Open Innovation and Intellectual Property Trends in China

-->

China is undergoing a revolution in the realm of IP and innovation. In just 3 decades, China has gone from no IP law to leading the world in patents filed and litigation to enforce patents. The level of innovation in China may well be the next big surprise for many in the West.

“Open innovation” is often used to describe collaboration with outside partners to accelerate innovation. Dialog about open innovation frequently assumes that it is recent and Western, but successful open innovation is not unique to the West. Innovation via cooperation between unlikely partners has been a characteristic of China for centuries. Relevant terms are guanxi (often translated as “relationships”) and yuanfen (fate that brings partners together). In China, guanxi and yuanfen have allowed proximity and chance to bring business partners together when there was a basis of trust, resulting in innovative alliances. The fusion of skillsets in China’s manufacturing economy often stems from collaborative innovation, though the results are often decried as merely the machinery of copying.

Accelerated innovation in China, including advanced systems for responding to market feedback, is the subject of a report from the MIT Sloan Management Review, where Peter Williamson and Eden Yin survey China’s innovation in rapid manufacturing and parallel engineering. A key element is obtaining feedback and innovation concepts from outside partners or customers. The cited example of Mindray Medical International, China’s largest medical equipment maker, shows how R&D fueled by rapid response to outside feedback enables advanced new products to launch four times as fast as foreign competitors. This is not old-school copying, but the impressive fruit of aggressive open innovation.

Many more examples could be cited, such as Lenovo’s rapid acquisition of foreign patents to fuel entry into new areas, or Wuxi Pharma Tech (NYSE: WX) and their collaboration with Germany’s Targos Molecular Pathology to support WuXi's bioanalytical work for pharmaceutical customers.

The global IP community was surprised in 2014 to learn that a Chinese paper company had secured 8 billion RMB in funding (over US$1 billion) backed by its intellectual property. The story was reported in a Chinese paper-industry publication in March 2014, and a few days later we had the privilege of reporting this story to the Western world on the Innovation Fatigue blog, which was in turn quickly picked up by Intellectual Asset Management (IAM) magazine. IAM’s blog noted that this deal is one of the biggest IP-backed loans in history.

The company, Tralin Paper (Quanlin in Chinese, or Tranlin in recent US stories), has a modest portfolio with around 100 Chinese patents, several internationally-filed patents and a few trademarks. Their technical strength is in creating paper with natural characteristics from waste paper and straw. Even if guanxi rather than IP was behind the financing, the fact that IP was used as publicized basis for the deal underscores the increasing importance of IP in China and the diverse ways in which Chinese IP can generate value. For Tralin, even if the IP were window dressing, its role even as a prop at a minimum provided PR value and strengthened Tralin’s position as thought leader in its niche. The most reasonable assumption is that IP also provided direct financial benefits, not just window dressing.

In the US, where Chinese innovation and IP is often deprecated, the impact of this deal is being felt strongly as Tralin/Tranlin is investing $2 billion in Virginia and creating 2,000 jobs with the technology they are bringing to US shores. News stories so far have missed the connection between US jobs and Tranlin’s ability to get capital based on Chinese IP, but we hope that Americans might recognize that innovation and IP from China is at least partly responsible for this welcome job growth.

Tralin/Tranlin’s story is part of a landscape in China where entrepreneurs and creative leaders are discovering the many positive uses of IP, including its ability to secure capital and build partnerships. But many Western companies wishing to build partnerships with their technology fear China and the risk of misappropriated IP. This lack of trust is being addressed gradually as China strengthens its IP laws and IP enforcement systems. Lawsuits, no matter how fair, are a last resort. Successful joint innovation requires trust directly between parties, and both sides need more successful examples for inspiration. Fortunately, a powerful role model of the technical, cultural, and political bridge-building that can occur in a healthy relationship rooted in carefully-maintained trust can be seen in a remarkable experiment in technology transfer and international cooperation: the Utah-Qinghai EcoPartnership, a unique collaborative effort that is using IP from the United States to solve major environmental problems in China.

