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Intellectual property (IP) protection is the No. 1 challenge for multinational corporations operating in China. According to the U.S. government, China accounted for nearly 80% of all IP thefts from U.S.-headquartered organizations in 2013,1 amounting to an estimated $300 billion in lost business. Among European manufacturers, the loss of IP in China reduced potential profits by 20%.2 Although multinational corporations can’t afford to stay away from China, in order to remain competitive they must develop mechanisms that enable them to shift some of their innovation capabilities to China safely, without losing critical know-how.3
The effects from IP leakage in China are ubiquitous. They are visible in counterfeited items including toys, luxury goods, automotive and aircraft parts, pharmaceuticals and other complex high-tech products.4 But IP violations go beyond products. They extend to pirated operational processes and the replication of entire business and service models. For many multinational corporations, IP leakage frequently becomes a barrier to Chinese sites becoming fully integrated partners in global innovation activities.
IP leakage often occurs through staff transfers or shared practices from foreign multinational corporations to local joint ventures or supply chain partners.5 For individual multinationals, this type of IP leakage is often a calculated risk worth taking in exchange for greater access to local markets through a partner’s channels or better quality parts from local suppliers. However, unintended IP leakage can affect a company’s reputation and profitability; in the worst case, it can create powerful local or even global competitors.6
Most of the executives we interviewed said that managing IP leakage is the most critical day-to-day activity when doing business in China. A senior executive from a Fortune 100 company commented:
When I moved to China from the U.S.A., I never imagined that I would have to include IP protection management in almost all of our business processes. I think about the issue actively every day.
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1. J. Parker, “Indigenous Innovation Remains Key Feature of New Development Policies,” The U.S. China Business Council, Nov. 12, 2013, www.uschina.org.
2. Ihrcke, J. Ihrcke and K. Becker, “Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations,” EU-China Trade and Investment Relations - Study 1 of 12: Machinery, www.development-solutions.eu, accessed January 15, 2014.
3. R. Ong, “Tackling Intellectual Property Infringement in China,” China Business Review 36, no. 2 (March-April 2009): 17-21.
4. D. Wagner, “International Perspectives on Counterfeit Trade,” MIT Sloan Management Review 49, no. 4 (summer 2008): 9-10.
5. H. Chesbrough, S. Ahern, M. Finn and S. Guerraz, “Business Models for Technology in the Developing World: The Role of Non-Governmental Organizations,” California Management Review 48, no. 3 (spring 2006): 48-61.
6. W. Shih and J-C Wang, “Will Our Partner Steal Our IP?” Harvard Business Review 91, no.1 (January-February 2013): 137-141.
7. Related research: A. Schotter and M.B. Teagarden, “Protecting Intellectual Property in China: A View from the Field,” in “Global Strategies for Emerging Asia,” eds. A.K. Gupta, T. Wakayama and U. Srinivasa Rangan (San Francisco: John Wiley & Sons, 2012): 235-264.
8. J. McGregor, “China’s Drive for ‘Indigenous Innovation’ — A Web of Industrial Policies,” July 27, 2010, www.uschamber.com.
9. M.M. Keupp, A. Beckenbauer and O. Gassmann, “How Managers Protect Intellectual Property Rights in China Using De Facto Strategies,” R&D Management 39 no. 2 (March 2009): 211-224.
10. I. Harvey, “Intellectual Property: China in the Global Economy - Myth and Reality,” briefing note, International IP Strategists Association (September 2011) 1: 1-8.
11. “Insights China: The China Context,” Sept. 22, 2012, www.solutions.mckinsey.com.
12. D. Somaya, D. Teece and S. Wakeman, “Innovation in Multi-Invention Contexts: Mapping Solutions to Technological and Intellectual Property Complexity” California Management Review 53, no. 4 (summer 2011): 47-79.
13. J. Palfrey, “Intellectual Property Strategy” (Cambridge, Massachusetts: MIT Press, 2011).
14. W. Jaeschke, Z. Lu and P. Crawford, “Comparison of Chinese and US Patent Reform Legislation: Which, If Either, Got It Right?” The John Marshall Review of Intellectual Property Law 11, no. 3 (special 2012) 567-601.
15. M.B. Teagarden and A. Schotter, “Favor Prevalence in Emerging Markets: A Multi-level Analysis,” Asia Pacific Journal of Management 30, no. 2 (June 2013): 447-460.
16. Keupp, Beckenbauer and Gassmann, “How Managers Protect Intellectual Property Rights.”
17. M. Reitzig, “How Executives Can Enhance IP Strategy and Performance,” MIT Sloan Management Review 49, no. 1 (fall 2007): 37-43.
18. C.B. Bhattacharya, S. Sen and D. Korschun, “Using Corporate Social Responsibility to Win the War for Talent,” MIT Sloan Management Review 49, no. 2 (winter 2008): 37-44.
i. M.M. Keupp, A. Beckenbauer and O. Gassmann, “Enforcing Intellectual Property Rights in Weak Appropriability Regimes,” Management International Review 50, no. 1 (February 2010): 109-130.