China’s tremendous growth in the number of trademark registrations tells a story of innovation. Contrary to traditional thinking about patents as key determinants for innovation, economists in recent years have identified trademarks as indicators of innovation. Trademarks are names associated with products or services in the marketplace. Trademarks connect the producers to the consumers; they are the embodiments of the producers’ investments and innovations. Understandably, to introduce a newly trademarked product or service, the enterprise must already be engaging in research and development (R&D), design, and testing. In other words, trademarks are symbols of the backend of innovations. The more products and services are introduced into the marketplace, the more trademark registrations are obtained and used in commerce. Accordingly, in the last decade, the fast growth of trademark registrations in China corresponds with the fast pace of innovations, indicating that Chinese enterprises have captured and dominated the global marketplace.
III. Manufacturing Intellectual Property Contributors
There are three contributors playing important roles in China’s rise as the global manufacturer of intellectual property: rapid revisions of intellectual property laws, transformative judicial decisions in intellectual property cases, and activity from governmental agencies creating intellectual property administration policies that provide the foundation for intellectual property production to rise in China.
A. China’s Rapid Revisions of Intellectual Property Laws
The numerical evidence of China as the key global manufacturer of intellectual property exists in parallel with China’s rapid revisions of various intellectual property laws. China has aggressively updated its intellectual property laws to form a systematic and timely approach to various new property assets: patents, copyrights, trademarks, domain names, and trade secrets produced by creative and entrepreneurial individuals and entities. Most significantly, the recent revisions of the intellectual property laws support the country’s shift from a manual-labor-based economy to an innovation-based economy. As expected in a planned economy, all four rounds of revisions reflect the Chinese government’s national strategy for transforming the country from being the global manufacturer of cheap goods to the leader of innovative and creative products.
1. Patent Law Revisions
China considered adopting a patent system in 1980, two years after President Nixon’s historic visit to China for the “Opening of China,” as part of China’s economic reform. When China began to welcome foreign investments to certain parts of the country, China was under pressure to embrace intellectual property. In the subsequent five years, China drafted its new patent law, which became effective on April 1, 1985.
China resisted a patent system based on international norms because, during the early years of its economic reform, China’s domestic patent filings were almost nonexistent. The patent system, therefore, protected foreign companies doing business in China, not Chinese businesses. In order to attract foreign investments, China needed to revise its 1985 patent law because the original version was soon proven inadequate. Moreover, the United States placed China on the Special 301 blacklist watch list, threatened to impose trade sanctions against China in 1991, and insisted that China revise its patent law to protect chemical and pharmaceutical products, extend the scope of patent protection, and lengthen the patent term’s duration, among other things. On January 17, 1992, the United States and China signed a Memorandum of Understanding that included provisions related to patent revisions. On September 4, 1992, China issued the First Revision of Patent Law, marking a new path of successive revisions.
Gaining admission to the WTO in 2001 proved to be a momentous achievement for China. In order to qualify for WTO membership, China had to amend certain laws, including its patent laws. In 2000, the year before its ascension to the WTO, China adopted the Second Revision of Patent Law. China benefited significantly from its ascension to the WTO by expanding trade with other countries while accelerating economic growth.
After establishing its role on the world stage, China then focused on its own transformation towards innovation in the next two decades. In 2010, China revised its patent law with the Third Revision of Patent Law. Thereafter, in 2020, China again revised its patent law with the Fourth Revision of Patent Law. These two latest revisions of China’s patent law, along with revisions of other intellectual property laws from 2000 to 2020, affirm a major shift from revising law under foreign pressure to crafting law for the nationalist purpose of encouraging indigenous inventions. In other words, China revised patent laws for China in the twenty-first century. As Table 1 illustrates, the number of invention patent filings in China leaped from just 308,326 in 2010 to a staggering 1,328,067 in 2019. Likewise, Table 2 demonstrates the growth from 407,238 utility model patent filings in 2010 to 2,259,765 in 2019. Regarding industrial designs, China witnessed an increase from 448,121 design filings in 2010 to 1,118,565 design filings in 2019.
The rapid successive revisions of patent law—together with the tremendous growth of actual invention patent, utility model patent, and industrial design patent filings—signal the importance of patents and designs to Chinese firms, so much that they seek legal protection for their innovation and creativity. Once upon a time, foreign entities dominated patent filings in China. That past is now replaced by the new innovative China, where Chinese entities dominate patent filings in the country and position China into a new era of technological competition.
2. Copyright Law Revisions
China’s history with copyright protection is complicated. China enacted its Trademark Law and Patent Law in 1982 and 1984, respectively, but did not pass its Copyright Law until 1990. The delay in enacting copyright law perhaps rests on the Chinese government’s tight control of expression that heavily regulates the press and publishing industry. Moreover, China did not seriously process complaints of Chinese violations of United States copyrighted works. The severity of the copyright piracy necessitated the United States to insist on China’s enactment of Copyright Law and protracted trade negotiations between the two countries in the 1980s. In the end, China passed its first Copyright Law on September 7, 1990, which later came into force on June 1, 1991.
