Had a great discussion with a bunch of our China lawyers the other day regarding how so many of our clients are expanding in Asia beyond China and of how so many of them have an Asia strategy, of which China is just one large part and usually initial part.

We then talked of how this has changed the work we do as their lawyers, especially in IP.

Five years ago, our typical manufacturing client would call us for legal help in starting a factory in China or for outsourcing their product manufacturing to a Chinese factory. With the former, we would help them set up a Chinese entity (either a WFOE or a Joint Venture) and with the later, we would draft an OEM Agreement. In both cases, we would discuss their intellectual property and typically help them file for a trademark or a patent in China, occasionally a copyright. Most of these companies were new to Asia, though some had operations in Europe.

Things are very different these days.

Many of our manufacturing clients have been making product in China for years and they are now calling us to add some other Asian country (usually Vietnam or Indonesia) to their manufacturing mix or because they now want to sell their China-manufactured product in China and/or somewhere else in Asia. These companies either have an Asia strategy or are seeking our help in formulating one. Whereas five years ago, a common question for us was “Shenzhen or Suzhou,” today we equally often hear “Hanoi or Jakarta?” Five years ago, we would get asked what we knew about “exotic” places like Yantai. Today it is exotic places like Da Nang.

Needless to say, it is not just manufacturing companies that need to guard their IP in China. Software companies, gaming companies, food and beverage companies, and consumer goods companies are registering their IP in Asia at what feels like a record pace. Balancing all the talk of a China manufacturing slowdown is the year by year increases in disposable income.

The “China-plus” strategies of our clients means that our IP discussions need to go well beyond China to include pretty much all of Asia. Five years ago, only around twenty percent of our clients needed to consider trademark or patent or copyright registrations in a country other than China. They were new to doing business in China and so they needed IP protection there. We would ask about their IP needs for the US and for Europe, but they had been in both places for so long that they were invariably covered.

Today, about half of our clients need IP protection in an Asian country other than China. Fortunately, most Asian countries (Japan, Korea, Vietnam included) have IP regimes quite similar to China’s. The real key for foreign companies expanding beyond China with their products is to be sure to recognize that whatever IP you registered in China probably provides you with little to no protection outside of China. In other words, in most cases, you must register your IP in whatever Asian country in which you are doing business. Also note that in your IP analysis, you must treat Macau and Taiwan and Hong Kong as countries completely separate from the PRC.

Got it?

Probably 99% of the Non Disclosure Agreements we see that have been used “quickly” by American companies with their potential Chinese counter-parties are defective, usually terminally so.  One of the things that most frequently makes them defective is that they call for disputes to be resolved in the United States. The problem with that is that Chinese courts do not enforce US court judgments and so even if the American company were to prevail in the United States, they typically have no recourse against the Chinese company unless the Chinese company has assets in the United States. Knowing this, the Chinese company feels free to violate the NDA with impunity.

A China NDA should not be simply pulled “off the shelf” because an “off the shelf” U.S. style NDA is just not going to work.  I am not going to tell you that NDAs with China need be super complicated, because they don’t.  But I am going to tell you that they need to be done right and that means not just pulling something off the shelf. In fact, when we do these sorts of agreements with Chinese companies, we nearly always do them as an NNN (Non Disclosure, Non Use/Non Compete, Non Circumvention) Agreement, not just an NDA.  We also ask a fairly long list of questions to our NNN client so as to tailor the NNN to its specific situation and to thereby maximize the likelihood that it will not be breached by the Chinese counter-party and to provide the best chance of recourse if it is.  To a certain extent, these two goals are the same in that providing the best chance of recourse against a Chinese company is what is going to have the most impact on preventing that company from violating the agreement.

