UNIVERSITY OF EASTERN FINLAND Faculty of Social Sciences and Business Studies Business School
IPR RELATED CHALLENGES IN TRADE FOR FINNISH COMPANIES IN CHINA
Master's Thesis, Innovation Management Riina Kenttämaa (250748)
April 2018
ABSTRACT
UNIVERSITY OF EASTERN FINLAND Faculty of Social Sciences and Business Studies Master’s Program in Innovation Management
KENTTÄMAA, RIINA: IPR as a trade barrier for Finnish companies in China Master’s Thesis: 82 pages
Supervisor: Professor Päivi Eriksson April 2018
Key concepts: Intellectual property rights, China, Finland, international business, trade barriers, culture in doing business
China has undergone a rapid development in the last 20 years. This has made foreign companies interested in investing into the Chinese market. The increase in foreign investment highlights the importance of intellectual property. Before the penetration of Western companies, intellectual property rights were practically non-existed in China.
This research focus on the differences in the Chinese market compared to the Finnish market. The aim of the study is to identify most commonly experienced challenges regarding especially intellectual property. These challenges are studied from the experience of Finnish companies operating in China. The study explores, how Finnish companies perceive compliance with intellectual property rights in China and how they value intellectual property rights in their own business. In addition, cultural differences, as well as obeying and enforcing laws, are key issues in this master’s thesis.
The research has been conducted as an empirical case study based on the experience of Finnish companies operating in China. Research data was collected by interviewing nine companies.
Interviews were theme interviews, and qualitative content analysis was used in the analysis.
Research results shows that Finnish companies still have learning to do considering intellectual property rights in China. Knowledge and understanding are not only deficient among Chinese people, but also among Finnish companies. Commonly experienced challenges Finnish companies are facing in China has been largely the same for a long time, which makes it more relevant to study further why these challenges continue to be barriers to trade.
TIIVISTELMÄ
ITÄ-SUOMEN YLIOPISTO
Yhteiskuntatieteiden ja kauppatieteiden tiedekunta Kauppatieteiden laitos
Innovaatiojohtaminen
KENTTÄMAA, RIINA: Immateriaalioikeudet kaupankäynnin esteenä suomalaisille yrityksille Kiinassa
Pro gradu -tutkielma, 82 sivua
Tutkielman ohjaaja: Professori Päivi Eriksson Huhtikuu 2018
Avainsanat: immateriaalioikeudet, Kiina, Suomi, kansainvälinen kauppa, kaupanesteet, kulttuurierot liiketoiminnassa
Kiina on viimeisen 20 vuoden aikana kehittynyt markkinana valtavasti. Tämän ansioista myös ulkomaalaiset yritykset ovat laajalti kiinnostuneita sijoittamaan Kiinaan. Ulkomaisen sijoituksen myötä immateriaalioikeuksien asema on korostunut entisestään. Immateriaalioikeudet olivat käytännössä katsoen olemattomat Kiinassa ennen länsimaisten yritysten etabloitumista markkinoille.
Tämä tutkimus keskittyy Suomen ja Kiinan markkinoiden eroihin. Tarkoituksena on tunnistaa yleisesti koetut haasteet varsinkin immateriaalioikeuksiin liittyen. Haasteita tutkitaan Kiinassa toimivien suomalaisten yritysten kokemuksiin peilaten. Tutkimuksessa selvitettiin muun muassa, miten suomalaiset yritykset kokevat immateriaalioikeuksien noudattamisen Kiinassa, sekä miten he arvottavat immateriaalioikeudet omassa yrityksessään. Tämän lisäksi kulttuuriset erot, sekä lakien noudattaminen ovat keskeisiä kysymyksiä tässä tutkielmassa.
Tutkimus on toteutettu empiirisenä tapaustutkimuksena, joka perustuu Kiinassa toimivien suomalaisyritysten kokemuksiin. Tutkimusdata kerättiin haastattelemalla yhdeksää suomalaista yritystä, jotka toimivat Kiinassa. Haastattelut olivat teemahaastatteluja, ja analyysissä käytettiin laadullista sisällönanalyysiä.
Tutkimustulokset osoittavat, että suomalaisilla yrityksillä on vielä parannettavaa immateriaalioikeuksien suhteen. Tietämys sekä ymmärrys eivät ole ainoastaan puutteellista kiinalaisilla, vaan myös suomalaisilla yrityksillä. Yleisimmät haasteet, joita suomalaiset yritykset kohtaavat Kiinassa ovat olleet suurimmassa määrin samoja jo pidemmän aikaa, minkä takia on relevanttia tutkia lisää, miksi nämä haasteet ovat edelleen kaupankäynnin esteenä.
TABLE OF CONTENTS
1. INTRODUCTION... 6
1.1.TOPIC OF THE RESEARCH ... 6
1.2.RESEARCH QUESTIONS AND PURPOSE OF THE STUDY ... 7
1.3.STRUCTURE OF THE THESIS ... 9
2. THEORETICAL BACKGROUND... 11
2.1.CULTURE AND DOING BUSINESS IN CHINA ... 11
2.2.THE CONCEPT OF INTELLECTUAL PROPERTY: GENESIS, PURPOSE AND DIFFERENCES ... 15
2.3.MAJOR CHALLENGES REGARDING INTELLECTUAL PROPERTY IN CHINA ... 23
2.3.1. Low awareness and inadequate enforcement ... 23
2.3.2. Value of the IPR ... 26
2.3.3. Copying and infringements ... 29
2.3.4. Cessation of infringements ... 30
2.4.THEORETICAL FRAMEWORK OF THE STUDY ... 32
3.1.METHODOLOGICAL APPROACH ... 35
3.2.DATA COLLECTION ... 35
3.3.ANALYSIS OF THE DATA ... 39
4. EMPIRICAL RESULTS ... 42
4.1.CHALLENGES BEFORE ENTERING THE MARKET... 42
4.2.CULTURE RELATED CHALLENGES ... 44
4.3.CHALLENGES REGARDING LEGISLATION ... 46
4.4.VALUE OF THE IPR ... 49
4.5.BEST PRACTISES ... 52
4.6.SUMMARY OF THE IPP IN CHINA ... 60
5. DISCUSSION AND CONCLUSIONS ... 63
5.1.SUMMARY OF THE STUDY ... 63
5.2.KEY FINDINGS AND THE THEORETICAL IMPLICATION OF THE FINDINGS ... 65
5.3.EVALUATION AND THE LIMITATIONS OF THE RESEARCH AND POTENTIAL FUTURE RESEARCH ... 73
6. REFERENCES ... 76
APPENDIX ... 81
APPREVIATIONS
AIC Administration for Industry and Commerce
CTMO China Trademark Office
EPC European Patent Convention
GATT General Agreement on Tariffs and Trade
IP Intellectual property
IPR Intellectual property rights
PCT Patent Cooperation Treaty
PRC People’s Republic of China
PRH Finnish Patent and Registration Office (Patentti- ja rekisterihallitus)
SIPO State Intellectual Property Organization
SME Small and medium size enterprise
TRIPS Agreement of Trade Related Aspects of Intellectual Property Rights
WIPO World Intellectual Property Organization
WTO World Trade Organization
1. INTRODUCTION
1.1. Topic of the research
During the last 30 years, China’s economic growth has been faster than any other country’s in history. This has aroused business interest among other earlier developed countries. (Haour & von Zedtwitz, 2016.) Main requirements for an institutional environment that ensure implementation of individual’s rights are independent and impartial legal system and mature market conditions.
