by Paul Shetler and Marcelo Silva

Less well-known than their Silicon Valley counterparts, China’s digital disruptors are no less ambitious. To help businesses better understand the size of the opportunity, Which-50 is publishing the China Digital Playbook, an ongoing series authored by digital transformation experts Marcelo Silva and Paul Shetler.

As America’s digital companies look to a growing, youthful, Chinese market, at least one doubt will hang in their minds. China’s treatment of American intellectual property — especially the high-value intellectual property brought in by international tech firms — has proven far from honest.

The Commission on the Theft of American Intellectual Property reported this year that they consider China to be the largest contributor to the up to $600 billion intellectual property theft costs the US economy every year.

For American tech firms, imitation isn’t the highest form of flattery: it’s one of the largest costs of doing business in China.

There are indications that that story is changing. In the long-term, pressure from American tech firms, and the American government, in addition to China’s increasing desire to be a home to worldwide digital leaders, might compel China to more strictly regulate intellectual property rights. But whether this move happens soon enough to assuage American company’s concerns about coming into China is another question entirely.

China’s treatment of intellectual property — past and present

When China first acceded to the World Intellectual Property Organization (WIPO) in 1980 after accepting the WIPO Convention, it would have been reasonable for Western firms to expect their intellectual property would be protected when they came into China.

That promise has turned out to be essentially illusory. As CNN has reported:

As China has raced to become a hi-tech manufacturing powerhouse, it stands accused by the U.S. government, industry groups and think tanks of trying to take a short cut by spying, hacking or forcing companies to hand over their intellectual property.

Some of this theft is the counterfeit of physical consumer goods, like China’s growing counterfeight fashion industry; other parts involve Chinese firms actively hacking into American companies’ networks for the purpose of industrial espionage.

In terms of digital business specifically, the Chinese government has effectively demanded that firms weaken their intellectual property protection as a condition of entry into Chinese markets, by:

The bargain behind China’s IP restrictions

One motivation for requiring large digital players to weaken their IP protections is obvious: Chinese companies benefit from the massive transfer of bleeding-edge technology to them, without needing to invest heavily in the research and development required to produce it.

The second motivation is more subtle. In the bargaining between the Chinese government and Western firms over the terms of their entry to China, the only playing card Western companies have on their side of the table is the threat that, if the conditions pushed upon them excessively weaken their intellectual property protections, the firms will pull out of China, or else not enter in the first place.

This is a threat the Chinese government has been more than willing to bear.

In fact, in some cases, the Chinese government has been more happy to lock out Western tech companies, where that’s necessary for the growth of their own nascent industries.

Think of the Chinese state’s role in excluding Facebook, Twitter and Google from the country — in part for reasons of censorship, but in part because it allowed domestic Chinese competitors Renren, Weibo and Baidu to take their place.

The tables are turning

That was a bargain that served Chinese tech companies well as the economy began to digitise.

But it’s recently been put under pressure. In the public sphere, the Trump administration looks set to order a probe into China’s treatment of intellectual property, which could result in WTO dispute resolution, or even trade sanctions.

More privately, there are signs that the Chinese government is acknowledging that the world’s largest tech companies could help fuel China’s digital growth.

Just over the last few weeks, we’ve seen signs of the Chinese government weakening its positions, including a Chinese Vice Premier publicly pledging that Western tech companies won’t be asked to turn over their trade secrets, in return for entry into China.

As Forbes has observed, the Chinese government is eager to pivot from ‘imitator to innovator’.

If these promises don’t come to fruition, we can expect discontent over the Chinese government’s treatment of IP rights to continue to cause fissures in its relationship with the United States.

But the growing market of digitally-enabled, middle-class Chinese buyers might prove too tempting for Western tech companies to ignore — whether they believe that their IP will be protected, or not.

About the authors

Paul Shetler is Expert in Residence at Stone & Chalk and an adviser to governments and organisations around the world who are transforming their business. He is a speaker on digital transformation and organisational change. Paul was the CEO of the Digital Transformation Office and the Chief Digital Officer of the Australian Government’s Digital Transformation Agency.

With over 20 years of online experience, Marcelo Silva is considered to be one of the most experienced and knowledgeable digital practitioners within the Australian digital space and has recently relocated to Singapore. He is the founder of Digital Transformation Scores, invests in innovative companies and consults to emerging digital businesses across the Asia Pacific.

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