We ask the following questions before we begin work on NNN Agreements for our clients (along with follow-up questions based on the answers):

  1. Please provide us with a one or two paragraph description of what you will be doing in China that you want to be covered by the NNN agreement. Note that what what we mean by an NNN agreement is: 1) Non-disclosure, 2) non-use/non-compete and 3) non-circumvention. For China, 2) and 3) are far more important than 1). The danger with Chinese manufacturers is that they will use the idea you provide them for their own production and that they will then attempt to sell that product to your own customers. These actions are what we seek to prevent through the NNN agreement.
  2. Provide the full legal name of your company, including state/province/country of formation.
  3. Provide the address and related contact information that you will want for the agreement.
  4. Provide the name and title of the person from your side who will execute the agreement.
  5. Does your company have a Chinese name? If so, what is it?
  6. Will you use this agreement for a single product or for multiple products?
  7. What is the best way to identify the products for which the agreement will be used? Please provide us with a clear, descriptive name that does not require attaching specifications or other proprietary information. Sometimes, even the name is proprietary. So we want to develop a designation that is clear but that does not reveal more than you want to reveal.
  8. Will you use this agreement with a single potential manufacturer or with multiple manufacturers?
  9. What types of information will you be providing to the Chinese side that would be protected by the NNN agreement. Our clients range from providing a general concept all the way to providing the full production specifications as the preliminary to a hard price quote.
  10. Will you expect the Chinese side to do any design work during the initial discussion period?
  11. Is your product protected by trademark, copyright or patent anywhere in the world? Where? What about China?
  12. After you disclose this product in China, are you interested in preventing the Chinese side from contacting any of your existing customers concerning your product or related products? If so, do you want a general prohibition or do you wish to attach a specific list of persons/companies that the Chinese side should not contact (a “No Contact List”).
  13. We normally require the Chinese manufacturer NOT contact any potential sub-contractors who would work in the production process. Please advise if you believe that this would be a concern in your situation. Note that some Chinese “manufacturers” are not actually manufacturers. They serve only as a “middle man” for the actual manufacturers. If you use that kind of company, they will need to be able to discuss your product with their subcontractors and we will need to allow for this.
  14. Please advise on any specific technology items that you wish to have protected in a heightened manner.
  15. Note that this Agreement will apply only to PRC China manufacturers. It does not cover Taiwan or Hong Kong or Macau companies that may handle manufacturing for you as intermediaries. If you will be dealing with companies from Taiwan or Hong Kong or Macau (or from any country other than the PRC), please let us know so we can make allowances for that.
  16. Note that the NNN agreement applies only to the preliminary negotiation stage for your product. If you move on to production, you will need a formal OEM agreement. If you will engage the Chinese side to do design, you will need a formal design agreement. The NNN agreement is NOT a replacement for these other agreements.

For more on China NNN Agreements, check out the following:

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One of the many things that makes suing Chinese companies and individuals so difficult in the United States is the requirement that service be done according to the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters, to which China is a party.  Service of an entity or person in China under the Hague Convention on Service must be done through the designated Chinese Central Authority in Beijing, which is the Bureau of International Judicial Assistance, Ministry of Justice of the People’s Republic of China. To accomplish this, the US party must submit the following to China’s Ministry of Justice:

  1. a completed United States Marshall Form USM‐94
  2. the original English version of the documents to be served (the summons must have the issuing court’s seal)
  3. a Mandarin Chinese language translation of all documents to be served
  4. a photocopy of each of these documents. N
  5. a payment of approximately US$100 by an international payment order, payable to the Supreme People’s Court of the People’s Republic of China.

China’s Ministry of Justice will then send the service documents to the appropriate local court. That local court will, in turn, finally effect service. In our experience Chinese courts are sometimes fairly slow to send out service. If the Chinese company or person you are suing is “powerful” service may be even slower. Repeatedly calling and emailing both the court itself and the Ministry of Justice can often expedite service. Service normally takes around one to three months.

