Chinese Government Takes First Steps To De-link Indigenous Innovation And Procurement, But Industry Groups Wary

SHANGHAI - Months after pledging a policy change, China is finally taking steps to break ties between indigenous innovation and government procurement policies. The changes in policy, according to a report released by the U.S.-China Business Council, address growing concern among multinationals that procurement policies - an estimated $1 trillion market - are increasingly designed to shut them out.

The policies in question were developed in 2006, when a series of trial measures aimed at fostering homegrown Chinese innovation set criteria for evaluating and certifying indigenous innovation products. This, according to the USCBC report, set the stage for policies giving preference to domestic companies that made the grade. In 2009, another circular launched the compilation of a catalogue of domestic innovators, offering them advantages when bidding for government contracts.

China's stance on indigenous innovation, in particular, has been a lightning rod for U.S. and European companies, as it could lead to discrimination against foreign products in government procurement and force foreign life sciences companies to move R&D operations to China to access its market.

The reaction to the policies was so strong that indigenous innovation was discussed at a bilateral meeting during Chinese president Hu Jintao's visit to the U.S. in January. Hu pledged that China would "not link its innovation policies to the provision of government procurement preferences" (Also see "Chinese President Pledges China Will Not Discriminate Against U.S. Businesses; Broad Healthcare Partnership Unveiled" - Scrip, 21 Jan, 2011.).

Traces Of Change Beginning To Materialize

It wasn't until early July that signs of a rollback in the policy started to materialize. The Ministry of Finance, Ministry of Science and Technology and National Development and Reform Commission released a circular invalidating the 2006 trial administrative measures on the accreditation of indigenous innovation products.

"This invalidates only three of the 20 or so of the involved policies," said Robert Poole, vice president of USCBC's China operation. "It's progress, but there are still a number of remaining policies that we'd like to see removed."

While the policies caused controversy, the direct impact on multinational companies is still unclear. In a survey conducted by the USCBC, 42% of respondents said the policies were a concern, while 60% said it was too early to judge the impact of the policy and only 10% reported having lost business as a direct result of the indigenous innovation policies. What concerns many businesses, said Poole, is the overall trend of favoring local companies over multinationals.

Indigenous innovation is the latest and perhaps thorniest of a series of controversies concerning China's business climate and the government's procurement process. The public procurement market in China represents anywhere from 12-20% of the country's total economy - a potential boon for domestic and multinationals vying to win government contracts.

Pharma Companies Face Numerous Hurdles

Multinational pharma companies also face a number of other hurdles at the provincial level. In a report released by the European Chamber of Commerce earlier this year, businesses complained of increasing difficulties as the procurement process increasingly moves to the local level. Even as the central government withdraws policies, bidding processes at a local level could remain biased. (Also see "Sweating The Little Things: European Companies Call On China to Overhaul Public Procurement System" - Scrip, 9 May, 2011.).

In particular, for tenders falling under the Government Procurement Law - which includes tenders by government ministries and agencies, as well as hospitals - there is no single integrated platform that lists all new tenders. This increases the costs for potential bidders, and many foreign-invested firms are forced to concentrate on only a handful of tenders, meaning less competition among bidders which translates into higher costs for local authorities.

Moreover, for medical device and pharmaceutical manufacturers operating in an environment where most hospitals are government owned, the implications, of course, are huge.

One of the most encouraging trends, according to Poole, is the withdrawal of indigenous innovation catalogues and related policies at the local level. Shanghai and Anhui province announced the elimination or suspension of their indigenous innovation catalogues in early July and the city of Xiamen suspended work on accrediting innovative companies. In June, Jiangxi reported it would suspend implementation of indigenous innovation product evaluation measures related to government procurement.

While there are still measures in place that favor domestic companies, the recent changes are a sign that China is willing to temper its policies favoring domestic companies. "These are steps in the right direction," said Poole. "There are benefits to Chinese consumers and to the marketplace from allowing in the best the world has to offer."

- Lauren Hilgers ([email protected])