Summary:
  • Ultimately, China’s weak IPRs enabled it to become what it is today – imitation breeds innovation.   
  • China has now reached a critical point in the IPR-innovation relationship: protection of IPRs must be enforced with greater vigour if innovation is to continue - by protecting homegrown innovation (and its profits), a greater incentive for innovation and development is created.
  • There are massive sectoral and regional variations in innovation and in IPRs enforcement – generally, regions with stronger IPRs have higher levels of innovation, yet no cause and effect can be easily established. 
  • China’s transition away from export-led growth relies on strong domestic innovation and robust IP protection to attract overseas investors 
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To cite this work: Katy Ling. (2018). “To what extent have intellectual property rights protections promoted innovation and development in China?”, katyling.com

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To what extent have intellectual property rights protections promoted innovation and development in China?

Introduction
Any question regarding Intellectual Property Rights (IPRs) in China requires a multi-dimensional approach, owing to the dynamic nature of the IPRs environment. Today’s intellectual property (IP) environment in China tells a different and more encouraging story than at the start of the reform period, partly due to a top-down effort to strengthen IPRs and repair the country’s stained image as a nation of pirates and counterfeiters. This change can be seen in the wider context of China’s structural transformation: shifting  from a manufacturing-based economy dependent on exports, to one led by domestic-demand and driven by innovation (Hsu, et al., 2016). Innovation and development in China have also been improving, especially in the fields of science and technology. The following analysis finds that IPRs protection in China is promoting innovation and development to a mixed extent. From a brief discussion of the literature, it is noted that there is a general consensus that better IPRs protection does increase innovation. After a summary of IPRs laws in China, the role of economic development in relation to China’s innovation will be explored. Next, the CCP’s policies aimed at increasing innovation-driven development are assessed. Disparity in the IPRs-innovation relationship by region and sector is then analysed before looking at the influence of inward FDI on Chinese innovation.

China’s attitude and legislation surrounding IP has been evolving for the last forty years. Although some IPRs laws began to appear in the late nineteenth century, these were obliterated under Maoist rule until the PRC’s ‘opening up’ in December 1978 marked a momentous turning point in the Chinese attitude to IP (Devonshire-Ellis, 2011:2). Economic reform increased trade relations with other countries who then put a spotlight on China’s weak IPRs. Throughout the 1980s, China made substantial progress in IPRs, joining major international organisations such as the World Intellectual Property Organisation (WIPO) and the Paris Convention. Significantly, China made dramatic reforms to its IP laws throughout the 1990s in order to conform to the Agreement on Trade-Related Aspects of Intellectual Property Rights and join the WTO (Maskus, 2004:49). China has continued to update its specific patent, trademark and copyright laws since accession to the WTO, and now has a similar IPRs legal framework to developed countries. Despite this, China maintains a reputation for counterfeit goods and IP infringement, as is evidently being demonstrated by the looming trade war between Washington and Beijing.

Definitions
Firstly, the title concepts must be deconstructed. Development in this sense is linked to innovation, and is used in relation to scientific and technological advancements. Innovation can be defined as ‘the application of knowledge to change or create more effective processes, products and ideas’ (IPO, 2016). Innovation is responsible for the progress of humankind, without inventors, artists, entrepreneurs and the like producing cultural and technological advancements, society would not be where it is today. Innovation has also been closely linked to economic prosperity (Rosenberg, 2004; Furman et al., 2002), and is very similar to the concept of IP.

WIPO (2011:2) defines IP as ‘creations of the mind’ which include ‘inventions; literary and artistic works; and symbols, names and images used in commerce’. IPRs are simply the rights given to the creators of these intangible assets which legally prevent others from copying or modifying a creation and can manifest themselves in patents, trademarks and/or copyrights. Patents protect new inventions from being made without permission by giving the owner exclusive rights to the invention, for a limited time (Devonshire-Ellis, 2011:7). Similarly, trademarks safeguard any word combination, symbol, design or grouping of colours which distinguish one brand from another (Devonshire-Ellis, 2011:7). Lastly, copyrights grant protection for creators of literary and artistic works (Dimitrov, 2009:15).

