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Message to CEOs—Don't Underestimate The Middle Kingdom in The Innovation Race

It's been a big week in Washington since Chinese President Hu Jintao arrived. Congressional members have not been afraid to speak their minds when it comes to China's economic, monetary and domestic policies.

But there is a another storm brewing that could impact many companies—the patent race.

While many have painted China as a land where pirating is king, the country is reinventing itself from a country of imitation to a country of innovation. I decided to talk about the innovation race and the fatal mistakes companies can make when it comes to China with Lewis Lee, IP attorney to US patent powerhouses like Microsoft on the dangers of under-estimating the Middle Kingdom.

LL: The United States is falling behind when it comes to graduating engineers and scientists. Are these numbers being reflected in the patent rankings?

Lewis Lee: The rankings are dominated by companies headquartered in Japan, Germany, Korea and the U.S.

However, we are seeing more and more research being located in emerging countries like India and China due to the large number of engineers and scientists, which in turn is fostering a growing culture of innovation in these countries. In the U.S., we need more educational emphasis on intellectual property.

After all, it is rapidly becoming the greatest asset class and greatest renewable resource of our time. Intellectual property should become a core requirement in business and engineering education disciplines, not just an elective in law school.

LL: Is the United States fostering an innovation-based economy?

Lewis Lee: Based on my experience and travels, the U.S. has traditionally done a great job nurturing creativity and innovation. Entrepreneurship is part of our culture in a way that is mostly unfamiliar in other nations.

In fact, the foundation of our intellectual property laws is penned into the U.S. Constitution, so you might say that our country was founded on the fundamental belief that innovation plus protection is key to long-term prosperity. China and India produce a lot of engineers and scientists but have historically been more comfortable with improving existing ideas than innovating new ones.

This may have been due to larger innovation issues, like access to capital, development of intellectual property laws and courts, and so forth.

And today, this seems to be changing. Most U.S. leaders recognize the importance of innovation to our economic future, but still more can be done to ensure a bright future in an increasingly competitive world.

Our leaders must gain a far better understanding of the policy upgrades that will be needed to allow innovation, and protection of that innovation, to grow into an ever-more effective engine of economic growth.

LL: What policies or tax reform can instill an innovation-based economy?

Lewis Lee: There is a lot of work to be done on many levels and on numerous issues, including immigration, free trade, broadband infrastructure, tax policy, R&D, and patent reform. For example, at the federal government level, the average wait time from filing to granting of a patent in the U.S. is 32 months.

While current PTO Director David Kappos is doing a terrific job, we will still need a more efficient and better funded system to accommodate the increased pace of innovation that the U.S. must achieve to be competitive in the coming decades.

At the corporate level, corporations need to shed their dated notions of the patent. It can no longer be treated as a type of insurance policy, purchased downstream after product development and launch. Rather intellectual property must be at the core of business strategy.

LL: The United States courts system is filled with patent litigation. What does the future look like here?

Lewis Lee: The increase in litigation is a reflection of how valuable intellectual property has become to our economy. Whereas 40 years ago 90 percent of the value of the S&P 500 companies was intangible assets, such as resources and factories, today it is mostly intangible assets, such as brands and ideas.

Unfortunately, we don’t presently have a smooth functioning market for the valuation and trade of such intangible assets, particularly in intellectual property. Litigation is the typical default tool for exchange and valuation when other mechanisms fail and patent litigation is extremely expensive. Our courts have a good worldwide reputation for producing fair outcomes, and are sometimes sought after venues by foreign companies seeking remedies against one another.

LL: We have seen an increase in patent trolls—how much of a detriment will this have on business?

Lewis Lee: Of all the assets a company can have, intellectual property is the least understood. Just as the relationship between the price of oil and the share price of Standard Oil was hard to deduce in the stock markets of the late 1800’s, it is the same with intellectual assets and corporate stock prices today. It is left to a few experts to sort out.

We’re in an innovation-driven economy, yet we are at the earliest stages of learning how to value and smoothly trade the underlying intellectual assets. Non-practicing entities, including so-called “trolls” recognized the commercial value of otherwise idle blocks of intellectual property, buying the IP and charging for its use.

All businesses, and not just technology companies, need to become more aware of the importance of intellectual property as a long-term strategic asset, and plan accordingly.

LL: In what areas is the United States losing in the innovation battle?

Lewis Lee: We are lagging in areas like alternative energies, such as wind, solar, and nuclear power. Other parts of the world are increasing focus on innovation in an attempt to build a culture that will one day keep pace with or exceed that of the U.S.

Elsewhere, we are seeing explosive leaps in areas like communication and IT, and in emerging segments like mobile banking, particularly in regions where infrastructure is newer and not based on legacy systems. Disturbingly, a study by the nonpartisan research group Information Technology and Innovation Foundation ranked the U.S. sixth among 40 countries and regions based on 16 indicators of innovation and competitiveness, but last in terms of progress made over the last decade on competitiveness and capacity for innovation.

LL: What sectors/areas is the United States the innovation leader?

Lewis Lee: We lead in many technology segments like software, telecommunications, and biotech. Despite the concerns about emerging powers like China, the US is still the world leader for innovation. It is part of our national heritage—we champion new ideas and even celebrate successful entrepreneurs.

Our education system, though the subject of much criticism, does in fact produce creative thinkers. And we freely supply capital to give good ideas a try. Finally, our courts are more developed than in other nations, our laws are democratically written, transparent, and they are enforced with reasonable predictability– all advantages for the U.S. in the global economy.

LL: You have unique insight into both U.S. companies (Microsoft) and China-based companies. How do both countries differ in their enforcement of intellectual property rights and what lessons can each country learn from each other?

Lewis Lee: Americans should no longer think of China as an emerging manufacturing power that disregards intellectual property rights.

The enforcement system in China is still new and developing, but the country is dramatically increasing the number of patent filings it wants to receive (up from 300,000 in 2009 to an estimated 2 million in 2015) and adding patent examiners at an astounding pace. China will enforce intellectual property rights as soon as doing so is in its national interest. That day will come sooner than most people expect.

For American companies, they must grasp the reality that patents are local—there is no worldwide patent. Companies that view the Chinese market as important must build intellectual property portfolios in China, not just the U.S., because Chinese companies are dramatically increasing their domestic (Chinese) patent filings at a rate far outpacing the patent filings of U.S. companies.

This is but one example of the thinking required to move intellectual property to the core of international business strategy. Ideas are the new asset class, and a renewable one at that, so companies must set about owning and protecting these assets in their strategic markets around the world.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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