The Relationship between Foreign Direct Investments and Intellectual Property Rights in China

Abstract

In recent years, China has emerged as a major recipient of foreign direct investments. Many international companies have decided to establish wholly foreign-owned enterprises or joint ventures in the People's Republic of China, either to serve the Chinese market with their products and services or to produce goods on-site for export to third countries. The past, however, has proven that entering the Chinese market is often a challenging venture due to economic, legal and cultural differences. Multinational enterprises therefore must possess certain capabilities or assets to be able to compete with domestic firms that are more familiar with their home market and with other foreign competitors that have entered the market earlier and gained more experience (Dunning, 1980). The relation between FDIs and other economic parameters such as taxes, wage levels or different provinces in China has already been observed by various economists (see Tung and Cho, 2000; Zhao, 2001; Cheng and Kwan, 2000). Another decisive factor that is often discussed in the context of FDIs, especially in developing and emerging markets, is the protection of intellectual property rights. Patents, for example, are property rights and technological assets that allow companies to prevent competitors from applying the protected invention. This gives patent-holders a technological advantage and compensates for other drawbacks that emerge upon their entering a foreign market.