However, in emerging markets and transitioning economies such as China, other institutional factors can play a significant role. (Cao, 2014.) Business in China for foreign companies has been vastly studied over the years, yet the aspect of intellectual property is still a timely subject. There have been huge improvements in intellectual property (hereafter IP) law and enforcement, but foreign companies still struggle with their rights in China and therefore more research is valuable.
According to Finpro, there are approximately 400 Finnish companies or their representative offices, joint ventures or subsidiaries operating in China (Finpro, 2010). Many of them are struggling with intellectual property, with one of the most notable example being shoe designer Minna Parikka.
Chinese registered Parikka’s trademark before Parikka entered the market. (Ranta, 2015.) Parikka struggled for a long time to buy back the rights for her own brand. Alternative solution could have been to act in China under a different brand. However, the latter option might be tough because people have to become acquainted with the new brand and the existing brand image would be difficult to link to new brand.
Kettunen, Lintunen, Lu & Kosonen (2008) contribute a study of the strategies of Finnish companies in China, in which they list many challenges for companies. The challenges are echoed by what other researchers have found, including weak law enforcement, inadequate knowledge, highly centralized government, corruption, and constantly changing and ambiguous regulations.
(Kettunen et al. 2008.) Because many studies discover these same challenges, it is interesting to study more why these problems still exist and how Finnish companies could avoid the obstacles.
The means for Finnish companies to enter the Chinese market are changing consequentially to the development of Chinese economy. Low manufacture costs is not a sufficient reason to start a business in China anymore. As China is transferring into a technology-oriented country, it creates many new possibilities for Finnish companies. This ongoing development also means new challenges including intellectual property related matters. Therefore, it is interesting to study the new issues raised by the transition phase. China being the biggest economy in the world, it is interesting to everybody in the business field, but mostly this research is supposed to give ideas to Finnish companies operating in China or interested in entering the market.
1.2. Research questions and purpose of the study
The purpose of this study is to understand Chinese IP environment and its effects on Finnish companies that are operating or selling in China. The IP system itself is well established, but the number of infringements and counterfeiting is vast. The goal of this study is to find answers how to avoid getting intellectual property rights (hereafter IPR) violated and how to create a successful intellectual property protection (hereafter IPP) strategy.
This study seeks to answer the research question: how do Finnish companies experience the IPR related trade barriers in China? Following sub questions will help to research the issue comprehensively:
1. Why do Finnish companies experience China as challenging and risky?
2. How do Finnish companies understand the failures in IPP?
3. How do Finnish companies formulate the best practises of IPP in China?
The study focuses on Finnish companies that operate in China or consider entering the market.
There is some research done from a similar viewpoint, but problems still exist and therefore more research is valuable. In addition, this research is based on concrete examples and experiences, which may give ideas that are more practical. I start this research by familiarizing the differences between Chinese and Western markets. To identify the best IP practises for Finnish companies in China, these two markets are compared. Culture is a significant part of this as well, because Chinese
culture have a clear significance for business means. Interest of this study is also in general viewpoints and beliefs about China as a business market, because China often remains very distinct.
The less people know about something, the more power they give to presumptions. Stereotypical thinking is often prevailing when considering China and Chinese people.
IP identification occurred in China decades after in Western countries, including Finland. Timely difference itself creates discrepancy, but is there different actions what would work in China compared to Finland? Studying whether companies have some special actions considering intellectual property protection in China is interesting. For example, could companies benefit from using different protection ways in China than it is in Finland? Do companies use IPR only as a defensive way or also for value adding purposes? In addition, it is interesting to know what kind of challenges companies have encountered, and what kind of actions they have chosen to overcome them.
My personal interest in China is the main source of motivation to conduct the study. China and its huge potential is fascinating. The country creates new possibilities to foreign companies and individuals, but not all understand how to get the most out of these opportunities. The topic of this research was formed with Finnish specialists working in China or somehow related to business in China. I contacted, for example, people working in Finnish Business Councils in China, the Finland – China Trade Association, as well as company providing IP and legal services. With the help of these professionals, we created this highly interesting and timely topic.
China’s westernization creates new possibilities and challenges for Chinese as well as for foreign companies. There are plenty of companies interested in the Chinese market, or companies already combatting there with their rights, to whom this study might be useful. In addition, Chinese beliefs and ways of doing business differ from ours, hence I address the meaning of culture in the study.
As a result of this empirical research, there will be IP related barriers identified in China, as well as some points how to tackle them. Therefore, the study is presumed to have utilization value for Finnish companies selling or manufacturing in China.
The topic is judicial, but the legal viewpoint is not familiar to me. Therefore, the legal aspect itself will only be addressed briefly, on the substantial part in understanding the topic. Focus is more in cultural differences, how they affect on doing business and the IPR related challenges in a business perspective. In addition, the research is only concerning mainland China, excluding Hong Kong, Macau and Taiwan.
1.3. Structure of the thesis
This thesis is divided into 5 chapters. In the first chapter, there is a brief introduction to the Chinese market and the IPR environment. Here is explained why this research is relevant and what contribution it is assumed to have to prior research. The topic is viewed in more detail in the following chapters.
Chapter 2 discusses the literature of the topic. First, I present the Chinese culture and the different characteristics of it. Culture plays a big role in understanding how Chinese do business, hence it is reviewed from the related standpoint to intellectual property and doing business. Secondly, I introduce the different types of IPP methods. After that IP is reviewed generally and then more specifically in China. In this chapter, I also recite the differences between Finnish and Chinese IPR environment.
In chapter 3, I explain the methodology used in this research, how I collected and analysed the data.
The characteristics of the companies interviewed for the study are presented in this chapter. The research process is discussed in order to the reader to understand, how I came up with the key findings in the study.
Chapter 4 presents the empirical results of this study. In this chapter, I introduce the interviewed professionals’ ideas and compare the findings from the analysis to the prior research. In addition, the differences in companies’ experiences are discussed and analysed. Based on the analysis, I try to identify some of the major challenges and useful practises for Finnish companies operating in China.
