Safeguarding Your Intellectual Property in China

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Fourth, as much as appropriate, apply for patent protection within China. In 2007, Schneider Electric (SU:FP), the French engineering company, learned this lesson well when a Chinese court ordered it to pay 335 million renminbi ($51.5 million) in patent infringement damages to Chint, a local competitor. Jean-Pascal Tricoire, Schneider Electric's chief executive officer, has called the charges "baseless" and "absurd." The problem, however, was Chint had filed for patents within China for technology that Schneider Electric argued it had been using for years.

Reducing Others' Ability to Steal Your IP

Companies can deploy at least four strategies to reduce the ability of insiders or outsiders to engage in IP theft. First, know your landlord. In one of the companies in our study, it took senior managers a few years to realize their offices had been wired for bugging before they moved in. Further investigation revealed that the building was owned by an arm of the local government with a reputation for actively appropriating foreign companies' technologies and sharing it with local state-owned enterprises. Once the company realized what was going on, it relocated the offices—discretely but speedily.

Second, manage physical access to the facilities. One of the world's leading packaging solutions companies with a major production hub in China has carefully partitioned its factory premises. While most parts of the factory are accessible to all employees, certain parts of the production process are kept hidden behind high walls and accessible only to highly trusted staff members.

Third, manage access to the codes and the data. While theft of proprietary code and data would be an issue for any company, it can be a particularly serious problem for companies in the information technology and services sectors. Experienced companies reduce such risks by prohibiting employees from bringing in or taking out any type of computing or memory device from well-demarcated zones and by disabling the computers from transferring any files or data outside of the internal network.

Fourth, cultivate relationships with the government and the media, especially at the local levels. Local governments in China face a mixed motive situation. They are eager to attract high technology players and R&D operations. At the same time, they may also like to help local companies get a leg up. In China, perhaps more than anywhere else, it will almost always pay to cultivate solid relationships with government officials and to keep making the case that protecting everybody's intellectual property is the fastest route to creating an innovation-driven economy. Similarly, good relations with the media can come in handy when the company takes on IP violators in not just official courts but also the court of public opinion.

Minimizing the Residual Damage

As we noted earlier, when companies operate in dynamic environments populated by ambitious competitors, some degree of IP leakage is inevitable. Companies can deploy two strategies to contain the actual economic damage resulting from such leakage.

First, disaggregate the total R&D program into modular projects and distribute the responsibilities for different projects across multiple locations not just within China but, if possible, also outside China. As one executive noted to us, "Don't put the whole equation in one location. This way, even if an entire team were to get recruited by your Chinese competitor, they'd still face the challenge of figuring out the other pieces in the puzzle. That'll slow them down."

Last but not least, keep innovating like crazy. A primary reason Silicon Valley has remained the world's epicenter for innovation is because people there move rapidly from one company to another (or to their own venture) and technology secrets are almost impossible to keep. Legal protections and company strategies help, but only partially. The best protection, however, lies in taking to heart the Red Queen's remarks to Alice in Lewis Carroll's Through the Looking Glass: "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Gupta (agupta@rhsmith.umd.edu ) is a professor of strategy at the Smith School of Business, The University of Maryland at College Park and a visiting professor in strategy at INSEAD. Wang (hwang@chinaindiainstitute.com) is managing partner of the China India Institute. They are the coauthors of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).