Innovation and IPR in China, Part III

Innovation and the protection of intellectual property rights (IPR) go hand in hand, and are two topics that come up frequently in discussions about China. Tsinghua University is doing a study on the status of both in China and asked for my comments. In Part I, I responded to Tsinghua’s first set of questions, and in Part II, I gave my answers to their second set.

Being diligent researchers, Tsinghua had a few follow up questions. As we discuss in this third post on the subject, just as IPR protection and innovation go hand in hand, so does capital and innovation.

Tsinghua: Jack, if it is not too much of an inconvenience, we would like to submit two follow-up questions to the answers that you provided. What is your specific advice for China on how to overcome the fundamental obstacles you mentioned (education; intellectual property rights; and lack of available capital for new, private companies)?

Jack: All of these, of course, are large, complicated issues that cannot be solved at once or in a short period of time. With all of them, however, China’s direction is important and will be closely watched. Also, the normal course of the development of China’s economy will help address many of them.

Taking them one at a time:

1.Education: From work that we have done, I know that China is re-thinking the way it educates its young, and is taking steps to have its educational institutions reform their teaching methods to include so-called “soft skills” such as leadership and teamwork that are so critical to promoting innovation and creativity. While this will take some time, I believe that China is moving in the right direction.

China will be helped in the area of education, though, by the increasing number of Chinese students who are studying abroad and returning to China to work and establish their businesses. In the past, when students left China to study abroad, more often than not, they would not return. However, with all of the opportunities now available in China, many are returning after they finish their studies. The more this happens, the more China’s educational system will be supplemented by schools around the world, which will give China more time to reform its own educational system.

2. Intellectual Property: For the most part, the laws are already on the books–it’s just a matter of enforcement. The international community—and perhaps many innovators in China—does not believe that the government and the courts are serious about enforcement. Making the enforcement of IPR a clear priority for all of those concerned will go a long way to overcoming this commonly held view.

3. Capital: China’s continued economic development is already having an impact in this area. In 2010, a total of 321 companies went public on Shenzhen’s SME and ChiNext (GEM) boards, raising a total of nearly RMB 300 billion ($46 billion) in funds. The number of companies that listed was more than three times the 90 companies that listed in 2009, and the capital raised was almost five times the RMB 62.8 billion ($9.7 billion) that was raised in the previous year. An additional 131 companies have already listed on either the SME or the ChiNext Board in 2011.

A vibrant equity capital market that circulates an economy’s capital and gets much-needed funds into the hands of companies and individuals that can use them most effectively can be an important tool to any country’s economic development. Bank and other types of debt financing have their place, but loans have to be repaid, so borrowed funds must be invested conservatively. Equity, on the other hand, represents risk capital that can be used to innovate and develop new products and technologies. China’s equity markets are now developing to the point where they are becoming an important source of risk capital for young, fast growing companies in all types of industries.

With the development of the SME and the ChiNext boards in Shenzhen, China’s stock market is fast becoming a viable funding source for the small and medium-sized enterprises that drive the growth of any economy. Just as the U.S. stock market played a vital role in the development of the American economy, so too will China’s stock market provide another growth driver for the country’s economy.

Tsinghua: In addition to addressing these obstacles, what are some additional specific actions that China’s leaders can take to further encourage innovation?

Jack: A country’s university system is perhaps its biggest “greenhouse” for innovation and should be emphasized. One of the reasons why even China’s leading universities do not rank among the top 100 globally is because their faculties do not publish as many papers that are recognized internationally, compared to their counterparts in the United States and other parts of the world. Professors at most U.S. universities, for example, must publish in addition to teaching to be granted tenure, and the basic research done at universities is often the basis for many new products and technologies.

I realize that Chinese universities already play a vital role in technological development in China, but perhaps more should be done. My sense also is that much of the work done at Chinese universities is application oriented and aimed at commercial development. Basic research that is then made available to the general public — even the public outside China — can do a great deal to foster innovation among a broader group of individuals and promote technological development.