China's Exports Moved Up the Value Ladder, EIU Report Underlines Dragons at the Door Thesis

Exports no longer only from coastal provinces
Photo:  Danny Friedmann

'Heavy duty, China's next wave of exports', is a insightful concise report (17 pages) from the Economist Intelligence Unit. It sheds light how the Chinese equipment manufacturing industry is climbing the value ladder. The first waves of exports were dominated by textiles and electronics and took place in the coastal provinces. The manufacturing for this coming export wave takes place in China's hinterland (for example Sany, Zoomlion, Sunward from Changsha, Hunan province, before Xugong from Xuzhou, the coastal province Jiangsu was most prominent in construction-equipment manufacturing), and as of 2012 it will not be driven by foreign direct investment but by domestic companies. Whether this shift in export activity from the coast to the hinterland is enough to bridge the gap in income inequality remains to be seen. The majority of the exports go to developing countries, or so called non-members of the Organisation for Economic Co-operation and Development (OECD) in 2012.

The report reads like the empirical support of professors Williamson and Ming's great book Dragons at your door, see IP Dragon's Book Review. Because although the report makes clear that the developing countries  mostly prefer low technological solutions, it also tells that it gives the Chinese manufacturers, that use innovation to produce at lower costs and offer more variety, the economies of scale so that the Chinese companies can offer higher technological solutions to more developed markets later on and become formidable competitors of companies such as Caterpillar. In other words the companies in the OECD can expect some enormous competition in a not too far future, and they should ask themselves some strategic questions, such as:

• Can we afford to stay out of these emerging markets that will make giants of our Chinese competitiors?
• Should we try to be more innovative by making a more sophisticated product or should we try to be more innovative by making the product in a more sophisticated way and by doing so, make the product cheaper and in more varieties?
• How can we harness these innovations in patents?

Read the EIU report here (after registration free pdf)

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Sobering Statistics Put China's Innovation Into Perspective

In the graphical perspective,
things become smaller if the distance
from the observer increases

Professor Anil Gupta and Haiyan Wang, writers of the book 'Getting China and India right', put China's innovation statistics into perspective.

Patent filings in 2008

• U.S.A. 400,769 filings
• Japan 502,054 filings
• China 203,481 filings

Gupta and Wang have a point when they argue that the Chinese inventions patented outside China are a more objective measure than the ones registered by State Intellectual Property Office (SIPO).
The most compelling statistic is the number for triadic patents or triadic patent families (patents that origin from one country but that are patented by the European Patent Office, United States Patent and Trademark Office and the Japan Patent Office).

Triadic patent families according to Organization for Economic Cooperation and Development (OECD) in 2008

• Europe 14,525 filings
• U.S.A. 14,399 filings
• Japan 13,446 filings
• China 473 filings

See the Compendium on Patent Statistics for 2008 here (pdf) on page 6. 

However, I would argue that these patent filings are not the best measure. Patent registrations would be a far more better indication of patent quality. 

Professor Gupta and Mr Wang wrote: in 2010 China accounted for

• 20% of the world's population
• 9% of the world's GDP
• 12% of the world's R&D expenditure
• 1% of the patent filings with or patents granted by any of the leading patent offices outside China. 
• 50 % of the China-origin patents were granted to subsidiaries of foreign multinationals   

Professor Gupta's and Mr Wang's Wall Street Journal article 'China's Innovation Is A Paper Tiger' can be read here and should not be confused with the title of my thesis 'Paper Tiger Or Roaring Dragon, China's TRIPs Implementations and Enforcement'.

UPDATE August 2, 2011: 
Joff Wild, editor of Intellectual Asset Management gives an update since 2008. In short: the growth in the number of China's triadic patent filings/grants paints a rosy picture. However China's innovation prospect is much bleaker. On this I concur with Mr Wild. Read more about the relation between innovation and intellectual property and innovation and censorship here.

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How To Measure IP Enforcement: Enforcement/Infringement Ratio and "Data Data and Data"

One of the recommendations of my upcoming thesis called: 'Paper Tiger or Roaring Dragon? China's TRIPs Implementations and Enforcement' is the need to increase transparency about IP enforcement (and of course it is the raison d'être of IP Dragon). To know whether China's enforcement progresses or declines I proposed the enforcement/infringement ratio which can be compared to the preceding enforcement/infringement ratio. I got a few emails asking questions about the enforcement/infringement ratio. I hope I answered your questions with the following (if not, please let me know):

Denominator: enforcement

How to measure the enforcement activities of China? One could use the aggregate number of foreign companies that effectively made use of China's enforcement routes (administrative, litigation, criminal and customs). A problem is that companies who enforce their IPR in China do not want to tell the world about it, because they fear that this will deteriorate their businesss opportunities in China. To overcome this fear an anonymous database could be made available.

Nominator: infringement

How to measure the infringement activities in China? The total number of IP infringements is very hard to determine for China. One could use the seized infringed goods originating from China by a network of customs outside China. The checks should be done in a uniform way. Up to now, the value of China’s exports of counterfeit and pirated goods is bigger than that of counterfeited and pirated goods used for domestic consumption. That is why using the data of the seizures of counterfeit and pirated goods by a network of foreign customs are relevant.

