Foreign Investment and IP Protection in China Presented by: Julia Zhu Allan Law Group/Alpha Leader...

Foreign Investment Foreign Investment and and

IP Protection in IP Protection in China China

Presented by: Presented by: Julia ZhuJulia ZhuAllan Law Group/Alpha Leader Group U.S.Allan Law Group/Alpha Leader Group U.S.

Los AngelesLos AngelesMay 14, 2008 May 14, 2008

© Allan Law Group © Allan Law Group 2008 2008

Foreign Investment Foreign Investment In ChinaIn China

© Allan Law Group 2008© Allan Law Group 2008

Foreign Investment in China Foreign Investment in China Overview:Overview:

One of the premier destinations for foreign One of the premier destinations for foreign investment investment

Overall foreign direct investment (“FDI”) to Overall foreign direct investment (“FDI”) to China rose by nearly 13.8% in 2007 over 2006China rose by nearly 13.8% in 2007 over 2006

Estimate for China’s inbound FDI in 2008: Estimate for China’s inbound FDI in 2008: growth in 4% - 6% rangegrowth in 4% - 6% range

Top foreign investors: HK the first; US the Top foreign investors: HK the first; US the sixthsixth

Top FDI destination: eastern region – 81.9%Top FDI destination: eastern region – 81.9% Hot sectors: manufacturing (57.7%) and real Hot sectors: manufacturing (57.7%) and real

estate (11.9%)estate (11.9%)

Source: The US- China Business CouncilSource: The US- China Business Council © Allan Law Group 2008© Allan Law Group 2008

FDI in ChinaFDI in China FDI in China (Total and US) 1998-2007

Source: Ministry of Commerce (MOFCOM)* MOFCOM stopped reporting contracted foreign investment figures by country in December 2005. Beginning in 2005, the number of contracts refers to the number of projects and the contracted value refers to actual investment levels.**Beginning in 2006, FDI statistics explicitly include financial and non-financial FDI; the cited figure incorporates both categories.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total Foreign Direct Investment (FDI)

No. of Contracts* 19,799 16,918 22,347 26,139 34,171 41,081 43,664 44,019 41,485 37,888

Amt. Contracted ($ billion)

52.10 41.22 62.38 69.20 82.77 115.07 153.48 189.07 200.17 NA

Amt. Utilized ($ billion)

45.46 40.32 40.72 46.88 52.74 53.51 60.63 60.33 69.47** 82.66**

US Direct Investment

No. of Contracts 2,238 2,028 2,609 2,594 3,363 4,060 3,925 3,741 3,205 2,627

Amt. Contracted ($ billion)

6.48 6.02 8.00 7.51 8.20 10.16 12.17 NA* NA* NA*

Amt. Utilized ($ billion)

3.90 4.22 4.38 4.86 5.40 4.20 3.94 3.06 3.00 2.62

US Share of Utilized Investment

8.50% 10.47% 10.76% 10.37% 10.24% 7.85% 6.50% 5.07% 4.12% 3.50%


Foreign Direct Investment by Vehicle Type, 2006 and 2007

Note: FDI=foreign direct investment; EJVs=equity joint ventures; CJVs=cooperative joint ventures; WFOEs=wholly foreign-owned enterprises

Number of Projects Utilized FDI Value ($ billion)

2006 2007 % Change 2006 2007 % Change

Total FDI 41,473 37,871 -8.69 65.82 74.77 13.59

EJVs 10,223 7,649 -25.18 14.83 15.60 5.13

CJVs 1,036 641 -38.13 1.99 1.42 -28.77

WFOEs 30,164 29,543 -2.06 48.56 57.26 17.92

Foreign-invested shareholding ventures 50 38 -24.00 0.44 0.49

Source: The US- China Business Source: The US- China Business CouncilCouncil

Issues to Watch in Issues to Watch in 20082008

Economic protectionism Economic protectionism

Product safety Product safety

New rules on foreign investment New rules on foreign investment Enterprise Income Tax LawEnterprise Income Tax Law Labor Contract Law Labor Contract Law Antimonopoly Law Antimonopoly Law Catalogue Guiding Foreign Investment in Catalogue Guiding Foreign Investment in

