Having spent over 20 years in China, I was recently asked the following questions by a student:

“IP protection is often not enforced by corporations wishing to do business in China, so as to maintain operations and market access. Should corporations pursue WTO actions when there are violations of IP rights in emerging markets like China?

Does this lack of action encourage China to continue along this unscrupulous path?”

The IPR protection issue in China has been a recurring theme and debate in U.S. corporations and the media. When asked these thought-provoking questions, I did a little bit research and wanted to share my thoughts. Let me start with interpreting Charles Darwin’s theory “The Survival of the Fittest”. There are two ways to survive: either to adapt in the environment or to alter the environment. Undoubtedly, it takes years of patience and tremendous effort to change the environment. A firm, as well, should adapt in the environment first and then participate in the force of changing the environment in the foreign market. Beyond theoretical claims, I shall use two examples to illustrate my point.

First, Microsoft’s operating systems and software. After entering China in 1992, Microsoft spent over a decade and billions of dollars of revenue lost to learn the way of doing business in China. Facing the piracy problem, instead of fighting with the government as it does elsewhere, Microsoft learned to closely partner with the Chinese government. Why is that? In 2002, the income per capita of China was $1,135 (current value), up 212.67 percent from $363 (current value) in 1992, but still ranking 151 among all countries and regions (source: World Bank). While Chinese individual customers (including me) couldn’t afford Microsoft’s genuine services and products, they opted for cheap or free pirated copies, the most famous of which was the “Tomato Garden”. Besides technical difficulties, the large population and low average income attributed to the weak desire of the Chinese government to strengthen IP protection.

Microsoft’s patience and persistence were critical. It cultivated Chinese customers’ dependence on and habit of using its products and services, profited hugely from the industry and public sectors, and gradually persuaded the Chinese government to further protect its rights. In 2009, the founders of Tomato Garden were arrested and sentenced for massive piracy of the Windows XP system, finally after quite a few years. Since then, cheap pirated windows systems are no longer easy to be found along streets, nor can the Office software be downloaded for free any more. Now, with the increase of disposable income, Chinese households tend to purchase more genuine operating systems and software.

The second example is that of American movies and TV shows. As the dominant pop culture in the world, American movies and TV shows have millions of young viewers in China. Ten years ago, even three or four years ago, the Chinese audience could buy cheap pirated DVDs or download the latest Hollywood movies and TV shows from many open source websites for free. In recent years, those websites have been shut down one after another by the Chinese Ministry of Industrial and Information Technology (MIIT). Baidu, the largest Chinese search engine and web service company was also recently fined for providing video content that violates IP protection regulations. However, the piracy problems cannot yet be completely controlled. Just like playing the game of Angry Doogipang, the digital whack-a-mole game, new problems surface constantly.

A better solution is to provide better substitute service for the audience. Youku and Sohu, two major video content providing websites in China, together with a few other companies came up with this solution. They purchase movies and TV shows from U.S. studios and offer free/cheap pay per view streaming service for Chinese audience. They update ABC, Showtime and HBO TV series weekly with bilingual captions. The convenience of streaming service has attracted Chinese viewers who would have otherwise downloaded shows or bought pirated DVDs. The income generated from advertising and member subscription can well compensate the U.S. corporations. U.S. studios and media companies gained much more profit by cooperating with local companies in providing free/affordable services, rather than simply filling lawsuits.

These examples illustrate that China is on the path of fulfilling its WTO commitments including strengthening IP protection. Rome is not built in one day. Similarly, the problems cannot be solved instantly. Companies should insist on protecting their IP rights, but not with too strong positions, unless they want to be kicked out of the market. They should be patient in lobbying the government to take real actions and to wait till the market matures. In the meantime, they should try to protect their rightful profits through alternative means.  

Infringement of intellectual property rights is a global problem, not only in China, but also in many other developing economies. Various methods can be applied to protect a company’s IPR, including both formal and informal institutional arrangements. Corporations originated in advanced economies are accustomed to seek IPR protections through established legal systems. However, in countries where legal systems are less developed, or where informal institutional arrangements are as important as formal ones (for example, China and India), IPR owners should be flexible and creative in seeking solutions. Moreover, successful companies such as GE believe that staying cutting edge with state of the art innovations is the key to protect IPR. As the saying goes: “Always imitated, but never duplicated/surpassed”.

 Reference:

1. Cavusgil S, Knight G, Riesenberger J. International Business : The New Realities, Boston: Pearson Prentice Hall, c2014.P417-429.

2. David Kirkpatrick, Jul.17, 2007, CNN Money, “How Microsoft conquered China? Or is it the other way around? ”, last viewed on Jan.19, 2014.

http://money.cnn.com/magazines/fortune/fortune_archive/2007/07/23/100134488/

3. The World Bank, “Data–GDP per capita (current US$)”, last viewed on Jan.19, 2014.

http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?page=2

4. Patrick Brzeski, Jan.1, 2014, The Hollywood Reporter, “Chinese Search Giant Baidu Fined for Copyright Infringement”, viewed on Jan.19, 2014.

http://www.hollywoodreporter.com/news/chinese-search-giant-baidu-fined-668155

Jingting Liu, the author of this guest commentary, is a doctoral candidate at the J. Mack Robinson College of Business Center of International Business Education and Research in Atlanta. Before coming to Atlanta six months ago, she lived in Beijing and Chongqing,China.  She received her bachelor’s and master’s degree from Beijing Language and Culture University in International Politics and Economics. She had previous work experience in the Chinese entertainment industry as a talent manger and also taught Chinese language and culture at the Confucius Institute at Georgia State University. She may be reached by email at jingting.a.liu@gmail.com.