In 2001, the same year that China overhauled its Patent Law and Trademark Law for the purpose of China’s accession to the WTO, China revised its Copyright Law. The revisions attempted to bring China’s copyright law provisions more in line with international norms. New types of works of authorship and online works for copyright protection were recognized in the 2001 revisions. In addition, judicial enforcement became available to copyright holders. Injunctive relief and larger damages provisions were included in the revisions. Overall, these new copyright measures aimed to combat the rampant piracy of books, video products, and computer software because authentic copies cost significantly more than counterfeits. Overall, China amended its Copyright Law under the pressure of joining the WTO.
In the next two decades from 2001 to 2021, China focused on developing its own creative content in books, films, and video games while leveraging the digital environment in creation, delivery, and distribution. The explosive growth of the internet and e-commerce led China to embark a new national plan where intellectual property creation and innovation are key pillars in culminating the revision of its Copyright Law in 2010. The revisions, in fact, existed under China’s grand strategy that culminated on June 5, 2008. The China State Council announced the “Strategic Outline for National Intellectual Property Rights,” which targeted 2020 as the year China would be a nation with high levels of creation, utilization, protection, and administration of intellectual property rights.
The arrival of social media and the platform economy led China to its latest round of copyright law revisions in 2020. China expanded the scope of copyright protection to cover works arising from digital technology. For instance, Article 3 of the amended Copyright Law incorporates a catch-all provision: “other intellectual creations that satisfy the characteristics of works.” Consequently, courts and relevant administrative agencies will decide copyright protection for future works generated from new technological advancements and innovations. Likewise, Article 3 replaced the wording of “cinematographic works” with “audiovisual works,” allowing works from sports, e-sports, music videos, and flash, among others, to be covered for protection. Also, under the new revisions in 2020, broadcasting now covers both wired and wireless, extending copyright protection to online streaming of sports, e-sports, and other online entertainment. Moreover, in order to deter copyright infringement in the digital era, China imposes harsher damages against infringers, encouraging a “desirable legal environment for inspiring creativity.”
3. Trademarks and Revisions
Among the different types of intellectual property, China selected trademarks for early legal development. In 1982, China’s Trademark Law was passed. For comparison purposes, China did not create its patent law and copyright law until 1984 and 1990, respectively. Perhaps the pressure from the United States and the West necessitated the development of trademark law ahead of patent law and copyright law. For instance, global companies such as Coca-Cola wanted their trademark protection before they would operate and distribute their products in China. In other words, trade could not exist without trademarks and corresponding protection.
China then revised its Trademark Law in 1993 and 2001. The revisions in 2001, like the companion patent laws and copyright laws, were designed to bring China’s Trademark Law in compliance with the WTO’s standards in order for China to be admitted as a WTO member.
The subsequent massive growth in China’s trade and commerce domestically and globally meant that China was producing more products and needed more trademarks to be used in association with those products. The growth caused China to revise its Trademark Law in 2012 to accommodate the new goods being produced. During this decade, China witnessed its ascent as the world’s trademark powerhouse: China registered more trademarks than any other country worldwide, and China led all nations in annual trademark filings and registrations beginning in 2010. The United States fell behind and continues to stay behind.
Consistent with its goal of developing intellectual property law for its own national interest, China curbs bad faith trademark filings and bad faith trademark litigation. In the 2020 revisions, China also enhanced statutory damages in trademark infringement actions and imposed punitive damages at five times actual damages.
The latter two rounds of revisions in 2012 and 2020 coincided with the other intellectual property law revisions. Strategically, China’s revisions of its patent, copyright, and trademark laws seem to be in lockstep. This demonstrates China’s understanding of the interconnection of patents, copyrights, and trademarks in the marketplace. Modernization of the three laws, therefore, requires frequent revisions or amendments in response to the dynamic changes of technology and the market both domestically and globally.
4. Trade Secrets and Revisions
Trade secrets is one area of intellectual property law that China has recently revised after twenty years of neglect. China first created trade secrets law in 1993. Provisions of trade secrets law are included in China’s Anti-Unfair Competition Law (AUCL). In contrast to how China substantially revised its patent, copyright, and trademark laws in order to ascend to the WTO, China did not revise its trade secrets law in the early 2000s. It was not until 2013 that China revised its trade secrets law. Subsequently, in 2020, China adopted its second round of revisions for trade secrets law.
The 2013 and 2020 revisions expand the definition of a trade secret, the misappropriation of trade secrets, and the remedies. For instance, owners of trade secrets no longer bear the difficult burden of proving that the defendants engaged in trade secret misappropriation conduct. Instead, the law requires the owners of trade secrets to establish a prima facie case of the defendant’s access to the trade secret at issue and establish that the defendant’s trade secret is similar to the plaintiff’s. This lessens the burden and essentially acknowledges that notable cases of trade secret misappropriations often involve departing employees who had access to the employer’s trade secrets. The revisions allow the trade secrets law to be responsive to real problems faced by intellectual property owners.
In summary, with the modernization of its trade secrets law, China has demonstrated to intellectual property owners an understanding that misappropriation of trade secrets does not occur through strangers but through departing employees. Trade secret thefts are serious concerns for Chinese businesses, as seen in the high-profile trade secret misappropriation cases. In addition, innovators demand that the law protect their valuable trade secret assets, not just their patents, copyrights, and trademarks.