Industry Industry © Allan Law Group 2008© Allan Law Group 2008

Chinese Government Chinese Government Wants:Wants:

Encouraged SectorsEncouraged Sectors:: ServicesServices New and high-technologyNew and high-technology Energy and the environment Energy and the environment Healthcare Healthcare


Chinese Government Chinese Government Doesn’t WantDoesn’t Want

Restricted or Banned Sectors:Restricted or Banned Sectors: Real estateReal estate Media and publishing Media and publishing Solely devoted to export Solely devoted to export China mastered or high usage of China mastered or high usage of

resources or energy resources or energy


Traditional Investment Traditional Investment Vehicles Vehicles

Direct Entry Methods:Direct Entry Methods: Wholly-foreign-owned enterprises Wholly-foreign-owned enterprises

(“WFOEs”)(“WFOEs”)

Joint ventures (“JVs”)Joint ventures (“JVs”) Equity joint ventureEquity joint venture Cooperative joint venture Cooperative joint venture


WOFE v. JVWOFE v. JV

WOFEWOFE ProsPros

No Chinese partner or JV contract No Chinese partner or JV contract Full control over management and production Full control over management and production Better IP protection Better IP protection

ConsCons Legal and regulatory restrictionsLegal and regulatory restrictions Lack of existing sales and distribution networkLack of existing sales and distribution network No production site and workforceNo production site and workforce Lack of local “Guanxi”Lack of local “Guanxi”


JV v. WFOEJV v. WFOE

JVJV ProsPros

Greater range of investment areasGreater range of investment areas Easier government approval Easier government approval Operational facilities in place and skilled staff Operational facilities in place and skilled staff Existing supply chainExisting supply chain

ConsCons Misunderstanding possibleMisunderstanding possible IP protection concernsIP protection concerns Complicates exit strategies Complicates exit strategies


Traditional Investment Traditional Investment VehiclesVehicles

Indirect Entry Methods:Indirect Entry Methods: Enter into licensing agreements with Enter into licensing agreements with

local companies local companies

Representative office Representative office


Other Investment Other Investment Vehicles Vehicles

Mergers and Acquisitions (“M&A”)Mergers and Acquisitions (“M&A”) Growth factors for M&A InvestmentsGrowth factors for M&A Investments New Foreign M&A regulationsNew Foreign M&A regulations

Special Situation Investments Special Situation Investments including Non-performing Loans including Non-performing Loans


IP Protection In China IP Protection In China


IP Rights in China IP Rights in China

Treaties, legislation and special Treaties, legislation and special courts to safeguard IP rightscourts to safeguard IP rights

Poor enforcementPoor enforcement

Counterfeiters and infringers being Counterfeiters and infringers being more sophisticatedmore sophisticated


Intellectual Property Intellectual Property Enforcement Enforcement

China IP Legal Enforcement China IP Legal Enforcement Dual Track System Dual Track System

Administrative EnforcementAdministrative Enforcement Special enforcement task forces in Special enforcement task forces in

administrative agenciesadministrative agencies

Judicial Enforcement Judicial Enforcement Civil litigation Civil litigation Criminal prosecution Criminal prosecution


IP Protection: Practical IP Protection: Practical StrategiesStrategies

Early filing – “First to File” principleEarly filing – “First to File” principle Trademarks Trademarks PatentsPatents Copyright Copyright Trade secrets Trade secrets

Create and enforce a clear IP Create and enforce a clear IP protection strategy throughout the protection strategy throughout the organization organization



Control the production processControl the production process

Strengthen the workplace safety Strengthen the workplace safety Background checks on key hiresBackground checks on key hires Non-compete and non-disclosure agreementsNon-compete and non-disclosure agreements

Conduct careful due diligence on potential Conduct careful due diligence on potential partnerspartners

Keep a close eye on competitors Keep a close eye on competitors © Allan Law Group 2008© Allan Law Group 2008


Engage with the legal system while Engage with the legal system while reducing dependence on itreducing dependence on it

Conduct surveillance of suppliers Conduct surveillance of suppliers and distributorsand distributors

Enlist political/media support Enlist political/media support


Thank You!Thank You!

Allan Law Group Allan Law Group


Foreign Investment and IP Protection in China Presented by: Julia Zhu Allan Law Group/Alpha Leader...

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