5 Ways To Protect Your Intellectual Property In China

Copycat China is notorious . Many Western companies hesitate to enter China or to bring in technology, because of valid concerns about loss of intellectual property. This concern is even greater when it comes to innovating or conducting R&D in China. But there is encouraging news: the framework for IP protection in China is improving and there are growing instances of firms that have successfully taken legal action. China’s government is paying more attention to this issue; it has made several recent announcements and taken action, including increasing the number of IP courts. Nevertheless, it is important to adopt a strategic approach from the outset in addition to a legal approach.

Protecting a company’s intellectual property depends on two sets of factors: the appropriability regime for intellectual property, or attitude towards copying, in a country; and the architecture of the industry in which the company operates. Whereas companies often assume both factors are beyond their control, under some circumstances a company can modify them to its advantage. In the case of China, where the intellectual property protection system is still evolving, MNCs have limited opportunity to influence the government to strengthen the appropriability regime through changes to the law or more stringent enforcement. One example of a successful approach was Microsoft’s persuading the Chinese government to install authentic Windows software on government-purchased computers.

The alternative to changing the IP regime is to change the locus of where value can be captured . This can take the form of reshaping the firm’s value chain, so as to capture value at a point which is less vulnerable to the IP regime in China. The firm reshapes, or segments, its value chain to keep the IP-sensitive parts outside China’s jurisdiction, making it difficult for copycats to backward-engineer .

Here are some specific strategies to protect your IP in China .

First, one strategy used by some firms is to set up a Chinese R&D center focused on a research domain in which the company does not currently have a large body of IP. By establishing a close collaboration with its partners, both parties have an incentive to avoid leakage. And if the field is new to the company, it is less likely to require inward transfers of existing IP. One major energy company, for example, funds a number of R&D projects in collaboration with Chinese universities and research institutes, mostly in fields concerned with alternative energy where the company has less core technology at stake.

Second, if they have any intention of using it in China, MNCs should patent – in China – intellectual property that may have been patented elsewhere . As patents are national rights, this is an essential requirement. Failure to do so can result in a Chinese (or other) competitor learning about the technology from, for example, published US patents which then they can freely exploit in the local environment.

Third, MNCs in China should be extra careful to employ well-established practices of IP protection . These include standard practices to protect inflows and outflows of sensitive classes of material, monitoring access to key labs, and control of computers, laptops and mobile phones. This also includes use of secrecy agreements with employees and suppliers as well as restricted-access rights to internal databases. One German company said to us: “The IT department makes every effort to keep our data safe, of course. Just like any other big company, we register the occasional attempt to break into our system; therefore we try to be careful. That being said, we certainly don’t want to establish an internal wall between Germany and China. This would be very counterproductive to our practical collaboration, and send the wrong message to our Chinese co-workers.” But the point should be made that it is more acceptable to monitor workers in China than in the West . Most Chinese companies go much further than Western ones: no mobile phones are allowed in or out of a building, blocking of USB ports on computers, and constant surveillance.

Fourth, another practice is splitting R&D into modular tasks and allocating some core tasks to the headquarters group, with specific tasks allocated to the group in China. Although this requires close collaboration between headquarters R&D and the China R&D center, it can provide protection, as the research can be compartmentalized. One major German technology company usually makes sure that a sufficient number of critical components is kept out of China. The problem is that other than keeping such components out of China, there is not much else that this company can do. The Chinese coworkers need the complete picture to work effectively and safely. Therefore it does not make sense to hide too much data from them. The German head of China R&D has his own rule of thumb: decide what you do NOT want to share with your Chinese colleagues, and share the rest freely.

Fifth, the best protection is to have highly motivated employees who want a long-term career with the company and to align their futures with it. Of course, it is impossible to stop an employee walking out the door to work for another competitor, but a well thought-out retention policy can help. However, Western companies need to be well aware that Chinese staff are generally not loyal to companies . As a German head of China R&D said, “The Chinese staff do not have the same feeling towards the company that I would have, and they do not care about the 100+ year old history of German engineering. However, they are loyal to their boss. So if your R&D managers have a good relationship with them, then you will probably reduce the risk of information being stolen. But there is no guarantee.”