The IPRs-innovation relationship
To analyse the extent to which China’s IPRs protection has promoted innovation, it is important to delineate the relationship between the two. Generally, there is a consensus that some level of IPRs are needed in the modern world, however, there is debate about how strong these protections should be for maximising innovation. On the one hand, the case for strong IPRs sees protection as essential for mitigating the risks of innovation. Innovations takes considerable time and money and the probability of failure is high; IPRs help incentivise innovation by increasing the benefits and outweighing the costs (IPO, 2016). Weak IPRs protection allows the reproduction of this hard-work for only a fraction of the cost, so, as well as curtailing the incentive for innovation, it also facilitates piracy and counterfeiting (Primo Braga et al. 2000:27). Therefore, the exclusive rights granted to holders of IP are essential in allowing them to price their creations above marginal costs to recover the original investment, despite limiting society’s immediate access to it (Primo Braga et al. 2000:27). This trade-off has been termed the ‘patent-bargain’ (Sweet and Maggio, 2014:666) and ensures that the pay-off from this gamble is sufficient. Kanwar (2007) provides empirical support for this argument, finding that continuously strong IPRs have a significant positive influence on innovation.

On the other hand, too strong IPRs have been heavily criticised. Gangopadhyay & Mondal (2012) argue that excessive IPRs discourage innovation as they supress the ‘free flow of scientific knowledge’ required for new developments and for improving prior innovations. Similarly, Heller and Eisenberg, (1998) see strong IPRs protection as producing a ‘tragedy of the anticommons’, whereby scarce resources are underused due to the owner’s exclusive hold of them. Moreover, extensive patent allotting will raise the price of innovation, making it more inaccessible. Given that both these arguments hold merit, an inverted-U shaped relationship between innovation and protection has been widely accepted (Furukuwara, 2007; Cadot and Lippman, 1995): a moderate to strong approach to IPRs will maximise the rate of innovation. Ultimately, the best level of protection will be that which allows the innovator to cover the risk-adjusted cost of innovation (Yueh, 2009:306). Importantly, cause and effect is difficult to establish. That is, innovation may determine the level of IPRs protection as well as IPRs protection influence innovation. The next section will examine the argument that innovation can prelude strong IPRs and still promote innovation.

The Role of Development
China continues to experience ubiquitous IPRs infringements – from the pirating of Hollywood films to the counterfeiting of pharmaceuticals – which has caused mounting tension with the US in particular. For example, in 2014, the US seized a total of $108 billion counterfeit goods originating from China (IACC, n.d.). This has largely been attributed to weak enforcement of the IPRs protection in place. The Chinese IPRs legal system is relatively new, meaning many courts have little experience which contributes to the enforcement problem (Gassman et al., 2012:23). However, the two main obstacles to effective enforcement are local protectionism and inadequate punishment (CECC, 2005:29).

Local protectionism sees judges abuse their power to protect local interests and promote their regional growth at the expense of others (Long & Wang, 2015:49). That is, a region may benefit considerably from IPRs infringement from its job creation and revenue (Chaudhry & Zimmerman, 2009:129). Long & Wang (2015) found that a plaintiff’s chance of winning is significantly higher if they go to court in their home town but that appeals at the provincial level reversed this trend, which suggests a locality bias. Moreover, for those found guilty of IPRs infringement, punishments are not enough to deter reoffending (CECC, 2005:29). For example, in 2015, less than 1% of trademark cases were transferred to the criminal system (SIPO, 2015a:16). Although, there are signs of improvement in IPRs enforcement (p. 8-9) IPRs violations are so rampant in China that the problem will not be stamped out any time soon. Therefore, protection in China can be seen as weak, relative to developed countries.
With such ineffective enforcement and an overt disregard for IPRs in China, much of the literature suggests that innovation in China should be low. On the contrary, innovation has been on the rise since 1978. As of 2017, China ranked 22nd place in the Global Innovation Index (GII, 2017), moving up from 43rd place in 2009/10 (GII, 2009/10); this improvement has occurred despite the ongoing counterfeiting problem. But why would the Chinese risk innovating when it can be copied at much lower financial and time costs, undercutting their profit? One answer lies in the level of China’s development. Despite having the second largest economy in the world, it must be remembered that China is still a developing nation, both in terms of its economy and society.

