Doing research and development in China is still rare for most SMEs, however, this trend is changing. As there are a great many engineers qualifying in China every year it has become an attractive country to consider for R&D. Moving this function to China does entail exposure to extensive IP risks which need to be considered and minimised if success is to be attained.
There are a variety of different IP risks to be considered and these include:
Having the right IP protection in place
A thorough assessment of the company's IPR situation is needed. If your SME does not have an internal resource to carry out the IP assessment, consider bringing in experts with specific knowledge on securing IPR in China. Performing such an assessment without having experience in both IPR and China-issues is not recommended. For a short introduction to a few of the issues to be considered in an IPR audit, please see the 'Assessing Your Company's Intellectual Property' section above.
Read more about how to register IP rights in China by following this link.
IP risks and business set-up
Physically relocating or establishing R&D in China is a significant business decision. Consider the status or type of entity you plan to establish or work with. There are different issues to consider depending on the type of business entity and how it is owned; for example, a Wholly Foreign Owned Enterprise (WOFE) operated by your own trained employees will be very different to the issues involved in performing R&D in a Joint Venture or by contracting to a domestic enterprise.
Make sure, if you are planning to work with an existing company, it is a properly registered, legitimate business (see the 'Sourcing/Sub-contracting' section above). If you are at the stage of discussing an R&D agreement with a prospective partner make use of confidentiality agreements and non-disclosure agreements to preserve your proprietary information and trade secrets (see the 'Business Partners' section).
Minimising IP risks is largely dependent on who and how you choose to handle the R&D in China. No matter how you choose to resolve the business set-up, it is important that technology transfer back to the SME is ensured. Steps to ensure this should be made prior to engaging in R&D in China.
Contractual issues in China
When looking to identify a potential R&D partner in China, you should consider how you want the relationship to work and what controls are needed to secure your rights. These issues need to be spelt out in a written agreement which can form the basis of a contract. It is NOT advisable to start R&D in China without a signed contract. However, it is important to keep in mind that a contract could be viewed as a "guideline for cooperation" in China, whereas in Europe a signed contract is viewed as legally binding. Contracts should not be rushed through, but should instead be a process where the contract can work more as a relationship manual.
In the contract, it is advisable to clearly state what Intellectual Property Rights are owned in respect of the items to be supplied and to clearly state that any know-how, discovery, invention (whether patentable or not), design, drawing, computer program, photograph, plan or record relating to the development of prototypes and the subsequent final version of products or any future developments to products which are made, created, developed or acquired by the supplier (together with all Intellectual Property Rights and any future rights in respect of any such matter) will belong to the SME absolutely. It is advisable to have a Chinese specialist forming the contract as there are certain China specific issues that should be considered.
Discovering and protecting IP rights - building a systematic approach
When R&D is conducted in China, there is a need for implementing structures which ensure that IP rights are discovered, evaluated and that an internal strategy for exploitation is made.
Helpdesk expert, Karin Beukel from The IPR Company explains
"often we see that it is the internal structures that are lacking, the business implication is that the SME does not get its IP rights secured, which eventually means that the innovation can be used by everybody and not only the SME. A stage gate structure that ensures that the SME discovers the potential IP rights should definitely be put in place, so that the SME can decide whether or not the IP right is of interest."
Restricting access - preserving trade secrets
Trade secrets can be defined as "Technological information and business information that is not known to the public, derives economic value for the holder, is of practical applicability, and has been subject to steps by the holder to maintain its secrecy". In practice the R&D department needs to be physically isolated and demonstrably secure, and visitors should be monitored closely (if having access at all). Furthermore, consideration should be given to the secure storage of important information.
Monitoring - IPR Security Audits
Always take a practical approach to securing valuable know-how and IP rights. Monitoring is therefore an option to check whether the current system in place is actually minimising the risk of leakages.
Helpdesk expert Karin Beukel from The IPR Company explains the process of audit sourcing partners for clients
"Through an IPR Security Audit, we determine to what extent the IPR area and the IPR processes within the involved client's organisation are secure. By doing so we can secure data for further optimisation of the client's IPR security platform and eventually develop a list of potential IPR risks for the company in question."
R&D departments which know they must adhere to controls, procedures and standards will do so if they are subject to checks; those departments which are not subject to checks will rapidly deviate from procedures and standards.
It is imperative that SMEs consider how inventions made belong to the SME. IPR-transfer obligations should be included in all employee contracts. At the same time it is imperative to educate the R&D staff how to handle valuable information to ensure that they are aware of confidentiality details.