Service on a Chinese company by mail is not effective and U.S. courts have held that China’s formal objection to service by mail under Article 10(a) of the Convention is valid. See DeJames v. Magnificence Carriers, Inc., 654 F.2d 280 (3d Cir. 1981), cert. den., 454 U.S. 1085; Dr. Ing H.C. F. Porsche A.G. v. Superior Court, 123 Cal. App. 3d 755 (1981).

In International Service of Process in Taiwan? Relax, it’s FedEx the International Technology Law Blog describes what is required for service in Taiwan and it is (at least compared to China) a piece of cake.  This is because Taiwan is not a party to the Hague Convention.  The International Technology Blog notes how in the recent case of SignalQuest v. Chou, the New York District Court judge affirmatively answered his own question of “When service of process absolutely, positively has to be effected on a Taiwanese defendant pursuant to FRCP 4(f)(2)(C)(ii), is Federal Express enough?”

The Court held that because Taiwan was not a signatory to the Hague Convention on service, Federal Rule of Civil Procedure (FRCP) Rule 4 would control. Rule 4 authorizes foreign service of process by letters rogatory or under the foreign country’s own laws on domestic service of process. But as the International Technology Blog points out, “the letters rogatory process takes months to complete, as it requires the assistance of courts and government offices in both countries.”  Service under Taiwan’s domestic requirements would have been “no less cumbersome, because Taiwan’s law requires service to be made by the clerk of Taiwan’s court.”

So the plaintiff in SignalQuest served the Taiwan defendant by Federal Express and argued that was proper under FRCP 4(f)(2)(C)(ii), “which permits process to be served on a foreign defendant – unless prohibited by the foreign country’s law.”  The defendant then moved to dismiss the case, arguing that because service by overnight courier is not permitted under Taiwan law, it must be deemed prohibited, for purposes of FRCP 4(f)(2)(C)(ii). “The court disagreed, holding service is not prohibited under foreign law unless it is expressly prohibited and it found the service by FedEx was proper.”

Sounds great, right?  Well International Technology Blog astutely points out one potentially massive flaw in serving a Taiwan company via Federal Express:

As a practical matter, service by FedEx may have been an acceptable solution for SignalQuest, where plaintiff was seeking only a declaratory judgment of [patent] non-infringement in the U.S., but a plaintiff should think twice before attempting such a tactic in a case where enforcement may be required in the defendant’s country. In Taiwan, a foreign judgment cannot be enforced until it has been recognized by a Taiwan court and there’s a fair likelihood Taiwan courts may refuse to recognize any judgment where service was made by mail, e-mail or other unorthodox means.

It would seem then that in most cases, a plaintiff suing a Taiwan company should do so through the clerk of Taiwan’s court, which also no doubt requires that the complaint be translated into Chinese.

Just read a Bloomberg News article, “Proview Using ‘IPad’ Name is Harmful: Apple,” that quotes me on the Apple-Proview dispute, as follows:

“It’s not really trademark law, it’s about whether the trademark was legally transferred or not,” Dan Harris, a Seattle-based lawyer with Harris Bricken who handles cases on intellectual property in China, said before the hearing. “Proview Taiwan agreed to sign over the trademark, but Proview Taiwan didn’t own the trademark.”

I see the case as being about authority. Authority to sell the iPad trademark. Who had the authority to sell the iPad trademark to Apple back when Apple (acting through a third party intermediary) thought it purchased the trademark for iPad in China back in 2009?  Let me explain.

If you bought the Brooklyn Bridge from me, you would not own it. Why not? Because I cannot transfer title in the Brooklyn Bridge to anyone because I do not own it in the first place. This analysis should be the starting point for analyzing the Apple-Proview case. I say this because it appears that Apple bought the iPad China trademark from a company that did not own it. Apple (again, acting through a third party intermediary) bought the iPad China trademark from a Taiwanese company called Proview Electronics Company, Ltd. (“Proview-Taiwan”) at a time when a Shenzhen company called Proview Technology Shenzhen Co, Ltd. (“Proview-Shenzhen”) actually owned it.

