Many multinational companies in China are losing the battle to protect their intellectual property, largely because they rely too heavily on legal tactics and fail to factor IP properly into their strategic and operational decisions. When we studied the Chinese operations of ten multinationals competing in IP-sensitive industries (including consumer electronics, medical equipment, pharmaceuticals, semiconductors, and software), we found that many executives think of protecting IP solely in legal terms—and sometimes only after property has been stolen. The most successful companies, however, take strategic and operational action to protect their IP before that happens, thus lowering their litigation costs and improving the odds that their IP will remain safe.

Companies should of course register their trademarks and patents with local authorities and prosecute violators with appropriate vigor (and prudence). The recent passage in China of a stronger statute on IP rights should better protect companies that take these measures. But litigation is no substitute for strategy. The best companies reduce the chance that competitors will steal their IP, by carefully selecting which products and technologies to sell and manufacture in China. For fear of IP theft, one pharmaceutical company we studied withholds its most innovative, high-margin drugs from the Chinese...