Friedrich-Schiller-Universität Jena
Wirtschaftswissenschaftliche Fakultät

Counterfeiting in the People’s Republic of China

Ulf Kramer

Table of Contents

1 Introduction and Preliminary Remarks ... 1

2 Definition and Delimitation of Relevant Terminology ... 4

3 Impact of China’s Counterfeiting Problem ... 8

3.1 Negative Impacts of Counterfeiting in China ... 8
3.1.1 Introductory Remarks ... 8
3.1.2 Costs to the Right Holder ... 8
3.1.3 Costs to Consumers and Potential Users ... 11
3.1.4 Social Costs ... 12
3.2 Positive Impacts of Counterfeiting ... 14
3.2.1 Positive Impacts to Consumers and Local Economies ... 14
3.2.2 Positive Impacts for Development and Innovation ... 16
3.2.3 Positive Impacts for China’s Political Environment ... 17
3.3 Summary of Main Impacts and Evaluation ... 17

4 Analysis of economic, legal and political environment ... 18

4.1 Insights of Contemporary China ... 18
4.2 Drivers for Counterfeiting ... 19
4.2.1 China’s Transition Process and Economic Framework ... 19
4.2.2 China’s Enforcement Institutions and Legal framework ... 20
4.2.2.1 Enforcement Institutions ... 20
4.2.2.2 Legal Framework ... 25
4.2.3 China’s Political Framework ... 28
4.2.3.1 Attitudes of the People’s Government of PRC ... 28
4.2.3.2 Local Protectionism and Development ... 30
4.2.4 Summary ... 32
4.3 Containment Options concerning Environmental Determinants ... 32
4.3.1 Extensive Legal Protection ... 33
4.3.2 Reforming China’s IPR Enforcement System ... 33
4.3.3 Improving China’s IPR Legislation ... 35
4.3.4 Lobbying and Encouraging Political Commitment ... 35
4.3.5 Summary ... 37

5 Analysis of Suppliers on the Counterfeiting Market ... 38

5.1 Attributes of China’s Counterfeiters ... 38
5.2 Drivers for Counterfeiting ... 40
5.2.1 Unawareness of Statutory Provisions ... 40
5.2.2 Financial Incentives ... 41
5.2.3 Enabling Resources and Technical Knowledge ... 41
5.2.4 Historic Insights and their Influence on the Perception of IPRs ... 43
5.2.4.1 Attitude towards the “West” ... 43
5.2.4.2 The Communist Era and the Perception of IPR ... 44
5.2.5 Cultural Traits and their Impact on Contemporary Counterfeiting ... 45
5.2.5.1 Confucianism ... 45
5.2.5.2 Collectivism and other Cultural Dimensions ... 47
5.2.6 Summary ... 50
5.3 Containment Options ... 51
5.3.1 Innovation and Constant Change of Product Attributes ... 51
5.3.2 Anti-Counterfeiting Technologies ... 51
5.3.3 Education and Deterrence of Counterfeiters ... 53
5.3.4 Securing the Value Chain ... 54
5.3.5 Co-Opting Preeminent Offenders ... 55
5.3.6 Passive Measures ... 56
5.3.7 Summary ... 57

6 Analysis of Consumers on the Counterfeiting Market ... 58

6.1 The Consumer of Counterfeited Goods ... 58
6.1.1 Introductory Remarks ... 58
6.1.2 Attributes of Chinese Consumers who Buy Counterfeits ... 58
6.2 Drivers for Counterfeiting ... 61
6.2.1 Increased Consumer Rent ... 61
6.2.2 Impact of Availability of Counterfeits on Purchase Intention ... 62
6.2.3 Cultural Traits and Consumer Behaviour ... 62
6.2.4 Sophistication of Chinese Consumers ... 65
6.2.5 Perception of Wrongdoing and Unethical Behavior ... 66
6.2.6 Anti-Big-Business Attitude ... 67
6.2.7 Novelty Seeking and Risk Avoidance ... 68
6.2.8 Summary ... 69
6.3 Containment Options ... 70
6.3.1 Matching Consumers’ Needs ... 70
6.3.2 Communication and Education ... 72
6.3.3 Summary ... 75

7 Conclusions and Outlook ... 76

7.1 Conclusions ... 76
7.1.1 Recommendations for Companies ... 76
7.1.2 Recommendations for the People’s Government of PRC ... 78
7.1.3 Recommendations for Chinese Consumers ... 78
7.2 Outlook ... 79
7.3 Concluding Remark ... 80