B. The Judiciary’s Role in Manufacturing Intellectual Property
China’s ability to manufacture intellectual property is, in part, a product of the judiciary, which has steadfastly shaped intellectual property law for clarity, consistency, and predictability. The judiciary actively engages in charting the contours of intellectual property law, beginning with the early stage of intellectual property law development and continuing throughout the subsequent decades.
With a systematic approach to administration of intellectual property cases, China’s judiciary swiftly addresses a large volume of disputes. The judiciary strategically targets main tech hubs with large numbers of intellectual property disputes and develops specialized intellectual property courts to exclusively handle intellectual property cases. For instance, Beijing, Shanghai, and Guangzhou have each established their own intellectual property courts because each of the three major cities enjoy high concentrations of tech companies with greater demand for specialized expertise from the judiciary to decide the disputes. The intellectual property courts maintain exclusive jurisdiction over technology-related civil and administrative intellectual property cases, well-known trademark cases, and administrative appeals relating to patent and trademark grants, invalidity, new plant varieties, layout-designs of integrated circuits, and compulsory intellectual property licenses. Outside the three main tech hubs, China utilizes the general people’s court at the lowest level to administer simple intellectual property cases, such as non-software copyright disputes; trademark disputes, excluding well-known trademarks; unfair competition, excluding technological trade secrets; and contracts related to intellectual property. For complex intellectual property disputes involving patents, software, trade secrets, well-known trademarks, and monopolies, China bestows jurisdiction to the intermediate people’s courts, which include twenty-one specialized intellectual property courts throughout the provinces. In other words, China brings the judiciary system, with specialized intellectual property expertise, to certain localities, matching judicial experience with local demands. On the other end of the spectrum, at the nation’s highest court, the Supreme People’s Court developed its own intellectual property court to hear patent, monopoly, and complex intellectual property appeals nationwide from the intermediate people’s courts.
A remarkable feature of China’s Supreme People’s Court is its proactive approach to statutory interpretations. When a new revision of a particular intellectual property law is enacted by the legislature, the Supreme People’s Court does not wait until cases percolate to the highest level for final adjudication to render its interpretation and application of a statutory provision. Instead, the Supreme People’s Court issues its interpretations before cases reach the Court. Consequently, all lower courts know in advance exactly what the Supreme People’s Court’s interpretations of statutory provisions are and can apply the interpretations to the cases filed in their respective jurisdictions. The Supreme People’s Court’s approach reduces disharmonious and conflicting rulings among the lower courts, minimizing unpredictability and uncertainty.
For example, in 2020, the Supreme People’s Court issued its interpretations concerning trade secret misappropriation disputes for “the purpose of correctly trying civil cases concerning the infringement upon trade secrets” and noted that it developed the interpretations “in accordance” with the new trade secrets law provisions in the “Anti-Unfair Competition Law” enacted in 2019 and “in light of the judicial practice.” Noting that the trade secrets law itself is embodied in only two simple articles, Articles 9 and 32 of the AUCL of 2019, the Supreme People’s Court crafted extensive interpretations detailing what lower courts must consider in presiding over trade secret disputes. The Supreme People’s Court identified what constitutes trade secret subject matter, what information is relevant in determining whether a piece of information is known by the public, and what circumstances are considered sufficient confidentiality measures to prevent trade secret disclosure, among many others.
Another example can be seen in the Supreme People’s Court’s Interpretations of Trademark Law in 2014. The Supreme People’s Court identified and listed twelve types of trademark disputes and a catch-all case in instructing lower courts how to determine if they are allowed jurisdiction over specific trademark disputes. Recently, on March 3, 2021, the Supreme People’s Court issued its interpretation on punitive damages in intellectual property disputes. The Supreme People’s Court also delineated the subject matters and types of trademark cases designated for specific level courts. In doing so, the Supreme People’s Court installed both the hierarchy and order of judicial adjudications. Consequently, the Supreme People’s Court reduced filings and acceptances of cases in the incorrect forum concerning trademark disputes.
Administration of intellectual property disputes in a vast country like China requires innovative leadership in the Supreme People’s Court to ensure clarity, consistency, and predictability. The Supreme People’s Court annually reviews intellectual property cases decided by courts across China and selects a set of exemplary opinions as “Guiding Cases” (GCs). This practice contributes to China’s jurisprudence for intellectual property development on several fronts. First, GCs showcase the best examples of judicial decisions and reasoning for others to emulate. Second, GCs set precedent-like opinions for courts to follow. Third, GCs identify new issues and concerns arising across China relating to intellectual property rights. Fourth, GCs unify courts in their approach to judicial drafting. Fifth, GCs impliedly encourage competition among judges for their decisions to be selected in the next set of guiding cases. Sixth, GCs exhibit China’s ongoing excitement, growth, and maturity in intellectual property law. Seventh, GCs demonstrate that the courts are a legitimate body to review administrative decisions. Finally, GCs illustrate that intellectual property proves to be important assets that individuals and businesses fully rely on and embrace, which stems from judicial adjudications to determine rights versus wrongs.
Moreover, litigants can quickly receive decisions from the courts. Intellectual property judicial adjudication is surprisingly fast in the highly efficient courts across China. A trademark dispute, after filing the complaint, is decided by the lower court on the merits after only four months. If the case is on appeal, the appellate court will render a decision in two-and-a-half months. If the case proceeds to the highest court, the Supreme People’s Court will then typically render its opinion in six to twelve months. In other words, adjudication of a trademark case from the lowest court to the highest court in China is less than two years. For comparison, a similar trademark infringement case in the United States will languish for ten years from the district court to the Supreme Court.