The fifth and last chapter of this research reviews the study. In this chapter, I present the key findings and the theoretical implication of the findings. This chapter recap the study as well as evaluates the study and the utility of results. The final chapter also provides ideas for future studies.
China is constantly changing and therefore more aspects that are interesting regarding intellectual property will surely come up in the future.
2. THEORETICAL BACKGROUND
2.1. Culture and doing business in China
Chinese culture is very different from the Western culture. Their history goes a long back compared to Finland’s short history as well as many other Western countries. As the culture is strongly related on how to do business, some features need to be discussed. Chinese Confucian values still affects largely on how Chinese people think and act. Traditional Confucian values have a big influence on these attitudes, and they are deeply rooted in the Chinese mind-set. (Chan &
Zakkour, 2014.)
Roughly, the whole period from 1950 to 1980 state-owned enterprises managed all manufacturing, trading, and distribution. The goods were moved between producers and the people by these state- owned enterprises. The term consumer did not really exist, because there was no retail, surplus income or freedom to choose. Nothing was legally sold or bought outside China. (Chan & Zakkour, 2014.) Considering the situation in the West, the liberation occurred relatively late, which in turn postponed the economic development. Moreover, the development has been so rapid, that things such as intellectual property has not got enough attention. Therefore, one could say that such fast development is not beneficial, because many things will be mismanaged.
State-owned enterprises were being privatized on a massive scale in the 90’s (Chan & Zakkour, 2014). This and the fact that foreign investment was largely welcomed to China enabled the oversea expansion. The Foreign Trade Law was adopted in 1994, which also eased the operation of foreign companies in China (Lam, 2009). However, this happened relatively late considering there were already many foreign companies operating in the market.
The globalisation of world economy in the 21st century has been remarkable, cross-national business is confronting challenges especially in cultural differences. Eight biggest barriers in doing business in the world market are cultural differences, price competition, information, language, delivery, law, foreign currency, and time differences. Neglecting cultural differences is a cause to a great number of the failures faced by cross-national companies. The globalisation of the world
economy has created vast opportunities for global collaboration among different countries, but simultaneously, it has also created new issues and challenges relating to the effective management of partnerships with different cultures. (Fan & Zizang, 2004.)
The understanding of the market is essential, especially in China, where the culture and government plays key role in everything. When intending to expand into China, it is mandatory to understand the economic, legal and political environment in China as well as the history. The administrative power is held by the state council and various local governments. Legislative power by the National People’s Congress and local People’s Congresses, and the judicial power is exercised by the Supreme People’s court and the other People’s Courts at various levels. China has only single dominant party, and this separation of powers is questioned (Wang, 2000.) In addition, the reason one must know Chinese history is that the Chinese define themselves by their history (Chan &
Zakkour, 2014). Market research requires plenty of time and resources. The market entry does not happen overnight.
Chinese cultural concepts such as rule of law, guanxi and losing face deviates from Western cultures, and therefore, attention must be paid on these. Rule of law refers to a system in which law can impose restrictions on the state and individual members of the ruling elite. During the period of Mao Zedong, given the trust on Party policies rather than law, China lacked even the basic laws.
(Peerenboom, 2002.) National culture influence Chinese managers more than the rule of law. In this context, they come under the influence of cultural, social and ideological factors in IP decision- making. Foreign managers can obtain significant advantages if they understand the influences of the social, cultural, political and legal perspectives on the formation of IPR. (Berrel & Wrathall, 2006.)
Western societies have long viewed law as an independent and autonomous entity protecting from concentrated power. The idea is that law provides a democratic conception of justice through the application of formal logical rules. In contrast, law in China has never been an expression of popular will. Traditional Chinese legal thought has been shaped by a very different understanding of the relationship between state and society. As a part of WTO agreement, China needed to develop an effective legal system. However, whether China should adopt the Western concept of
rule of law was not part of the agreement but is the subject of continuing debate. In Western societies, the prevalent idea is that law must transcend economics, politics and culture, and be equal for all. The origins of Chinese legal system were derived from Soviet civil law system and influenced by western civil law system. The influence of the western notion of rule of law is still absent. China’s legal system can be described as a relationship between the constitutional hegemony of the communist party and the authority of the law. (Blazey & Chan, 2008.)
When the PRC introduced its own legal system in 1949, the lack of legal theory meant that legal principles were borrowed from the Soviet Union. This is an interesting matter, because Finnish companies view the Russian market even more challenging than the Chinese market. This is partly because of the corruption and protectionism existing in Russia to a greater extent than in China and the notion of democracy is also questionable in Russia. Starting from 1978, China sought to integrate with the globalized market economy while trying to adapt its legal development in a suitable way for its own special needs. (Lam, 2009.)
Chinese culture is strongly based on relationships (guanxi). Guanxi is a measure of the extent and strength of personal relationships. Person with good guanxi should be able to deal quickly and effectively with government bureaucracies and achieve results that would normally be challenging to achieve. (Schramm & Taube, 2003.) This could be considered more as lobbying than corruption, and it is not only harmful. Guanxi is strongly based on reputation as well as favour and favour in return thinking (Nojonen, 2016). Guanxi has both positive and negative aspects, with the latter dominating most of the discussions. On one hand, critics affiliate it to promoting country’s extensive corruption, and as a hindrance for China becoming a modern society based on the rule of law. On the other hand, guanxi relationships can reduce uncertainty, lower transaction costs, provide resources, and increase a sense of connectedness. (Gold & Wank, 2002.)
Especially for transitional economics, guanxi is crucial because of the underdeveloped market institutions and non-transparency of political institutions. This, to some extent, explains why guanxi can often lead to corrupted behaviour in Chinese society. Guanxi is established on trust and it can provide a greater feeling of security than the law or an agreement. Hence, in comparison to
Chinese guanxi culture, the legal mechanism is weaker than the western IPR legal enforcement.
(Cao, 2014.) According to Chan and Zakkour (2014), guanxi and networks are the most important source of money, security, and status in China (Chan & Zakkour, 2014).
Guanxi is one of the core elements in Chinese Confucianism as well. Confucian ethics is humanistic, obligation-based and collective in nature. Confucianism ranks collective values over the individual values. Confucianism necessitates hierarchism, authoritarianism and paternalism, which provided moral legitimacy and enduring stability to the imperial power, society and family. Moreover, it prescribed a vertical structure of human relationships and top-down system of social interactions that were based on seniority and authority (Ip, 2009.) Western culture, including Finnish, is egalitarian, individualistic and contractual based, basically completely opposite to the conservative, collective and relationship based Chinese culture (Chen & Partington, 2004). Finnish companies are efficient and wants to proceed quickly in business, thus it may be difficult to understand the importance of establishing good relationships over a banquet for instance.