It has been suggested that ‘the optimal level and impact of IPR could vary by stage of economic development’ (Park, 2008:297). For developing countries, effective IPRs matter less because there is less domestic innovation to protect. Moreover, weak protection allows the copying of foreign innovations whereby citizens can ‘learn by doing’, increasing the potential for future innovation (Raustiala & Sprigman, 2013:27). This echoes the argument that strong IPRs hinders innovation by restricting knowledge, and suggests that this is affected by level of development. From a realist perspective, governments, in the pursuit of self-interest, act rationally when they allow weak protection and the resultant imitation, as it is the surest way to catch up with their more advanced counterparts. Therefore, the optimal level of protection for China, as a developing country, will be different to that of developed countries.

Peng (2013) puts forward an institutional-based view of IPRs, arguing that the weak protections in China are temporary and will improve once the economy becomes sufficiently innovation-driven. Drawing on the history of the US to support his theory, Peng asserts that there should be a more optimistic outlook on Chinese IPRs. In the nineteenth century, the US, going through much the same economic transition that China has been undertaking since 1979, was ‘the leading IPR(s) violator’, at the expense of the British who repeatedly tried to negotiate with America to improve its IPRs laws (Peng, 2013:135). This situation is remarkably similar to that of the US and China today, with America replacing the UK as the fiercest advocate for IPRs protection. IPRs protection will improve when a country has more to lose than to gain from weak laws and enforcement. Because China’s IPRs protections were relatively weak in the first few decades of reform, innovators have been able to learn from developed countries which has fostered home-grown innovation. In this sense, copying is not always the enemy of innovation (Raustiala & Sprigman, 2013:26).

One need only look at China’s growing smartphone industry to see an example of imitation generating innovation. China’s top smartphone companies have long been lambasted as Apple or Samsung copycats, making cheaper, lower quality products with similar designs, functions and even names. For example, Apple successfully prevented Xiaomi, a top Chinese technology firm, from registering its ‘Mi Pad’ tablet as an EU trademark on the basis of the name being too similar to Apple’s ‘iPad’ (Reuters, 2017). Such outright imitation is a by-product of the lax IPRs laws in China and is also enabled by the lack of legal action from western companies not wishing to risk a lawsuit in the precarious regulatory environment. However, after years of imitation, companies such as Xiaomi, are being recognised for their own technical innovations and developments in the smartphone market. Huawei, one of Xiaomi’s competitors, spent US$9.2 billion on research and development (R&D) in 2015, outspending Apple, and demonstrating a commitment to bringing something new to the market (Osawa & Schechner, 2016). This strategy paid off when Huawei released its P9 smartphone a year later with a dual-camera, making it the first mainstream smartphone to incorporate the advanced system; Apple subsequently released the iPhone 7 Plus with the same feature. This suggests that Chinese tech companies are beginning to innovate in the smartphone market, and are even being copied by American companies themselves.