Access to justice through swift access to courts and adjudications in China allows a large volume of cases to be decided each year. As such, owners of intellectual property can rely on the courts for their protection. In return, the courts in China see themselves as protectors and enforcers of intellectual property. Indeed, on April 22, 2021, the Supreme People’s Court issued the People’s Court 5-Year Intellectual Property Judicial Protection Plan. The Supreme People’s Court identified areas where all courts across China will focus on in the next five years in order to strengthen judicial protections for intellectual property assets, specifically by improving trial qualities for patent cases, increasing punishments for bad faith trademark registrations, and intensifying damages, including punitive damages in certain intellectual property infringement cases.
C. The Administrative Agency in Manufacturing Intellectual property
China’s administrative agency plays a key role in manufacturing intellectual property. Recent initiatives and the restructuring of the agency overseeing intellectual property displays China’s goal of elevating intellectual property production and protection.
1. China National Intellectual Property Administration
For several decades, China handled patents and trademarks through a patchwork of separate agencies: the State Intellectual Property Office (SIPO) for patents, the State Administration for Industry and Commerce (SAIC) for trademark registrations, and the General Administration of Quality Supervision, Inspection, and Quarantine (GAQSIC) for some trademark enforcement. Recognizing that both patents and trademarks are important to China’s National Intellectual Property Strategy, in China 2025, China completely revamped the structure of intellectual property administration and administrative enforcement. In March 2018, China dismantled both SAIC and GAQSIC, brought both patents and trademarks under SIPO’s control, and renamed SIPO to a new English name, China National Intellectual Property Administration (CNIPA). CNIPA itself is under the supervision of the newly formed State Administration for Market Regulation (SAMR).
CNIPA’s main responsibility is to implement principles, policies, decisions, and plans related to intellectual property formulated by the Chinese Communist Party (CCP). Specifically, CNIPA must strengthen the creation, protection, and application of China’s patent and trademarks. That means CNIPA devises plans and regulations to “rigorously protect trademarks and patents,” including examination, registration, and administrative adjudication of intellectual property. In addition, CNIPA is responsible for the administrative enforcement of trademarks and patents, handling local intellectual property disputes. Further, CNIPA is in charge of fostering the use of intellectual property. This responsibility covers CNIPA’s new policies on promoting the transfer, licensing, and commercialization of intellectual property. CNIPA will standardize the valuation of intellectual property assets for commercialization purposes and formulate policies and measures to develop and supervise intellectual property intermediary services related to the commercialization of intellectual property assets.
With broad scope of authority in the management and enforcement of patents and trademarks, CNIPA is a powerful administrative agency in accelerating China’s manufacturing of intellectual property. Among its many initiatives, CNIPA implemented fast-track intellectual property applications and shaming measures against infringers.
2. Fast-Track Intellectual Property Applications
China has implemented several measures to fast track patent applications. The fast-track program reflects China’s focus on key industry sectors. In 2012, SIPO targeted invention patent applications related to environmentally friendly or green technology innovation in China. Five years later, in 2017, SIPO expanded the fast-track program to other technology areas. Specifically, the Administrative Measures for the Priority Examination of Patent Applications, which became effective on August 1, 2017, recognized industries involved in energy conservation and protection, new-generation information technology, biological sciences, high-end equipment, new materials, electric automobiles, and smart technologies. The Administrative Measures also focus on fields related to the internet, big data, cloud computing, and any industries encouraged and supported by local governments. Qualified applications will receive their first examination reports within forty-five days, and CNIPA will issue patents within one year.
When COVID-19 hit Wuhan, CNIPA addressed new problems caused by the fast transmissions of the virus that brought Wuhan to a complete lockdown. The State Administration for Market Regulation, National Medical Products Administration, and CNIPA jointly promulgated the Ten Measures to Support the Resumption of Work and Production. Among the Measures, patent and trademark applications related to the prevention and control of the COVID-19 pandemic are prioritized.
3. Enforcement of Intellectual Property Initiatives – Shaming Infringers and Fast-Tracking Infringement Proceedings
Two other recent notable initiatives implemented by CNIPA relating to the enforcement of intellectual property are shaming infringers and accelerating administrative enforcement measures.
Individuals or entities that engage in intentional infringement of intellectual property face public shaming, in addition to court orders on damages and injunctions. Such infringers are deemed “untrustworthy.” Their identities are then published by the State Administration for Market Regulation, which possesses supervisory authority over CNIPA. This is the first time public shaming of intentional infringers by an administrative agency has materialized. Such measure confirms China’s serious stance regarding intellectual property enforcement and sends a message to all infringers that intentional infringement of intellectual property will not be tolerated. Impliedly, China signals to companies that they should continue in their creation of intellectual property and trust that their intellectual property assets will be protected and enforced.
