Jack Perkowski: Innovation and IPR in China

Our Chinese business expert, Mr China, Jack Perkowski has recently shared his insights on innovation and IPR in Forbes. Below is the extract of Part I of the trio articles:

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Innovation and the protection of intellectual property rights (IPR) go hand in hand, and are two topics that come up frequently in discussions about China. Tsinghua University is doing a study on the status of both in China and asked for my comments. Following are my answers to Tsinghua’s first set of questions. Part II will address the remainder.

Tsinghua: Are enterprises in China way behind in R&D capacity relative to the current stage of the country’s economic development? Is China way behind in brand building? Do you agree that the U.S. was more advanced during its early development in these areas?

Jack: Comparing the development of R&D capacity and brand building in China to the United States is very difficult because the two countries have developed in such different ways.

The U.S. economy has been an open economy since the country’s inception, so products and technologies have been developed gradually over many years in line with the overall growth and development of the U.S. and the global economy. For example, DuPont was founded in 1802; Procter & Gamble in 1837; Coca-Cola in 1892; and General Motors in 1908. Even McDonald’s, founded in 1940, is already a 70-year old company.

Moreover, McDonald’s did not open a restaurant outside the United States until 1967, when it opened a store in Canada. It takes time to build a truly global brand.

China, on the other hand, was racked by upheaval in the early part of the 20th century, and was closed to the world from 1949 to 1978, when the U.S., Japan and the European countries were making up for time lost during the war and building their economies in earnest. Brand building and technological development all but ceased in China during this 30-year period.

As a result, Chinese companies faced a high wall of technology that had been erected over many years in the developed economies when Deng Xiaoping opened up China in 1978. Before Chinese individuals and companies could begin to innovate, they had to first climb this wall of technology and absorb what had developed while China was closed. In other words, China had to first catch up with the rest of the world before Chinese companies and individuals could even think about inventing new technologies, or building global brands. After 30 years of economic reform and catching up, I would argue that China, as a country, is just now reaching the top of that wall.

The post-World War II period perhaps marked one of the greatest periods of brand building and technological development in the United States. During these years, the American economy transitioned from its focus on industrial production to support the war effort, to one led by consumption. As the Chinese economy now transitions to a consumption economy, I believe that brand building and the development of R&D capacity will accelerate in China, just as it did in the United States.

Tsinghua: Will China have corporations like Google or Apple that are highly creative?

Jack: There is no doubt that China economy will ultimately spawn companies like Google and Apple that are highly creative. Chinese people are smart, hard working and entrepreneurial, so there are no deficiencies in China’s human capital to suggest that such companies cannot be developed in the country.

While there are many structural inhibitors — the educational system, government control, the protection of intellectual property rights, capital — to the development of creative companies in China today, most, if not all, of these inhibitors will diminish over time. As they do, and as the consumption side of the Chinese economy grows in importance, a more fertile environment for the development of creative companies will be created.

Tsinghua: Will China be able to have corporations like GE or IBM that are dominant global innovators?

Jack: Any company that is a dominant global innovator today most likely has a large footprint in the United States for one simple reason—America is the single largest unified market in the world. As a result, it is nearly impossible to be a globally dominant player without having an important position in the U.S.

With a population over four times that of the United States, the Chinese economy will surpass the American economy in sheer size within the next 20 years. As it does, it will become nearly impossible for companies that are dominant global players today to remain so, unless they stake out an important position in China. That is why companies of all sizes, from all parts of the world, are intensifying their efforts to gain a larger share of the China market.

Likewise, the continued growth of the Chinese economy, and its ultimate ascendancy to the top of the global economic pyramid, will afford Chinese companies the opportunity to build a strong base in their home country that will position them to become globally dominant as well. Any company, Chinese or otherwise, that gains a large share of the China market for its products or technology, will have the scale necessary to enable it to become a globally dominant player.

In product after product, local companies in China are gaining market share at the expense of their international competitors. Local Chinese car producers now account for 34% of the China market, up from 23% in 2003. Chinese manufacturers of excavators have a 40% market share today, versus 9% in 2004. China’s wind turbine manufacturers now command 88% of the market, as compared to only 21% in 2004. And, many large, important industries like trucks, diesel engines and wheel loaders are dominated by local players.

With the continued growth of the China market, local companies will get bigger. They will also improve technologically and from a quality point of view, and the large supply of capital now available in China ensures that they will be well funded. It is only natural that many of these companies will become globally dominant.

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