Bloomberg BusinessWeek: China Could Game the U.S. in Intellectual Property
China is dramatically increasing its patent filings to "build an economy that relies on innovation rather than imitation," The New York Times reported recently. China's goal is to increase its yearly invention-patent filings from 300,000 to one million by 2015. (In comparison, around half a million patent applications are filed in the U.S. per year.) To make this happen, the newspaper reported, China is offering cash bonuses, better housing, and tax breaks.
The Times is right about China's intellectual-property ambitions. China achieved the same feat in academic research, where it is now second only to the U.S. in the number of academic papers published—and is positioned to overtake the U.S. by 2020. But The Times' conclusion is flawed: Patents will neither make China more innovative nor will they benefit the global economy. A vast number of China's academic papers are plagiarized or irrelevant; its government-sponsored patents will be similarly tainted. In contrast to the tiny proportion of academic papers that serve to expand the world's knowledge base, however, Chinese patents will serve as land mines for foreign businesses. They will allow China to demand license fees from companies that do business there or to shut them out entirely.
Many in the tech industry, myself included, consider most U.S. patents commercially frivolous and irrelevant. But as The Economist has reported, this problem is far worse in China, where patent examiners are paid more if they approve more patents. They routinely approve even the most dubious filings. And Chinese academics, companies, and individuals have strong incentives to patent worthless ideas: With more patent filings, professors gain tenure, workers and students gain residence permits to live in a desirable cities, corporate income tax is reduced from 25% to 15%, and companies win lucrative government contracts. The reward doesn't come from innovation, but from the act of filing a patent application.
Patents Hobble the Technology Sector
Patents are necessary to protect the designs of industrial equipment, pharmaceutical formulations, biotechnology products and methods, biomedical devices, consumer products (toothpaste, shampoo, contact lenses, and so forth), advanced materials and composites, and widgets (lighting fixtures and elements, batteries, toys, tools, and the like). But in the fast-paced technology industry, patents are like nuclear weapons, not tools to facilitate innovation. That's because in the tech world, things change rapidly. Speed and technological obsolescence are the only protections that matter.
You see the destructive nature of patents in the lawsuits that plague Silicon Valley. There are battles among the behemoths—Microsoft (MSFT), Hewlett-Packard (HPQ), IBM (IBM), Oracle (ORCL) and SAP (SAP)—and between behemoths, startups, patent trolls, and large corporations. Innovation comes from collaboration, as when technologies are built upon new platforms such as the iPhone (AAPL), Android (GOOG), and Facebook. In contrast, patents are used to stop other companies from innovating. Startup entrepreneurs live in constant fear that behemoths or patent trolls will bankrupt them with frivolous lawsuits.
Companies thus pay small percentages of their profits or barter the rights to their patent portfolios to fend off an aggressor. This problem is far worse in China, where all patent filings are in Chinese and the interpretation as to whether a technology infringes is left to local judges who may not understand much about technology. The judges will likely side with locals rather than with foreigners. Because of language problems and the sheer volume of patent filings, there is no easy way for foreign companies entering the Chinese market to determine whether patents that cover their technologies already exist.
Just 25 Years of Patent Law in China
China has a big advantage, too: Most global patents that have been filed over the past decades are not valid in China. Patent laws did not exist there until 1985. For any U.S. or global patent to be valid in China, it must have been filed there. Moreover, companies in China are free to develop products and technologies that could not be developed in the U.S. or Europe without obtaining patent licenses.
Take the iPhone, for example. It has more than 1,000 patents, yet Apple has filed for about only 300 patents in China and has been issued 19. Any company in China can legally use intellectual property that is not patented in China. New products they create cannot be exported to territories covered by Apple's patents—which leaves most of the world, other than the U.S. and Europe. Companies operating in China can legally create new products and processes by mixing and matching technologies from different sources and innovating in new ways.
U.S. policy makers have long touted the benefits of the U.S. patent system to the world. They have demanded that other countries respect our intellectual-property laws and play by our rules. China has been one of the worst offenders, stealing and replicating American technologies on a grand scale. Now China may do with intellectual property what it did with capitalism: adapt our system and beat us at our own game.