IPR laws and internet censorship harm US businesses in China

The internet is a key element in today’s digital economy, with most businesses in the developed world having broad high speed access to uncensored data streams and digital tools. While the Chinese market remains generally positive for American businesses in a number of key respects, the laws and regulations of intellectual property rights and their enforcement remain problematic. A recent survey finds that 52% of US businesses cite China as a greater risk of IP leakage and data security threats than other regions in which they operate. Internet censorship too is inhibiting US businesses operating in China, among which productivity, data sharing across global operations and deploying companywide digital tools is impeded.

Every year, for the past 18 years, the American Chamber of Commerce in the People’s Republic of China (AmCham China) has produced a survey into the local market conditions of American businesses operating in China. This year’s survey, titled ‘2016 China Business Climate Survey Report’, was created in partnership with Bain & Company. The research itself involves 469 respondents from American businesses operating in China. The respondents are predominantly senior-level country managers (66%), followed by directors or functional heads (16%). Respondent companies have a range of revenues, with 34% under $10 million, 35% between $10 and $100 million and 31% above $100 million. The companies operating in China do so across a range of sector categories including Industrial & Resources, Technology & Other R&D Intensive, Consumer (product & service) and Services.

The research covers a range of factors relating to the operating environment in China. These include not only the company’s revenue growth and macro-economic conditions, but also factors such as continued investment in the region, access to skills, regulatory changes, and intellectual property conditions.

Intellectual property rights
The research highlights that China remains a region in which intellectual property rights (IPR) laws and regulations in a range of categories are lowly rated by American company’s operating in the region. Trade secrets protection is particular poorly rated, with 38% of companies saying that they are ineffective, compared to 17% who say that they are very ineffective. Patents are the best protected through laws and regulations according to the respondents, at 66% saying that regulation is either effective or very effective, while 27% say that it is ineffective.

In terms of the enforcement of IPR laws and regulations, trade secrets fares the worst — with 40% saying that enforcement is ineffective and 20% saying it is very ineffective. Patent enforcement also fares relatively poorly, with 34% saying that enforcement is ineffective and 12% saying that it is very ineffective.

Chinese authorities are mindful to the damage IPR violations, especially in the area of trade secrets and patents, can have on the friendliness of the business environment. Recent years have seen the environment improve, according to respondents. In 2014, 86% said that China’s IPR laws had improved in the past five years. In 2015, this increased further to 91% that believe IPR laws have improved in the past five years.

The report also finds the level of risk associated with IP leakage and IT or data security threats in China remains riskier than in other jurisdictions in which the company operates. In 2015, 52% of respondent companies rated China as a greater risk, while 46% say it is comparable to other jurisdictions. There is, however, a downward trend in terms of IP and IT or data security threats in the country — in 2014, as much as 60% said the risk in China is greater.

Internet censorship on business
Another issue the report highlights is that ‘the great firewall of China’, and other measures to inhibit the free flow of information on the internet through censorship of content and websites, continues to impact companies’ ability to conduct business in the country. 36% of respondents believe it negatively impacts their operation, 43% say that it somewhat negatively impacts their conduct while 11% say it is somewhat positive and 10% that it positively impacts their operations.

The effect of censorship has a range of effects on business. Productivity issues and the (in)ability to share data between global teams, due to the slower pace of accessing websites outside of China, is cited as an issue for 77% of respondents, while the inability to access certain websites and sources of crucial information/data was cited by 71% of respondents. 63% said that they were hampered by unreliable or inconsistent access and speed, which saw one in ten organisations invest less in innovation in the country, while 56% were unable to use certain online tools for their operations — limiting the potential of new companywide digital tools available in other regions. Only 5% of respondents said that internet controls do not hinder their business in any way.