So the big legal issue in China is not really a trademark issue, it is an ownership and authority issue. The ownership of the trademark when it was allegedly sold is not really in doubt; it was owned by Proview-Shenzhen. The real question is whether Proview-Shenzhen authorized Proview-Taiwan to sell the iPad trademark to Apple and that is mostly what is being argued in the Chinese courts.

To modify the Brooklyn Bridge analogy, let’s say that you bought a house from Mr. Jones and it turned out that Mr. Jones did not own the house, but rather, his wife, Mrs. Jones, owned the house. If Mr. Jones and Mrs. Jones were in the midst of a divorce and she had told him not to sell the house and had told you that she owned the house and so Mr. Jones could not sell it to you, your claim to own the house through the purchase would probably be pretty weak. But let us suppose that Mr. and Mrs. Jones were happily married and Mrs. Jones was right there during the negotiations for the sale of the house and never said a word about how she was the one who actually owned it. Well your claim to own the house would be a lot stronger.

The Apple-Proview case is dealing with similar factual issues, as can be seen in the Bloomberg article. In other words, it looks like a factual mess.

And that is not the only factual mess. Remember how I keep saying Apple used a third party intermediary to try to buy the China iPad trademark. Well, Proview-Taiwan is suing Apple in the United States about that, claiming that the way Apple sought to buy the iPad name constituted fraud and unfair competition. My initial reaction upon hearing of this lawsuit was to assume it had little validity. I assumed this because it is quite common for big companies (small ones too) to try to buy something through a third party intermediary so as to avoid revealing to the seller how much the desired item may really be worth and I had never heard of a lawsuit being brought over that.  But in reading, “How Apple snookered Proview to get the iPad trademark,” I am not prepared to just laugh off that lawsuit.

So what should your takeaway be from the Apple-Proview case? Nothing more than that you need to be sure that the company with whom you sign a contract is the right company. I know this sounds basic, but this sort of thing happens more than you can imagine in international deals.  I personally have worked on at least two joint venture deals gone bad where the American company had signed an agreement involving the wrong party. In both cases, the American company thought it had a deal to be the distributer of the Joint Venture’s products outside China, but in fact, the agreement actually said that the American company would be the distributer for its Chinese joint venture partners’ products. And since the Chinese partner did make products that the American wanted to distribute….

For more on the Apple-Proview case, check out “Apple v. Proview. China Trademarks And So Much To Learn” and if you want still more, go over to China Hearsay, where Stan Abrams has written nearly a dozen posts on this case. And for you law-geeks out there, click here for a copy of the just-filed Amended Complaint (along with some interesting exhibits) in Proview’s U.S. litigation against Apple.

 

A reporter called me the other day on the Apple-Proview trademark kerfuffle. She kept wanting me to give her a quote on what foreign companies should take away from this dispute and I kept parrying with her, unable to give her just one. I kept finding myself saying “it’s probably more complicated than that.”

Let me back up a bit. As many of you no doubt know, Apple is in a massive trademark fight with a Shenzhen-based company called Proview. Near as I can tell, the facts are as follows:

  • Proview-Shenzhen registered the iPad trade-name before Apple had ever manufactured an iPad.
  • Proview-Taiwan (a Taiwanese company that is not the same company as Proview-Shenzhen) entered into an agreement with Apple (or, more accurately, a company acting on Apple’s behalf) to sell its Asian iPad trademarks to Apple.
  • Apple claims that agreement with Proview-Taiwan included the PRC iPad trademark, but Proview is claiming otherwise.
  • Apple sued Proview (I think Proview-Taiwan, but I am not sure) in Hong Kong and the Hong Kong court ruled that Apple is entitled to use the iPad trademark on the Mainland.