To get feedback about this ratio I talked to the people from the World Customs Organisation (WCO), European Union Directorate General Taxation and Customs Union (EU DG Taxud) and the Organisation of Economic Cooperation and Development (OECD). The theoretical idea of the ratio was well received. But all had questions about the practicalities of the ratio: i.e. How to get reliable data?

The OECD just came out with part IV, the executive summary (parts I-III will be made public later), of a comprehensive report about the economic impact of counterfeiting and piracy world wide. Its conclusion is that transparency about IP enforcement is key, but that in practise it is is very hard to gather, even for the OECD with all its expertise and resources. A fortiori this might be the case for data about IP enforcment in China.

The executive summary of the OECD report says:
"Information on counterfeiting and piracy falls far short of what is needed for rigorous analysis and for policymaking. Priority should be given to (i) improving information that is available from enforcement activities (i.e. customs and other law enforcement agencies) and (ii) expanding the use of surveys to collect basic information on developments from right holders, consumers and governments."

These additional information should be, according to the OEDC, systematically collected, comparable and comprehensive. See pages 18-21 of Part IV The Economic Impact of Counterfeiting and Piracy Executive Summary.

Asked about what was the biggest challenge to get transparency about IP enforcement, the remark from Mr. Wolfgang Hübner, counsellor in the OECD's Directorate for Science, Technology and Industry was telling: "Data data and data." The methodology of the OECD report was to send a questionnaire to all WCO member countries of which 90 responded. The quality of those responses was not consistent.

On a smaller scale, for example in the EU or in a network of a few EU members, it might be feasible to get the systematic, comparable and comprehensive data about IP enforcement.

That is why the EU or a network of a few EU members might be a great candidate to make use of the enforcement/infringement ratio.

The realisation that transparency about IP in China is of great importance cristallised May 22, 2007 into a Memorandum on Strengthened Cooperation in Border IPR Enforcement between the General Administration of Customs (GAC) and the US Customs and Border Protection (CBP), which was signed by Mu Xinsheng, Minister of Customs and U.S. Customs and Border Protection Commissioner W. Ralph Basham (see picture).

In the memorandum the two countries agreed to exchange information on significant intellectual property rights seizures each quarter in order to track violators and conduct enforcement actions. "The country receiving information will have 90 days to report to the providing country on enforcement actions resulting from this disclosure of information.
U.S. and Chinese Customs officials have pledged to exchange counterfeit and pirated goods seizure statistics every six months for goods originating in or destined for the other country. The statistics exchange will describe the number of seizures, quantity and value of goods, description and/or Harmonized Tariff Schedule classification of the commodities, mode of transportation and the main ports of import and export for the goods in the two countries."

See the news release of the US Customs and Border Protection here.

Another thing agreed upon in the memorandum is that both countries must provide information of up to 10 specific IPR-related seizures each quarter. That sounds not very ambitious. But it might be a first step to give access to each other's IPR enforcement activities. Read Zhu Zhe's article about it for the China Daily here.

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Cost of Piracy Overestimated Says OECD, Underestimated Says ICC

Steve Whitehouse of Thomson Financial reports about an unpublished Organisation for Economic Cooperation and Development (OECD) study which puts trade losses in 2005 at up to 200 billion US dollar, considerably lower than the 600 billion US dollars estimated by the International Chamber of Commerce. Read Whitehouse's article via Forbes.com here.

US officials estimate the costs for companies [1] around the globe. of China’s counterfeit and piracy exports as between US $ 50 [2] and 60 billion [3] a year.

However, objective statistics about IP in China are a great challenge for scholars. That's why IP Dragon proposed to use the Enforcement/Infringement ratio, for it does not give absolute figures, but at least gives an indication of whether the situation improves or deteriorates, read more here.

China is not the only one to blame for its lack of transparency. Trade associations and lobby groups have their own agenda. Some argue that Business Software Alliance has misrepresented the facts [4] or that Motion Picture Association of America claims a right to misrepresent the facts [5].

Notes:
[1] This excludes the lost tax revenues for governments, lost employment, and extra costs for health and safety.
[2] “U.S. officials say its exports cost legitimate producers worldwide up to $50 billion a year in lost potential sales,” Associated Press, ‘China’s piracy hurting its own industries’, July 7, 2006, available at: http://www.msnbc.msn.com/id/13617619.
[3] “International companies are losing more than $60 billion a year because of piracy in China, according to the U.S. government,” ‘U.S., EU to Fight Counterfeits From China, Russia’, Bloomberg, June 19, 2006, available at: http://www.bloomberg.com/apps/news?pid=10000100&sid=aTSjqiimKzYc&refer=germany.
[4] “BSA or just BS”, Economist, May 19, 2005, available at: http://www.economist.com/business/displaystory.cfm?story_id=E1_PJJPQNS.
[5] Ryan Singel, “Copyright Groups Continue Fight Against Anti-Lying and Spying Bill-Updated”, Wired Thread Level, April 11, 2007, available at: http://blog.wired.com/27bstroke6/2007/04/copyright_group.html.

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