Background

Foreign investors and business associations are carefully tracking developments in China’s implementation of an Indigenous Innovation Policy and accompanying changes in government procurement. Indigenous innovation is a government policy response to perceived overdependence on foreign technologies, patents, and brands in the Chinese economy. Through indigenous innovation, government planners seek to limit reliance on foreign technology by promoting the development of Chinese owned technology and intellectual property. To achieve these ends, local governments have not only created incentives for domestic development but have implemented a series of discriminatory policies to discourage foreign participation in certain industries.

Implementation

Pursuant to broad policies set by the Ministry of Finance, National Development and Reform Commission, and Ministry of Science and Technology, among others, local governments publish catalogues of “indigenous innovative products.” Preference in government procurement is given to listed products which are subject to an accreditation process. Factors, such as IP ownership, trademark, and local ingenuity are considered in accreditation.

While there have been no explicit restrictions based upon a manufacturer’s foreign-investment status, very few products produced by foreign invested enterprises have received accreditation. This exclusion of foreign invested enterprises is due primarily to the requirement that the Chinese entity fully owns the relevant IP and first registers its trademarks in China. Due to IP protection and global competitiveness concerns, foreign invested enterprises are unlikely to meet these requirements.

On November 15, 2009, the PRC Ministry of Science and Technology and Ministry of Commerce released a notice, Circular 618, of the government’s intent to create a national level Catalogue of Indigenous Innovation Products for Government Procurement. Circular 618 proposes six broad areas for accreditation, including computers and application equipment, telecom products, modern office equipment, software, new energy equipment, and highefficiency energy-saving products. Considering the breadth of the proposed categories and the fact that government procurement in China includes state owned enterprises, numerous agencies, hospitals, and other large organizations, national level accreditation requirements may have a substantial economic impact on foreign invested suppliers.

Reactions

A collective of international trade associations has requested a delay in the application of the new national level procurement catalogue, raising numerous concerns and the need for clarification. In a joint letter dated December 10, 2009, these organizations emphasized the restrictiveness of the new regulations and potential for dulling, rather than promoting, innovation and development.

Recent high-level talks between U.S. Department of Commerce, Treasury, and State Department officials and their PRC counterparts included discussion of the proposed regulations. Initial reports suggest that China may consider revising the accreditation requirements defined in Circular 618 to reduce the impact on foreign invested enterprises. However, there has been no word as to when revisions can be expected.

Developments in this important area require continuous monitoring, although the involvement of both the United States government and broad-based organizations like the United States – China Business Council should prove helpful.