Intellectual Property in China

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I’ve been discussing the free/fair trade debate in the last two blog posts. In this one I turn to the issue of intellectual property (IP) in China.

Microsoft in the classic example. Most computers run on Windows and use Office. In the US and most western nations you’ll pay to use this intellectual property. In countries like China, most do not. On paper, Chinese law protects intellectual property rights, but enforcement is spotty at best, and many Chinese simply don’t see it as a serious problem. Estimates of Microsoft losses in China are all over the board, with $60 billion as a good guess. These estimates might be inflated because they assume that all Chinese users of Microsoft products would have paid for them if pirated versions were not available. $20 billion is a conservative bottom line loss, and that’s a lot for one firm.

The Intellectual Property Commission Report estimates the total annual IP-related losses for US firms in Asia to be around $300 billion, about the same amount that US firms export to the continent. The report (http://www.ipcommission.org/report/ip_commission_report_052213.pdf) is worth reading if you have some time, as it chronicles the various problems, from patent and trademark violations to piracy and copyright infringement. The takeaway point is that IP is a very serious problem, especially in China.

There are two primary reasons why IP law is so difficult to enforce in China. First, the nation lacks the infrastructure and incentives to prosecute offenders. China has improved in this regard during the past two decades, but it’s got a long way to go.

Second, IP in China and the US is viewed very differently. Historically, Americans have championed creativity and individuality. But as a collective society, the Chinese tend to place less value on individual innovation; in their view, new ideas aren’t as important as production. Put another way, many Chinese see the value of an iPhone primarily in its production and distribution, not in its conception and original design. Hence, IP is largely a collective entity. It’s no secret that Chinese companies tend to focus on mimicking innovative global competitors, but with a lower cost structure.

I once discussed the IP problem with a group of undergraduates in Beijing and most of them just didn’t understand why I thought it was a serious issue. Why should you be concerned if millions of Chinese are using pirated copies of Windows and Word, they asked? These users wouldn’t be able to afford to pay for it anyway. Of course, if Microsoft pirates could be required to pay for the product in order to use it, many would find a way to do so, increasing the size of the market and driving down the price. I explained that innovation occurs because of property rights and incentives, but in the end most of the students were okay with Westerners sorting that out, leaving Chinese firms to use and reuse global technology as they wish.

While it’s unrealistic to eliminate IP theft in any country, but the Chinese government must develop the infrastructure necessary to enforce international standards. If they don’t, innovative Western firms must continue to overcharge for their new products to cover developmental costs while many Chinese firms and consumers get a free ride. Nobody in China has an incentive to do this without international pressure, which is why insisting on real action is so important.

4 Comments

4 Comments

  1. Len  •  Jul 27, 2016 @5:45 PM

    I was waiting for you to cover this. I don’t see how American tech companies can ever compete in China when they are allowed to steel what we pay to develop. I don’t know the answer, but we better come up with something.

  2. techgeek1991  •  Jul 28, 2016 @5:44 PM

    The solution is simple but requires guts. Tariff imported goods at a level that equals the amount of IP stolen by pirates in the country. These government have no incentive to clean up the problem now.

  3. Arthur W.  •  Jul 29, 2016 @2:24 PM

    Microsoft, Adobe and others are going to a new business model that pushes rental of the software products. This will allow them to obsolete the computer based versions. This will take time maybe many years but that appears to be where they are headed. Piracy is also a problem in the US and Europe.

  4. techgeek1991  •  Jul 30, 2016 @7:30 AM

    Most software is rental, but this can still be exploited. It’s a little more difficult than copying discs, but it’s not that hard.