According to Qu (2012), the Chinese culture excluded the idea of intellectual property, because Confucianism was in contradiction to the notion of IP to a large extent. First, in Confucianism, social order is achieved by actions, which are following the order of the nature. Natural and social order continuously react to one another. Second, the notion of equality and individuality is a premise for intellectual property, which is opposed to Confucianism. Third, according to the collective mind-set, it was believed that intellectual knowledge was the common heritage of all Chinese people and could not be owned by individuals. (Qu, 2012.)
Long-term orientation is another essential characteristic of Chinese culture. In a long-term oriented society such as China, only relative truth is said to exists. Chinese people do not strictly adhere to rules but take the context and specific situation into account when interpreting a rule. Whether something is true or false, or right or wrong should be assessed considering the circumstances.
According to Nojonen (2016), there is no rational division between sense and emotions that is known in the Western countries. Therefore, everything promoting desired situation is allowed without further consideration. Chinese focus on acting in the moment seeking immediate advantage,
but in a big picture the time horizon is long. (Nojonen, 2016.) As the social norm of guanxi maintains long-term relationships, mutual commitment, loyalty, and obligation, business relations in China rely on trust, and a contract is seen only as a general guideline for co-operation rather than a legally binding document as it is in the West (Cao, 2014). This brings challenges to Finnish companies, as being used to sign a contract and shake hands as a sign of a competent mutual agreement.
The concept of “face” in China is also relatively unfamiliar to Western people. It is essential to respect the face of your Chinese colleagues and avoid doing anything that will cause them to lose their face. For example, negative feedback should always be given in private only to the party involved. In addition, one must protect their own face in order to receive the respect from Chinese people. Enhancing the face of the Chinese colleagues by flattering their ego and making them look good in front of others is also seen important and advantageous. For Finnish people, this might be uncomfortable because we are not used to giving ample compliments just to fawn on. Moreover, Chinese tend to avoid confrontation because the fear of losing face. (Easterby-Smith, 1995.)
Although, these traditional Confucian values are still existing in China, the break down has started.
First reason to that is the ongoing economy transformation from centrally planned to a market economy. The second is China’s assimilation into the global economy, hence foreign companies have a bigger impact on the workforce. (Delios, Wu & Day, 2014.)
2.2. The concept of intellectual property: genesis, purpose and differences
The IP system in China was established a little over two decades ago, and as a young system it is not as secure than the IP systems of developed countries such as the UK and USA, which are the pioneers in IP sector (Yang, Sonmez & Bosworth, 2004). Companies would not transfer technology to China without proper IPP. Thus, developed countries have actively advocated the need for secure IPP, especially in developing countries, such as China. (Yang, 2003.) The risk of foreign firms exposing their intellectual property to potential imitation, increases through foreign direct investment or international trade. Simultaneously while China is developing, the need to introduce
newer technology in the Chinese market also grows. Therefore, the tendency of foreign firms to patent in China is expected to grow over time. (Hu, 2010.)
Intellectual property rights are a category of intangible rights protecting commercially valuable products of the human intelligent. These can be in the industrial, scientific, literary or artistic field.
IPR includes patents, utility models, trademarks, industrial design rights, copyrights as well as trade secrets and the right against unfair competition. (Qu, 2012.) Intellectual property is a group of business assets along with legal ones. As intangible business assets, there is no significant value by themselves, they become valuable in the context of business. In order to be able to manage IP effectively as business assets, it is necessary to understand what patents, trademarks, and registered design can do for the business. Intellectual property strategy is a set of actions to support company’s long-term business objectives (Sullivan & Harrison, 2011.)
Patent is a fixed-term exclusive right granted by the state to an inventor to secure the invention.
Patent is an efficient way to get a monopoly for example to technological innovation. In order to get patent registered, the terms of novelty, proper subject matter, inventiveness and practical applicability must be fulfilled. (Wen-yu Young, 2011.) According to Kalanje (2006), the number of patents company owns is typically used as one of the key factors for determining innovation intensity of the company (Kalanje, 2006).
There are three different types of patent in China; invention patent, design patent and utility model patent. Invention patent is the strongest form of patent, it goes through detailed examination, and takes 3-5 years to be granted. The protection term for invention patent is 20 year, as it is for patent in Finland as well (WIPO, 2004.) Unlike in Finland, design in China is protected under the scope of patents. Compared to the Finnish system, design has no protection without registration. In order to get the registration, design must be sufficiently distinguishable from other designs. Protection term for design patent in China is ten years, which is significantly shorter than the 25-year design protection in Finland (WIPO, 2004.)
The utility model is a lighter version of patent, and it is faster way to obtain the protection compared to invention patent and the term of protection is 10 years, hence it is suitable for protecting products
with short lifecycles. Utility model patent protects only products with new shape or structural features, not for example any methods of production or processes. (WIPO, 2004.) Almost 3/4 of the patents in China are utility and design patents, even they are considered as weak "petty" patents (Haour and von Zedtwitz, 2016.) Utility model in Finland is not categorized as a patent, and as a protection method it is not very popular, approximately 500 applications per year. Protection term for utility model is 4 years, which can be renewed once for 4 years and once for 2 years. In total, the period is 10 years. (PRH, 2015.)
Trademark individualizes the goods and distinguishes them from the goods of competitors. In principle, the trademark can be any word, letter, numeral combination, sign, colour etc. (WIPO, 2004.) Different types of trademarks are product, service, collective and certification mark.
Trademark registration requirements consists that it needs to be distinctive, but not too generic, descriptive or functional, and not similar to other marks that are already registered. Trademark protection term is ten years, and it may be renewed for indefinitely. (Wen-yu Young, 2011.)
Copyright is granted for the creation without separate registration. It protects for example literary and artistic works as well as computer programs. (WIPO, 2004.) Since China is a member of the WTO and Berne Convention, there are no formalities required for other WTO members to own a Chinese copyright. However, China considers copyright ownership and copyright protection distinct. Foreign copyright owner’s work must be first published in China, the author must be a resident of a jurisdiction that are in international treaty with China or foreign work must first be published in a member country of a treaty which China is also a member to qualify for copyright ownership. (Wen-yu Young, 2011.) Although copyright is an automatic right in China, it is highly recommended to register rights to settle disputes effectively when they occur.
The Anti-Unfair Competition Law protects individuals and corporations by prohibiting a scope of actions considered fraudulent. The Anti-Unfair Competition Law also includes an article providing protection to trade secrets. (Wen-yu Young, 2011.) A trade secret is any non-public information with potential commercial value, which is secured by confidentiality measures. Trade secrets can’t be protected as trade secrets when they become publicly known. Trade secrets encompass industrial
and commercial secrets including sales methods, distributions methods, advertising strategies, list of suppliers and clients and manufacturing processes. (WIPO, 2004.)
