IP theft is a long-term risk, while cheap labor and access to the Chinese market are short term benefits.

Company executives may have short term incentives, and little interest in the long term health of their organizations.

Company executives have to compete with executives willing to compromise their company's long term health in the short term.

Well said. It reminds me of Warren Buffet's statements about insurance companies and excessively low premiums.

The well-run insurers are always competing against the most poorly run, excessively risky insurers.

Some of these poorly run companies offer irrationally low premiums and gain lots of customers because of it -- but then go bankrupt. OTOH, well run insurers that used sound underwriting principles and charged rational premiums end up with fewer customers.

It sounds like you are advocating something like IP mercantilism which is even worse than the original mercantilism considering that IP is not a zero-sum commodity. It should be distributed as widely as possible.

And then what incentivizes a company to invest heavily in R&D if they will derive no disproportionate advantage from their discoveries? Wouldn't there be a bit of a tragedy of the commons situation where everyone tries to wait for everyone else to invest so that they can reap the reward while others bear the cost? If that comes to pass, everyone will be poorer as R&D spending slows down.

First mover advantage and brand building. The status quo even with strong IP protections is reverse engineering and making something that can be sold legally often with additional refinements. That sort of system can be argued as working as intended for everyone.

Apple for instance can be copied easily yet iPhone knockoffs don't command comparable prices due to lack of established trust and quality. Rivals compete openly with their own R&D.

Microsoft the behemoth failed to break in the phone market even with heavy supportive measures and willingness to take a loss like they did with xbox.

Keeping customers. See Shenzhen which is a free-for-all but out-innovates about everyone else in product development:

https://www.youtube.com/watch?v=SGJ5cZnoodY

You know the HN line “your business model is not my problem” that’s trotted out when it’s the advertising industry or the media industry? Well, “your business model is not my problem”.

Part of the problem is expansion into China is a hot take for stockholders. It's difficult to stand in front of a board and say "no, we will never expand into China".

It's also essentially game theory; the first defectors (those entering the Chinese market) will seize most of the reward.

So now that US companies have entered China, can you name some examples of first entrants who have “seized the market”?

I think your entire premise is dubious. The first mover advantage cannot be great because the Chinese government will never allow a foreign company to have a dominant position in an important domestic Chinese market. Without significant change since in government those first entrant companies are simply very foolishly assuming the regulatory environment will be anything like it is in the United States or Europe.

Apple? They clocked almost $10B in revenue from China in Q3 2018, close to 20% of total revenue.

KFC, McDonald’s, Starbucks, Nike, Adidas, Polo, Estée Lauder, Coach, Michael Kors, Armani, Chanel, Gucci, are all extremely popular.

Go to any department store in China and the first two floors (i.e. the prime spots) all feature foreign brands.

> It seems to me that execs understand and take a calculated risk when they choose to do business in various parts of the world. If they cannot make this calculation, they should not be running a company.

There's an externality here, it's not just that one company, but all of its competitors that are losing out on these IP "appropriations". Then, let's say you're one of the companies that are able to "sell out", if you want to profit at all, you need to be the first to sell out. You can't rely on nobody selling out, therefore selling out isn't even bad management.

Excellent point. And not only that, but "execs understand and take a calculated risk when they choose to do business in various parts of the world" seems like a rather no-brainer question, but is actually incredibly complex. In this calculation, what variable(s) are being optimized for, and over what time frame? Transferring the majority of manufacturing overseas might be the best thing for everyone involved (which assumes we actually have the ability to accurately and honestly measure such a thing) in the short run, but maybe it isn't the best thing for everyone or even anyone in the medium to long term.

Answering such questions is very, very difficult, but rarely do I even see anyone asking such questions. "Free trade is shown to increase GDP of all participating countries", which is a fact as far as I can tell, seems to be the limit of how deeply we want to think about these things, and suggestions that the world just might be a bit more complex than that usually elicits passionate, seemingly non-negotiable disagreement.

Perhaps we should consider revoking patent and other IP protections for companies that knowingly or negligently allow IP to be transferred to jurisdictions that do not respect IP rights in pursuit of profit.

Otherwise it's a double whammy, your foreign competitors compete unbound while your domestic market competition is restricted.

It would also align the game theory to prevent companies from "selling out" to such jurisdictions.

Patents are public knowledge. How do you revoke public knowledge?

You revoke the monopoly patents grant in the local jurisdiction, not the knowledge.

Big pharma would lobby hard against that kind of law change.

Oh for sure, companies are aware but what can they do about it? For all that we talk about all powerful mega corps, they still have to bow down to actual governmental power. The only appropriate way for them to fight this is by requesting diplomatic intervention from their home state.

By the same logic, I'm aware there likely isn't a prince in Nigeria who will send me a boatload of money if I send them .1% of that money over the internet. We nonetheless, as a society, choose to shame and fight the action of the scammer, though many capable people fall for it.

What I mean to say is that just because I'm taking a calculated risk does not remove the other party of moral and legal liability for their theft of some kind.

In fact, the only argument I remember hearing (I think it was Marc Andreessen?) against the shaming of the scammer in the prince analogy is that they sometimes have no other option to feed their family. I doubt that justification applies to Chinese IP theft.

> In fact, the only argument I remember hearing (I think it was Marc Andreessen?) against the shaming of the scammer in the prince analogy is that they sometimes have no other option to feed their family. I doubt that justification applies to Chinese IP theft.

I do not necessarily agree with this argument, but it actually translates to China's situation pretty directly - you could argue that their attitude to IP is a necessary component of their attempt to quickly lift the whole country out of poverty.

Fair point! From an ethical perspective I would still choose to shame it, but that equivalence can definitely be justified; it's no different than the Nigerian scammer but on a country-wide level. I like it.

Another question would be whether the Chinese acquiring this IP would trickle down to help those in poverty, or whether the wealth would stay consolidated at the top.

> Another question would be whether the Chinese acquiring this IP would trickle down to help those in poverty, or whether the wealth would stay consolidated at the top.

A good question. If hardware market is any good of an indicator, I'd be hopeful - https://www.bunniestudios.com/blog/?p=4297.

It certainly has to help someone in a re-education camp somewhere in China.

>All the while, these companies keep their financial gain private, in the pockets of execs and shareholders.

I don't think the gain is as one-sided as you suggest here. The American consumer has had decades of inexpensive goods available. That is a real economic benefit.

Cheap luxury goods like TVs and phones and financed cars?

I don't think this naked materialism really improves quality of life for the average schmuck, it just adds a gilding.

> More than anything else, the attitude displayed in this article appears to me as an attempt to defer (or pass to the public) the consequences of the above calculated choices.

Say what you will, but "privatize profits and socialize losses"[1] is winning formula, even in a country that on its face rejects socialism.

What's interesting in light of your observation is that companies didn't stay away from China due to onerous demands - in that parallel universe, the executives would be lobbying for China to open its markets. What happened in our world goes to show what they value more: keeping their IP or access to the markets/manufacturing. Now they want to have their cake and eat it.

1. corrected (had repeated 'profits') - thanks @greenleafjacob

You mean privatize profits and socialize losses.