Intellectual Property Rights in China: The Benefits of Piracy

Maximiliano Durazo (University of Southern California, USA)

Due to piracy in China, international companies lose approximately $60 billion per year.(1) It is believed that counterfeit sales in China exceed $16 billion and that 75% of the world's counterfeits originate in China.(2) When intellectual property rights are present and enforced, companies are more willing to foster innovation by investing in research and development. If intellectual property rights were not present, these same companies would spend substantially less, keep their innovations a secret, or not produce the innovative product at all.(3)

One criticism of intellectual property rights, particularly with respect to patents, is that they have the potential to grant monopolistic power to a company. Stifled competition, price increases, product shortages, and lower quality goods are just a few of the inefficiencies that may occur.(3) China displays some examples where the aforementioned trade-offs between intellectual property rights and lack thereof (widespread piracy) may not exist, particularly with the information technology industry.

A prime example of piracy in China is related to the Microsoft operating system, Windows. Most personal computers in China are sold without an operating system. Instead of purchasing Windows, individuals are able to obtain a counterfeit version for less than $1.(4) China has made some effort to curb counterfeiting. For example, government offices in Beijing are now required to use licensed software.(5) However, pursuing charges against a multitude of persons using pirated software is not realistic. Rather than allow the lack of intellectual property rights to discourage creative investment, Microsoft has invested over $1 billion in research and development in China.(5) In this case, piracy limited the monopolistic power of Microsoft but did not deter Microsoft development. In addition, piracy promoted a network effect by spreading Microsoft products throughout a country with over 1 billion people. Since Microsoft controls a large portion of the market share, companies that want to become globally competitive must purchase Microsoft's officially licensed products. As a result, Microsoft is finding partners in China such as Lenovo, which controls 36% of the mainland China computer market share.(5) Lenovo recognized that in order to be a "respected global player," they must pre-install Windows operating systems on their computers. Therefore, they have promised to procure roughly $1.3 billion in software from Microsoft in the coming year.(5)

Intel recently initiated and then settled a copyright infringement suit against Shenzhen Donjin Communication Technology Co. in China. Though the details of the settlement are confidential, one result was a brokered licensing deal between Shenzhen Donjin Communication Technology Co. and Intel.(6) Lack of intellectual property rights in China did not discourage Intel investment. Over the past twenty years, Intel has invested $1.3 billion in China part of which has gone towards research and development.(7) Intel employs over 6000 people in China and will hire more after building their $2.5 billion semiconductor plant near Dalian, China.(7)

In 2002, there were several reports indicating that Adobe Systems would be abandoning their interests in China due to the abundance of piracy.(8) Contrary to those reports, Adobe Systems is now "experimenting" in China by reducing prices up to 80% in an effort to reduce piracy.(4) Instead of avoiding investment in a country where their products are being extensively pirated, Adobe continues to pursue its interests in China's growing economy.

Software companies understand and expect that persons who purchase illegal copies will eventually buy legitimate copies.(9) If a piece of software, hardware, or other product is going to be illegally copied, a company prefers that it is one of their products rather than a competitor's product.(9) Eventually, as in the case of Microsoft, companies are able to benefit from the large market share that has been established within a country like China. Carlos A. Osorio, a research associate from Harvard University, concludes that illegal copying of software encourages rapid development in an early stage software market.(10) Piracy benefits the software company and implies that some companies pursue copyright enforcement differently in various countries.(10) It is estimated that China will soon surpass the United States as the world's largest Internet market.(11) Internet technology companies that seek to benefit from this growth will pursue business in China despite the piracy problem.

As China's government grapples with the issue of how to address the overwhelming amount of counterfeits, there are some suggestions on how to manage the issue. For example, Adobe Systems is reducing their prices and thus making their products more competitive against the counterfeits. Other industries within China, such as the book publishing industry, have successfully applied and benefited from this tactic of price reduction.(4) Keisuk Kamimura, Senior Research Fellow and Associate Professor from the International University of Japan, recommends another option. He suggests adopting the "Creative Commons Public License (CCL)" as a complement of current copyright laws.(12) CCL provides social benefits without cost. The idea behind CCL is that creative works stem from previous creative works.(12) Monetary gain is not the central issue with CCL; rather, CCL is intended to encourage the free sharing of creative works by all who would like to participate, thus facilitating more creative works.

Lack of intellectual property rights is an issue that needs to be rectified in China and around the world. Businesses and entrepreneurs should be able to create, market, and sell their products without the threat of piracy. Whereas protection of intellectual property rights encourages innovation and creativity, it can sometimes lead to monopolistic power. In the case of China, the trade-offs between intellectual property rights and lack thereof are not always present. Despite the lack of property rights in China, private companies continue to benefit. Likewise, research and development in China continue to grow.(13) As China's economy expands, further intellectual property rights protection is inevitable. Meanwhile, the current benefits from the lack of intellectual property rights in China cannot be discounted.

References:
 1. "U.S., EU to Fight Counterfeits From China, Russia (Update1)." Bloomberg.com. Jun. 19, 2006.
 2. U.S. Commercial Service. "Sporting Goods Market in China." U.S. Department of Commerce. Sept. 20, 2005.
 3. "Patent." Wikipedia.org. Jul. 3, 2007.
 4. Heim, Kristi. "Businesses scramble to outfox the fakes." Seattle Times. Feb. 13, 2006.
 5. "Big Windows Cleanup In Asia." BusinessWeek. Jun. 4, 2007.
 6. "Intel Settles Legal Dispute in China." Lancaster Newspapers. May 14, 2007.
 7. "New Intel Facility Planned in China." The CalTrade Report. Apr. 6, 2007.
 8. Becker, David. "Adobe may ditch China sales." CNET Networks Inc. Jan. 14, 2002.
 9. McDougall, Paul. "If You're Going To Steal Software, Steal From Us: Microsoft Exec." Information Week. Mar. 12, 2007.
 10. Osorio, Carlos A. "A Contribution to the Understanding of Illegal Copying of Software: Empirical and analytical evidence against conventional wisdom." Harvard University. Jun. 2002.
 11. "Looking Around the Whole Online World." Feb. 13, 2007. eMarketer Inc.
 12. Kamimura, Keisuke. "Turning Point for Copyright System: Merit of 'Creative Commons'." GLOCOM. Oct. 2, 2006.
 13. Tonelson, Alan. "China Captures Increasing Share of Global R&D." AmericanEconomicAlert.org. Feb. 11, 2007.