Indeed, with enforcement mechanisms, CNIPA devised a new and fast approach to adjudicating major patent infringement disputes. The administrative adjudication is efficient in both time and cost. The entire infringement adjudication, from the filing date to the final decision, is only three months long. Powerful injunctive remedies are available to the intellectual property owners who prevail. Losing parties may appeal the administrative decisions to a people’s court. The types of patent infringement qualified for fast-track adjudication include disputes involving major public interests seriously affecting the development of an industry, inter-provincial administrative disputes, and disputes with a significant impact. This fast-track administrative adjudication for patent infringement is innovative and maintains no peers in other jurisdictions, including the United States, the European Union, and Japan. Again, such measure demonstrates that China has entered a new phase regarding intellectual property. China, the global manufacturer of intellectual property, encourages the manufacturing of intellectual property through implementation of strong enforcement mechanisms, among other initiatives.
IV. Manufacturing Intellectual Property Through Subsidies
The United States has frequently criticized and berated China as an egregious violator of intellectual property rights and a pirate of counterfeit trademarked and copyrighted goods. By providing filing subsidies, housing subsidies for intellectual property professionals, and other industrial subsidies, national and local governments in China strategically incentivize the production of intellectual property by Chinese individuals and entities both in China and worldwide.
A. Patent and Trademark Filing Subsidies
One of the most common subsidies provided by the Chinese government is a subsidy for patent and trademark filings. China’s patent subsidies comprise part of the government’s national policy to increase the number of patent filings for the last two decades. Indeed, China announced the National Intellectual Property Strategy in 2008, initiating new developments in the creation, commercialization, protection, and administration of intellectual property. Within this framework, China released the National Patent Development Strategy (Patent Strategy) in 2011, mapping how China would innovate and become competitive through the implementation of new incentive policies, including patent subsidies.
The Patent Strategy, interestingly, affirmed the then-existing patent subsidies. For example, under the Interim Measures for the Administration of Special Funds for Subsidizing Foreign Patent Applications, effective August 28, 2009, for each invention, China authorized a maximum subsidy of 100,000 RMB, which covers five foreign applications. If the invention is deemed a “major innovation,” the filers could receive a higher sum. In addition to the national reward, the filers could seek subsidies at the provincial and municipal levels. For instance, in 2007, the Shanghai government implemented subsidies of 30,000 RMB per country for foreign filings, with a maximum of three countries. The Patent Strategy, however, distinguished the new national patent subsidies from the existing programs by focusing on high-quality, deserving patents.
Under the Patent Strategy, thirty-one of China’s provinces and municipalities adopted some type of patent subsidies, and the subsidies continue to grow much larger. For example, by 2019, the Beijing municipal government bestowed a filer with a maximum of twenty million RMB per year in subsidies for filing foreign patent applications and a maximum of two million RMB per year in subsidies for filing domestic patent applications. The Shanghai municipal government followed by bestowing a filer with a maximum of ten million RMB per year in subsidies for filing foreign patent applications. The Shanghai government also granted subsidies for filing domestic patent applications at a smaller amount.
With respect to trademark filings, Chinese provincial governments formulated subsidy programs to encourage local businesses to obtain trademark registrations. For instance, in 2016, China disclosed to the WTO a list of subsidies provided by twenty of the thirty provinces. Among the subsidies, the list revealed that three municipal governments extended monetary sums to local companies that register trademarks in the European Union, any single country, and through the Madrid System. Per trademark registration, the government grants 5,000 RMB.
By numerical measures, China has succeeded in its goal to be the top filing country in the world for patents and trademarks. China has much to celebrate as a result of its National Intellectual Property Strategy and Patent Strategy. Critics, however, offer different observations relating to the costs of China’s policy. Some critics have charged that the trademark subsidies allow applicants to engage in bad faith registrations because the grant sum exceeds the actual filing fees, promoting individuals to “easily live off of the profits of the filings.” In fact, the bad faith trademark filings are so rampant that both the Chinese and United States systems are overwhelmed. The USPTO voiced its frustration with the increase in fraudulent trademark filings by Chinese entities. Consistent with the criticism of trademark subsidies, the USPTO suggested that China’s patent subsidies encourage filers to seek patents in order to receive the subsidies but not to protect innovation. Others also asserted that China’s patent subsidies have led to an increase in “junk patents” that possess limited commercial value and impose burdens on the USPTO.
In response to the USPTO report issued on January 13, 2021, China announced on January 27, 2021, that it would phase out patent subsidies by 2025. The announcement, however, leaves other non-market incentives for patent filings intact. The other non-market factors include lowering the corporate tax rate to fifteen percent, instead of the statutory twenty-five percent, via China’s High and New-Technology Enterprise program; patent requirements for an IPO listing in the Shanghai Stock Exchange’s Science & Technology Board; and reduced prison sentences, among others.
B. Housing Subsidies for Intellectual Property Professionals
With eyes on maintaining the global lead on the number of patent and trademark filings, China adopts different types of subsidies to ensure that the manufacturing of intellectual property continues. One of the constituents assisting the procurement of intellectual property is intellectual property professionals. Companies cannot obtain patents and trademarks without the intellectual property professionals’ expertise in intellectual property law and practice. China, therefore, has recently targeted intellectual property professionals in its manufacturing of intellectual property.