IPR includes legislative guidance, administrative control and judicial enforcement. Legislative guidance refers to the Chinese legislative system in guiding the patenting activities and protection.
Administrative control means the administrative organizations and their functions in patent applications, examinations, approval and protection. Judicial enforcement refers to the court system and its functions relating to patent disputes. (Yang, 2003.) All these organs have different responsibilities regarding IPR, which makes the system complex and remits are obscure especially for foreign companies.
The protection of technology has direct impacts on the technological transfer, trade flows, FDI and R&D. Because these activities often take place accompanied by technology flows from industrialized countries to developing countries, where the protection is generally weak, the level of IPP there becomes the primary concern of IP holder. China is attractive objective of market expansion for oversea IP holders, because its huge market and the lack of high technologies.
However, it is very difficult regarding how to choose an optimal IPP system since the determinants and the situations of countries and industries are different and opaque to understand. Companies must realize that IP cannot be seen as an unambiguous concept and something that can be only measured by laws. (Liu, 2005.)
It is highly important to be aware of how IP can be valuable to your business. Even though SMEs often have limited resources, IPR registration is not the place where to be cheap. IPR is not only for protecting innovations from competitors, IP assets can also be an important source of cash-flow through licensing deals or IP sales, as well as a significant factor when attracting investors (China IPR SME Helpdesk, 2016.)
Intellectual Property licensing is frequently used as exploitation of IP. In licensing, a company buys the right to use another company's intellectual property rights such as a trademark or patent.
The agreement is restricted to a license in a given area and the necessary rules are agreed, such as the coverage of the agreement. (WIPO, 2015.)
The need for international protection of intellectual property started already at the end of 19th century (WIPO, 2004). Compared to Western countries, China established IPR legislation relatively late, after the Open-Door Policy, which started in 1978 (Yang, 2003). Before the Open- Door Policy, China restricted foreign investment to export oriented operations. Foreign investors were required to establish joint venture partnerships with Chinese firms (Blazey & Chan, 2008).
Since China joined World Intellectual Property Organization (WIPO) 1980, the Chinese government has made consistent efforts to improve its intellectual property environment for example by passing IP laws, burning pirated products, and shutting down underground factories (Cao, 2014).
According to Ministry of Foreign Affairs, 15% of the population were living below the poverty line in 2010. The income of government’s poverty line is 2,300 yuan (~300€) per year, and approximately 43.35 million people were still below it by the end of 2016. The government’s goal is to get rid of serious poverty by 2020 (Ministry of Foreign Affairs, 2010.) China’s rapid development and economic growth has created new possibilities for people to succeed. The desire to use these new opportunities is huge and Chinese are eager to have everything now. This might draw back the attention from matters such as intellectual property, when everything is wanted immediately. Moreover, the burgeoning development is the main reason for these new opportunities as well as for the new challenges.
Generally, more developed countries can protect IP more adequately, when less developed counties prioritise their economic development over IP as a private right. China is a part of this second category of nations. (Wang, 2000.) Many developing countries, including China, would prefer to set different IPR standards for different industries at different stages of development. Such differentiation is inconsistent with the laws and institutions of developed countries and therefore impossible to put to use. With increasing globalisation and integration of world markets, the United States and other developed countries have been unwilling to apply different IPR standards to developing countries due to the potential for infringements and for significant loss of sales.
However, sometimes standards applied to everyone, produce too much IPP too early in some developing countries and can cause international conflict between developed and developing countries. (Croix & Konan, 2002.)
EU directives and regulations has largely shaped the Finnish national legislation. The foundations of our intellectual property law is based on the international agreements Paris Convention and Berne Convention. The World Intellectual Property Organization (WIPO) manages The Paris and Bern Conventions. WIPO’S mission is to promote IP throughout the world in co-operation with various states and other international organizations and thus encourage creative action. The purpose was to renew these conventions continuously, but it is not easy to reach a consensus on IP issues in terms of industrialization and other social development among the different states. The latest reforms are from 1967 and 1971. When the renewal of the conventions managed by WIPO failed, the protection of intellectual property rights was developed on the GATT (General Agreement on Tariffs and Trade) negotiations. In 1993, an agreement was reached with the Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS Agreement). At the same time, the World Trade Organization (WTO) replaced the GATT. (Haarmann & Mansala, 2012.)
The patent application process was also harmonized in the 1970s’ by signing the European Patent Convention (EPC) in 1977 and the Patent Cooperation Treaty (PCT) in 1978. Finland joined PCT in 1980, WTO in 1995 and EPC in 1996. China joined PCT 1994 and WTO after 15 years of negotiation in 2001. Compared to Europe, China was relatively late in establishing IP, therefore some foreign companies suffered the consequences before proper IPP (WIPO, 2004.)
There are three routes to file a patent application. First, patent application can be filed in China directly with the State Intellectual Property Office (SIPO). Foreign applicants must use a local patent agency to handle the filing of a patent. Second, patent application can be first filed in a foreign country, which is a Member State of the Paris Convention, and then extended to China filing a patent application within 12 months for invention patents and utility models, and 6 months for designs, claiming the priority date of the first application. Third option is to file a patent application under the Patent Cooperation Treaty (PCT), selecting China as one of the designated states. A PCT application can be filed with the European Patent Office (EPO) or any national patent office within the EU, for example PRH in Finland (China IPR SME Helpdesk, 2016.)
Trademarks in China can be registered via national or international system. National trademark applications are filed with the CTMO in Mandarin. The international registration is available under
the Madrid Protocol through the World Intellectual Property Organization (WIPO). This can be also done via PRH in Finland who passes it on to WIPO. When filing a trademark, products and services are divided into 45 classes according to the Nice Classification. China is further dividing these classes into sub-classes. It is important when registering a trademark in China that the registration covers products and services in each of the sub-classes that have relevance to your business. (China IPR SME Helpdesk, 2016.)
In addition to the trademark registration, company must register products in different Chinese authorities before exporting and selling. According to Tong (2008), companies must be careful with this product registration and have trademark registration process at least started, because so- called counterfeit hunters actively check the inspection processes by registering authorities in order to spot possibilities to file a complaint and ask for compensations. (Tong, 2018.)
China has two layers of legislative organizations, the central government and its ministerial and provincial government organizations. In administrative control, there are three separate organizations under the state Council managing different IP forms: The State Intellectual Property Organization, the Trademark Office and the State Copyright Administration. These organizations are responsible for the examination and approval of IPR, interpretation of IP laws, monitoring of IP activities and administrative settlement of IP disputes. Ministerial and provincial organizations cooperate with the central offices and supervise local or organizational IP activities. Both, the central government and its ministerial and provincial government have the power to introduce legislation and regulations. This two-tier legislative system inevitably causes the disconnection between national laws and provincial and local government laws (Yang, 2003.)
