The Role of Copying in Innovation

Should the US complain about forced intellectual property transfers in China?

President Trump and his trade negotiators ­argue that China has unfairly forced U.S. companies to share their most valuable technology with Chinese companies. They also allege that the Chinese government employs espionage to steal valuable technology from U.S. companies. Some people explain this as cultural, arguing that copying is central to Chinese culture.

Against a broader background, a more balanced view emerges. In short, when a country’s economic interests favor copying, IP rights are not well protected, but when a country’s economic interests favor protection of IP rights, the government will move to support its domestic economic interests. The broader background covers both geography and history. Consider, for example, the history of protection of intellectual property rights (IPR) in the United States.

[To read more of Steven C. Sereboff’s thought leadership click here]

When the U.S. declared its independence from Great Britain, it had a primarily agrarian economy. The Founding Fathers, all leading citizens, made their money as lawyers, speculators in land or stock, trading, or farming. None was an industrialist. Benjamin Franklin, famous as an inventor, made his fortune in the newspaper business and publishing. His most famous publication, Poor Richard’s Almanack, was a highly popular resource for farmers and households. In that kind of environment, there was little need for IPR protection. Though some people, like Franklin and Thomas Jefferson, innovated, most new technology came from outside the country. That is, the U.S. was a net importer of innovation.

The U.S. eventually became an industrial economy, and today, an information economy. After its War of Independence, the U.S. continued to be a net importer of innovation. During the 1800s, the country transitioned from an agrarian economy to an industrial economy.

In parallel with this slow shift from farming to manufacturing, the U.S. slowly strengthened its IP laws. Competition among domestic manufacturers drove innovation. Over time, the innovative domestic manufacturers sought and received government help in repelling competitors that copied their innovations. By the time of World War I, the U.S. economy was solidly industrial, and its IP laws reflected this. The focus remained on protection of domestic companies from other domestic companies, but globalization eventually changed this, too. After World War II, the U.S. adopted significant enhancements to its patent laws, reflecting the need to further protect domestic companies from other domestic companies.

Eventually, U.S. industry suffered severely from foreign competition, especially from Japanese electronics and auto manufacturers. The U.S. government stepped in to help. At the time, many Americans believed that the Japanese were mere copyists, and that their Asian culture promoted copying. The U.S. government, led by President Ronald Reagan, reacted to the demands of domestic companies by enacting significant enhancements to the patent laws. These enhancements gave U.S. companies new weapons to fend off the foreign competitors.

The Reagan-era IP laws helped many U.S. companies, most notably Texas Instruments. These companies used the U.S. courts and ­Super 301 actions before the International Trade Commission to secure huge monetary transfers and injunctions against foreign ­competitors.

Over time, Japanese manufacturers felt the pressure of competition, especially domestic competition, and matured into incredible innovators who also demanded domestic IPR protection from their government. In more recent years, Japanese companies have suffered domestic market-share losses at the hands of companies from South Korea, Taiwan, and China. The Japanese government has reacted by studying and adopting some Reagan-era IP law reforms.

Other historical examples abound. Consider India and its protection of pharmaceutical innovation. The Indian pharmaceutical manufacturing industry dates to the 1970s. At that time, for young Indian drug companies, generic drugs were their easiest path to market. Copying allowed the Indian companies to grow strong. By 2018, India supplied almost half of all generic drugs in the U.S. In time, though, competition and market-size limits led the Indian pharma companies to move up the value chain to ­development of proprietary drugs. Inparallel with industry maturation from generic (i.e., copied) drugs to proprietary drugs, the Indian patent laws have been strengthened to protect the domestic pharma industry.

Contrast India’s story with Brazil’s. Brazil has never provided much protection for drug innovations. Prior to the 1990s, Brazil did not even allow patents on medications. With little domestic industry in pharmaceuticals in Brazil, there was no benefit to IPR protection. The Brazilian government did not care that foreign companies wanted patent protection. Today, Brazil is reportedly the eighth largest pharmaceutical market in terms of revenue. Despite the huge market size and international treaty obligations, drug innovations get little protection in Brazil. This simply reflects the small size of Brazil’s pharmaceutical manufacturing industry.

[For more on SoCal IP Lawgroup LLP’s approach to Intellectual Property click here]

Turning back to China, one can readily see how it falls neatly into these historical models. Like the U.S., the Chinese economy transformed from agrarian to industrial. In parallel with its breakneck pace of industrialization, Chinese IP laws have developed quickly—maybe quicker than anywhere else. Like elsewhere, the Chinese government has enhanced IPR protection because domestic companies have demanded it. At best, foreign companies are secondary beneficiaries. Thus, Chinese technology companies like Huawei want protection from copying by domestic rivals such as ZTE; they do not worry much about copying by Apple. This also disproves the view that China has a culture of copying that will not change. The culture of copying in the U.S. came to an end, as it did in Japan and elsewhere in Asia.

Domestic economic interests, not complaints by foreign governments, almost always drive changes in IP laws.

Domestic economic interests, not complaints by foreign governments, almost always drive changes in IP laws. Perhaps the Trump Administration will succeed where prior administrations have failed. This may mostly reflect the maturation of Chinese industry, and may also arise from President Trump’s asymmetric ­approach to deal making. Time will tell.