Another demonstration of China leading the way in innovative tech is Tencent. Like China’s smartphones, Tencent used to receive accusations of copying competitor companies, such as AOL. The founder even candidly expressed in 2007 that “[To] copy is not evil” (Sullivan & Liu, 2015:414). Yet, nearly twenty years after its creation, Tencent has become a global innovator of its own, with WeChat, an instant messaging app, achieving phenomenal success with 1 billion monthly users (Atkinson, 2018) and opening the door for the company to expand its e-commerce innovation. The app sets itself apart from other messaging apps due to the multi-functionality of the platform; users can pay, book a cab and even find a date without leaving the app. Therefore, it is PayPal, Uber, Tinder and more, all rolled into one. Established western tech giants are following Tencent’s model, with Facebook integrating e-commerce into the social media platform (Crouch, 2016). Therefore, China’s lax IPRs permitted the accumulation of experience which has had a positive effect on innovation in the long-run. 

That being so, perhaps China has now reached the turning point whereby innovation is accounting for sufficient economic development and needs protecting. The PRC initially introduced IPRs laws due to large external pressure but now internal pressure is acting as the main driving force for change. There are bourgeoning domestic calls for IPRs reform in China. For example, Jack Ma, founder of Alibaba, a Chinese e-commerce conglomerate, has referred to the counterfeiting of goods as a ‘cancer’ and took the company into the International Anti-Counterfeiting Coalition in 2016 (Economist, 2016). Moreover, Tencent called for the CCP to increase the punishment on IPRS violators and make law enforcement more rigorous (Wan, 2015). Peng et al. (2016:28) sees such domestic pressures as mirroring those from indigenous stakeholders in the US in the late nineteenth century, such as author Mark Twain and Eli Whitney, inventor of the cotton gin. Moreover, the majority of IP lawsuits in China, over 98%, are between domestic firms rather than with  foreign companies (Prud'homme, 2017) suggesting that the Chinese are getting serious about IPRs. Therefore, following the logic of history, China must now improve the enforcement of IPRs as the Chinese economy becomes more reliant on innovation, especially in its big businesses.

The State and Innovation
It is important to understand the increase in Chinese innovation in the context of China’s structural transformation. When the reform period began in the late 1970s, China quickly gained a reputation as the world’s factory and became a leader in manufacturing and cheap labour. Yet, the CCP is striving to move up the value chain and to decrease dependence on its export-led growth, as outlined in ‘Made in China 2025’ (Branstetter, 2017). One only need to look on the back of Apple’s iPhone to summarise the current state of global industry: “Designed by Apple in California: Assembled in China”; China is striving to make “Designed in China” the new norm. The aim is to become a ‘big technological innovation power by 2050’ (Reuters, 2018) and the CCP recognises that strengthening IPRs protections is one way to achieve this.

Beijing has made considerable steps towards enhancing the enforcement of IPRs, announcing the National IPRs Strategy in 2008 with the purpose of promoting innovation. 2014 saw the establishment of specialised IPRs courts in Beijing, Shanghai and Guangzhou, signalling dramatic progress in the PRC’s commitment to IPRs enforcement. The courts offer a more direct channel for IPRs disputes to be heard, speeding up the process and making it more effective. In 2017, similar IPRs tribunals were set up in China’s ‘second-tier’ cities, such as Wuhan and Nanjing. These bodies have first instance jurisdiction over IP cases in their respective provinces, removing cases from the local courts and mitigating the effects of local protectionism (Weightman, 2018). Moreover, technical investigators are employed to offer IP expertise to judges which improves the fairness of the adjudication process.  

Further progress in China’s IPRs can be seen in increased deterrence of IP infringement. Relative to developed countries, China used to insist on ‘unrealistic standards of proof’ and held strict conditions for evidence (Hu, 2016:5). This, along with the small damages awarded to the winners – an estimated 36% of the damages patent holders seek – made IP cases not worth pursuing for many businesses (Weightman, 2018). However, the 2014 revision of the Patent Act sought to facilitate the burden of proof and some courts have established an ‘obstruction of evidence’ precedent which assumes the infringer’s guilt if they withhold requested evidence (Hu, 2016:23-24). Moreover, Xi Jinping has insisted that China will increase punishments on IPRs violators so that they pay a heavier price (Xinhua, 2017). The IPRs courts have been instrumental in keeping Xi’s promises: the average damages awarded for patent infringement are now US$217,000, a three-fold increase from 2015 (Weightman, 2018). 