There are no rules to define the division of authority between different levels of the political system.
The division is based on policy rather than law, and these policies are constantly changing.
Continuously changing regulations, bureaucracies, and reporting relationships makes business planning challenging in a country where the government has a major role in the economy. New laws and regulations are coming into force unpredictably and surprisingly, as well as the lack of prior information about their contents and timing bring challenges. New regulations may even come into force retrospectively. (Lieberthal & Lieberthal, 2003.) Government policy in China is
opaque because the public policy makers’ motives and the policy-making processes are not clear (Delios, Wu & Day, 2014).
China is the world biggest producer of counterfeit goods, although the Chinese government claims to be successfully fighting against counterfeits. Chinese highly value foreign technology and expertise, therefore a lot of the copied products are foreign and usually well-known brands. In addition, because of the problems in the current court system together with extensive counterfeiting, Chinese IPR holders prefer to sue foreign actors instead of Chinese makers of counterfeits, since foreign parties are relatively clearer targets (Zhao, 2014.) Western companies tend to think that Chinese copy only from foreign companies. However, on the contrary to the presumptions, 98%
of the infringement cases Chinese sue Chinese. (Haour & Zedtwitz, 2016.)
Intellectual property rights can be used to facilitate successful innovation effectively. The protection of technology involves legislation, enforcement of intellectual property protection as well as other factors. Technology intensive products seems more valuable than labour intensive products. China has recognized this and export and import of technology-intensive products are key concern for the Chinese government. Trade of these technology-intensive products will not only bring more profits, but also motivate the industrial development. (Liu, 2005.) Thus, intellectual property plays major role in innovativeness, China has set a strategic goal to be an innovative country by 2020 (Zhang, 2014). As China is wishing to be more innovation oriented, increasing the awareness of IP has become significant. Moreover, innovation is a process, which demands effective participation from different divisions of an enterprise, such as technical experts, management, marketing, finance, legal, as well as outside consultants, suppliers, outsourced component manufacturers and service providers (Kalanje, 2006.)
At present, the framework of intellectual property is well established, partly because of the external pressure from Western countries (mainly from the US) and organizations such as WTO and WIPO (Wang, 2004). WIPO played a major role at the formation of China's intellectual property protection. The WTO, on the other hand, has been a significant force in driving improvements to the IP system (Yang, 2003.) However, the laws were under revision for a while after joining the WTO, enforcement is still inadequate, and the current system is complex (Cao, 2014). In addition,
fines are so low that they are not preventing companies from copying because infringers earn a sufficient profit, even if caught and fined (Sepetys & Cox, 2009). Although, the fines from infringements are getting higher, which might partly have an effect on copying (Xinhua, 2017). If the legislation is nowadays well established and enforcement sufficient, why are the number of counterfeit goods and intellectual property infringements still remarkable?
Invention patents used to be dominated by foreign companies, but this is recently shifted to Chinese companies. This indicates that the knowledge among Chinese companies is rising. Foreign companies own approximately 42% of invention patents. (Haour & von Zedtwitz, 2016.) The Chinese government has adopted a tax incentive policy to attract FDI for the transfer of technology and leadership skills from foreign to Chinese companies. This tax reduction is for foreign companies who have patenting activities and are recognized as innovative by the Chinese government. China’s FDI regulations encourage foreign investors to import high technology and machinery, but also require the foreign investors to conduct R&D. (Cao, 2014.) In fact, Chinese taxation system treated foreign enterprises differently until the disparity was removed in 1991 with the Income Tax Law (US Congress, 1997).
2.3. Major challenges regarding Intellectual property in China
2.3.1. Low awareness and inadequate enforcement
The existence of laws is unknown partly to the Chinese population, let alone to foreign investors.
Communist Party of China plays a major role in operational levels, which partly results in uncertain legal status. Important source of legitimacy is the significance of legal authority. (Lam, 2009.) The adoption of laws does not necessarily imply that there is effective enforcement, which has come under increasing examination with the implementation of Agreement of Trade Related Aspects of Intellectual Property Rights (TRIPS). TRIPS should support the IPR system in China, particularly in enforcement provisions within the structures of the WTO. (Yueh, 2009.)
Many Western countries consider Chinese culture as imitative, lacking creativeness and a perfect environment for copying and mass production. It is also claimed that Chinese manufactures have
less moral scruples about producing counterfeits, because until the recent years, Chinese workers rarely knew about Intellectual Property. (Wen-yu Young, 2011.) According to Berrel and Wrathall (2006) most foreign managers also remain uncertain about legislation concerning IPR (Berrel &
Wrathall, 2006). Because of the unawareness of both parties, educating companies about the IPR is necessary.
China’s rapid development explains many of the challenges in IP law enforcement, thus understanding the genesis of IP China is significant. Chinese intellectual property system follows all the major international treaties on IPR. According to Wen-yu Young its acquisition and maintenance regime are easily recognized and understood by foreign business, but the cultural differences become noticeable in litigation and examination. (Wen-yu Young, 2011.)
Stevenson-Yang and De Woskin (2005) steeply states that government's ownership and control over economy are the main reasons undermining private intangible property rights, and development or culture has little to do with it. According to them, the government does not support inventions and thus innovation is not sustained. (Stevenson-Yang & De Woskin, 2005.) This is widely contrarily to other studies, which emphasize the meaning of the culture. Thus, cultural differences will be addressed in this study in order to understand the differences in IP as well as in business markets in general. It is impossible to engage with Chinese companies in partnership, if one does not understand the cultural background.
Apart from cultural factors, the economic system in China somewhat explains the low awareness of IPR. Cao (2014) claims that the concept of private property rights does not exist in China because of the short existence of the private sector and privately owned small and medium sized enterprises (SMEs). Ideally, China wants to protect copyrights to improve their culture and society. However, copyright protection is related to ideological issues, unlike patent or trademark rights. In some cases, because of China’s ideological policy, it is relatively difficult for China to enforce copyright laws. On one hand, China wants welcome foreign technology, but on the other hand it wishes to prevent the penetration of Western ideology. (Zhang, 1997.) According to Liu (2005) highly democratic societies are likely to have a strong recognition of protecting intangible assets such as IP, which also partly explains the low awareness and enforcement in China (Liu, 2005).
