Monday, September 5, 2011

Are China's Indigenous Innovation Policies Encouraging R&D Shift to India?

Original patent for Diesel Engine (copyright expired)

My ears typically perk up when I hear the term “indigenous innovation”, mainly because I find the evolution of this set of Chinese technology assimilation policies (good succinct overview from the blog of a Chinese law firm), as well as the vigorous responses to these policies by foreign enterprises and governments, fascinating.

The plan was originally announced by China's State Council in 2006 in the The Guiding Principles of Program for Mid-to-Long Term Scientific and Technological Development (2006-2020). In 2009, further announcements specified that Chinese government procurement would be tied to the degree of “indigenous innovation” that the desired products possessed. Products that were fabricated with IPR owned by a Chinese entity and not restricted by foreign institutions or individuals would be deemed indigenously innovated. Moreover, product trademarks would have to have been originally registered in China. These clarifications raised understandable anxieties among foreign enterprises, which were faced with the prospect of either transferring their design houses and key technologies to China or being shut out of competition for government orders.

Evolution of the rules of indigenous innovation have continued since 2009, as this July 22, 2011 WSJ “blog” post by Chinese legal specialist Stanley Lubman claims. Specifically, in January 2010, the Ministry of Science and Technology relaxed the definition of indigenous innovation. The Ministry specified that foreign-invested enterprises could conduct R&D elsewhere as long as the enterprises in question were registered entities in China. Alternatively, Chinese enterprises could offer "indigenous" innovation by purchasing the rights to use a technology developed elsewhere.

One year later, President Hu Jintao himself took relaxation of indigenous innovation policies a step further by announcing that such innovation would be delinked from government procurement. Clearly, the Chinese government has decided, for whatever reason, that the draconian 2009 announcement went a few steps too far.

What motivated my own response to this subject was a September 1, 2011 piece in the Wall Street Journal Asia, to which a professor of mine drew my attention. The article in question, written by Anil K. Gupta and Haiyan Wang, claims that China’s indigenous innovation program is stifling R&D within China by pushing foreign enterprises to carry out their more valuable innovation projects in India, where intellectual property rights are more respected. The Gupta and Wang article is full of interesting numbers. Here is an excerpt: 
These policy differences appear to have a significant influence on corporate behavior. Consider the top 10 U.S.-based technology giants that received the most patents from the U.S. Patent and Trademark Office between 2006 and 2010: IBM, Microsoft, Intel, Hewlett-Packard, Micron, GE, Cisco, Texas Instruments, Broadcom and Honeywell.

Half of these companies appear not to be doing any significant R&D work in China. Between 2006 and 2010, the U.S. Patent Office did not award a single patent to any China-based units of five out of the 10 companies. In contrast, only one of the 10 did not receive a patent for an innovation developed in India.

India has proven more fertile territory for these companies. For the 10 tech giants taken together, India-based labs received more patents (1,119) than did China-based labs (886) during this period.

At the company level, the difference can be even more striking. For the seven out of 10 companies where Indian units received more patents than Chinese labs, the aggregate numbers were 978 vs. 164. Only a strong showing for China from two outliers, Microsoft and Intel, pulled up its aggregate filings - Chinese labs at those two companies secured 722 patents compared to 141 from Indian labs.
On the whole, the Gupta and Wang article is very interesting, but it may suffer from a few misconceptions that give the Chinese government less credit than it deserves and that downplay what may be a longer-term trend towards the favoring of India.

First of all, Gupta and Wang seem to lay the blame at the feet of the Chinese central government, when, as Lubman points out, China has already backed off on the most contentious elements of indigenous innovation. National government procurement projects are no longer required to use indigenous innovation, and the definition of that innovation is now flexible enough to allow most foreign enterprises plenty of wiggle room to avoid the transfer of key technologies and research operations to China.

In fact, national leaders may even understand the conclusion that Gupta and Wang express at the end of their article:
If it wants to become a global technology leader, China needs open doors, strong intellectual property protection, and no stacking of the deck in favor of Chinese companies—a policy mix exactly opposite to some of its current indigenous innovation measures.
As Lubman notes, the problem of linkage between procurement and indigenous innovation has been displaced to the local government level. He offers us the examples of Shanghai, Beijing and Nanjing, which, like many other local governments, have established their own procurement standards:
The Shanghai [procurement] catalogue, for example, listed only two indigenous innovation products from FIEs out of a total of 523. Of 42 products listed in the Beijing catalogue, only one came from an FIE. On Nanjing’s list, there were none.
Therefore, the matter has now become just one of the many cases where local governments pursue their own goals independently of the central government's directives.

