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The Worst Innovation Mercantilist Policies of 2016

January 9, 2017

From China and Indonesia to Russia and Turkey, this report documents the year’s 10 worst cases of protectionist and trade-distorting polices that are subverting innovation in high-value tech sectors.

Around the world, countries are competing for market share in high-wage, innovation-based industries. Unfortunately, as this global race for innovation advantage intensifies, many countries have turned to “innovation mercantilism”—a strategy that seeks prosperity by imposing protectionist and trade-distorting policies that tip market scales to expand domestic technology production.

These destructive “beggar-thy-neighbor” tactics—such as forcing companies to transfer the rights to their technology or relocate their production, research and development (R&D), or data-storage activities—are intended to either replace imports with domestic production or to unfairly promote exports. Countries increasingly are using such innovation mercantilist policies in high-value tech sectors such as life sciences, renewable energy, computers and electronics, and Internet services. This report documents the 10 worst innovation mercantilist policies enacted by countries in 2016, finding China, Indonesia, Russia, and Vietnam to head the list.

Innovation mercantilist practices do not just damage competitors; they damage the entire global innovation system, leading to less overall innovation and productivity growth. Moreover, they often do not even help the countries embracing the practices, particularly over the long run; instead, mercantilist policies lead them to neglect the greater opportunity to spur growth by raising the productivity of all sectors, not just high tech.

This fourth annual report documents what the Information Technology and Innovation Foundation (ITIF) sees as the 10 worst innovation mercantilist practices proposed, drafted, or implemented in 2016. Policies were chosen based on their detrimental effects globally, so some nations have more than one included, due to the policies’ widespread impact:

  • China: Introduced a new cybersecurity law that imposes extensive local data-storage requirements, audits that discriminate against foreign technology products, and forced intellectual property and source code disclosures.
  • China: Introduced new cloud-computing restrictions that essentially exclude and prevent foreign firms from operating in the Chinese market.
  • Germany: Introduced forced local data-storage requirements—ostensibly due to privacy and cybersecurity concerns—as part of a new telecommunications data law.
  • Indonesia: Introduced forced local data-storage requirements for Internet-based, over-the-top content providers.
  • Indonesia: Introduced a patent law amendment that undermines pharmaceutical intellectual property and forces local production and technology transfers.
  • Russia: Introduced forced local data-storage requirements and encryption-key disclosure as part of a new telecommunications data law.
  • Russia: Introduced new government procurement rules that ban the purchase of foreign software.
  • Turkey: Introduced a new data-protection law with stringent transfer requirements that acts as de facto forced local data storage.
  • Vietnam: Introduced forced local data-storage requirements for Internet-based, over-the-top content providers.
  • Vietnam: Introduced a new network-security law that forces companies to disclose encryption keys and source code to the government as a condition of market access.
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