Amid the rapid transmission of the COVID-19 Delta variant, when more countries imposed further lockdowns and restricted movement, China decidedly carved out a different direction. Indeed, on August 17, 2021, the People’s Government of Huangpu District, Guangzhou, China, announced its new Administrative Measures for Intellectual Property Special Funds in Guangzhou High-tech Zone, Guangzhou Development Zone, Huangpu District, Guangzhou to lure intellectual property professionals to relocate to Guangzhou.
Intellectual property professionals who are between the age of forty and fifty and mid-career, with more than fifteen years of work experience in the field of intellectual property, are qualified to receive 2.5 million RMB in housing subsidies if they are willing to relocate to Guangzhou. The housing subsidy is generous, given that the salary of intellectual property professionals, as stated in the announcement, is merely 800,000 RMB. This means that the housing subsidy is three times their annual salary. For junior intellectual property professionals below the age of forty, the housing subsidy is 500,000 RMB. Comparatively, in the high-cost housing market in Silicon Valley, local governments in San Jose, Palo Alto, and the vicinities do not offer any housing subsidies to attract intellectual property professionals to relocate to the areas.
The housing subsidies exemplify a local strategy adopted by municipalities known for developing innovation parks across China. Municipal governments compete against each other to attract talent for innovation in high-tech sectors. As intellectual property is “the bridge between innovation and value,” municipal governments want to ensure that intellectual property professionals are available and ready to build the bridge.
C. Industrial Subsidies
China’s intellectual property is the end result of Chinese subsidies in favorite sectors of the economy. In other words, China’s intellectual property strategy is at the core of China’s development in different economic sectors. Understanding China’s intellectual property strategy requires a close reading of China’s policy regarding the promotion of specific sectors.
The Chinese government’s Made in China 2025 initiative plans to direct two trillion RMB through 800 funds for the distribution of subsidies to high-tech companies. The initiative identifies ten key industries, including advanced information technology, aerospace and aeronautical equipment, automated machine tools and robotics, medicine and medical devices, and energy-saving and new-energy vehicles, among others. The subsidies are meant to facilitate development and growth in the identified sectors in China by 2025. The initiative’s ultimate goal, however, is to accelerate China’s efforts to take over international high-tech companies.
In 2020 alone, China directed a staggering 213.6 billion RMB ($33 billion) in subsidies to several key sectors. The government focuses on 113 companies in the semiconductor sector and provides payments totaling 10.6 billion RMB to these companies for the research and manufacture of computer chips. This amount represents a fourteen percent increase from semiconductor subsidies in 2019 and a twelve-fold increase from the last decade. A single chipmaker, Semiconductor Manufacturing International Corporation, received 2.5 billion RMB in subsidy payments, in addition to obtaining 2.25 billion RMB from state-owned funds, for its plan to build a new chip plant in Shenzhen. China’s heavy investment in the semiconductor sector positions the country to capture 19.4 percent of total demand for Chinese-made chips worldwide. In addition to the semiconductor industry, China focuses on defense, aviation, ship building, and pharma as the favorite sectors for subsidies. In the pharma sector, China has “drastically increased subsidies to drugmakers,” extending subsidies to companies like CanSino Biologics and Shanghai Pharmaceuticals Holding. Moreover, among the companies receiving subsidies, thirty percent are state-owned enterprises, but they seize sixty percent of the total subsidies. In addition to the subsidies, China also provides low-interest loans and tax breaks to home-grown industries.
Companies in the key industries receiving various subsidies and incentives obtain patents in record numbers. For instance, Huawei became a global telecom company after the Chinese government provided $46 billion in loans and credits, $25 billion tax breaks, and $1.6 billion in grants to the company over a decade. As the largest telecom company in the world, Huawei also leads in the number of patents issued by CNIPA. In the 5G technology area, Huawei owns 3,007 patents, the highest among all patent holders worldwide. Huawei garnered more than $1 billion in patent licensing fees from others between 2019 and 2021.
V. Manufacturing Intellectual Property Through Ex Post Incentives
China has implemented various subsidies and tax breaks to encourage companies to conduct R&D and procure intellectual property. These are ex ante programs. Interestingly, China also cultivates a new ecosystem for manufacturing intellectual property through ex post incentives. These incentives recognize intellectual property as an important ingredient for obtaining capital and financing.
A. Patents and IPO-Listing Incentives
In order to encourage the production of patents by tech companies, China recognizes patents as the innovative requirement for listing in the Shanghai Stock Exchange’s latest index. In 2019, the Shanghai Stock Exchange created the Science and Technology Innovation Board, or “STAR Board,” as referred by Chinese authorities. Applicants for the IPO listing are China’s most promising tech companies attracting worldwide attention. The twenty-five companies listed on the first day of trading have fetched gains from eighty-four percent to four hundred percent.
Notably, to be considered for listing on the STAR Board, an applicant must possess Chinese invention patents. The applicant must own a minimum of five invention patents, and the patents must be responsible for the applicant’s revenue. The applicant is also required to spend a minimum of five percent of its operating income on R&D in each of the last three years. In addition, the applicant’s compound growth rate of operating income in the last three years must have reached twenty percent. Alternatively, if the applicant cannot meet these requirements, the applicant must own more than fifty invention patents “that form the core technology of the applicant,” the core technology must have been recognized nationally by national authorities, and the applicant must have won national technology invention awards, among other factors. In other words, the listed companies are patent rich.