The improving protections have indeed coincided with an increase in innovation. For example, venture capital, a proxy for innovation, was 6.5 times higher from 2014 to 2016, than the previous two year period (Chandler, 2017). Venture capital investment carries great risk, therefore, this represents a growing confidence in China’s entrepreneurs and innovators. This increase came after the establishment of the specialised courts which created a securer investment environment, supporting the theory that effective legal institutions, which uphold IPRs, promote innovation and increase economic development (Fang et al, 2017:2448). Moreover, after the passage of the PRC’s first patent law in 1985, there were 138 patents granted (another common proxy for innovation) (Yueh, 2009:307), after three amendments refining patent protections, nearly 360,000 patents were granted in 2015 (WIPO, 2016). This suggests that the ‘patent-bargain’ is incentivising innovation.

In spite of this, the quality of these patents has been debated. This has been connected to the incentives the CCP offers for patent filing encouraging low-quality patents. Such incentives include professional promotions, hukou permits, tax breaks or money (Economist, 2010). In 2015, only 20.9% of patents granted were classed as ‘invention patents’, of which have much higher standards for innovative content (SIPO, 2015b). Therefore, the genuine innovativeness of the granted patents widely varies. Furthermore, whereas 5% of Chinese patents seek foreign protection, 50% do so in the US, suggesting that Chinese inventors regard upwards of 95% of their domestic inventions as being of such low quality, they are not worth attempting to patent abroad (Economist, 2014). Therefore, the state’s role in producing innovation is limited: genuine innovation cannot be forced.

Notwithstanding, the state policies’ impact on China’s innovative advances should not be understated. In 2015, Chinese scientists became the first in the world to genetically modify human embryos. This substantial scientific development received worldwide recognition and is a considerable step in preventing genetic diseases (Cyranoski and Reardon, 2015). Moreover, in early 2018, Chinese researchers achieved a physics milestone when they sent securely encrypted data using quantum mechanics. Unlike previous Chinese research in the area, this signalled China’s place at the forefront of new technology (Cookson & Hornby, 2016). Rather than the increased IPRs protection, these breakthroughs give merit to the significant government funding dedicated to R&D. From 2012 to 2017, there was a 70.9% increase in R&D expenditure in China (Reuters, 2018). Moreover, the CCP has been encouraging the study of STEM (science, technology, engineering and maths) subjects, with twice as many STEM graduates in 2013 than the US (McCarthy, 2017). The increased money available for R&D as well as the future researchers from increased STEM students acts as an important determinant of China’s innovation in science and technology. Consistently, Yueh (2009) found that the input of R&D personnel is a significant determinant of patents, and therefore innovation. This suggests that the recent developments in China may have been a product of the increased means for innovation rather than the changed IPRs. Therefore, IPRs are not the only influencing factor on innovation in China, top-down policies also play a role, although not always successfully. Nevertheless, there is substantial evidence that, in line with the literature, strong IPRs do foster innovation in China.
Fang et al. (2017:2466) found that higher post-privatization gains in innovation are concentrated in Chinese regions with high IPRs protection, whereas privatisation in areas with weak protection had virtually no effect on innovation. Supporting the argument for strong IPRs, they contend that innovation is dependent on the profits gained which in turn depends on the strength of protection (Fang et al., 2017:2448). Moreover, Ang et al. (2014) supports these findings showing that stronger IPRs protection increases spending on R&D in Chinese firms and produces tangible innovation such as patents. The increased security from stronger IPRs has therefore been shown to promote innovation in China.

