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.

A Tree for the Forest: India, Taiwan and America's Flawed Asian Security Architecture

Clinton to India: Time to peek out the gate

"It's time to lead," proclaimed Hillary Clinton during a speech in Chennai on July 20, and America’s relationship with India took a symbolic step forward. 

The message to India was loud and clear: India must look outward, and, as it does, it will have a partner in the United States. According to Clinton, the rationale for this partnership is simple: “We think that America and India share a fundamentally similar vision for the future of this region," she said.

This unequivocally positive declaration is striking in its contrast with an entirely different declaration made exactly one year ago. At the 2010 ASEAN Regional Forum in Hanoi, Clinton called for amultilateral solution to the South China Sea dispute. As the Secretary of State declared:

The United States supports a collaborative diplomatic process by all claimants for resolving the various territorial disputes without coercion," she said at the end of the event. "We oppose the use or threat of force by any claimant.

Of course, everyone knew exactly which claimant was forefront in Clinton’s mind. And just in case anyone had doubts, her assertion that the US had a “national interest” in ensuring freedom of navigation in Asia made the target of her remarks crystal clear. Such terminology was a direct rebuke to China’s decision to reclassify the South China Sea as a “Core Interest” in the spring of the same year. Clinton’s remarks presented a vision of East Asian security that was fundamentally dissimilar to that of China, which prefers to resolve its territorial disputes bilaterally, without the involvement of the US.

Clinton’s warm embrace of India must have troubled Chinese strategists, and the Secretary of State wouldn’t have been blind to this possibility. As Fareed Zakaria remarked to John King on CNN after Clinton’s comments in Chennai, the Secretary was careful to avoid portraying India as a counterweight to China in her speech. She did not want to give Chinese listeners the impression that India would be part of a US strategy of containment. Only a pure optimist could believe she succeeded.

For many Chinese strategists, the American quest for security partners around China’s periphery is a tactic designed to keep the Middle Kingdom down. PLA Air Force Colonel Dai Xu is among them. Dai describes this strategy in the first chapter of his recent book, C-Shaped Encirclement (Note: The link leads to Amazon’s China glance inside the book. I am not advocating you buy it.):

大国小国或公开耀武扬威，或暗中排兵布阵，或公然抢劫，或大肆挑衅……这都不是偶然的，而是互相联系、互相配合的。这些小事件，都是大包围圈上一个又一个的火力点。

Large countries and small countries either openly make a show of their power, or deploy their forces in shadows, or wantonly provoke… none of this is by chance. It is by mutual association, mutual cooperation. These little affairs are collectively the firing points of a great encirclement.

According to Dai, the US is the marionettist behind this encirclement. America has arrayed forces or made allies in a great C-shaped arc around China, starting from Korea in the east and stretching around the maritime south and out to the west. Surmised American designs on Tibet and Xinjiang also make their way into Dai’s theory, although China’s iron grip on these “Autonomous Regions” makes it hard to take the colonel seriously in this regard.  

Dai’s concerns about America’s interactions with Korea, Japan, Vietnam, India and other maritime Asian states are a bit more understandable. After all, the US does have alliances with Korea and Japan and has varying degrees of security cooperation with other Asian states. Nevertheless, Dai’s “they’re out to get us” encirclement mentality doesn’t account for the very real possibility that America’s “C-Shaped Encirclement” of China is an accident of geography rather than a real encirclement strategy. After all, the foundation of US power in Asia is the US Navy's freedom of navigation. Faced with an increasingly capable and assertive PLA Navy, it makes sense that the US would seek partnerships with states that could provide support on the high seas. Unfortunately for China, those seas just happen to be arrayed in an arc around China’s southern and eastern peripheries - and far to the southwest of China too if you add India, with the ocean that bears its name, into the supposed containment strategy. So nobody should have been surprised that, in Chennai, Clinton also mentioned that India could play an important role in maritime security beyond its territory. This was fully in line with America’s pan-Asia maritime security strategy.

Yet with each partner the US adds to its coterie across maritime Asia, it becomes more and more apparent that a flaw exists in this American strategy.  The Obama Administration still seems hesitant to bring a key regional security stakeholder into the fold. This stakeholder is Taiwan. 

We can't entirely blame Obama for the island's continued isolation. Since the days of Nixon, presidents have looked on Taiwan as an irritant - the fly in the ointment of China policy. For a brief moment at the beginning of the Bush II presidency, it seemed as if that might change. But events would temper W's initial pro-Taiwan activism.

