This may be the author’s version of a work that was submitted/accepted for publication in the following source: McGaughey, Sara L., Liesch, Peter W., & Poulson, Duncan (2000) An unconventional approach to intellectual property protection:The case of an Australian firm transferring shipbuilding technologies to China. Journal of World Business, 35(1), pp. 1-20. This file was downloaded from: https://eprints.qut.edu.au/210963/ c 2000 Elsevier Science Inc. This work is covered by copyright. Unless the document is being made available under a Creative Commons Licence, you must assume that re-use is limited to personal use and that permission from the copyright owner must be obtained for all other uses. If the docu- ment is available under a Creative Commons License (or other specified license) then refer to the Licence for details of permitted re-use. It is a condition of access that users recog- nise and abide by the legal requirements associated with these rights. If you believe that this work infringes copyright please provide details by email to [email protected] License: Creative Commons: Attribution-Noncommercial-No Derivative Works 4.0 Notice: Please note that this document may not be the Version of Record (i.e. published version) of the work. Author manuscript versions (as Sub- mitted for peer review or as Accepted for publication after peer review) can be identified by an absence of publisher branding and/or typeset appear- ance. If there is any doubt, please refer to the published source. https://doi.org/10.1016/S1090-9516(99)00031-0 AN UNCONVENTIONAL APPROACH TO INTELLECTUAL PROPERTY PROTECTION: THE CASE OF AN AUSTRALIAN FIRM TRANSFERRING SHIPBUILDING TECHNOLOGIES TO CHINA McGaughey, S.L., Liesch, P.W. and Poulson, D. (2000) An unconventional approach to intellectual property protection: The case of an Australian firm transferring shipbuilding technologies to China. Journal of World Business, 35(1):1-20. Author for Correspondence: Sara L. McGaughey, Department of International Economics and Management, Copenhagen Business School, Howitzvej 60, 1st and 2nd floor, DK 2000 Frederiksberg, Denmark E-mail: [email protected] Tel: +45 3815 3004 Fax: +45 3815 2500 This version 1 September 2003 Abstract1 Risks associated with the dissipation of intellectual property rights of foreign firms transferring technology to China have received some attention in the academic and professional, trade-based literature. An innovative Australian manufacturer and designer of large, high-speed catamaran ferries (INCAT) recently entered into a joint venture with a Hong Kong-based partner (AFAI) to manufacture ferries in China, without any formal, institutional protection of its proprietary knowledge. Key findings uncovered through an in-depth analysis of this case include the identification of novel bundles of firm-specific resources and capabilities that sustain a firm's intellectual property and, ultimately, its competitive advantage in the face of dissipation risks, and a combinative competency of the firm in creating these bundles. This study illustrates a case in which the conventional means of protecting intellectual property need not always be followed to best ensure the firm’s retaining its competitive positioning in foreign markets. 1 The authors wish to thank Jeff Kelly, CEO of the Department of State Development in Tasmania, for sharing his insights concerning the internationalisation of Incat, and the anonymous reviewers of Journal of World Business for useful suggestions on an earlier version of this paper. The insights and advice of Professor Rosalie Tung are also acknowledged with much appreciation. This research was supported by the United States Information Agency for an Asia-Pacific Economic Cooperation grant which assisted in funding a visit to China to conduct interviews at the Panyu shipyard, and a Special Research Grant from the University of New South Wales. INTRODUCTION One aspect of firm internationalisation that is increasingly attracting the attention of firms, governments and academicians is the risks associated with the dissipation of a firm’s technology and know-how in foreign market operations. This is often cited as an issue of particular concern to foreign enterprises entering countries which have had a history of infringement of intellectual property (IP) rights, including China (Ding, 1997; Vanhonacker & Pan, 1997). At the forefront of the Big Emerging Markets, China represents an attractive market to foreign enterprises (Cui, 1998). Since the early 1980s, the Chinese ‘open door’ policy has enabled greater flexibility for foreign business activities in China, with the importation of technology and know-how being a primary focus of the Chinese government’s policies (Chen, 1995). Indeed, China's modernisation programs, popularised since 1975 by Deng Xiaoping, have recognised the critical importance of imported technology transferred from foreign corporations and governments (Tackaberry, 1998). This same philosophy remains today. To facilitate the importation of technology from abroad, it has often been argued that strong IP protection is necessary. The willingness of technology-rich foreign firms to transfer technology to less-developed nations has arguably been jeopardised by the threat of dissipation of IP rights embedded in their products and processes (de Bruijn & Xianfeng, 1993), although in some quantitative studies the variables chosen to capture the importance of IP protection are insignificant (Ball, Rong & Pearson, 1993; Vanhonacker & Pan, 1997). Although China was accepted as a member of the World Intellectual Property Organisation in 1980, the introduction of China’s patent law in April 1985 was viewed as vulnerable to one-sided interpretation by a number of foreign firms (Chen, 1995). 