China's administrative system is described by ambiguity. All the different levels (provinces, prefectures, counties, townships, and cities) and each state organizations create their own 5 year- plans. In addition, all levels also produce statutory local regulations. Control is divided to different agencies and government bureaucracies, a separate legal regime govern intellectual property rights and foreign business is treated differently from local business for example viewing taxation policies etc. (Nojonen, 2016.) Moreover, there is a constant battle between the country’s central government and the provincial and local governments over relevant law, and execution of it. This makes it difficult for companies operating in China to know exactly what the rules are. (Fogel, 2010.) The pressure and regulations coming from different directions partly causes the irregularity in legislation and its observance, thus is an important factor for companies to understand.
The social environment boost IP infringements. China is in the transition stage from labour intensive to technology intensive industry. With the development and opening of the country, China manufactures products for customers all over the world, which, with the current relatively loose IP legal system, creates more opportunities for IP infringement. Cao (2014) studies the weak enforcement from four different dimensions: socio-cultural, legal, economic and political institution. According to Cao (2014), the biggest reasons for the weak level of enforcement can be found in the immature IP legal system. Lack of coordination, on-going transition stage, low awareness and inadequate personnel all follows from that. The uncertainties come for example from frequent policy changes, lack of transparency, widespread corruption, low predictability, and bureaucratic red tape. (Cao, 2014.)
Law enforcement refers not only to the implementation of judicial decisions, but also to the extent to which laws and regulations are enforced by government agents, such as police, customs officials, security officers etc. In a rule of law system, law enforcement agents are obliged by law and are expected to perform their duties solely in line with the law. In China, the misuse of power, practise of favouritism and irregularities committed by law enforcement authorities are widespread.
Moreover, it is difficult to do business with Chinese authorities, especially police. (Lam, 2009.)
Corruption and local protectionism can’t be ignored when discussing the law enforcement system in China. According to Wang (2000), local protectionism is a serious form of corruption. Especially,
in smaller cities, the local welfare may be prioritised over law and regulations. (Wang, 2000.) Local court is led by the local government, which has interest in regional economic affairs (Blazey &
Chan, 2008). For example, no local official will shut down a factory due to an IP violation, if the factory employs a major part of its citizens. According to Cao (2014), local protectionism can be excluded from the barriers by establishing guanxi with local authorities (Cao, 2014.)
In addition, according to Delios et al. (2014), corruption is still an issue in China. They consider one reason why corruption is still existing in a today’s world, could be that the nature and pace of modern life are against with the Confucian values. For example, is it right to help a friend or family, although the act is seen as corruption? (Delios, Wu & Day, 2014.)
Kettunen, Lintunen, Lu & Kosonen (2008) remarks that there have been some improvements in the law enforcement in recent years due to networking, lobbying and personal relations with the authorities. Nevertheless, the territorial differences in execution are remarkable. Litigation on the local level is challenging since they tend to favour local actors, foreigners have better chances on higher court level, where the territorial factors are not that dominant. (Kettunen et al. 2008.)
2.3.2. Value of the IPR
Value of the IP is an interesting aspect for this study, because companies have very different insights about the IP and its utilization. The importance is noticeably related to the business field, but how companies prioritize IP varies a lot. IP protection makes intangible assets a bit more tangible by turning them into valuable exclusive assets (WIPO.) Harrison and Sullivan (2011) suggests that companies need to clarify the objectives of IPR. Why do they have to protect their knowledge and what knowledge is worth the IP invest? IPR is for protecting innovative and creative work. The ownership of these intangible assets is challenging to define, if one has not claimed their possession by registering their innovations. (Harrison & Sullivan, 2011.)
The idea of IPR value by Harrison and Sullivan (2011) can be thought as a pyramid. The pyramid of value thinking is divided into 5 stages. Bottom level is the most primitive and the top level is the most developed. The pyramid describes how companies used their IP portfolio to support the
company’s business and goals. Not understanding and using the whole potential of IP, is one of the main reasons why Finnish companies struggle with their rights and protecting them. Companies should think more how IPR is supporting our business and achieving the goals. (Harrison &
Sullivan, 2011.)
At the level one, “Defend Position” IP is strongly used merely as legal means to keep competitors out of their market. This is the most essential of the IP functions, therefore it is at the base of the pyramid. At this level, the IP function provides a patent shield to protect the company from litigation. This level is mostly creating processes, and quantity is often thought as effectivity.
(Harrison & Sullivan, 2011.)
The second level is “Manage Costs” in which companies focus on how to reduce the costs of filing and maintaining their IP portfolios. Companies in this level is still in defensive mode, but they already begin to see IP as a business investment. Why would companies invest in IPR if they are not enforcing the rights? Companies are interested in cost-reduction activities, increasing efficiency, increasing effectiveness and raising productivity. (Harrison & Sullivan, 2011.)
The third level “Capture Value” is where companies have expanded the scope of their ip management activities beyond only defensive purposes, moving from risk-reduction to value generation. Passing from the previous levels to this one requires a major change in company’s attitude. Companies at this level may have own IP function, and the IP is started to view as a business asset, rather than just a legal asset. (Harrison & Sullivan, 2011.)
The fourth level is “Synthesize Opportunities”. At this level, company’s management has realized the power of using IP for a range of business roles. Companies at this level recognize that IP is truly a strategic asset for the firm, and companies start to evaluate how IP can help them to manage their organizations. Companies at this level use IP in tactical positioning. (Harrison & Sullivan, 2011.)
In the fifth level “Shape the Future”, the IP function is deeply established in the company, and takes on the challenge of identifying future technology trends and consumer preferences.
Companies at level five understand that there is nothing certain about future and company can define its own desirable future. Patent applications are used as a technology option investment to place bets on alternative business and technology futures. (Harrison & Sullivan, 2011.)
The Value Capture process is a natural follow-on to the preceding step. While firms have many ways to capture value from their patents, the most commonly used methods are; patent productizing, patent monetizing, litigating and positioning. In productizing, the patent is used to protect new product features. In monetizing, the patent is used obtaining revenue directly from the use of the patent in a license or other value-generating use. Patent litigation is applied defensively to entities seeking to litigate and use the patent offensively in litigation. In positioning, the patent is exploited for competitive blocking, to create barriers to competitive entry and to enhance company’s image. (Harrison & Sullivan, 2011.)
Figure 1: IPR hierarchy
Reference: Harrison & Sullivan (2011)
Shape the Future
Synthesize Opportunities Capture Value
Manage Costs
Defend Position
2.3.3. Copying and infringements
Why do Chinese copy? Inherited from the Emperor era, China has a strong tradition of copying (Kettunen et al. 2008). The attitude towards copying is still more propitious in China than it is elsewhere. Chinese view copying strongly as a learning from others, without imitating it is impossible to learn and innovate. The development of emerging economies is associated with creative imitation. (Archibugi & Filippetti, 2010.) Although, China is the biggest country in counterfeiting, one must keep in mind, it is a worldwide issue (Zhao, 2014). In addition, after China’s transforming from imitative to innovative country, knowledge of intellectual property is expected to grow substantially.