In a July 21 article in The Diplomat, Minxin Pei discusses the changes in Chinese foreign policy that have followed the country’s few leadership transitions. Pei notes that, unlike Jiang Zemin, Hu Jintao outsourced much of his Taiwan policy to the United States, which was roped in to keeping Taiwan in line. George W. Bush more than happy to comply.

For a Bush Administration bogged down in Iraq and Afghanistan, ensuring that the ship of cross-strait relations remained on an even keel was a top priority. The last thing Bush needed was conflict with China at a time when the US was lacking the resources to become involved in East Asia. And what better way to keep that cross-strait ship sailing than by quietly supporting the Kuomintang, a party that China had already anointed as negotiation-worthy during the 2005 visit of KMT elder Lien Chan? The KMT offered a reassuring message to Washington: We won’t be troublemakers, unlike President Chen Shui-bian of the Democratic Progressive Party. So began Washington’s quiet but noticeable support for Ma Ying-jeou. This piece (note the bit about Ma's advocacy for increasing Taiwan's defense spending), while slanted in its coverage, recounts the pro-Ma mythology perfectly.

Over three years after Ma's election, the US still values stability in the Taiwan Strait. But would the US choose short-term stability at the expense of jeopardizing its wider maritime security framework? For the moment, it seems as though this is precisely what is happening. 

Under Ma Ying-jeou, the Taiwan’s security situation is deteriorating by the day. This problem runs much deeper than the Obama Administration’s continued hesitancy to provide modern replacement planes for Taiwan’s aging air force. First of all, there is the issue of defense spending. Despite its challenged security situation, Taiwan still spends less than 3 percent of its GDP on defense, a problem that the Ma Administration hasn't rectified (remember that note above?) despite the fact that current funding is not even sufficient to cover the administration's own pet project of creating an all-volunteer military. Meanwhile, under Ma, military exercises have continued to bescaled back or canceled entirely. As a result of these issues, the day where a strong China can coerce Taiwan into a political solution that favors Beijing is drawing near.

This is a problem because Taiwan is of great strategic importance, especially to a naval power such as the US that values freedom of navigation highly. This importance is manifold. 

First of all, the “loss” of Taiwan would have ramifications for broader Asian security as current security partners of the US, doubting America's ability to defend its friends, would accelerate the build-up of their military arsenals. A naval arms race is already underway in Asia. This arms race would only gain steam in the wake of a failure of the US to honor its nebulous (not legally binding) commitment to a long-time friend.The US, on the other hand, would lose credibility as a protector in the region as a whole.

Second, unlike the nearby main landmass, Taiwan is situated on the edge of the continental shelf. This would ensure that a China in possession of the island would be capable of launching submarines rapidly and quietly into the depths of the Western Pacific Ocean. Note that US Satellites can see Chinese subs that steam away from Hainan Island, while subs wishing to avoid detection in the East China Sea (average depth: 188 meters) or Taiwan Strait (deepest point: 70 meters) have their work cut out for them. This leaves the deeper Luzon Strait, a bottleneck that could be observed using sonar buoys and undersea sensors. With control of Taiwan, these problems would disappear, while China would benefit from a greater reach into the Pacific and more clandestine operations in the waters of Northeast Asia.

Third, Taiwan bestrides some of the world’s busiest sea lanes, situated at a major point of access to the South China Sea. A China in control of Taiwan would be in a position to close the Taiwan Strait and the Strait of Luzon to vessels from nations that offend the Middle Kingdom. This would increase the time and expense of shipping as vessels would be forced to sail 1,000 miles further south to the Celebes Sea in order to find an international waterway into the South China Sea. 

Finally, while energy supply lines to Northeast Asia could always be rerouted in the event that China decided to refuse Japan-bound tankers to take the shorter route, the increased freedom of movement in the Pacific that Taiwan would provide to China's navy would make even longer steaming routes from the Middle East more risky. Since oil tankers are, for the most part, privately owned and operated, there is no guarantee that operators will take the risk of such voyages without much greater compensation. Without a stable energy supply, Japan’s Self-Defense Forces would find it even more difficult to prevent the Chinese from settling old scores - such as that over the Senkaku/Diaoyu Islands, without a massive US engagement.

And why would a China endowed with this enhanced strategic position stop at the Senkakus? The Middle Kingdom seems to have a predilection for suddenly rediscovering or reevaluating territorial claims based on history. China's modern claims to the Senkakus, for example, date to 1971, while its adamant insistence that the Spratleys and Paracels (which were never even mapped until the British made the effort in the nineteenth century) are Chinese territory date from the days of the PRC.

