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Pdf/ 13-298 7Lh8.Pdf CIGI Papers No. 239 — March 2020 Beyond “Forced” Technology Transfers Analysis of and Recommendations on Intangible Economy Governance in China Anton Malkin CIGI Papers No. 239 — March 2020 Beyond “Forced” Technology Transfers Analysis of and Recommendations on Intangible Economy Governance in China Anton Malkin About CIGI Credits The Centre for International Governance Innovation (CIGI) is an independent, non- Director, Global Economy Robert Fay partisan think tank whose peer-reviewed research and trusted analysis influence Program Manager Heather McNorgan policy makers to innovate. Our global network of multidisciplinary researchers and strategic partnerships provide policy solutions for the digital era with one goal: to Publications Editor Lynn Schellenberg improve people’s lives everywhere. Headquartered in Waterloo, Canada, CIGI Graphic Designer Sami Chouhdary has received support from the Government of Canada, the Government of Ontario and founder Jim Balsillie. VISION CIGI is an internationally recognized think tank that addresses significant global issues at the intersection of technology and international governance. MISSION CIGI builds bridges from knowledge to power by conducting world-leading research and analysis to offer innovative policy solutions for the digital era. À propos du CIGI Le Centre pour l’innovation dans la gouvernance internationale (CIGI) est un groupe de réflexion indépendant et non partisan dont les recherches homologuées par des pairs et les analyses fiables incitent les décideurs à innover. Grâce à son réseau mondial de chercheurs pluridisciplinaires et de partenariats stratégiques, le CIGI offre des solutions politiques adaptées à l’ère numérique dans le seul but d’améliorer la vie des gens du monde entier. Le CIGI, dont le siège central se trouve à Waterloo, au Canada, bénéficie du soutien du gouvernement du Canada, du gouvernement de l’Ontario et de son fondateur, Jim Balsillie. VISION Le CIGI est un groupe de réflexion de renommée internationale qui traite des problèmes mondiaux importants à l’intersection de la technologie et de la gouvernance internationale. MISSION Le CIGI jette des ponts entre la connaissance et le pouvoir en menant des recherches et des analyses de pointe pour offrir des solutions politiques innovantes à l’ère numérique. Copyright © 2020 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Board of Directors. For publications enquiries, please contact [email protected]. This work is licensed under a Creative Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright notice. Printed in Canada on Forest Stewardship Council® certified paper containing 100% post-consumer fibre. Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org Table of Contents vi About the Author vi Acronyms and Abbreviations 1 Executive Summary 1 Introduction 2 China’s Technology Acquisition Model 4 Dimension One: State-abetted, Market-driven Acquisitions 12 Dimension Two: FDI Restrictions and Joint Ventures 19 Dimension Three: Regulatory and Jurisprudential Measures, Including Competition Law 23 Policy Recommendations 25 Conclusion 26 Works Cited About the Author Acronyms and Anton Malkin is a CIGI research fellow. His Abbreviations research focuses on China’s role in the global economy, with a focus on finance and intellectual property. At CIGI, Anton has published works on the impact of China’s industrial upgrading 3G third generation policies on global trade governance, the domestic 5G fifth-generation politics of capital account liberalization in China, and China’s relationship with the International AI artificial intelligence Monetary Fund and regional financial governance arrangements. Anton's current research examines CCP Chinese Communist Party the impact of China’s industrial policies on Chinese multinational firms’ acquisition of foreign- FDI foreign direct investment owned technology assets and China’s financing of ICs integrated circuits emerging technologies through venture capital. ICTs information and communications From 2012 to 2013, Anton was a senior visiting technologies scholar at the School of International Studies at Peking University. His Ph.D. thesis examined IoT Internet of Things the role of foreign financial institutions in the transformation of China’s financial IP intellectual property markets and state-owned enterprises. IPR IP rights JVs joint ventures LTE Long Term Evolution M&A mergers and acquisitions MNCs multinational corporations MOFCOM Ministry of Commerce NDRC National Development and Reform Commission NPEs non-practising entities OECD Organisation for Economic Co-operation and Development R&D research and development SAMR State Administration for Market Regulation SEPs standards-essential patents SOEs state-owned enterprises VC venture capital WIPO World Intellectual Property Organization vi CIGI Papers No. 239 — March 2020 • Anton Malkin Executive Summary Introduction This paper examines the drivers of Chinese firms’ What role does the Chinese government play in acquisition of foreign technology, which has the acquisition of foreign technology by Chinese elicited a great degree of unease among advanced firms — both state-owned and private? The economy policy makers. It focuses, specifically, answer is seemingly straightforward, or so the on the Chinese government’s role in Chinese US government contends: IP theft and industrial firms’ tech acquisitions. Categorized by critics as espionage, coupled with market leverage to “forced technology transfers,” China’s technology extract foreign technology from foreign direct acquisition regime in fact encompasses legitimate, investment (FDI) arrangements. These practices rules-based methods of technology acquisitions, are typically referred to as forced technology such as outbound mergers and acquisitions (M&A), transfers.1 However, a closer examination of the patent portfolio purchases and competition law issues presents a more complicated picture. enforcement. It also encompasses failings of the Chinese legal and regulatory system, government- To begin, the concept of forced technology transfer business collusion, trade secret theft and other is itself broad. It encompasses legitimate, rules- types of intellectual property (IP) infringement. based methods of technology acquisitions, such Conflating the failings of China’s regulatory as outbound M&A, patent portfolio purchases system and legal enforcement with the actions and competition law. It also encompasses failings of Chinese firms (private and state-owned), and of the Chinese legal and regulatory system, with China’s industrial policy writ large, leads to abuse of Chinese FDI regulations, industry- the conclusion that China’s technology acquisition government collusion and other rent-seeking practices amount to a concerted public-private behaviour by Chinese firms (both state-owned effort to advance Chinese business interests and private). This paper seeks to illuminate these at the expense of those of its trading partners. complexities and to give a more accurate picture This paper challenges this common perception of what China’s trading partners could expect surrounding the motivations behind Chinese from the country going forward. It also seeks to firms’ technology acquisition strategies. give guidance to small, open economies, such as Canada, on how to maintain and improve It investigates China’s technology acquisition trade relations with China. This issue has gained framework from three dimensions: first, the special urgency in the context of the emerging asset-seeking dimension, which involves Chinese technological and trade rift between China and firms’ outbound technology acquisitions; second, the United States, which threatens to balkanize inbound acquisition based on joint ventures (JVs); the world’s technological supply chains. and third, regulatory and jurisprudential policies employed by Chinese authorities. In addition, This paper investigates China’s technology this paper provides a model for understanding acquisition framework from three dimensions: China’s technology acquisition regime and → first, the asset-seeking dimension, explains how China’s changing IP protection which involves Chinese firms’ and commercialization framework changes the outbound technology acquisitions; dynamics of Chinese firms’ approach to foreign technology. It shows that while the Chinese state → second, the dimension of inbound, plays an active role in Chinese firms’ technology JV-based practices; and acquisition choices, its role should be seen as one of facilitator, rather than as one of a predominant → third, the dimension of regulatory driver of the choices that Chinese firms make in and jurisprudential policies employed catching up with their global rivals’ technological by Chinese authorities. capabilities. This process of catch-up is carried out within an environment when both global, The paper begins by providing a model for as well as domestic, IP laws are tightening, as understanding China’s technology acquisition Chinese firms are expected (by Chinese authorities) regime and explains how China’s changing IP to commercialize and utilize
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