Variation in China’s IPR and Innovation
Fang et al.’s (2017) study brings to light the regional variation in IPRs protection across China. Due to its great size, China is made up of varying administrative regions, each with provincial governments with a degree of autonomy over policy in their region. This has made the strength of IPRs in each area inconsistent, owing to regional IPRs-related entities such as the government, the public and enterprises (CIPI, 2009) and varying degrees of local protectionism. This disparity is demonstrated by Figure 1, which compares the strength of IPRs in a region to the number of invention patents granted – a valid indicator of innovation. Figure 1 shows a strong positive correlation between IPRs strength and innovation strength throughout China: the stronger IPRs protecting regions also ranked highest for patents granted. For example, Jiangsu was ranked first and second for invention patents granted and IPRs strength respectively, whereas Anhui was ranked seventh and tenth. 
 

This regional disparity reflects the wider issue of economic and social inequality in China. These seven regions are the top innovating areas in China and are all located in the east, mirroring the urban-bias China’s development has taken, with the greatest economic progress concentrated in the eastern-coastal regions. For example, Beijing and Shanghai have some of China’s strongest protections, consistently, they also rank in the top 5 innovating regions (Figure 1) and are the two richest in terms of GDP per capita (Babones, 2018). These two regions also received dedicated IPRs courts in 2014, suggesting that the reform efforts are  geographically skewed to the most economically developed areas.

There are not only regional inconsistencies in China’s IPRs protection, significant sectoral disparities exist as well. Industries in China have been growing at different rates, the sectors protected are generally in the areas where there has already been indigenous development. For example, there have been great developments in China’s biotechnology industry, such as the genetic modification research (p. 9). Consistently, there are also strong protections for biotechnology, with strict prosecution for infringement and invalidation of non-inventive patents (Wang and Wu, 2018). Moreover, with a rapidly ageing population it is in China’s best interests to make advancements in this sector. As such, China’s IPRs laws have been promoting innovation in some industries and not others. Yu (2007:208) states that in the areas of pharmaceuticals, fertilizer and foodstuffs, China would benefit less from greater protections. The CCP might be more hesitant about increasing protection in these areas as the general public would bear the costs, owing to resultant higher prices (Yu, 2007:209). Besides, investment from low-end goods and services relies more on cheap production costs and market opportunity for investment, rather than strong IPRs laws (Yu, 2007:209). Indeed, the weak IPRs protection in these sectors is evidenced by frequent reports of large-scale ‘fake food’ production including rat-meat posing as lamb and the well-documented scandal of melamine contaminated baby formula in 2008 (O’Brien, 2017). Consequently, the weaker IPRs protections in these low-end industries allows for more piracy of such goods, which will reduce innovation in the field. Therefore, like regional variation, IPRs and thus innovation, differs between sectors.

A further explanation for the geographical and sectoral variations in IPRs lies is the influence of foreign pressure. In 2006, the US identified Guangdong, Beijing, Zhejiang, and Fujian as ‘hot spots’ in ‘acute need’ for more effective and sustained ‘proactive, deterrent IPR[s] enforcement’ (USTR, 2006:16). As seen from Figure 1, these areas have since built the strongest IPRs framework in China.[1] This suggests that the international focus on these areas prompted the CCP to prioritise change in these specific regions and subsequently has promoted more innovation here. In terms of sectoral disparity, Cheung (2009:81) writes that government departments regarded as ‘having the necessity to demonstrate to the world Chinese IPR compliance’, such as IT and trade, ‘would pay closer attention in observing IPR rules’. Again, this highlights the importance the CCP places on its global image and why IPRs have been promoting innovation to a mixed extent. 

The Influence of FDI
China’s reputation as a pervasive infringer of IPRs has had negative consequences for innovation owing to the effect on foreign direct investment (FDI). Inward FDI benefits innovation by increasing domestic patent applications, as a result of ‘spillover effects’ (Cheung & Lin, 2004:25). For example, inward FDI has a ‘demonstration effect’ whereby the very presence of foreign companies can inspire new innovations in the host country (Cheung & Lin, 2004:26). Moreover, vertical spillover from foreign firms to their local suppliers enhances innovation capabilities of domestic companies through means of knowledge transfer and staff training (Cheung & Lin, 2004:26).