What’s to prevent, for example, a resurrection of Chinese claims to Okinawa?  Colonel Dai certainly seems to feel China’s loss of influence over the Ryuku Islands keenly. As he mentions in the first Chapter of his book:

2月16日，美国国务卿希拉里访日，日美双方签订驻冲绳（琉球群岛）美军迁往关岛 的协议。这个协议的签署，是美国对日本战略的重大转折，喻示着美国正在放出关了六十多年的日本老虎。到现在为止，还没有人认识到这个协议的严重性。冲绳是什么地方？是原来的琉球。闻一多有个《七子之歌》，在哭台湾的这一首中，这样说“我们是东海捧出的珍珠一串，琉球是我的群弟，我就是台湾……”不仅中国人把琉球看成是中国的孩子，美国人也是这么看的。二战胜利后，美国两次向蒋介石提出把琉球群岛归还中国，条件是派孙立人的远征军进驻日本，作为占领军。蒋介石一是考虑打内战，二是害怕日后引起和日本的麻烦，没答应。之后，美国就把自己的军队驻那里了。它在观察，看日本和中国未来谁可能成为美国的盟友，它就把琉球给谁。现在，它决定给日本了。

 On February 16 [2009], the US Secretary of State Hillary Clinton visited Japan. Japan and the US signed an agreement covering the movement of American forces on Okinawa (Ryuku Islands) to Guam. The signing of this agreement is a big turnaround in the US strategy toward Japan. It makes clear that the US is releasing the Japanese tiger that has been locked up for 60 years. People still don’t recognize the importance of this agreement. What is Okinawa? It was originally Ryuku. The Song of the Seven Sons [poem by Wen Yiduo, an early 20th century poet ], which deplores [the loss of] Taiwan, says, “We are a string of pearls beaten out by the East Sea. Ryuku is my younger brother. I am Taiwan…”Chinese people not only see the Ryukus as China’s children, but Americans also think of them this way. Following WWII, the US offered to return the Ryukus to Chiang Kai-shek’s China twice. The condition was that China had to send the expeditionary force of Sun Liren to occupy Japan. On the one hand, Chiang was thinking about the [Chinese] civil war, and, on the other, he was worried that this would give him trouble with Japan later. Therefore, he did not respond. Afterword, the US put its own army there. Based on American observations of which country – Japan or China – would become an ally of the US, the US would make its decision on who to give Okinawa to. The US has decided to give them to Japan.

Would it matter to Dai that, on the eve of their absorption into Japan, the Ryukus were an independent kingdom that China had just as little right to as Japan had? Certainly not! Once Okinawa was taken, perhaps he would move on to Annam (which, incidentally, means the Pacified South). North Vietnam was a Chinese possession for over 800 years. With the South China Sea converted into a Chinese lake, the Vietnamese, who have fought several defensive wars against China since the establishment of the first Vietnamese empire, could be forgiven for worrying about their fate. And next would be….Certainly this is wild speculation. It is meant to suggest not what definitely would happen if China controlled Taiwan but what could happen. 

So what does this long digression have to do with India? India is a continental power with a growing navy in the midst of a complicated security environment. While the country is indeed preoccupied with its longstanding Maoist insurgency and its rivalry with Pakistan (therefore inclined to think locally or, at the most, regionally), India is no stranger to the security challenge posed by China – a benefactor of Pakistan, a claimant to Arunachal Pradesh and Aksai Chin, and a rival naval state with eyes on the Indian Ocean. Clinton’s public call for India to lead may have earned her brownie points in New Delhi, but New Delhi hardly needed Clinton’s urging to start asserting its leadership. In fact, an Indo-Chinese rivalry for Asian leadership is already underway.

Herein lies the irony of Clinton’s appeal to the Hindu Tiger. The Obama Administration is going to great lengths to court a power that already shares much of America’s strategic vision. Yet it is willing to neglect a partner on China’s very doorstep – one that, if overcome, would seriously handicap the US' stated aim of maintaining freedom of navigation throughout Asia. In the tapestry of America’s preferred Asian security framework, loose threads continue to protrude around Taiwan. If this situation continues, the day will come when China will need only to tug hard enough to cause the whole rug to unravel. 

Instead of failing to see the forest for the trees, it seems the US is failing to see an important tree for the forest.