By Abdul Hameed Iqbal

After a long period of rapid economic growth and significant structural change, the Chinese economy increasingly makes use of advanced production technologies, as demand shifts toward higher-quality goods and services.

Mainly as Chinese enterprises place growing emphasis on developing their brand-name recognition by building reputation for quality of their goods, and with consistent product innovation for diversification.

In such an environment, the provision and enforcement of intellectual property rights (IPRs) take on considerable importance as fundamental form for promoting further economic growth and development. However, failing to support an adequate IPR regime could act as a drag on future growth.

Chinese enterprises also are aware that their access to frontier foreign technologies depends to a growing extent on IPRs. Thus, significant economic interests are emerging in favor of a stronger system.

In response both to this change and to considerable external pressure, China is undertaking a dramatic reform of its intellectual property laws. Since 1990, China has revised and updated its laws covering copyrights, trademarks, patents and trade secrets (“anti-unfair competition” laws) and has adopted protection for integrated circuits.

China has also enacted protective systems for plant varieties and pharmaceutical marketing rights. China is also establishing protection for geographical indications, which specify particular locations at which a product such as wine is made.

China has joined nearly all major international IPR conventions, including the Paris convention in 1984, the Madrid Protocol and the Washington Treaty in 1989, the Berne Convention and the Universal Copyright Convention in1992, the Geneva Phonograms Convention in 1993, and the Patent Cooperation of patents and trademark and the deposit of microorganisms.

China is also revising its law regarding IPR in order to conform to the requirements of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in the World Trade Organization (WTO). When the reforms are completed, China will have a modern legislative structure for IPRs on a par with many industrial economies.

set up special IPR courts in eight cities. Furthermore, in 1997, a Software title ‘Verification Office’ was established as a joint Sino-U.S. Initiative to examine the legitimacy of software purchases by Chinese factories and offices.

However, significant problems remain in the administration and enforcement area. Victims of infringement complain loudly about weak monetary and civil penalties, frustrating delays in administrative and court procedures, and local protectionism that make enforcement actions difficult to sustain in regional jurisdictions.

The evolving system of IPRs presents both opportunities and challenges for the Chinese economy. The opportunities stem from establishing an improved environment for technical innovation, product development, and inward technology and investment flows.

However, economists now recognize that there are stimulative effects of IPR protection on economic development and growth. We discuss several general channels of influence, all of which are related to one another.

STIMULATION OF INVENTION AND INNOVATION Invention refers to the creation of new knowledge, and innovation (or commercialization) refers to the development of marketable products from that knowledge.

An inadequate set of IPRs can stifle both these processes even at low levels of economic development. For example, most inventions are specific to local market circumstances; it is not necessary to invent frontier-level international technologies to benefit from local patent or utility model protection.

In the vast majority of cases, invention is a mundane process involving minor adaptations of existing technologies, with cumulatively powerful effects on growth. It is as important for firms to adapt new management and organizational systems and new product and quality control mechanism, as it is to find new technologies.

Those investments can be quite costly and will be undertaken only when the risk of other loss to unfair competition and trademark infringement is minimized. In an environment of weak protection, it is difficult also to foster attitudes of creativity, invention, and risk taking. Rather, the economy stagnates in a mode favoring copying and counterfeiting.

Trademarks also provide strong incentives for the entry of new firms and the development of new products with quality guarantees, even in poor nations. The introduction of new firms and products based on local foods, cultural advantages, and indigenous crafts responds elastically to trademark protection, and such firms find it easier to move up the value added chain as they grow larger and their trademark are better recognized.

through interregional production and marketing. As such enterprises grow, they establish specialized departments for marketing, strategies, research and development (R &D), which then become sources of important technical changes. Some may even become significant exporters as they stabilize their quality levels.

Seen in this light, an absence of effective trademark protection acts as a significant drag on industrial development prospects, it deters the entry of new firms, which would not undertake the significant costs of investing in quality maintenance and reputation without such protection. It diminishes the prospects for exploiting large-scale economies, particularly to the extent that protection varies across regional markets. It prevents the entry into export markets of reputed products. Instead, weak protection favours the production of low-quality goods in small production runs and imitation activates. Although this strategy may yield short-term profits, it becomes a significant restriction on growth over time. Moreover, weak protection forces legitimate firms to produce relatively low-quality products to be competitive with infringers.

Similar comments apply to copyrights. Sectors that are dependent on copyrights, such as publishing, entertainment, software, fashion and interior designers will not find much entry by local firms in the absence of copyrights, even if there is considerable activity in copyright markets. Creation of new films, music, and software is expensive and little worth the investment by local entrepreneurs if their products will be copied. Accordingly, lower-quality copies may be widely and cheaply available, but society’s long-run cultural and economic development is stunted.

There is evidence that strengthened IPRs stimulate innovation in developing countries. For example, in a survey of 377 Brazilian firms by the Brazilian Ministry of Industrial Development and Commerce and the American Chamber of Commerce, it was found that 80 percent of those firms would invest more in internal R & D and labor training if better legal protection were available (Sherwood 1990).

A balanced treatment of IPRs must recognize that they also bear a potential for imposing economic damages. There may even be net losses in the short run after a stronger regime is introduced, because the dynamic benefits sketched above may take longer to appear. This aspect of costs and benefits imparts a bias against serious and effective reform in poor countries, because it is difficult to mobilize future beneficiaries into a current political force. It also explains why external pressure is a catalyst for change. We discuss these potential costs of IPRs here.

Administrative Cost The costs of administering and enforcing a modern IPR system are high. For china, they easily will amount to annual sums in excess of US$ 10 million. They include the costs of training examiners, judges, lawyers, and enforcement officers, along with the costs of running various offices. Many of these costs may be covered by administrative fees charged to apply for and register patents and trademarks, whereas other may be limited by adherence to international registration agencies such as the Patent Cooperation Treaty (as China does).

The largest cost is really the opportunity cost of devoting scare scientific, engineering, and legal personnel to the complex of IPR administration, a cost that points out the need for maintaining high rates of human capital formation.

Like China, other countries also have the right to safeguard their interests in competition and social objectives through effective regulation of IPRs as those rights become stronger.

Thus, the governments should think through the appropriate form of pricing regulations in its drug procurement programs, as medicines receive stronger protection. More fundamentally, an opportunity arises for all developing countries to consider what form of competition regime they will implement as they shift further toward the market.

(This article has been produced from the paper that was written by Sean M. Dougherty, which Dougherty was doing field work in China for the MIT Science and Technology Institute.)