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European companies are hesitant to do business in China because of fears that their intellectual property will not be protected, according to the European Union's Trade Commissioner Catherine Ashton.

Ashton told a trade and investment fair in China that she was "encouraged" by efforts to improve protections there.

"Without the promise of protection for their innovations, European companies are sometimes hesitant to invest here," she said. "Protection of intellectual property, especially patents, is... crucial if more companies are to bring their ideas and their technology to China."

Ashton talked of poor protection for intellectual property rights as being a "barrier" to investment.

"With global competition for the best investment rising, governments should be seeking to attract not restrict investment. Barriers in China not only cost European business, but also deprive the Chinese economy of investment inflows and significant tax revenues," she said.

She did say that the situation seemed to be improving, though. "It is ... very encouraging that the Chinese leadership sees the necessity of a well-enforced IPR system as a stepping-stone to future economic development," she said.

Ashton stressed that investment into the EU from China and to China from the EU must flow more freely than in the past.

"Foreign direct investment should not be curtailed by equity caps, unnecessary joint venture obligations or restrictions in sectors considered strategic. On the contrary – the more important and economically strategic a sector, the more indispensable it is to attract investment which brings technology transfer and research and development," she said.

"Investment is the fuel that drives the engine of long-term sustained economic development. With the free flow of investment inside the European Union, we have created not only the biggest economy in the world, but also a strong motor for economic development," said Ashton, the UK's nominated Commissioner.

See: Ashton's speech

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OUT-LAW.COM is part of international law firm Pinsent Masons.

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