Intellectual property protection is the No. 1 challenge for multinational corporations operating in China. According to the U.S. government, China accounted for nearly 80% of all IP thefts from U.S.- headquartered organizations in 2013, causing an estimated $300 billion in lost business. For European manufacturers, the loss of IP in China reduced potential profits by 20%. The effects from IP leakage are visible in counterfeited items including toys, luxury goods and automotive and aircraft parts.
But IP violations go beyond products. They extend to pirated operational processes and entire business and service models. For many multinational corporations,
IP leakage becomes a barrier to integrating Chinese sites and partners into global innovation activities. IP leakage frequently occurs through staff transfers or shared practices from foreign multinational corporations to local joint ventures or supply chain partners. For multinationals, this type of IP leakage is often a calculated risk worth taking. However, unintended IP leakage can affect a company’s reputation and profitability. Even worse, it can create powerful local or even global competitors.
To learn about how companies are managing the China IP protection challenge, authors Andreas Schotter and Mary Teagarden studied more than 50 multinational corporations. They identified nine IP protection practices that companies can use in China. Four of the practices are defensive and externally focused; the other five are proactive and internal. Together, these practices, which operate on the strategy, legal and business intelligence layers, create what the authors call the “IP protection web,” which allows corporations to (1) expand faster within China and across other emerging markets; (2) improve performance; and (3) enhance local and global innovativeness.
According the authors, most of the companies they studied learned to protect their IP through trial and error — there is no single “best” process or practice. However, the changing composition of IP risk creates a need for ongoing reconfiguration. Indeed, as Chinese companies become more skillful at absorbing leaked IP from those employees who formerly worked for international rivals, international companies must develop more sophisticated responses and develop new ways to engender loyalty.