To read more about the Utah-Qinghai EcoPartnership, with some interesting photos showing the fruits of this unique collaboration based on respect for IP rights and mutual trust, see the article I published with two co-authors (Edgar Gomez, and Alan Smurthwaite) in the Diplomatic Courier, "Open Innovation and IP Trends in China: Insights from the Utah-Qinghai EcoPartnership."

Tortoise Innovation: The Problem with Corporations (and Their Inventors) Hiding in a Shell

Many large companies take a tortoise approach to innovation and stay as hidden within their shells as possible, even some who advocate open innovation. Tortoise companies may have creative R&D staff, including many scientists doing good work, but they keep these inventors hidden in the shell rather than encouraging them to publish or present their work.

The hares, on the other hand, take greater risks as they frequently step out of their comfortable burrows. They let their inventors not just show up at conferences and other events, but take the podium and present. Or, when appropriate, publish their work in major journals. As a result, their inventors become known and get to know many others with related interests. It is that visibility that allows potential partners to find them, to learn about their work, and to come forward with proposals for partnership or further innovation. These visible minds become more highly connected and able to contribute more directly and effectively to the open innovation needs of the Corporation. They are connected to other industries and better connected to the market, and may be more likely to recognize ways to adapt their inventions for better success.

The extreme of tortoise innovator may well be the large body of government scientists that conducted high-tech R&D for decades in the old Soviet Union. One of my past open innovation activities at Innovationedge included traveling to Moscow to assist Russia (more specifically, ISTC: http://www.istc.ru/) in finding external partners for the huge body of invention that arose from government labs in past work (this public information: e.g., I am listed as a speaker on the published agenda of a biotech meeting in Moscow with a presentation entitled "Innovationedge Partnership to bring innovation from Russia to the U.S."). 

Unfortunately, much of that work in the Soviet Union, in my opinion, was dominated by deep drilling into highly isolated wells of expertise, with advanced technologies that were unconnected to real-world industry and markets. Creating connections and finding market opportunities after the fact (as in “answers in search of problems”) is much less efficient that developing inventions tailored to meet real market needs in the first place. The scientists were some of the best in the world, but they were working in isolation, often in great secrecy, with little ability to discuss their work with outsiders and obtain needed feedback and insights to make their work more useful outside their immediate focus. Looking back in time at the fruits of past Soviet era R&D to me looked like closed innovation to an extreme.

My observation of the isolation of Russian R&D relative to industry and markets is consistent with the detailed observation and analysis by Dina Williams in “Russia’s innovation system: reflection on the past, present and future” in The International Journal of Transitions and Innovation Systems, Vol. 1, No. 4, 2011, p. 394-412, available via Academia.edu at  http://www.academia.edu/1207385/Russias_innovation_system_reflection_on_the_past_present_and_future (free download with registration).

Success in open innovation and even in making conventional internal innovation more successful can be enhanced when innovators “get out more often” and increase their visibility in relevant communities. Innovation is frequently about crossing boundaries and making new connections, and open innovation almost by definition involves reaching past one’s own corporate boundaries to find solutions outside. What better way to do this than by having innovators physically or virtually stepping outside those boundaries and being visible to potential partners?

One of my favorite experiences during my days at Innovationedge involved seeing a technology go from an inventor’s garage to a multinational corporation where it is now being commercialized globally. A key event in that story involved speaking at technical conference where my presentation included some information about our client’s invention. Afterwards, I was approached by an R&D leader from a significant corporation who wanted to know more. There was much more work after this—open innovation success is rarely fast and easy—but that new connection took us on a path toward success. Related stories occur frequently when innovation is shared. But silent companies who rely on their tortoise shell eventually find that solid defense is irrelevant. Sometimes, the prizes go not to those who best hide behind their fortifications but to those who cross the finish line in the race for innovation.