The situation is well described by the fact that counterfeit products are also sold in the annually held Trademark festival, even if that should be a place to raise the awareness (Lince, 2017). Besides, the Chinese government views product counterfeiting as a small crime. Laws protecting IPR are unclear and are not sincerely enforced. Product counterfeiters may only have their products confiscated and symbolically fined when being caught. Furthermore, because of a decentralized enforcement authority structure, local governments may not co-operate with the central government in undertaking any strong actions because of the local economic interests. (Hung, 2003.)
As the supply of counterfeit products creates its own demand, many Chinese consumers are fond of foreign brand products, but cannot afford them. Consequently, they turn into buying the cheaper counterfeit products. The production and marketing of counterfeit products is a nationwide business in China. It is being operated and managed much like legitimate businesses. (Hung, 2003.) Chaudhry (2006) consider why China is the primary source of counterfeits. According to her research, corruption, consumer willingness to purchase fake products and the lack of intellectual property law enforcement are substantial reasons for counterfeit popularity. (Chaudhry, 2006.) Chinese government and authorities should strictly intervene in this, because it would be everybody’s interest to stop the counterfeit business.
Kettunen et al. (2008) studied Finnish companies’ strategies in China, including the intellectual property aspect. According to their research, subcontractors are typically the one who is copying and therefore choosing the right partners is crucial. The most important note in their study is simply, that the easiest way to protect your rights is registering and patenting. In addition, companies should consider which parts of technology could be taken to China and which critical parts of the products should be kept in Finland or in Europe. (Kettunen et al. 2008.)
Chaudhry Zimmerman, Peters and Cordell (2009) also propose actions for managers to combat against counterfeits. According to them, the most efficient way is educating and informing different parties about IP. (Chaudhry et al. 2009.) This should occur naturally for companies, but unfortunately, that is not always the case. When resources are limited, tough decisions must be made where to focus and what to leave in the background.
2.3.4. Cessation of infringements
According to Wen-yu Young (2011), there are 3 types of government action to enforce IPR:
administrative, civil and criminal. Chinese legal system strongly favours administrative action.
Litigation is viewed as more costly for all parties, as well as to the government. Administrative action is appropriate in copying cases of clear reproduction. (Wen-yu Young, 2011.)
In most cases, IPR holder should start enforcing own rights by starting an investigation.
Investigation can verify the existence of, and determine the scope and level of, infringement and provide evidence for filing a complaint. Investigation help to determine whether to proceed with warning letters, cease and desist letters, administrative actions, or litigation. Furthermore, an investigation is the best and often the only opportunity to obtain evidence to be used in administrative action. (Wen-yu Young, 2011.)
Administrative action starts with the request to carry out raids. Before that, company should have prepared their own investigation. The foreign actors in the market should also educate the local law enforcement. This happens while establishing good relationships, and without co-operation with the local police, these raids might not even take place. (Chaudhry et al. 2009.) Administrative
actions are favoured because it is a fast and an effective way to handle with IPR violations.
Administrative actions can result in fines. (The US-China Business Council, 2015.)
Civil litigation is equivalent to a court case in Europe. Civil suits are heard in IPR specialized courts. Beijing, Shanghai and Guangzhou have these specialised IP courts. Courts in civil actions are capable to handle better IP infringement cases. Court proceeding are costly and time-consuming, therefore, not highly preferred. (The US-China Business Council, 2015.) Civil litigation generally takes six to twelve months until the judgement (China IPR SME Helpdesk, 2016).
Criminal action begins with investigation managed by local public security bureaus, which then transfers the cases to criminal tribunals in the people’s court to appropriate jurisdiction. The IPR owner must report the case to the local public security bureau, who then decide whether to accept the criminal case. Judges in criminal cases can also sentence violators to imprisonment A downside of criminal action is that it is difficult to initiate. (The US-China Business Council, 2015.)
All actions must be filed in and conducted in Chinese language. Foreigners must ensure that all foreign source documents and evidence are authenticated, when they bring any type of legal action in China. Sometimes this authentication must be legalised and requires notarization and confirmation by the local Chinese embassy or consulate. All foreign documents and evidence should be translated into Chinese and verified by a translator designated by court. (Wen-yu Young, 2011.)
First step when infringement happens is often to issues a warning or desist letter to the infringer.
Warning letter is generally issued to an infringer who doesn’t know that the products they offer are infringements. It serves as a notice that the activity violates Chinese statutes, and prevents the recipient from later claiming to be innocent. Recipient may be willing to destroy their stock but usually will not make other concessions to IPR holder. A desist letter typically demands infringers to immediately stop the production and sale, the letter should be followed by a phone call to let the target know that the IPR holder is serious. The primary goal is the immediate cessation of infringement activity, in addition the goals are also deterrence, and the identifying of the manufacturer and/or distributor of unauthorized goods. (Wen-yu Young, 2011.)
If warning letters are not effective, and negotiations will not stop the violation, infringer is taken to court. China has four levels of courts, three of them are qualified to act as trial courts as well as appellate courts. The intermediate courts handle major cases involving foreign elements, and trials involving IP claims. Most actions for enforcement of IPR owned by foreigners should be brought to the intermediate people's court of the location where the infringement occurred or the defendant residence city. A claim for damages should be presented to the civil courts. (Wen-yu Young, 2011.)
Arbitration is most appropriate for disputes between two parties with competing claims, such as parties to a contract or business dealings (Wen-yu Young, 2011). Arbitration is confidential and its decisions can be enforced in different jurisdictions, thus many parties in international business prefers arbitration as a dispute resolution system. (Wei & Yaxi, 2014.) According to Yang and Clarke (2005), consultation and mediation are the preferred ways of dispute resolution in China, because in the traditional culture conflicts should be avoided. However, compared to arbitration and litigation, there is no legal bind in consultation and mediation. (Yang & Clarke, 20015.)
To sue an infringer in court, IPR owners must have evidence gathered from the infringing products, as well as the location of infringing manufacturers and sellers. Much of the illegal production is done by small underground factories, which are difficult to trace. (Li, 2009.) In majority of the cases, it is the responsibility of the IPR holder to collect evidence to be presented in court, whereas in Europe the infringer can be ordered to provide relevant information and evidence to court. (China IPR SME Helpdesk, 2015.)
2.4. Theoretical framework of the study
IPR was non-existent in China until the 80s. To join the WTO, China needed to change and initiate many laws, and the negotiations were ongoing for 15 years. In that time, the situation was a lot more developed in Western countries. In addition, China is still in a transition phase when it comes to IPR. Partly because of this, low awareness and inadequate enforcement still exists.
