Trade Organization (WTO). However, it has signaled its intention to do so, and corresponding reforms are under consideration. When the reforms are completed, China will have a modern legislative structure for IPRs on a par with many industrial economies.

Beijing also established education and training programs in IPRs and upgraded its administrative and legal systems for enforcing these rights. For example, China recently set up special IPR courts in eight cities. Furthermore, in 1997, a Software Title Verification Office was established as a joint Sino-U.S. initiative to examine the legitimacy of software purchases by Chinese factories and offices. However, significant problems remain in the administration and enforcement area. Victims of infringement complain loudly about weak monetary and civil penalties, frustrating delays in administrative and court procedures, and local protectionism that makes enforcement actions difficult to sustain in regional jurisdictions.

The evolving system of IPRs presents both opportunities and challenges for the Chinese economy. As will be discussed in detail in later sections, the opportunities stem from establishing an improved environment for technical innovation, product Page 297 development, and inward technology and investment flows. The challenges include moving resources out of infringing activities into legitimate businesses, coping with higher costs of imitating products and technologies, and absorbing the costs of administering a stronger system.

Stated differently, stronger IPRs will shift economic incentives away from encouraging static competition through copying toward promoting dynamic competition through innovation, technology absorption, and product design. The latter policy environment is appropriate for an economy, such as China, that has aspirations to be a leader in technology development. However, such an environment will place competitive pressures on lagging sectors and will raise concerns about the distribution of costs and benefits among individuals and enterprises.

In this context, the ultimate objective of a stronger system is to maximize the competitive gains from additional innovation and technology acquisition over time, with particular emphasis on raising innovative activity by domestic entrepreneurs and enterprises. Upgrading protection for IPRs alone is a necessary but not sufficient condition for this purpose. Rather, the system needs to be strengthened within a comprehensive and coherent set of policy initiatives that optimize the effectiveness of IPRs. Among such initiatives are further structural reform of enterprises, trade and investment liberalization, promotion of financial and innovation systems to commercialize new technologies, expansion of educational opportunities to build human capital for absorbing and developing technology, and specification of rules for maintaining effective competition in Chinese markets. Developing these inititiatives is the overriding challenge facing Chinese policymakers in the IPR realm.

The chapter proceeds as follows. In the next section, we discuss the intricate relationships between IPRs and economic development, reviewing available evidence on that subject. We analyze recent trends in the use of IPRs in China in the following section, considering both data and information learned from a series of interviews with enterprise managers, Chinese administrative bureau personnel, scholars, and local enforcement agents. Furthermore, we develop some crude indications of how Chinese economic development could be affected by stronger IPRs. In the final section, we provide conclusions and recommendations.

II IPRs and Economic Development

The relationship between IPRs and economic development is extremely complex and can only be summarized here.1 The evidence is sometimes difficult to interpret because many of the concepts involved are not well measured. However, there is a growing consensus that stronger IPRs increase economic growth and improve development processes if they are properly structured.

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How Economic Development Affects IPR Systems

To date, most economists have focused on one direction of causation, from economic development to strengthening of standards for intellectual property protection. For example, in one recent article, an index of strength of patent laws in 1984 across countries was developed (Maskus and Penubarti 1995). There is a strong positive relation-ship between patent strength and real per capita gross national product (GNP):

Patent = -0.51 + 0.49 × GNP R2 = 0.37

The regression points out that national policies depend on growth in income levels, among other factors. It is easy to understand the political economy of this process (see Evenson and Westphal 1997; La Croix 1992; Sherwood 1990; Siebeck 1990). The poorest countries allocate virtually no resources to invention or innovation and have little intellectual property to protect.As incomes and technical capabilities grow to moderate levels, some inventive capacity emerges, particularly of the adaptive kind, but competition remains based on imitation, and the majority of economic and political interests prefer weak protection. As an economy develops, additional inventive capacity and demands for high-quality products emerge, and more firms lobby for effective protection, a process that is abetted by foreign firms interested in servicing growing markets. Finally, protection shifts up sharply at the highest levels of income.

There is a strong correlation between the strengths of patents, trademarks, and copyrights, although many developing economies have enacted reasonably strong trademark and copyright laws (see Rapp and Rozek 1990; Ryan 1998). The strength of enforcement efforts also differs with economic development levels. On the part of poor countries, this reflects both an unwillingness to pay the costly administrative expenses and an inability to manage complicated technical and judicial issues associated with IPRs.

Note from this analysis that if a country has widely varying income levels and technological capabilities in different regions, there will be strong differences in interest in IPRs. China currently seems to be in this position, with far higher incomes in the coastal and urban regions, as we show in a later section. In turn, firms from those regions tend to be much more active in using IPRs and in wishing to see them protected, leading potentially to interregional disputes over intellectual property infringement and enforcement.

How IPRs Stimulate Economic Development

The evidence...

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