Toloken

“We need this kind of culture [of innovation],” he told a recent forum in Guangzhou on how China should transform its economy. “If we do not upgrade our manufacturing, we will always be a step behind our competitors in the international arena.”

Tang, the deputy director of the Guangdong Provincial Intellectual Property Office, said China’s focus on low-cost manufacturing made the country wealthier and raised its GDP remarkably over the last 30 years.

But that strategy won’t work to take the country forward, he said. Many times, the real profits behind “Made in China” have gone to companies in wealthy economies which own the products and technology, Tang said, “We have actually given our profits to the developed countries.”

In other words, Tang believes China should strengthen its IP laws so that its own companies have more incentive to profit from their own technology or products.

It’s a transformation underway in how China thinks about itself. The old model of relying only on low-cost manufacturing isn’t sustainable, for a lot of reasons, and some in China are pushing hard for an industrial upgrade. IP is part of that.

But China still has a long way to go, judging by some other stories I heard recently at the conference where Tang spoke, the Pearl River Delta Forum on Innovation and Intellectual Property. It was sponsored by the U.S. Chamber of Commerce and the Guangdong Intellectual Property Office.

Consider this from American software giant Microsoft. It projects that China will become the world’s largest market for personal computers in 2011, two years earlier than previously estimated.

Sounds like a business bonanza, until you learn that China ranks 49th in the world in spending on software for each new computer.

That’s partly because China, as a developing country, doesn’t have as much money to spend on expensive software. But it’s also because software counterfeiting remains widespread.

India, which has less than half the per capita income of China but has stronger IP laws, ranks higher than China, placing 33rd in software spending.

Clearly product piracy shrinks the China market for software. Of course that hurts Microsoft’s profits, which is why they speak out and push China for tougher laws.

But the weak laws also make it harder for Chinese firms to develop their own products, to do their own innovation.

Microsoft has the advantage of developing its products in markets like the United States, where it can better protect the investment needed for that initial innovation.

China’s huge domestic market — soon to be the world’s largest PC market — should offer Chinese firms a similar advantage, but too often it doesn’t, and weak IP laws are part of the reason.

Another example: David Hon, a Chinese-American businessman whose company makes high performance, folding bicycles in Shenzhen, told the conference that he’s moving research and development out of China because he can’t protect his business from employees who leave and take IP with them, violating what Hon said are non-compete contracts.

“The non-compete clause is almost impossible to enforce,” said Hon, who is CEO for Los Angeles-based Dahon Inc., which has factories in mainland China, Taiwan, Macau and the Czech Republic. “People can take reams of paper and CDs and thousands of drawings out of the company” without any effective way to stop it.

Counterfeiting is strong in part because it means jobs, and those industries can have powerful connections in some Chinese cities.

A Chinese IPR lawyer I met at the conference told me that when he travels to court cases in Shantou, a medium-sized city in Guangdong with a dicey reputation for pirated products, he asks the police to escort him to court hearings because investigators in other IP cases have been attacked and beaten.

On the other side, there is a lot of innovation going on in China, and as some speakers at the conference said, IP laws are getting better. I’ve heard many people say that.

Ultimately, I’m not sure it matters very much what foreign companies say. Changes will come if it’s in China’s own interest to have stronger laws, if the jobs and economic benefits of innovation outweigh the jobs and benefits of product piracy.

Here’s one way I think that could happen: Regions in China (or anywhere in the world, for that matter) that can combine solid IP protection with lower-cost manufacturing could have real advantages in the global competition for investment and people.

Toloken is Plastics News Asia bureau chief, based in Guangzhou.