Here is where it gets so complicated and here is how I see it:

  • Proview-Shenzhen still shows up as the owner of the iPad trademark in China.
  • It is not clear if Proview-Shenzhen ever contracted with Apple to give Apple the China iPad trademark or any sort of license to use that trademark.
  • It appears that Proview-Taiwan did enter into some sort of trademark sale or licensing agreement with Apple (again, actually the company acting on Apple’s behalf), but since Proview-Taiwan did not own the PRC trademark for iPad, there are some real issues as to the validity of such a sale or license.
  • Did Proview-Taiwan have any interest in the PRC iPad trademark such that it could transfer or sell that interest to Apple?
  • Did Proview-Shenzhen ever agree to sell or license its iPad trademark to Apple?

What I find really difficult to believe is that Apple and/or Apple’s attorneys would have done a deal to acquire rights to the iPad trademark in China without having done real due diligence on that trademark. Basic due diligence would have revealed that the PRC iPad trademark was registered to Proview-Shenzhen and at that point, Apple would have required Proview-Shenzhen (not Proview-Taiwan) sign on to the contract to assign or license the PRC mark. So the first thing to be learned from this (maybe) is to do your due diligence and make sure that when you are buying something or securing a license to something that you are in fact doing so with the company that is actually authorized to sell or license that item.

This all came to the fore when Proview-Shenzhen started asking trademark officials in various Chinese cities to start pulling iPads from store shelves because those iPads infringe on Proview-Shenzhen’s trademark.  Some cities are pulling iPads from store shelves and this is obviously not good for Apple. [Full Disclosure: I have a disproportionate percentage of my retirement savings wrapped up in Apple stock]. Some cities seem to be refusing to do so, in what appear to be political, not legal, reasons.

Now Proview-Shenzhen is saying that is going to ask China customs to block exports of Apple’s iPads from China because they infringe on Proview-Shenzhen’s trademark. The media (and even Proview-Shenzhen itself) seem to believe this will not happen because it would look so bad for China politically. This is where the real lesson lies. If you are not Apple, I can pretty much assure you that all of your iPads would be off the shelves in China by now and they would also not still be leaving China via export. The real lesson then is on how to prevent this from happening to “your” trademark and that lesson is really quite simple. If you want to avoid your product getting pulled off shelves in China and/or prevented from leaving China, make sure that the trade-names and trademarks you put on your product (or on its packaging) are actually registered (or licensed) to you in China. And just to be clear, “in China,” for purposes of China’s trademark law, does not mean in Hong Kong or in Taiwan or in Macau or in the United States or in Australia or in any other country. If you want China trademark protection, you must register the trademark in China.

For more on China trademark law, check out the following:

Here are some articles for those who want to read more about the Apple-Proview fight:

Just don’t say we didn’t warn you.

UPDATE: Stan Abrams over at China Hearsay has two great (recent) posts on this dispute. The first post, “Apple vs. Proview: The Assignment Agreement!” contains Stan’s analysis of the Trademark Assignment Agreement between Apple (actually it’s stand-in entity) and Proview. Stan does a great job of analysing the Assignment Agreement, which really is by far the key issue involved in the case. I completely agree with all that Stan says about the Agreement and I add one thing to it. If you think you can properly assign a Chinese trademark without using an experienced attorney to draft the contracts and oversee the agreements you are wrong. And if you think that after reading Stan’s post, you are flat out crazy.

The second post, “What Have We Learned About China’s IP System? Answer: nothing,” posits that the issues in this matter involve a commercial dispute, not IP. I generally agree with this. The heart of the issue is how you secure ownership or rights to someone else’s trademark.

Just got back from a family vacation in Puerto Rico. While there, I saw a rental car company called “Target.” This company had the same logo as the Target stores so common on the U.S. mainland. Well of course that got me to thinking. Is this rental car company infringing on Target (the store’s) trade-name and trademark (the logo)?  Or is it the case that even though Puerto Rico is a U.S. territory, its trademark regime is separate from the United States?

My research quickly determined that Puerto Rico’s trademark regime is actually separate from that of the United States. In other words, if you want your name or mark trademarked in both the United States and Puerto Rico, you should register it in both places. Presumably, Target rental car beat Target stores to the name and logo in Puerto Rico and is now able to use both legally there. 