The requirements affirm the importance of patents, a signal that the applicants are highly regarded as innovative. The requirements link R&D spending to resulting patents and patents to the applicant’s main income. Tech companies attempting to meet the requirements fiercely compete for the IPO opportunity on the STAR Board. Investors are enthusiastic in pouring their investments into the listed companies. In two years, the STAR Board listed more than 300 companies that together raised a total of 380 billion RMB ($58.8 billion) in IPOs. The present market value of these listed companies was estimated at the time of STAR Board’s second anniversary to be 4.95 trillion RMB.
B. Patent and Trademark Pledge Incentives
Another incentive to manufacture intellectual property is the ability to use the intellectual property as collateral in pledge financing. During China’s Five-Year Plan for the period of 2016-2020, patent pledge financing rose to 470 billion RMB, representing 3.1 times the financing obtained over the prior five-year period.
Patent owners in China rely on the patents they have produced to subsequently obtain loans. In 2020 alone, Chinese patent owners registered 405,000 patent transactions that amounted to 155.8 billion RMB, an increase of 2.8 times from the previous year. In other words, China encourages lenders to accept patents as collateral for issuing loans. Nowadays, patent owners do not just manufacture patents to use and make products; they leverage patents for financing purposes. In order to popularize the patent pledge program, China implemented patent commercialization in thirty-seven key cities across the country in 2017. Three years later, the thirty-seven key cities witnessed a drastic increase in patent pledge financing; they experienced significantly higher patent pledge transactions and loan amounts compared to the rest of the country without the program.
For the combined patent and trademark pledges in 2020, China reported that financing reached 218 billion CNY, or a 43.9 percent increase from 2019. The total number of patent and trademark pledge projects was 12,093, or a 43.8 percent increase from the prior year.
Overall, the intellectual property pledge financing is part of China’s policy to allow companies that have procured patents and trademarks to gain access to credit. With the ease of access to loans, these companies can continue to survive and grow, “facilitating the high-quality development of the economy.” Also, recognizing that startups are small companies not having physical assets, possessing patents and trademarks, and often facing difficulty in securing loans, the intellectual property pledges broaden financing opportunities to these companies. Understanding that some startups operate under liquidity pressure and need quick access to financing, China created a “green channel for fast-track financing” by reducing the number of working days for processing loans from seven days to three days for companies to apply and receive loans from patent pledges and two days for trademark pledges.
C. Incentivizing Intellectual Property Creations Through a More Equitable Approach Between Employers and Employees
In the United States, inventors are obliged to assign inventions to their employers. Even if there are no written contracts, the inventors must assign the inventions if the inventors are hired under obligations to assign. Employers do not provide extra compensation to the inventors upon assignments because the employers believe that they have already provided salaries and workplace benefits for the employees to invent. Consequently, inventor-employees receive no profit sharing in the event that their employers exploit the inventions. China takes a different approach to encourage innovations by inventor-employees.
Indeed, in 2009, China revised its Patent Law to bestow remuneration rights on inventor-employees. While employers secure the right to apply for patents based on employee inventions, the employers must reward the employees. Specifically, Article 16 of the Patent Law states that employers who have received patents from an employee’s invention must “reward the inventor or designer” a “reasonable amount of remuneration according to the scope of application and the economic results.” The Chinese government then promulgated Implementing Regulations to further detail the scope of the reward to employees. The Regulations set forth a minimum “sum of money as prize” if the employer and inventor-employee fail to agree upon a reward within three months of the patent grant. The then-monetary sum was a minimum of 3,000 RMB for invention patents and 1,000 RMB for utility model or design patents. In addition to the prize money, the Implementing Regulations require the employer that profits from the exploitation of the patent to share profits with the inventor-employee for the duration of the patent’s life. The minimum percentage of the share of profits was to be not less than two percent for invention and utility model patents and not less than 0.2 percent for design patents. Alternatively, the employer may opt for a lump sum payment instead of a percentage share of profits given to the inventor-employee. In the event the employer enters into a licensing arrangement with others to exploit the patent, the employer must provide the inventor-employee a share of not less than ten percent of the fees received.
In the recent revision of China’s Patent Law, which became effective in June 2021, China continues to recognize the remuneration rights of inventor-employees and designers. Most notably, Article 15 of the new Patent Law commands that the government “encourages” employers to “implement property right incentives” by sharing stock rights, options, and dividends and enabling inventor-employees or designers to “enjoy reasonably . . . the benefits of innovation.” In other words, whatever benefits from exploiting the patents the employer obtains, the employee holds the right to a reasonable share, and the employer should implement incentive programs to reward employees. If the employer fails to implement an incentive program, the minimum amount of monetary prize, percentage of shares, and royalty from licensing fees prescribed by the Implementing Regulations govern.
The 2021 Patent Law reflects China’s new national desire to promote and encourage indigenous innovation through local talents. By recognizing the importance of inventor-employee contributions in the procurement of patents, China aims to balance the employer’s desire to hire and retain talents and the employee’s desire to be compensated for their own innovations. Employees often do not garner much protection. The new law cements the protection of the employee’s rights in inventions.
