For years, a red-shaded map of China’s intellectual property regime would show the strongest IP protection in the major cities – indicated by deep, 100 percent red, and the weakest — barely 10 percent red — in the outlying provinces and some coastal regions. Nevertheless, firms operating in such an uneven, almost idiosyncratic legal environment, can pursue a patenting strategy that will provide a strong measure of protection. This author describes four such strategies.
The effective deployment and management of intellectual property strategies provide the freedom of operation in R&D and mitigate the risks of imitation and expropriation in those emerging markets where legal and regulatory uncertainty is high. Combined with firms’ other business strategies, effective patenting strategies facilitate the accumulation of technological knowledge across geographic boundaries and movement up the value chain. Cumulative technological knowledge and innovation encapsulated by patents are strategic assets that provide options for long-term exploration and expansion into new markets. Therefore, it is important for firms operating in China to gain insight into the strategic management and deployment of intellectual property rights – specifically patenting strategies – in this increasingly competitive and global innovation landscape.
Despite China’s rapid scientific and technological development, rising GDP and household income, the country’s intellectual property right (IPR) protection environment remains less than adequate.[i] However, there is a growing awareness and call for stronger intellectual property protection, due mainly to foreign firms’ pressure on the Chinese government and a push by Chinese high-technology firms such as Lenovo, Huawei and Haier, especially as they move up the value chain.
At the same time, the Chinese government is explicitly targeting the enhancement of an indigenous innovative capacity in science and technology (S&T) to further drive economic progress, move up the value chain and reduce dependence on foreign technologies. Some of the policy measures taken by the government include: (i) favorable tax incentives to encourage R&D spending at the enterprise level; (ii) establishment of special funds to support the assimilation of imported technologies, and the continuous innovation and development of major technologies and equipment; and (iii) the strengthening of intellectual property rights system and legal environment for innovations. This relentless push is mandated in its policy directive: “China’s medium- and long-term national plan for science and technology development 2006-2020,” issued by the State Council of China in 2006.
Against this backdrop, and in an effort to amass a greater patent portfolio, both domestic and foreign firms have dramatically increased their patent applications in China with the State Intellectual Property Office of China (SIPO). Many such patents eventually granted to these Chinese firms, particularly in the semiconductor, computing and information technology sectors, are filed for strategic and defensive purposes. These patents serve to: (i) provide cross-bargaining chips when negotiating with other competitors that may enter the intellectual property space of particular firms in the future; (ii) mitigate the potential expropriation risk of the particular firm’s intellectual property assets by other competitors or new entrants; and (iii) establish particular firms’ IPR territories or fend off litigations by other domestic and foreign firms entering the same technology space down the road. For example, some Chinese and Taiwanese computer and integrated circuit manufacturers such as Elan Microelectronics and Taiwan Semiconductor Manufacturing Company (TSMC), have been aggressively patenting their core technologies in China to create strong patent portfolios. These patents serve as an effective defence against, for example, patent-infringement lawsuits brought by large U.S. MNCs such as Agilent Technology, and as key bargaining chips – to facilitate cross-licensing of technologies or other royalty payments – when negotiating with U.S. firms entering the Chinese market down the road.
On the other hand, in the emerging life science and biotechnology sector – one of the Chinese governments’s priority technology areas – the number of patents (per technological product) is much less, the substantive (or potential economic) value of each patent is higher. The patents held by firms in this space are particularly valuable for investment and product-development purposes and to attract early-stage funding.
In addition to the differences across technological sectors, the quality of the de facto IPR system and enforcement varies across different regions in China. While the general IPR institutional environment in China is often considered as weak and inadequate, the level of local protection and enforcement of patents across the Chinese provinces and municipalities actually varies (based on patent infringement dispute, enforcement and resolution statistics from official SIPO annual reports). Specifically, the IPR protection, enforcement and legal systems are more robust and comprehensive in the more developed, coastal provinces such as Guangdong, Jiangsu, and Shandong, and in the major cities such as Beijing, Shanghai and Tianjin. The intellectual property courts in these cities are also more effective and responsive in resolving IPR disputes and in protecting foreign and domestic firms’ intellectual property assets. On the other hand, the enforcement regime insome of the less advanced, inland provinces such as Guizhou, Qinghai, and Shaanxi, is less comprehensive and more influenced by local administrative units, which could further complicate IPR enforcement. The variation in the IPR system and the level of enforcement across the different regions is partly due to the availability (or constraint) of human and financial resources, as well as the differences in the norms and practices of the local IPR administration.
Domestic and foreign multinational firms, particularly those which have been operating and conducting R&D in China over an extended period of time, should understand the importance of managing and deploying sound intellectual property strategies. While prior studies have shed light on the importance and implications of patenting strategies as a critical component of firms’ innovation strategies, most of these studies have focused on the developed economies such as the U.S. and Europe, which differ markedly from the developing economy of China, where intellectual property institutional and regulatory environments are constantly evolving. To date, we still lack a strategic framework for understanding the optimal patenting and innovation strategies that firms in China pursue or should pursue. I propose such a framework in this article.
Four strategies for patenting in China
Companies in China must consider that there are differences in technological product offerings and IPR institutional qualities across geographic regions in the country. Along these two important dimensions, firms focusing on technological innovations and performing R&D functions in China could adopt one of the following patenting strategies: incremental patenting, effectual patenting, augmented patenting, or foundational patenting.
