IP and patents: The US versus China

China And The Chinese Economy

Last year, Kris Sayce told Money Morning readers a transition to a new economic power was underway.

As you’re probably aware, China’s economy is going through something of a transition.

It’s transitioning from a mainly manufacturing-based economy towards a services economy. That’s the mainstream take on it, anyway.

We agree with that…to a point. However, what the mainstream doesn’t realise is that this isn’t a binary change. In other words, there isn’t a set point at which China will stop being a manufacturing economy to instead be a services economy. 

The reality is that it will be both. Plus, it will be something else as well — it will be a technology economy too

If history tells us anything, it’s that technological advancements tend to result in huge changes of wealth.

There was the Industrial Revolution, the manufacturing and consumer revolution of the 20th century and the technological revolution of the past 30 years.

To capture China’s revolution, Kris created New Frontier Investor. With analyst Ken Wangdong, this service seeks investment opportunities in emerging markets.

Imagine if you had invested in America just before the manufacturing revolution, which enabled America to be the world’s greatest economic power for the past 60 years. Well, that’s what Kris and Ken are trying to achieve with New Frontier Investor. They want in at the bottom. Kris mentioned above how it’s the technological advancements that shift the wealth and power.

Today I’ve found proof that, technologically, China is going to leave the West behind.

It’s called Gongkai.

It’s the only tech word you to need to know. And Gongkai will be the future driver of growth in the global economy.

I’ll explain what Gongkai means to you in a minute.

First, let’s address what once in a lifetime economic changes have to do with a tech newsletter.

You see, the US patent system is broken. The current Western patent system for innovation, the one that dominates the world, is the American one.

It began in April 1790. The first patent law passed set the fees so low that any anyone could afford them. Rich or poor, if you had a good idea or invention, you could afford to protect your idea. This was in contrast to the elitist systems dominating Britain and Europe at time. Patent fees were so high that only the rich and powerful could protect their inventions.

The American law ensured patent fees would be roughly 5% of the British patent fees at the time.

Within 50 years, the US had three times the per capita patenting rate that Britain did. Americans were patenting five times as many inventions per year as the Brits, even though their populations were roughly equal.

Suddenly, becoming an inventor was a career path for the average Joe. The broke guy with a brilliant idea and the ability to create it could one day profit from it.

The laws set in the late years of the eighteenth century unwittingly became the first tradeable market for new technology.

These low fees, and the ability to license the patents for a fee, is a big reason for much of America’s economic growth during the nineteenth and twentieth century.

Effectively, the US patent system created a giant encyclopaedia of ideas, innovations and inventions. Investors and inventors could make money from this. And the new technology would grow the economy.

After all, there’s no growth in an economy without innovation.

And these days, far too many innovative ideas are locked up in a legal paperwork vault.

Very few patented ideas see the light of day.

Accessing them is too costly for the average person.

This is because the system was designed to reward the inventor with royalty payments with the intellectual property owner entitled to some form of financial remuneration for sharing the idea with the public and permitting them to use it.

However, the very system designed to protect and encourage innovation is now crippling the Western world.

Nowadays, the average person needs at least US$20,000 for legal and other fees for one patent.

And what does this buy them?

Nothing productive — a piece of paper saying no one else can use your idea without paying a fee.

To get the idea of the legally protected patent off the page and into production, a person would need millions of dollars. Or they’d have to schlep the idea around to multi-billion dollar corporations in the hope of scoring a licensing agreement to see their invention come to life, though Kickstarter and other crowdsourcing sites may change this…

But there’s more to the story.

The system may have worked in the past. But in today’s world — the one bigtime, hungry corporate lawyers run — it’s simply not an option for the average person to legally protect an idea.

Not only that, but massive corporations spend hundreds of millions, sometimes billions, of dollars mining the patent database for a good idea. Sometimes they buy the idea. Other times they’ll just bury an inventor in frightening and expensive legal paperwork.

The patent system has become a litigious system. It’s no longer protecting and encouraging innovation. It’s crippling the Western economy.

But over in China, they have Gongkai.

So in America they have a system that protects intellectual rights and entitles financial remuneration when another party uses the idea.

The concept of Gongkai, on the other hand, concerns a network of sharing innovations and ideas amongst the community.

Let me explain.

Kaiyuan is a Chinese word that refers to openness in the Western style intellectual property framework. However, when this word is used, it explicitly means that its IP is not ‘open’. That is, the information is recognised as protected by law and not to be shared.

However, as evidenced by all the counterfeit merchandise, many Chinese corporations have little regard for IP rights.

The way they see it, information should be shared and built upon by others.

There is one condition. Gongkai isn’t about a one way flow of value, such as copying music or movies. It should be something where many parties can share in the value.

The phrase Gongkai, leans on the Chinese word Kaiyuan. Coined by Andrew ‘bunnie’ Huang, he determined that Gongkai references copyrighted documents, but ones overturned to the public.

In other words, the IP information is shared with the people, for the people to work on.

With Gongkai, IP ownership is part of a network. That is, other people share their ideas and inventions with each other. As Huang puts it, Gongkai is ‘the far sight necessary to create good ideas and innovations is attained by standing on the shoulders of others.’

Chinese entrepreneurs… churn out new phones at an almost alarming pace. Phone models change on a seasonal basis. Entrepreneurs experiment all the time, integrating whacky features into phones, such as cigarette lighters, extra-large battery packs (that can be used to charge another phone), huge buttons (for the visually impaired), reduced buttons (to give children emergency-call phones), watch form factors, and so forth. This is enabled because very small teams of engineers can obtain complete design packages for working phones — case, board, and firmware — allowing them to fork the design and focus only on the pieces they really care about.

Sure, these ‘whacky’ inventions seem pointless. But because people are collaborating on them, whacky ideas that don’t work are quickly squashed.

Tinkering, experimentation and improvement quickly sort out the good ideas form the bad.

Given the freedom to invent, copy, improve and create gives the Chinese economy a competitive advantage of the West.

The nimble approach the Gongkai system brings to innovation will test the American system —the one that defied the British system over 200 years ago.

Gongkai will show us what our patent system is — that is, a broken and stifling.

The freedom to collaborate and share information will see the tech sector in China prosper in the years to come. Meanwhile, the global economic power shift continues.

Shae Smith
for The Daily Reckoning Australia

Sam Volkering
Sam is Editor for Money Morning and it's small-cap and technology analyst. He spends his time hunting down the most exciting stocks on the planets, whether they’re potential-packed volatile small-caps or tech firms transforming our future through cutting-edge technologies. You can find more of Sam’s work over at Australian Small-Cap Investigator, where he shares the best small-cap stocks he finds on the ASX, or at Revolutionary Tech Investor where he reveals the latest breakthrough tech investment he’s discovered.

Leave a Reply

1 Comment on "IP and patents: The US versus China"

Notify of

Sort by:   newest | oldest | most voted
Mark Syman
Mark Syman
1 year 9 months ago

Sam – the reason the US patent system needs to be improved is because the lawyers and lobbyists who defend patent infringers (e.g. google. Dell, Cisco) want it that way. Those lawyers lobbyists have convinced Congress and gullible journalists that patents should be difficult to enforce, and thus we have new patent laws that make it harder and more expensive to enforce patents.

A lot of techies are against patent pools (i.e. Gongkai) https://www.techdirt.com/articles/20101028/09595211635/why-the-answer-to-the-smartphone-patent-thicket-is-not-a-patent-pool.shtml#comments

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au