Over the last few decades, internationalization has become a vital process of businesses and many companies have expanded operations in different countries to increase market shares and revenue. Globalization and technological advances have contributed in removing the barriers between nations through deregulations and free trade to make international venture much less expensive and less complex (Jack, 2013). For example, emerging economies have taken globalization’s opportunities to boost economic growth and development through attracting foreign investment. In emerging economies, China has been one of the most attractive markets for foreign firms since economic reforms 1970s with rapid economic growth and large population. According to World Bank (2014), China became the second largest economy in the world and it has significant impacts on the global economy. Despite of Chinese market offers foreign firms many opportunities, doing business in China involves high level of challenges. Foreign firms frequently face risks that are from unstable formal institutions and differences in cultures in China. However, intellectual property (IP) infringement is one of the most important issues in China and it has affected different multinational enterprises’ areas, including revenue’ losses, brand damage and decreased innovation’s efforts (Jain, 1996). This essay will examine the effect of intellectual property leakage on foreign firms in China. It will also analyze the drivers of IP infringement.
In China, there is a common joke, “Everything is fake but your mother”. This joke addresses that IP issues are serious in China. Most MNCs are from Western countries especially U.S have very crucial role in contributing China’s foreign direct investment (FDI). MNCs announced that IP protection is their number one challenge in China (Schotter & Teagarden, 2014). MNCs suffers IP infringement, including violations of copyrights, patents, trademarks and trade secrets. Counterfeit products are produced wide ranges including food, clothing, electronic devices, and luxury goods. In addition, even high technology goods such as mobile phones, laptop and cars cannot avoid IP violations in China. For example, Apple Inc. – an American multinational corporation that produces the wide range electronic products such as laptop and mobile phone. Apple’s distinctive products including IPhone, MacBook and iOS software have been very popular among Chinese consumers. However, according to BBC News (2011), the company cannot prevent their products being copied in China and the IP infringement also take to a higher level that the whole Apple store is copied. Fake stores had the same store’s design and appearance, logo and staffs’ uniform as real Apple stores. In fact, total 22 fake Apple stores were undercover by Chinese authorities in Kunming city South East China and the stores’ owners were charged for violating Apple’s trademarks. One of the interesting fact is fake Apple’s stores made everything looked similar to real stores that even staffs believed they worked for Steve Jobs. Therefore, IP theft issues show China’s regulatory and legal risk has high rank among risks in China (Appendix A)
Even there has been Intellectual Property Rights (IPR) established since China’s economic reform in order to attract foreign investments, inadequate enforcement of IPR is still an enormous barrier for foreign firms. Schawarz & Wong (2006) claims China produces approximately 60%- 70% counterfeit goods globally and most products are under well-known brands from U.S and Europe. Therefore, China is the main source of counterfeit product worldwide. As the result, IP issues have substantial impact on many firms from small medium size enterprises to multinational corporations operating in China. U.S is where the most MNCs are from and they have crucial investments in China. According to US government (2013), U.S organizations are victims of 80% of IP infringement in China resulting