Could you please elaborate on
China’s track record of protecting
intellectual property rights?
China is definitely not a safe haven
for intellectual property. Piracy and
counterfeiting are widespread.
Contract manufacturers routinely
produce additional batches of
branded goods and sell them cheaply
in the underground economy. There
is an entire industry churning out
illegally copied movies, music and
software. Pirates routinely record
new releases of blockbusters in
foreign cinemas and make them
instantaneously available in the
Chinese market. Sometimes, you can
even see part of the audience in the
lower part of the movie frame –
courtesy of the pirate cameraman!
Chinese websites offer virtually all
copyrighted intellectual resources
you can imagine. It is also quite telling
that department stores in China do
not allow customers to take pictures
inside their premises. The
management fears that copycats will
imitate the store format. During
special occasions, when foreign
dignities flock to China, the
authorities crack down on vendors of
pirated goods. But as soon as the
event is over, the sellers are back on
the street and policemen pass by
without taking any action – apart
from possibly inspecting the offering
with a view of purchasing it!
Despite all the understandable anger
about such flagrant violations and
glaring disrespect for the rights of
others, it is useful to take one step
back and look at the big picture. The
Western approach of protecting
intellectual property, such as
patenting, is only one of many
possible ways of governing the
creation and diffusion of ideas. It is
empathetically not the Holy Grail for
building a creative economy. In a
nutshell, the West tries to stimulate
innovation by granting the inventor a temporary monopoly on the
exploitation of his ideas. Patents, for
instance, have proved to provide
people with powerful incentives to
develop new ideas. But, alas, they
limit the diffusion of innovation.
Monopoly prices lead to a lower level
of demand than would be the case in
perfectly competitive markets. This
can give rise to highly undesirable
outcomes. For example, many people
are dying in poor countries because
they cannot afford the premium
priced drugs that would cure them.
In case of software companies, some
may profit from increasing returns.
For example, the more people are
using an operating system, the more
applications will be developed for it,
which in turn attracts more users.
Such reinforcing loops make it ever
more difficult for competitors to catch
up. The monopolist might be
tempted to rest on his laurels, which
slows down progress.
Patents even can be disadvantageous
for the holder. First, he must disclose
the details of his invention to the
authorities. To keep their valuable
formulas secret, some companies
decide not to patent them. Instead,
they put in place secure internal
processes for transmitting the
knowledge fromone generation to the
next. Besides, the patent holder
needs significant resources to enforce
his rights everywhere in the world. In
practice, this is often impossible. In
view of these difficulties, many
companies regard patents primarily
as signals of innovative prowess,
destined to charm investors, rather
than as useful tools for protecting
ideas.
Besides, every cloud has a silver
lining. Paradoxically, in China, the
victims of piracy may actually profit
in the long run. For example, the
operating system Microsoft Windows
became the de facto standard in China, because many people used
pirated versions. Without
widespread illegal copying, the
software might not have gained such
supremacy there, since it would have
been too expensive for ordinary
citizens. Likewise, fashion labels
became famous owing to
counterfeiting, among other things.
Companies would have needed to
spend vast amounts of money on
advertising to gain such a large mind
share in China. If there will be
stronger legal safeguards in the future,
these firms are likely to capitalize on
past violations of their intellectual
property rights.
In conclusion, it is high time to
reconsider what is the best way to
stimulate and diffuse innovation in
different circumstances. The current
distribution of value between
inventors, commercializing entities,
customers and other stakeholders is
arbitrary. It is not aGod-given lawthat
IPR owners should earn economic
rents. One alternative approach
would be to reward inventors with a
one-off payment, after which the
innovative goods and services can
become available in the market at
perfectly competitive prices.
You mentioned that piracy is quite
prevalent in China. What can
companies do about it?
First, it is important to determine
the root causes of piracy in China.
According to my research, such
violations are not only due to cultural
factors, but, more importantly, to the
prevailing incentives for both
consumers and producers.
Whenever the circumstances favor
piracy, people are likely to succumb
to the temptation, no matter where
they are located. Many Westerners
eagerly downloaded music for free
from file sharing services such as
Napster. A gadget with features
comparable to Apple’s IPhone became available about one month
after the launch of the original.
According to industry insiders, the
electronic manufacturing services
(EMS) company that build the IPhone
leaked its technical specifications to
as many producers as possible,
hoping that in the end nobody could
be singled out for
piracy.
Let us examine the incentives at work
in China. It is very difficult to
convince customers through rational
argument that they should pay a
significant economic rent to a quasimonopolist
for software instead of
buying counterfeits without legal
risks. Likewise, many contract
manufacturers do not see any reason
why they should refrain from
producing for the blackmarket to gain extra revenues without incurring the
costs of developing intellectual
property.
Most people only change their
behavior when it leads to undesirable
consequences. Companies that want
to protect their intellectual property
have to spoil the piracy bargain. First,
they should lobby for better legal
safeguards. It should be noted that
crying out in China will not help
multinational companies very much.
It is more effective to convince their
home governments to exert pressure
on China to punish both the creators
and users of illegally copied
products. In the past, without facing
the risk of retaliation, it was rational
for the Chinese government to turn a
blind eye on piracy and
counterfeiting. The economy
benefited from the inexpensive diffusion of innovation. Besides,
since China did not generate much
intellectual property, it did not need
to fear violations of its rights.
Moreover, foreign companies should
join hands to improve the legal
environment instead of clandestinely
celebrating attacks on their peers.
Firms also can hire private detectives
to trace down pirates and pass the
information on to prosecutors.
