As China’s economy is slowing down, everyone supports the idea that China must innovate. According to a report prepared by McKinsey Global Institute in 2015, China must grow through innovation. To a certain extent, the Chinese government has planted many seeds to transform itself from a manufacturing economy to an innovation economy. For instance, China spends more than US$200 billion on research (second only to the United States), grants over 30,000 PhD degrees in science and engineering, and leads the world in patent applications (more than 820,000 in 2013). China certainly has the “know,” but it lacks the “how.” Here is why.
Ever since the economic reform initiated by Deng Xiaoping in 1978, China has leveraged its sheer size of cheap labor market and consumer market to become the “factory of the world” and the “consumer market of the world.” Over the last two decades, many major Chinese manufacturers focused on imitation (i.e., developing similar products that look like and/or function like global brands) but priced for the Chinese market. Due to global competition, China’s economy cannot grow unless Chinese firms can develop truly innovative products and services. However, without strong IP protection, even Chinese firms are reluctant to invest heavily in R&D to innovate. Why? The counterfeit is the “enemy at the gates.”
As China grew richer (over 1 million millionaires and 109 million middle class Chinese with wealth of between US$50,000 and US$500,000) and as China became a member of WTO in 2001, China continues to the world’s largest producers of counterfeit products. According to the U.S. Custom Bureau, over 50 percent of the fake products seized in 2015 were made in China. According to the economist, among all products seized reported by the World Customs Organization in 2013, over 84 percent of the counterfeit goods, ranging from medicines (e.g., fake Viagra) to leather goods (e.g., fake Louis Vuitton luggage), were originated from China (Figure). Counterfeits discourage innovations in China. What can be done?
With so many counterfeits and copycats lurking around, how can Chinese firms invest in R&D without the fear of being copied? So far, the war against counterfeits in China is improving. After Alibaba’s online marketplace Taobao was found selling counterfeit products, Alibaba vowed to fight counterfeit goods by joining the International AntiCounterfeiting Coalition (IACC) in 2016. However, as long as China has the efficient and covert supply chains to produce and distribute counterfeit products, the war on counterfeits can be endless.
Instead of just focusing on the “supply” of counterfeits, perhaps one should also focus on the “demand” of counterfeits in China. Knowing Chinese consumers are fear of being shamed, perhaps major Chinese brands and global brands can use social media such as Sina Weibo and WeChat to educate the public about ways to identify fakes and to create a shameful culture about the possession of fake goods. This shame culture can curb the demand for counterfeits especially when counterfeit holders are fearful of being exposed.
By using law enforcement to suppress the supply and by using social media to shame those counterfeit owners to curb the demand, the counterfeit market in China will shrink. Shrinking the counterfeit market will enable China to grow its innovation economy.