Safeguarding Your Intellectual Property in China

Some IP leakage is inevitable. From discussions with senior executives at several U.S. and European companies, here are three ways to slow involuntary leakage

By Anil K. Gupta and Haiyan Wang

Of all the challenges multinational corporations face in China, perhaps the single biggest pertains to safeguarding the company's intellectual property (IP). The country is notorious for its counterfeiters, pirates, and IP scofflaws, yet withdrawing from the world's second-largest economy is not an option for most multinationals. On the contrary, given the never-ending travails of developed economies, corporate leaders need to redouble their efforts at going after the rapidly growing opportunities in big emerging markets such as China and India.

Having conducted in-depth discussions with senior executives at several American and European companies regarding how they manage the risk of involuntary IP leakage while remaining deeply engaged with China, we believe corporate leaders must accept the reality that they can never make their company 100 percent leak-proof on the IP front. Movement of people and exchange of knowledge across organizations is a defining feature of every vibrant ecosystem—be it Boston, Bangalore, or Beijing. If you want to play in these ecosystems, you must accept the inevitability of some IP leakage. The key, therefore, is to figure out how to slow down involuntary leakage so you are able to accumulate new IP at a faster pace than the loss. Companies accomplish this objective by focusing on three goals: curbing the motivation for IP theft, reducing others' ability to steal IP, and minimizing the residual damage from the IP leakage that does occur.

Curbing the Motivation for IP Theft

Companies can deploy at least four strategies to dampen the motivation for IP theft. First, unless there are compelling reasons to the contrary, compete in not just the premium segments but also the value segments. Take Microsoft's (MSFT) Windows and Office software products for PCs. Annual per capita income in China is about $4,000, less than one-tenth of that in the U.S. In such a context, unless Microsoft offers low-cost versions of these products to potential customers, any talk of intellectual-property rights will be no better than flailing one's arms in the wind. As the company finally digested this reality, it started to offer extremely low-priced software bundles for students.

Obviously, such a multi-segment approach by itself cannot eliminate software piracy in China. In combination with other strategies, however, it can be a useful plank in reducing the level of piracy.

Second, cultivate strong bonds of affinity and commitment between local employees and the company. As Steven Leonard, Asia-Pacific president for EMC (EMC), noted to us, disgruntled or uncommitted employees can be the source of the biggest IP risks for any company. Companies such as EMC, IBM (IBM), and others pay deliberate attention to ensuring that employees find the work exciting and see the company as a potential lifelong destination rather than just a transitory ramp to better opportunities elsewhere. Offering high potential employees regional or global responsibilities beyond China is one of several mechanisms to cultivate deeper bonds with the local staff.

Third, draw a clear line between inside versus outside. As the China president of a U.S. manufacturing company noted, "We make it very clear. Here is a list of our inviolable rules—relating to intellectual property, corruption, and so forth. If you play by the rules, we'll reward you. However, if you cross the line, we'll be very tough and we'll go after you."