6
The Legal Environment: Competition Policy, Standards, and Intellectual Property

A country that aspires to become a leader in innovation not only must have a well-developed research and commercialization infrastructure and ready availability of investment capital but also must create a legal environment that is conducive to innovation. As STEP board member and session moderator Alan Wm. Wolff noted in his opening remarks, competition policy, standards, and intellectual policy are among the policy levers that countries use to influence innovation. Microsoft or Intel or a biotechnology firm may choose to invest anywhere in the world; but wherever they go, they will be governed by local rules of intellectual property protection and competition policy and technical standards that are likely to reflect local conditions even if they adhere to international standards. The key question for any policy, he said, is whether it promotes innovation. “The impact of these policies can be very positive. They can also be distinctly negative.”

The speakers in Session 6 examined some aspects of competition, standards, and the legal environments in China and India in the context of their contribution to innovation and treatment of foreign direct investment in the two countries.

COMPETITION POLICY IN CHINA

Following his introductory remarks, Alan Wolff discussed recent developments in China’s competition policy—in particular the newly enacted anti-monopoly law (AML), drafted in a relatively open process, allowing foreign firm participation. Foreign direct investment has been essential to China’s development and growth, but now the government of China seeks an “objective symbiosis” between international investment and indigenous innovation. This will entail stronger intellectual property rights and stronger, more vigorously enforced anti-trust laws. Under the new law, a key determinant of market dominance is whether a company has 50 percent of the market. Abuse of such a dominant position can involve sustaining unfairly high prices or refusing to trade with related parties without justification.

In the discussions leading up to the new AML, observers became concerned about how the law will apply to multinational firms and whether it will be used to restrict them unfairly relative to domestic firms. For example, industries dominated by state-owned enterprises are exempt from the law’s application altogether.

STANDARD SETTING IN CHINA

Pete Suttmeier of the University of Oregon has studied the use of technical standards as a policy tool of China’s government. There is a popular proverb: “Third-class companies make products; second-class companies develop technologies; and first-class companies set the standards.” Fifty percent of China’s current product standards are based on international standards, but China aspires to internationalize more Chinese standards. The development of Chinese standards is viewed as a means of gaining leverage in international commerce that has been beyond China’s reach.

China is wary of the international standards setting process as a result of its experience with Wired Authentication and Privacy Infrastructure (WAPI), DVD technology, and video



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6 The Legal Environment: Competition Policy, Standards, and Intellectual Property an “objective symbiosis” between international A country that aspires to become a leader in investment and indigenous innovation. This will innovation not only must have a well-developed entail stronger intellectual property rights and research and commercialization infrastructure stronger, more vigorously enforced anti-trust and ready availability of investment capital but laws. Under the new law, a key determinant of also must create a legal environment that is market dominance is whether a company has 50 conducive to innovation. As STEP board percent of the market. Abuse of such a member and session moderator Alan Wm. Wolff dominant position can involve sustaining noted in his opening remarks, competition unfairly high prices or refusing to trade with policy, standards, and intellectual policy are related parties without justification. among the policy levers that countries use to In the discussions leading up to the new influence innovation. Microsoft or Intel or a AML, observers became concerned about how biotechnology firm may choose to invest the law will apply to multinational firms and anywhere in the world; but wherever they go, whether it will be used to restrict them unfairly they will be governed by local rules of relative to domestic firms. For example, intellectual property protection and competition industries dominated by state-owned enterprises policy and technical standards that are likely to are exempt from the law’s application reflect local conditions even if they adhere to altogether. international standards. The key question for any policy, he said, is whether it promotes innovation. “The impact of these policies can be very positive. They can also be distinctly STANDARD SETTING IN CHINA negative.” Pete Suttmeier of the University of Oregon The speakers in Session 6 examined some has studied the use of technical standards as a aspects of competition, standards, and the legal policy tool of China’s government. There is a environments in China and India in the context popular proverb: “Third-class companies make of their contribution to innovation and treatment products; second-class companies develop of foreign direct investment in the two countries. technologies; and first-class companies set the standards.” Fifty percent of China’s current product standards are based on international COMPETITION POLICY IN CHINA standards, but China aspires to internationalize more Chinese standards. The development of Following his introductory remarks, Alan Chinese standards is viewed as a means of Wolff discussed recent developments in China’s gaining leverage in international commerce that competition policy—in particular the newly has been beyond China’s reach. enacted anti-monopoly law (AML), drafted in a China is wary of the international standards relatively open process, allowing foreign firm setting process as a result of its experience with participation. Foreign direct investment has Wired Authentication and Privacy Infrastructure been essential to China’s development and (WAPI), DVD technology, and video growth, but now the government of China seeks 27