Recognition for inventorship only is insufficient; monetary remuneration in the form of equity, options, and dividends, among others, is necessary. Salary alone fails to demonstrate the value of the employee’s patents when the employer is the only entity enjoying all the benefits. Sharing two percent of the profits generated from a patent owned by the employer with the inventor-employee speaks to both the employer’s recognition of the employee’s contribution and the employer’s appreciation of the contribution.
VI. Implications For the United States and China: What Manufacturing of Innovation Means to China and the World
China’s transformation from a nation of manufacturing inexpensive goods to a nation of manufacturing innovation, as seen through the production of intellectual property assets, contains profound implications for the United States and the rest of the world.
As the new and leading global powerhouse of intellectual property, China is not producing intellectual property assets like cheap goods for sale. Intellectual property assets, such as patents, signify that Chinese individuals are no longer the factory workers but the inventors who create inventions that are of patentable subject matter, useful, new, inventive, and worthy of protection and competition. In 2019, Chinese inventors filed 1.244 million patent applications in China and 61,000 international patent applications. China tech companies like Huawei, Tencent, Lenovo, Gree, ZT, and Vivo have become global tech companies and lead the nation in the numbers of patents received by domestic and international enterprises annually. With the increase in patent filings, Chinese inventors demonstrate that they are continuously engaging in innovation, building, and creation for the constantly changing technical environment.
The large numbers of patents issued each year also demonstrate that Chinse companies are heavily investing in R&D. The works conducted by individuals in R&D yield large increases in patent filings and patent grants. For instance, Huawei invested 20 billion CNY in R&D for 2020, and it continues to lead the telecommunication equipment sector worldwide. Huawei received 6,371 patents, leading all domestic and international firms in their patent filings in China. Tencent planned to invest $70 billion into emerging technology in the next five years, and the company’s patent filings in blockchain technologies constituted 12.4 percent of 5,800 patent applications in this new niche. In addition, Tencent captured the vision of digital inheritance and filed for a patent on how to let owners pass down digital items like in-game property and currency upon death. In other words, manufacturing intellectual property reflects an increase in R&D spending and the seizing of new opportunities in new technologies.
With respect to copyrights, China understands the importance of content and the associated soft power. By rapidly revising its copyright law, China accommodates and encourages the explosive growth and distribution of digital content for entertainment and communication. For instance, China is among the largest digital publishing markets in the world. This means that ancillary advertising revenue generates the financial resources necessary to propel both the development and growth of China’s digital publishing industry. Likewise, China’s game sector, consisting of mobiles games, PC web games, and PC client games, just to name a few, had a market of $58 billion in 2020, which is expected to rise to $86 billion by 2027. Top game publishers are all Chinese companies, as foreign games failed to reach Chinese players. Moreover, China’s domination in 5G technologies allows the growth of a mobile-based virtual reality gaming market. China’s successful games are made for Chinese audiences, with cultural appeals in the storylines and effects. In addition, games have soft power: Chinese players enjoy playing social games to fulfill their desires to be inclusive. Further, game companies like Tencent build platforms of digital content that allow players to go from playing games to listening to music streaming services and using educational apps to read books and learn English.
On the opposite end of companies spending on R&D is trademark and brand acquisitions. When companies file and obtain trademarks, they have reached a mature stage in the process. These companies now have products to enter the marketplace and need to have names, logos, and symbols associated with their new products. In other words, these companies have gone through R&D, as well as the building and testing of their products. Filing for and obtaining a trademark registration signifies the readiness of companies to showcase the concrete results of their innovations. Therefore, China being the global powerhouse of manufacturing trademarks suggests that many Chinese companies have continuously engaged in the innovative and creative process in order to introduce new products, under new trademark registrations, into the marketplace.
In manufacturing innovation, China exerts domination over its vast domestic market, shutting out foreign competition. Foreign companies have been vying for a share of China market. But these companies face stiff competition and unwelcoming restrictions. In sectors related to intellectual property, such as telecommunication, consumer electronics, hardware, software, and biopharma, among others, Chinese firms dominate the Chinese market. This means that Chinese consumers and businesses are no longer dependent on foreign goods and services that are based on intellectual property. Indigenous innovations fuel the appetite of Chinese consumers.
Consequently, without recognizing these implications and initiating appropriate responses, the United States will continue to face its own demise. In many ways, the United States has lost its focus. The political instability, Trump divisions, January 6th insurrection, racial and income inequality, health care insecurity, and pandemic crisis expose the United States’ fragility and inability to match China’s fast pace in innovation. Further, the American exceptionalism hinders a willingness to recognize China for its transformation and innovation. Hawkish policy pundits often demonize China as tech pirates; they ignore comprehensive policies implemented by China in the last twenty years, which have positioned the country to become the number one producer of intellectual property assets for the new information economy. Manufacturing innovation means that China has already set up a new stage for the next global competition to determine which nation will reign in tech. This means that corrections are needed to propel the United States for a position in the new tech war. Still, effective corrections can only occur after the United States stops demonizing China and recognizes the multi-prong approach that China has implemented on manufacturing innovation.
VII. Conclusion
Manufacturing innovation is a long and strategic process that China has embarked upon in the last two decades. China is in position to compete for tech domination as the world moves into the new information age. Time is of the essence for any serious competitors in the new era. Recognizing the complex layers of China’s approach to manufacturing innovation is the first step for the United States to position itself in the new tech war.