Hong Kong and China are the same way. And Taiwan and Macau too. I am constantly having to explain this to our clients, at least half of whom just assume that a trademark registration in the PRC operates as a trademark registration in Hong Kong and vice-versa. And who can blame them, since Hong Kong is one with the mainland, right? Same with Macau, right? Many have this same view regarding China and Taiwan as well. None of this is true.

If you want your brand or mark registered and thus protected in China, Hong Kong, Macau and Taiwan, you must register them in China, Hong Kong, Macau and Taiwan. If you thought you were protected in more than one of these places simply because you had registered in one, you had better get moving and start registering in one, two, or three more. 

What do you think?

The Korea Law Blog did a post, entitled, “Enter the Korean Market — Then Enter China and Japan,” positing that companies use Korea as a test market for China:

The Secretary General [of the EU Chamber of Commerce in Korea, Jean–Jacques Grauhar] mentioned something that I think all global businesses should recognize.

He notes that:

While the world focuses on the Chinese market, company executives should also try to include Korea in their itinerary whenever they visit this part of the world, because a presence in South Korea is indispensable for truly global brands and could in fact constitute an excellent launching pad to reach the Chinese and Japanese market.

In most cases, Korea is a great test market before entry into China and Japan. Many of my clients have successfully succeed and also “successfully” failed in Korea and choose to enter or forgo the Chinese and Japanese markets based on these Korean experiences.

Korea is simply a much cheaper place to do business than Japan and is a much geographically small market than China, thus, lowering the cost of doing business.

Color me skeptical.

Why should a company go into Korea before going to China? What are the benefits of doing that, rather than perhaps using one Chinese city as a test market?

I am a huge fan of Korea and I absolutely am not saying companies should ignore Korea because they should not. But I do question the value of using Korea as a prelude for China. I am just not sure mastering Korea would help all that much in mastering China and even if it does, why not use Vietnam or Singapore or Taiwan as your prelude for China? 

Korea as China stepping stone?

What do you think?

Great article in today’s Wall Street Journal, entitled, Why China Grows So Fast. It is written by Michael Spence, a 2001 Nobel laureate in economics, a senior fellow at the Hoover Institution, a professor emeritus of management in the Graduate School of Business at Stanford University, and chairman of the independent Commission on Growth in Developing Countries. It explains why China’s economy has done so well for so long.

Spence defines “high growth” as GDP growing at more than 7% per year for 25 years or more and notes there are 11 such cases of sustained high growth: Botswana, China, Hong Kong, Indonesia, Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand.  “China is the latest case, the largest in terms of population, and the fastest.

According to Spence, though every country’s “sustained high growth is to some extent idiosyncratic, they share certain features:”

In all cases, there is a functioning market economy with its price signals, incentives, decentralization and enough definition of private property ownership to enable investment. All attempts to circumvent this necessary condition through central planning have met with major misallocations of resources and failure.

The high growth paths are characterized by high levels of savings and investment, even in the early stages when the per capita incomes were low. “High” savings in this context means at or above 25% of GDP. China again was the high-water mark ranging between 35% and 45% of GDP. The investment includes a substantial component of public-sector investment in education and infrastructure, both being crucial as they increase the rate of return to private-sector investment, which is the proximate driving force in the growth process.

A third key ingredient is resource mobility. Contrary to the image that sometimes comes from a macroeconomic overview, productivity growth at these rates is not achieved by having everyone do what they were doing before, but a little bit more efficiently. The portfolio mix of economic activity changes very rapidly. This is what Schumpeter called “creative destruction” and Paul Romer calls “churn.

