China's indigenous innovation policy originates from its National Medium- and Long-Term Program for Science and Technology Development (2006-2020). Identified as a guiding principle for China’s “great renaissance”, “indigenous innovation” is defined as “enhancing original innovation, integrated innovation, and re-innovation based on assimilation and absorption of imported technology” to improve China’s national innovation capability.
Since the adoption of the Program, China has promulgated legislation to give accredited “national independent innovation products” priority in government procurement. In theory, all Chinese legal persons, which include such foreign-invested enterprises (FIEs) as Chinese-foreign joint ventures and wholly foreign owned enterprises, are qualified to apply for the accreditation of their products. In practice, however, few FIEs have obtained such accreditation. For example, of the 523 products listed in Shanghai’s indigenous innovation procurement catalogue, only two are reportedly produced by FIEs.
Another requirement for getting the accreditation of an independent innovation product is that the intellectual property of the product must be held by a Chinese legal person. A draft rule being considered further requires indigenous innovation products “to not have any disputes or controversies with another product’s intellectual property.” These requirements could be burdensome for foreign firms. Due to China’s inadequate protection of intellectual property, foreign firms are often reluctant to transfer the rights to their Chinese subsidiaries.
Because of these legal requirements, foreign companies face two difficult choices:
Option 1: Do not transfer technology to China but give up China’s huge government procurement market, which amounts to $88 billion per year at the central government level and much more at local levels.
Option 2: Transfer technology to the Chinese partner, through which the product is accredited as a national independent innovation product, but risk technology theft.
Last December, a group of US hi-tech and intellectual property-dependent companies told the US International Trade Commission that they cannot abandon the huge Chinese market primarily because their shorter-term interest in maximizing profits often outweighs their longer-term concerns about intellectual property infringement. In addition, they fear that if they leave the Chinese market, their competitors will fill the gap. Based on these considerations, these firms often choose Option (2), despite the risk of losing the technologies. James McGregor, former head of the American Chamber of Commerce in China, suggested that China’s indigenous innovation policy is “a blueprint for technology theft” on an unprecedented scale.
A US-China joint statement issued during President Hu Jintao’s January visit to the US seems to suggest that foreign companies’ concerns about the indigenous innovation policy will be addressed. In the statement, China agreed to eliminate the discriminatory indigenous innovation policy. Nevertheless, it remains unclear whether these commitments will be effectively implemented. Before this happens, it is highly likely that many hi-tech firms in the US and EU will choose Option (2). The atlantic community will naturally wonder whether this move might put at risk not only the firms’ technologies but also transatlantic security if those technologies are security-related.
To alleviate such concerns, China should, apart from eliminating the discriminatory innovation policy immediately, step up its efforts in improving protection of intellectual property and increasing transparency in government procurement. Improvements on these fronts also benefit China. Local Chinese companies play increasingly important roles as innovators and they need strong intellectual property protection to stay innovative and competitive. Government procurement easily allows governments to pick their favored bidders. Transparency in this process would help combat corruption, which is a major cause of unrest in Chinese society.
China’s goal to advance its innovation capability is admirable and understandable. But achieving this goal at the risk of undermining China’s relations with US and EU is shortsighted and unwise.
Dr. Mei Gechlik is visiting Fellow at the Hoover Institution and is a Lecturer-in-Law at Stanford Law School.
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