Careful preparation for reverse innovation

Mofcom maintains and publishes the Catalogue of Technology Prohibited or Restricted From Export by China (中国禁止出口限制出口技术目录). The current Catalogue was promulgated on September 16 2008 and became effective on November 1 the same year. The Catalogue is organised by industry groups, and each of the listed technology is assigned a serial number. Each serial number has either a letter J or a letter X attached to it. The letter J denotes technologies in the prohibited category while the letter X denotes technologies in the restricted category.

Mofcom does not publish a separate catalogue for uncontrolled technologies. Therefore, if a technology is not listed the Catalogue, the unlisted technology should presumably be classified as uncontrolled.

Exporting intangible technology
When it began regulating technology export in the early 1990's, China was not yet a favoured destination for global R&D funds. Before the turn of the millennium, so-called glocalisation (a combination of globalisation and localisation) was the dominant business model. Under glocalisation, most multinational corporations developed new technology in a few technologically advanced countries and, later, stripped-down versions of the same technology were adopted for markets in developing countries at lower price points. Now, reverse innovation has replaced glocalisation and turned the old business model on its head. The new corporate strategy is to sponsor R&D projects in developing countries with the objective of introducing the resulting technology worldwide.

Similarly, in the early 1990s, the Chinese legislator was mostly likely focusing on controlling the export of tangible technologies, that is technologies embodied in some type of tangible objects, such as sophisticated machinery. Regulating the export of intangible technologies, such as inventions developed in China with overseas funding, probably was an afterthought. In fact, the language in the new rules still reflects the legislators' focus on exporting tangible technologies. For example, the Measures for the Administration of Technologies Prohibited or Restricted from Export contain a provision that outlines procedures for obtaining export financing and insurance. Regardless of whether the Chinese legislator was focusing on regulating the export of inventions developed in China with overseas funding, the plain language of the export control laws applies to the export of tangible and intangible technologies.

Sponsoring technology research
In executing its version of reverse innovation, a multinational corporation will likely face compliance issues when sponsoring technology research in China. If the sponsor's expectation is to export the resulting technology from China, then long before signing a research sponsorship agreement or sending any research sponsorship funds to China, the sponsor and the fund's recipient should think through the various steps in complying with the Chinese technology export control laws. If the proposed research is intended to produce a resulting technology that would fall within the restricted category, the law requires that the Chinese researcher apply for a Letter of Intent for Technology Export Licence (技术出口许可意向书) from Mofcom before negotiating in earnest or make any binding commitment with the sponsor. After receiving the application, the Ministry of Commerce will conduct trade review while forwarding relevant portions of the application to the Ministry of Science and Technology for technical review. The expected wait time for Mofcom to make its decision on a Letter of Intent is about 30 working days.

Complying with the Letter of Intent requirement before signing a research sponsorship agreement is critical. A valid Letter of Intent is a prerequisite for applying for the Technology Export Licence. Without a valid Letter of Intent, Mofcom will not issue the Technology Export Licence (the last step in the compliance process) when the R&D project is complete and the sponsor gets ready to export the resulting technology from China.

Under the current rules, a Letter of Intent is valid for three years and allows the proposed research to be conducted in China during this time frame. If the research project covered under an existing Letter of Intent could not be completed within three years, the Chinese researcher has to file another application for a new Letter of Intent. The current law does not provide for extending an existing Letter of Credit. Again, this reflects the legislator's focus on regulating the export of tangible technologies, where three years should be ample time.

When the time comes to export the resulting technology, the application for the Letter of Intent also serves as the application for the Technology Export Licence. In other words, the compliance process does not entail filling out a separate form for the Technology Export Licence. The person exporting the technology must submit the Letter of Intent, the sales contract, and other required addendums for review, and Mofcom will make its final decision within 15 working days after receiving the completed package of materials.

Rule on submitting applications and forms
Applications for the Letter of Intent and the Technology Export Licence, as well as the registration form for the export of uncontrolled technologies, are all submitted through an online system maintained by Mofcom. Not all applicants can submit their applications and forms directly to this online system. At present, only large and well-established institutions, such as Beijing University or Fudan University, that are authorised to handle their own applications have direct access to the online system. All others, such as independent researchers and small research labs, have to engage a licensed import and export agency company with access to the online system to facilitate their filings.

Implications on business objectives
If the research sponsor's business objective is to transfer the resulting technology for use outside China (whether as a transfer of know-how or transfer of right to apply for a patent), a coherent compliance road map with specific action items should be an integral part of the project's exit strategy. At the outset, the sponsor should determine whether the proposed research project in China would produce a technology that will fall within the restricted category. If so, the sponsor then needs to include the wait time for obtaining for a Letter of Intent as part of the project's compliance timeline. Because independent researchers and small research labs cannot access Mofcom's online system, time for finding and engaging a licensed agent company to facilitate the application filing also should be added to the compliance timeline.

As discussed earlier, gaining the Chinese government's final approval to export restricted technology entails a two-step process: the technology exporter starts the process by applying for a Letter of Intent and completes the process by converting the Letter of Intent into an Export Licence. Whereas the Letter of Intent is a prerequisite for obtaining the Export Licence, unfortunately it is not a guarantee for receiving the Export Licence. The government still has the legal authority to deny the Export Licence after a sponsor has relied on a Letter of Intent in its decision to invest time and money into a project. Thus, the sponsor should not mistake a Letter of Intent as an unqualified pre-approval for exporting restricted technology out of China.

Understanding required
With R&D talents that can deliver innovative technologies, China is now positioned to benefit from the reverse innovation business paradigm that will shift more R&D projects to the developing countries. Technology researchers in China have attracted and will continue to attract an increasing share of global R&D funds. Those who sponsor research in China with the expectation of exporting the resulting technology from China should understand and comply with the newly enacted rules and procedures on technology export control. Sponsoring research in the restricted category requires a Letter of Intent before serious negotiations or making a binding commitment. Exporting the resulting technology in the restricted category requires a Technology Export Licence. And exporting any uncontrolled technology requires registration.

Richard Chao, Dorsey & Whitney, Shanghai