China's small and medium-sized enterprises (SMEs) are at the forefront of the country's efforts to move away from a so-called copycat economy and toward exporting its own innovations, and there's no shortage of foreign interest.

US-based energy efficiency technology firm LP Amina revealed at a conference on SMEs held last week that it will collaborate with a Chinese partner later this year to help a thermal power plant in the US cut costs and emissions, so that it can be viable for another 20 years.

"This will be new for us," said LP Amina Chairman William Latta, 42, without giving further details.

"Not only is China very important because it's a very large market, it's also important because innovations that happen here create innovations throughout the world," Latta told the Global Times on the sidelines of the 4th APEC Fortune Forum - SMEs Dialogue with Global 500, in Chengdu, Sichuan Province last week.

Businessmen, officials and economists discussed innovative opportunities and difficulties for both Chinese companies and foreign ones with Chinese partners during the forum.

High-speed China

For Latta, speed was a key attraction for him in setting up a research facility in China in 2008.

In the US, it takes much longer to go through the process of technical discussions, getting approval, planning and actually executing the project, partly because of the stability of the US utilities market, where most power plants are 40 years old on average, Latta said.

The process of implementing Amina's de-NOx technologies, which are used to reduce nitrogen oxide pollutants from combustion, takes only two months in China, compared with 15 months in the US, he said.

The same applies to innovations in China, according to Latta. From design to approval and getting commissions, it is much quicker than in the US, even with the complexities of dealing with the less-developed intellectual property (IP) environment in the country, he said.

Tax burden

Participants at the two-day forum acknowledged that SMEs, and the private sector in general, are the most innovative in China's economy, but they complained that the business and regulatory environment in China is still not conducive to innovation.

The main problems are the heavy tax burden, the insufficient IP protection and the fact that it's hard to get sufficient financing, they said.

"The prosperity of SMEs is a prerequisite for the sustainability of the Chinese economy in the future," because they are good at creating more different products, different business models and more jobs to stimulate consumption, Xu Lieke, general manager of Shanghai First Food Chain Development Co, told the forum on June 21.

In China, 99 percent of the companies are SMEs, which provide nearly 80 percent of the country's employment and contribute almost half of the tax revenues, chinanews.com reported Monday, citing government figures.

Currently, many small firms have only 1 to 3 percent net profit margins, and it has become increasingly difficult for them to recruit workers because of salary inflation, Xu said, noting that the government could give tax breaks to SMEs to help them overcome this problem.

Beijing and Shanghai have carried out value-added tax (VAT) reforms to replace business tax, in a bid to lower the tax burden on the transportation sector and certain service sectors.

However, Xu said that Shanghai First Food had not benefitted so far.

In Shanghai's pilot program, the VAT rate is 11 percent, higher than the 3 percent business tax, but companies are allowed to reclaim part of the VAT with their purchasing receipts.

However, for many of Shanghai First Food's purchases of agricultural products, they do not get any receipts, so its logistics unit now pays 3 percent more tax than before, Xu said.

Several companies interviewed by the Global Times in May also complained that the VAT program had actually increased their tax burden.

IP issues

The lack of stringent IP protection also compromises the environment for innovation in China, forum participants said.

"There needs to be a good IP protection mechanism to encourage innovation, or else people will copy rather than create," said Wu Jian, vice president of DuPont China.

From October 2010 to June 2011, Chinese police dealt with 43,550 cases of IP and trademark infringements, which in total accounted for products with a market value of over 500 billion yuan ($78.5 billion), the State Intellectual Property Office said in a white paper in April.

The central government has the resolve to crack down on IP infringements, but what matters are the IP law enforcement in local areas and improvement of the legal processes, which should heighten the costs for the perpetrators, Wu said.

In the absence of significant regulatory improvement, companies are forced to come up with their own ways to protect their IP rights.

"In the US, the IP strategy is all about the legal process, so you need to use patenting in a legal structure to protect your IP. In China you need a different strategy," Latta of Amina said. "For us, in our collaborations, it does complicate things."

Instead of paying hefty fees to IP lawyers to protect the patents, according to Amina's experience, a company needs to work with multiple, selected partners in China, and choose what information to share and what to withhold from a particular partner.

Thus, every partner shares only a limited amount of know-how, but if the process is well coordinated, faster and more cost-efficient innovations than in the US are still possible, said Latta.

Amina is collaborating with Shanxi-based Gemeng International Energy Co on a coal-to-chemical project and sharing IP on 50-50 basis, he said.

Time to hire

For SMEs there is a silver lining to the ongoing global economic slowdown, according to Tony Goodwin, CEO of London-based recruitment firm Antal Ventures.

"When the larger companies start worrying about the market, they stop hiring quite quickly, but that means that the talent that would have normally gone to them is available to the SMEs. So, really, it's a talent acquisition opportunity for the SMEs," Goodwin told the Global Times last week.

"It's actually the smaller companies that are going to get us out of recession, that are going to come up with new ideas, new products and new services that people are going to buy, and that will eventually turn into big companies," said Goodwin, giving the examples of Facebook and Zara.

"We have to use our economic policies to nurture and encourage this entrepreneurial spirit and thinking."