At company and industry levels, new firms and sectors are created and others decline or die off. If you take a snapshot of a rapidly growing developing economy at five-year intervals, the changes are dramatic. At 15-year intervals the same economy is barely recognizable in the second picture. South Korea is not now a center of labor-intensive manufacturing, but it once was. The same is true of Japan, though one needs to be in an older generation to remember. Even advanced economies like Spain, Ireland and Italy were at some stage surplus-labor economies, and employed that in labor-intensive industries, or exported it, or both.

Early on in a country’s growth, the vast majority of people are in agriculture, where there is typically a surplus of labor. So when the agricultural workers start moving to the cities, the “loss in output in the traditional sector is minimal or zero because of the surplus labor condition, and hence the overall productivity gain is substantial.” “This movement of people geographically and across sectors is not an ancillary side effect of the growth process, but rather the essence of it.”

This movement from agriculture to industry is always going to be “socially and politically” disruptive and in trying to mitigate these effects, “it is better to protect people and incomes rather than jobs and firms” because the “latter approach impedes the competitive responses of firms in the private sector and, in the context of the global economy, becomes very expensive.”

Spense postulates that “all cases of sustained high growth prominently include a growing export sector as a growth driver and a rising fraction of GDP associated with exports and imports. There are no examples of sustained high growth in the postwar period that do not involve integration into the global economy.

I so agree, and not because I lack the guts to challenge a Nobel laureate on his own turf (Yasser Arafat’s Nobel Peace Prize completely disabuses me of that).

I love what Spense is saying because I am always analogizing China to Japan and Korea and screaming that China’s economy (and this includes things like IP protection) is not unique. I also like Spence’s call for governments to help the people directly, rather than trying to protect jobs and firms. I actually think this prescription for growth applies to developed countries like my own as much as it does to developing countries like China.

What do you think?

The World Economic Forum out of Davos, Switzerland, just released its Global Competitiveness rankings and China has fallen from 48th last year to 54th this year.  The Forum summarized China’s positioning as follows:

China’s ranking has fallen from 48 to 54, characterized by a heterogeneous performance. On the positive side, China’s buoyant growth rates coupled with low inflation, one of the highest savings rates in the world and manageable levels of public debt have boosted China’s ranking on the macroeconomy pillar of the GCI to 6th place — an excellent result. However, a number of structural weaknesses need to be addressed, including in the largely state-controlled banking sector. Levels of financial intermediation are low and the state has had to intervene from time to time to mitigate the adverse effects of a large, non-performing loan portfolio. China has low penetration rates for the latest technologies (mobile telephones, Internet, personal computers), and secondary and tertiary school enrollment rates are still low by international standards. By far the most worrisome development is a marked drop in the quality of the institutional environment, as witnessed by the steep fall in rankings from 60 to 80 in 2006, with poor results across all 15 institutional indicators, and spanning both public and private institutions.

To see the full list, go here [pdf format].   To see the criteria employed, go here [pdf format]. The top ten most competitive countries are as follows:

  1. Switzerland
  2. Germany
  3. Netherlands
  4. United Kingdom

Hong Kong came in 11th, Taiwan in 13th.  This is a serious, well documented ranking, and China’s falling six places, due in large measure to its institutional failures (legal, ethical, transparency) should not be taken lightly.

About a month ago, we did a post on the Chinese companies that had made Fortune Magazine’s Global 500 list.  That post, “Twenty Three (Or Fewer?) China Companies Make Fortune Global 500,” was based on Chinese newspaper articles reporting on the Fortune list.  At the time of our post, I could not figure out exactly how many China companies had made the cut because it appeared that some of the Chinese newspapers were including Taiwan and Hong Kong companies in the list.  Now that the Fortune Magazine article has gone online, I can clear up any residual confusion by stating that twenty (not twenty-three) China companies made the list, including, Hutchinson Wampoa, out of Hong Kong.  As I had suspected, three of the companies on the China newspaper lists are actually based in Taiwan.

Of the 20 PRC companies, 15 are based in Beijing, two are based in Shanghai, and Hong Kong, Guangzhou, and Changchun each have one.