The second, and greater, misconception of the Gupta and Wang article is its implication that correlation is causation, with the imbalance in new patent applications by US enterprises in India as opposed to China being blamed on indigenous innovation.

While China’s indigenous innovation policies are probably a contributing factor in this disparity, we should remember that the concept of indigenous innovation was rather inchoate in China between 2006 and 2009. The most disquieting elements of the policy were only in effect from February 2009 to January 2010, with delinkage of procurement from indigenous innovation happening on a national scale, if not a local one, just one year later. In other words, the Gupta and Wang piece encourages us to think that the very large disparity between India and China in the conducting of important R&D work has arisen within a two-year span. This implies almost unbelievably fast resource distribution decisions and plan implementations on the part of the enterprises in question.  

It is more likely that Gupta and Wang have tapped into a much deeper spring of discontent towards the state of Chinese IPR protection than their article implies, with India slowly and steadily gaining ground over China as a home for R&D operations over a period of many years.

Now, India’s IPR protection record is far from flawless. This Intellectual Property Rights Primer for India, published by the UK Intellectual Property Office, discusses both the good and the bad:
A major cause for concern in enforcement is bureaucratic delay, with a backlog of cases at both the civil and criminal courts. This means that cases can run for five years or more. There is a lack of transparency, particularly at the local level. Set against these problems is the balanced approach of the Indian judicial system, which comes down heavily on IPR infringers. Over the years decisions in favour of foreign companies against local infringers have demonstrated the judiciary’s impartial approach. In addition, the readiness of the Indian courts to grant interim injunctions usually means an infringement is halted pending the outcome of a case.
The fact that the Indian judicial system seems to be genuinely interested in protecting intellectual property, despite enforcement problems, has probably done much to improve the reputation of India as a home for R&D operations.

Contrast this with China, where considerable roadblocks to foreign enterprises seeking to defend their IPR exist in the court system despite the fact that laws designed to protect intellectual property exist. In this Bloomberg article Vivek Wadhwa, a Senior Research Associate at Harvard Law School, briefly discusses some of the issues foreign companies face in China in regards to patent protection:
...all patent filings are in Chinese and the interpretation as to whether a technology infringes is left to local judges who may not understand much about technology. The judges will likely side with locals rather than with foreigners. Because of language problems and the sheer volume of patent filings, there is no easy way for foreign companies entering the Chinese market to determine whether patents that cover their technologies already exist.

China has a big advantage, too: Most global patents that have been filed over the past decades are not valid in China. Patent laws did not exist there until 1985.For any U.S. or global patent to be valid in China, it must have been filed there. For any U.S. or global patent to be valid in China, it must have been filed there.
Language difficulties, nationalistic sentiments and slow acceptance of Western patent-protection norms would all contribute (and have been contributing) to problems with IPR protection in China even without the existence of indigenous innovation policies. On the contrary, in India, language and many norms are broadly shared at the policymaking level, while nationalist chest-thumping is primarily directed at Pakistan and China. Therefore, faced with a choice between basing Asian R&D operations in India or China, it makes sense that Western enterprises would favor India over time, whether or not China enforces indigenous innovation policies. The analysis by Gupta and Wang seems to lack an acknowledgement of the big picture behind the trend they present.

Therefore, while I salute Gupta, Wang, Lubman and Wadhwa for individually adding to the discourse on indigenous innovation, I would encourage them all to put their heads together in order to give us all a more comprehensive picture of the situation.


  1. I'm not very familiar with patent law, and innovation more in general. However, it would seem to me that you won't succeed either in China, nor in India, without a long-term approach to the markets.

    Provided that you can pay for a good attorney, I guess you'd probably be on the safer side in India, as an innovative investor.

    FOARP has written about patenting in China a while ago, on CLB. It's no country-to-country comparison, but then, it should take a thesis to render a really comprehensive picture of the situation.

  2. One more thing, the central government is definitely aware of a link between scientific development and prosperity / development in recent years, beyond the mere slogan. Maybe researchers like Huang Yasheng added to the awareness. But all in all, state investment (via provincial investment companies not least) still seems to emphasize infrastructure.