Recently, China’s IPRs theft and the consequences this has for American businesses have made headlines, with estimated costs to the US between $225 billion and $600 billion per year (Pham, 2018). There has been mention of a trade war between the two countries after President Trump imposed high tariffs on Chinese imports. These events, as well as China’s inability to shake its reputation as an IPRs infringer, generate damaging consequences for China. US FDI into China has stagnated since 2012 (Rhodium, n.d.) and dropped by 6.5% in the first seven months of 2017 compared to 2016 (OECD, n.d.). Although there are numerous factors effecting inward FDI to China, such as trade costs, the perception of weak IPRs in China can be seen as a catalytic inhibitor to foreign investment. In support of these claims, Zhang et al. (2016:13) find a significant positive correlation between the degree of IPRs in China and inward FDI in the country. Thus, as FDI can produce innovation, China’s weak IPRs laws may be discouraging foreign investment and hindering domestic innovation.

Moreover, China’s pursuit of a transition away from export-led growth requires investment from high-tech industries, especially as labour-intensive industries have begun to move to cheaper countries. Foreign firms were initially attracted to China after the reopening of its economy to take advantage of the cheap labour and the emerging market, which were enough to outweigh the costs of ineffective IPRs protections (Yu, 2007:180). However, such location advantages have begun to fade as China develops and the middle class expands. Rising wages means that companies, including Nike, have begun to leave in search of lower-cost options in the rest of Asia: average hourly wages in a Chinese factory increased by 64% to $3.60 from 2011 to 2016 – more than five times the average in India (Yan, 2017). Therefore, the pull factors which once lured big companies to China are diminishing and increasing the attention paid to push factors, such as weak IPRs. As iterated on page 12, high-end industry is less-reliant on these location advantages and are more concerned about China’s IPRs laws. If China does not improve its reputation, it risks becoming stuck in the middle-income trap as it struggles to attract the new investors it needs to upgrade its industry. In this sense, China’s IPRs have not been promoting maximum innovation and development due to pessimism from foreign firms. This will begin to matter more in the future as the attractiveness of China’s cheap labour supply declines and more sophisticated industries look for a securer IP environment.

Conclusion
Overall, IPRs in China have been promoting innovation and development to a mixed extent. On the one hand, China’s IPRs can be seen as correspondent to its level of development. Lax protections allowed for widespread imitation which produced gains in innovation as citizens learned valuable skills, as is demonstrated by the smart phone industry. However, China has now reached the critical moment where it must strengthen protections to protect home-grown innovation. Successful improvements to IPRs can be seen in the specialised courts and harsher punishments for offenders, which suggests China is moving in the right direction. This progress, in conjunction with the national effort to encourage innovation, such as through increased R&D expenditure, can be seen as promoting innovation. On the other hand, weak IPRs in China have a negative impact on incoming FDI, of which has been shown to encourage innovation through knowledge transfer. Moreover, state policies, such as patent subsidies, have produced superficial gains in innovation, with disproportionate numbers of invention patents to the number of patent applications. The regional and sectoral disparities in Chinese IPRs and subsequent innovation variation emphasise that a blanket answer cannot be given. In the coastal areas and major cities, IPRs have promoted innovation and development, however improvements have been less in the rural and inland areas of China. Again, this shows how IPRs are rooted in development; economic development will be a driving force for change in areas with weak IPRs which will consequently promote innovation there.

This essay has shown that China is not the exception to the rule that strong IPRs protections promote innovation. The Chinese are driven by the incentives and profit offered from strong IPRs. If China is to successfully transform into an innovation-driven economy, it must upgrade its IPRs protections throughout the country and different industries, as well as convince the international community that it no longer deserves its infamous reputation. If it does not, the impressive advances in Chinese innovation risk stagnating.
Appendix

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