2 Furthermore, while respect for individual property rights is deeply rooted in the individualism (Hofstede, 1994) of many western cultures and nations, the collective and group-oriented Confucian and Marxist heritages of China is at odds with such a belief (Zeller 1999), adding to the perceived risks for foreign technology-based firms operating in China. China, in particular, has been identified as having weak IP rights legislation, a very weak level of enforcement and a very weak overall level of protection, when compared with other developing Asian economies such as Indonesia, Malaysia and the Philippines (Deng, Townsend, Robert and Quesnet, 1996). Protection of foreign firms’ technologies has, however, been strengthened by Memorandums of Understanding on IP protection between China and a number of her trading partners. China has also recently demonstrated an increased commitment to international standards in traderelated areas including IP protection, as is evidenced by its substantive compliance with the requirements of the GATT Uruguay Round Agreement on Trade-Related Aspects of Intellectual Property Rights and the strengthening of judicial enforcement of IP rights and efforts to gain membership of the World Trade Organisation (WTO). China withdrew from the GATT, the predecessor to the WTO, in 1949. While China lodged an application for membership of the WTO in 1986, this has not yet been accepted due to a process whereby new entrants must finalise agreements with all member countries on the terms of entry as a precondition to WTO membership. To date, China has concluded agreements with a number of countries, including Japan, South Korea and New Zealand, but there are still contentious issues to be resolved with, among others, the United States, the European Community and Australia. While an agreement with Australia was almost reached during the last round of negotiations, the Chinese submission was eventually rejected because it lacked specifics. 3 In July 1999, the US House of Representatives voted to extend China's Normal Trade Relations (NTR) status for another year, despite the debate over the alleged Chinese stealing of nuclear technology. In the past, the US has been instrumental in blocking China's entry into the WTO. The negotiations between the US and China will continue in September 1999, when Presidents Clinton and Jiang Zemin meet at the APEC summit in Auckland. Opinions on the prospects for China's entry into the WTO in 1999 are mixed. Although IP issues have not been a major sticking point in the negotiations concerning China's entry into the WTO, China's accession to the WTO is likely to be viewed as a positive step towards mitigating the perception that remains among many technology- oriented organisations that there is a high risk of dissipation of one’s proprietary know-how in China. Indeed, China’s 1996 APEC Individual Action Plan outlines a number of strategies designed to enhance the protection of IP rights should it gain access to WTO by 2000, including improvements in administrative enforcement, the strengthening of judicial tools and efforts to further enhance public awareness of IP right protection. Nonetheless, the ongoing perception of IP-related risks in China is also partly a function of China’s approach to technology transfer. China's technology transfer regulations have been written to favour the Chinese recipient firm. For example, the foreign licensed technology typically belongs to the Chinese partner following expiry of a technology transfer agreement, which is generally of less than ten years duration (Bassolino and Tse, 1999). This is the antithesis of a fundamental tenet of western technology licensing, in which the use and disclosure of the IP by the terminating licensee is precluded. In addition, the codified technology that is transferred to a Chinese venture must 4 be certified by a government research and design institute, whose charter is also the diffusion of technologies to domestic enterprises (Tackaberry, 1998). Consistent with, and perhaps a consequence of these policies and procedures, are a number of problems that a foreign investor in China may face, including the counterfeiting of products made in China, the unauthorised sale of products made under licence, and the unauthorised use of technology that has been transferred (Wheare, 1996). Illustrating this concern in the Chinese context, the Chairman and Managing Director of Zhuhai Toria Marine Engineering Co.