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28 THE DRAGON AND THE ELEPHANT compression. Its proposed WAPI standard was PATENTS AND INNOVATION IN INDIA rejected internationally in March 2006. China’s Shamnad Basheer, visiting George strategy on standards so far has had Washington University law professor, spoke on disappointing results. Still, many Chinese the evolution of the Indian patent system, which believe that the country has not only a world has been driven by the pharmaceutical industry, class capacity for technological innovation but the dominant patent filing sector (Figure 9). As also enormous market power for influencing recently as the 1970 Patent Act, India departed technical standards and that the two should be from international norms advocated by the developed and exploited hand in hand. The United States in replacing product patents with current long-term plan (2006-2020) calls for process patents for pharmaceuticals. When moving the economy from “Made in China” to firms understood they could then legally make “Created in China.” In the meantime, against an existing products simply by changing the international background of institutional fluidity, production process, huge growth followed for China has pushed for open standards and open the Indian generic manufacturers. Ranbaxy’s source development. production of Cefaclor, an antibiotic, is an Chinese standards have generally not been example of a commercially successful Indian successful in first-tier markets, but may fare product based on that strategy. better in the relatively near term in second- and By accepting the 1994 Agreement on Trade- third-tier markets. In Suttmeier’s view, the Related Aspects of Intellectual Property (TRIPS) United States and other advanced countries as part of the Uruguay Round trade negotiations, should engage with China and anticipate a India was obliged to reintroduce pharmaceutical broader “regime insurgency” against the role of product patents, over huge resistance, and finally the World Trade Organization and other did so in the Patent Act of 2005. How does the multilateral bodies in setting the rules. 35,000 28,882 30,000 24,415 25,000 20,000 17,466 15,000 12,613 11,466 10,592 8,503 10,000 4 ,824 5,000 0 99 00 01 02 03 04 05 06 FIGURE 9 Patent applications in India. SOURCE: Basheer

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THE LEGAL ENVIRONMENT 29 pointed out that China has a civil law system, in 2005 law change business strategies? In contrast to the common law system of the particular, does it mean Indian firms will United States. Common law systems derive develop more R&D-based innovative products? general rules from specific cases, while civil law The answers are not yet clear, in part because of systems usually start with an abstract rule that the slowness of the Indian Patent Office, which judges interpret and apply in specific cases. has only 135 examiners to handle 26,000 patent Chinese intellectual property law has applications a year and the many post-grant evolved repeatedly since 1985, when no patent challenges that the system allows. A law existed. The 1985 Act was amended in modernization initiative is now attempting to 1992 and again in 2000, in anticipation of reduce the time to patent, but it will be slow- China’s entry into the World Trade going for some time to come. Organization. In 2006, a third set of Bhaven Sampat of Columbia University amendments was adopted. Meanwhile the State gave an overview of the top patent applicants in Intellectual Patent Office (SIPO) has grown India by volume. They are dominated by quickly in numbers and sophistication. In 2006 multinational pharmaceutical, information alone over 500 new examiners were hired, and technology, and telecommunications firms. cumulatively over 1.7 million patents have been Bayer, Pfizer, Honda, Qualcomm, Novartis, granted. Enforcement will and capacity have Glaxo SmithKline, Microsoft, Samsung, developed more slowly. Johnson & Johnson, Merck and Ericsson are Chinese law provides for three categories of among the top 20 patenting entities. Many of patents—invention patents (affording protection their applications are defensive, designed to for 20 years), utility model patents (10 years), protect existing products. Indian patent law and design patents (10 years). The latter two matters primarily in sectors where the Indian types of patents can be obtained more readily market is gaining a significant share of the than an invention patent, usually in a matter of global market. IT firms, for example, are not months (Table 2). Applicants generally seek filing many patent applications in India. both a utility and an invention patent at the same time, acquiring the protection of a utility patent relatively quickly and than abandoning it when THE CHINESE PATENT SYSTEM the longer-term invention patent issues. Patentability criteria include novelty, inventive- Soonhee Jang, an Eli Lilly and Company ness and practical applicability. Unlike the corporate intellectual property attorney, United States there is no provision for term provided an overview of Chinese patent law. (In extension for patents on regulated pharma- 2006, Lilly was among the top multinational ceuticals, as authorities want generic products to pharmaceutical companies in China, with more appear in the market as quickly as possible. than 1,000 employees in over 50 cities.) Jang TABLE 2 Categories of Patents under Chinese Law I nvention Utility Model Design New design of the shape, the pattern or their Any new technical Any new technical combination, or the Subject Matter solution relating to a solution relating to the product, a process, or shape, the structure or combination of the color improvement thereof combination of a product with the shape or pattern of a product 20 10 10 Patent Term (years) Substantive Examination Formality Only Formality Only E xamination Pendency 22 months 9 months 6 months SOURCE: Jang

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30 THE DRAGON AND THE ELEPHANT (Figure 10). The top international filers are Compensation schemes for rewarding Japanese, United States, South Korean, and inventors vary and what constitutes reasonable German nationals in that order. remuneration is sometimes controversial, In discussion, the experts on the Chinese and although a common basis is 2 percent of a firm’s Indian patent systems agreed that it is premature after-tax profits on an invention. It seems to judge whether the current patent regimes in unlikely that uncertainty about employee both countries are providing an impetus to compensation is a deterrent to inventiveness and innovative activity. On the other hand, foreign innovation. Between 2000 and 2006, patent direct investors are voting on the newly applications have increased more than 20 strengthened patent systems “with their feet,” percent every year; filings by Chinese nationals investing heavily in both China and India. are outpacing those of foreign-owned firms 140,000 8 31 2, 12 Domestic Foreign 120,000 85 ,4 2 100,000 17 93 , 42 88 ,8 79 80,000 86 47 ,7 ,3 65 69 64 ,7 56 9 60,000 54 , 40 2 71 48 6 ,6 ,5 54 39 62 ,2 40,000 33 ,9 29 20,000 0 2001 2002 2003 2004 2005 2006 FIGURE 10 Invention patent application filing in China, 2001-2006. SOURCE: Jang