8 Bibliography ... 81

9 Appendix ... 96

A - Tables ... 96
B - Figures ... 102
D - Short interview concerning counterfeiting in the PRC ... 106
E - Table of Chinese terms used in the paper ... 109

1 Introduction and Preliminary Remarks

Since the proclamation of the opening up policy (gaige kaifang) in the 1980’s by Deng Xiaoping and the present economic growth, Chinas economy is expected to become the world’s number one within the next 20 years. With the focus on surpassing growth rates, trade surpluses and an increasing domestic demand from 1.3 billion consumers, many decision makers ignore the fact that China has already become one of the worlds leading country: China is the number one of global counterfeiting.
Observers and researchers agree upon the fact that the scope, magnitude and impact of Chinas counterfeiting is unique in world history. The range of imitated products has no limits; China’s counterfeiters copy everything from sunglasses and sport shoes to elevators and aircraft parts. At a visit in February 2006, Germany’s foreign minister Steinmeier broached the issue of German maglev technology which is assumed to be used in the new Chinese maglev train (Wetzel, Muscat, 2006). This and other examples show that there is scarcely any industry or technology which is not threatened by China’s counterfeiters.
The impact is alarming. Chinese official sources estimate the damages due to Chinas counterfeiting to exceed 16 billion U.S. Dollars a year. They admit that in the Chinese market, three genuine products oppose seven counterfeits (Mocek, 2005, p. 30). Eight percent of China’s gross domestic resort to counterfeiting (Chow, 2004, p.1).
The negative consequences are concerning: tax revenues vanquish, legal businesses are disrupted, consumer safety is threatened, genuine producers are confronted with loss and shrinking credibility, innovation and investments are constricted and organized crime is promoted.

Problem Formulation and Delimitation
Although Chinas counterfeiting issue makes headlines in the economic world, only few research examined the problem in a comprehensive way. Many journalists focus on legal issues and thus mainly on the supply side of counterfeiting. Other researchers simply blame Chinas cultural heritage to be the main cause. Most papers lack a broad approach, which is inadequate regarding the magnitude and scope of Chinas counterfeiting.
The objective of the present paper is to give a comprehensive overview about counterfeiting in the People’s Republic of China. Comprehensive shall mean that all aspects of counterfeiting are subject to analysis. In the following, supportive drivers for counterfeiting and possible enforcement strategies against counterfeiting are identified and discussed. Since, the paper focuses on China, cross border counterfeiting, impacts in other countries or global approaches are only mentioned in few cases to highlight similar issues in China. The final objective is, to introduce possible strategies against: Counterfeiting in China.
A closer definition for the term “counterfeiting” is given in chapter two. “China” in this case refers to “Mainland China”, which excludes Taiwan as well as the former colonies Hong Kong and Macau. The expressions: “China” and “People’s Republic of China” are used interchangeable although there is no question that Hong Kong and Macau are part of the PRC. The reasons for this introductory delimitation are legal and economic differences with the former colonies as well as the political debates and differences¹ with Taiwan.

Methodology and Structure
Since counterfeiting is an illicit business, quantitative approaches are limited. Additionally comprehensive quantitative research faces problems such as the high level of heterogeneity within the Chinese environment or political restrictions. Most counterfeiting research is based on personal interviews, observations, official records and data as well as publications of interest groups. Qualitative evaluation therefore seems the more effective methodological approach. Although the present study shows the results of quantitative research, the general methodology follows qualitative trajectories.

The structure is divided into five main parts (Chapter 3 to Chapter 7) which combine descriptive and in the following, normative research. Chapter three introduces the impact of counterfeiting to highlight the up-to-date facts and importance of the issue. Chapter 4 to 6 represent the common market structure. They systematize the study into three main categories of research: environmental (economical, legal, political), supply side (“the counterfeiter”) and the demand side (“consumers”). Each research category is examined towards: relevant drivers, attributes, and containment options. Chapter seven gives a final summary and analyses future prospects.

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1 “one country – two systems” (yiguo liangzhi) means, that Hong Kong and Macau stay capitalistic oriented market economies for 50 years after the reunification with Mainland China. China’s economic system remains socialistic oriented. Since, the IPR legislation of Hong Kong is based on British case law, this paper focuses on Chinese legislation.