1. Incremental patenting
When the technology is complex (i.e., in the semiconductor, information, communications and computing sectors) and the de facto IPR protection and enforcement environment in the region is relatively weak, firms could engage in incremental patenting. An incremental patenting strategy is suitable for innovations which represent additive improvements (or are “derivatives” of prior innovations). For example, modest enhancement in the speed or capacity of a portable hard disk drive is an ideal candidate for incremental patents. These technological innovations require relatively less R&D investment and can be situated in technological product segments which evolve rapidly. While both invention and utility-model patents can be sought to protect such incremental technologies, utility-model patents – especially for new technical solution relating to the shape, structure — or their combination — of a product should be deployed as the dominant form of patenting. Compared to invention patents, the less-known utility-model patents can provide a more affordable route for innovations which are physical products. These patents can be granted faster because they receive only preliminary examination, not substantial examination. Hence, they are particularly popular with domestic Chinese innovators and firms which are more (financial or otherwise) resource constrained and place a premium on speed-to-market. However, the drawback is that such patents carry a ten-year term from date of filing rather than the twenty-year term for invention patents.
Utility-model patents have real teeth in China. For example, in a famous court case, the Chinese company, the Chint Group, which specializes in electrical, instruments, power transmission and distribution products, was paid approximately U.S. $45 million in damages for alleged infringement of its utility-model patent protecting a miniature circuit breaker. Payment was made by the French-headquartered Schneider Electric company.
Oftentimes, firms focusing on an incremental patenting strategy can use a large number of utility-model patents, in conjunction with some “improvement-” invention patents to protect technologies or products which have a more strategic value than substantive value (i.e., potential economic value), and to signal their favourable position in the intellectual property space to competitors.
2. Effectual patenting
When the technology resides in the complex technology sectors, and the de facto IPR protection and enforcement environment in the region is relatively high, firms could engage in an “effectual” patenting strategy. Here, a greater proportion of invention patents (compared to those used in the incremental patenting strategy), in combination with some utility-model patents, could be deployed to provide effectual IPR protection and litigation against infringement. This strategy is particularly suitable for firms that develop technological products with higher strategic value (and with some substantive value) or those innovations requiring more sophisticated and longer R&D, as well as more substantial investments. In the Chinese regions where IPR protection and enforcement are more robust, firms could (and probably should) invest in long-term research to develop major technological innovations with higher commercialization and market potential. Here, the incentives for obtaining invention patents covering more “basic” or key technologies are higher, as the high costs of obtaining such patents are justified by more effective protection of their major technological innovations and spread over a longer period of time (i.e., twenty years) in intellectual property protection.
3. Augmented patenting
On the other hand, when the technology is discrete (i.e., in the chemical, biotechnology, pharmaceutical and life sciences sectors, where each invention such as a drug molecule is protected by fewer patents) but the de facto IPR protection and enforcement environment in the region is relatively low, firms could consider an “augmented” patenting strategy. As utility-model patents may be obtained only for physical products, methods or chemical compounds may not receive utility model protection since they do not have a shape or structure. Invention patents become particularly important for securing the property rights of innovations in the discrete technology sector. Here, firms should focus on the application (and awarding) of invention patents, combined with fewer utility model patents whenever applicable. The invention patents will augment or strengthen the frequent use of utility-model patents to cover products with higher substantive economic value in regions with weak IPR protection. The longer period of protection (of twenty years) is also a major consideration for biopharmaceutical firms, as some drug candidates take several years just to pass through phases one to three of the clinical trial stages for safety and efficacy considerations before marketing and sale can commence.
4. Foundational patenting
When the technology is discrete and the de facto IPR protection and enforcement environment in the region is high, firms could engage in a “foundational” patenting strategy. Here, firms should predominantly seek foundational invention patents that make a larger number of legal claims that cover the fundamental or core scientific and technological innovations critical to the long-term positioning of the firm. These technological innovations and breakthroughs are the fruits of tedious R&D efforts over a long period of time. They may include advances such as important biopharmaceutical and chemical compounds and molecules in the life sciences industry. Most of these molecules and compounds (especially those pertaining to important human disease indications) have a high substantive value and some of them would eventually become blockbuster drugs or form the foundational innovations for subsequent technological developments in the firm.[ii] Accordingly, firms should place a high priority on getting these technologies the strongest and longest possible protection. This is because their downstream commercial potential and demand can be vast, which can help to easily offset the higher cost of R&D and for securing these foundational patents.
Figure 1 below summarizes the two-by-two matrix of potential patenting strategies that firms can deploy in the emerging market of China. While the focus of this article is on patenting strategies under different levels of technological complexity and degree of IPR institutional protection across different regions, other internal factors (outside the scope of this article) such as organizational context and firm strategic intent and alignment, should also be taken into account when developing patenting strategies. The key message is clear – finding the right balance in securing (“improvement” or “basic”) invention and utility model patents forms the cornerstone of effective patenting and innovation strategies in China. The nature of technology sectors within which innovations of different strategic and substantive value reside, as well as the importance of regional IPR environment under which these innovations are developed, should be carefully considered in strategy formulation by domestic and foreign technology firms with interest in China.
The effective deployment and management of intellectual property strategies provide the freedom of operation in R&D and mitigate the risks of imitation and expropriation in those emerging markets where legal and regulatory uncertainty is high. Combined with firms’ other business strategies, effective patenting strategies facilitate the accumulation of technological knowledge across geographic boundaries and movement up the value chain. Cumulative technological knowledge and innovation encapsulated by patents are strategic assets that provide options for long-term exploration and expansion into new markets. Therefore, it is important for firms operating in China to gain insight into the strategic management and deployment of intellectual property rights – specifically patenting strategies – in this increasingly competitive and global innovation landscape.
[i] Minyuan Zhao, Conducting R&D in Countries with Weak Intellectual Property Rights Protection, Management Science, 2006, 52(8), 1185-1199
[ii] Kenneth G. Huang and Fiona E. Murray, Does Patent Strategy Shape the Long-run Supply of Public Knowledge? Evidence from Human Genetics, Academy of Management Journal, 2009, 52(6), 1193-1221