My first encounter with Intellectual Property (IP) protection in China came via a fairly intense standoff with government officials.
Inspectors who were also industrial spies
The company I worked for made products for coal mines. It wasn’t necessarily outrageous that inspectors from the Mine Safety Bureau showed up at our plant for a surprise inspection. But they went a step to far when they demanded to see our proprietary design information and wanted access to the portion of our plant where we custom-built products for customers. Those requests had nothing to with safety and were clearly beyond the purview of any such inspection. Among other things, the inspectors threatened to shut us down by failing us for the inspection.
A standoff at the factory door
Particularly since the Mining Safety Bureau was a unit of the state and most of our competitors were state-owned enterprises, we had real reason to be concerned for our intellectual property. For two days we held fast and refused to yield to the demands. There were some fairly tense discussions. I asked my Chinese colleagues if there might be legal repercussions for us personally, like we might be arrested or I might be thrown out of China. They replied, “Probably not.” I was looking for “Definitely not. Don’t be ridiculous.” My nerves were not calmed.
Our JV partner defended our joint interests
We never yielded and eventually the inspectors left. Interestingly, our partner, also an SOE, stood firmly loyal to our cause. They had invested in our joint venture. It wouldn’t help them for our JV to lose its advantage. Working political back channels, our partner SOE was able to ensure our joint venture wasn’t punished too severely. None of us were punished individually. But the overall experience wasn’t exactly a testimonial to the integrity of the regulatory environment.
Of course these days, as tension with China has mounted, there’s much focus on the issue of IP theft relative to China. It is indeed a legitimate concern. But it is also important to put China’s behavior into perspective. The fact is that, just as with corruption and other aspects of weakness in the Rule of Law (ROL), virtually all Less Developed Countries (LDC’s) suffer from weak IP protection.
Poor countries have weak intellectual property protection
Software piracy data is a good example of that. According to statistics compiled by the Software Industry Alliance, all developed countries have a software piracy rate below 35%. The average piracy rate for low income countries is 65%. Below are some examples.
India 63%
Russia 63%
China 77%
Indonesia 85%
Vietnam 81%
Pakistan 86%
Venezuela 88%
Emerging economies overall 68%
USTR data is consistent with SBA data
Another example is the US Trade Representative’s (USTR) “Special 301 Report,” published annually, which reviews the IP protection performance of America’s trade partners around the world. The “Watch List” is by far dominated by emerging markets. The only time an advanced economy shows up on the list is because of some disagreement over a potential law related to IP, usually digitally-related. It isn’t necessarily because the advanced economy is stealing IP directly as is common with the low income countries.
The pattern is the same: weak rule of law in low income countries
Besides reflecting the same pattern as corruption and all other aspects of the rule of law—weak in LDC’s and stronger in Advanced Economies—IP protection is also significant in that it shows that weakness in ROL extends beyond the government. It is pervasive throughout society—government, business, individuals, etc. This in turn reinforces the point that the Rule of Law is a cultural issue, not simply a legal or political issue. It can’t be solved without considering how to drive cultural change.
