(FORTUNE Magazine) – 7

Ben Ye is one of China's many rising young stars. At 24, he won the first round of a business-plan competition at Beijing's prestigious Tsinghua University with a proposal for a web-conferencing company. Rather than stay in the competition, Ye took his idea and started a business called V2 Technology. He has been able to raise $1.3 million and build a 70-person company, yet the plan didn't account for one potentially fatal threat: pirates. Two years ago, when V2's software hit the market, resellers called to say that cheap, illegal copies were already being hawked.

Ye's lawyers declared that the only way to get relief was to find the pirates, collect evidence, and bring it to the cops. "We said, 'Forget it,'" says Ye. "We aren't Sherlock Holmes." He eventually engineered a solution--new versions of the software will work only if the user plugs a V2 "dongle" into a USB port on a computer, the digital equivalent of a car's ignition key. But coming up with that fix took time and resources that could have been spent improving the software.

Ye's situation is hardly rare in China, a country that has all but replaced its red flag with the Jolly Roger. The U.S. Patent and Trademark Office says that 66% of the counterfeit goods seized at American borders now come from mainland China, up from 16% five years ago. Inside China's booming market, things aren't much better. A recent study by tech researcher IDC, paid for by the Business Software Alliance trade group, found that 92% of all software used in China is counterfeit. China is now tied with Vietnam as the country most likely to steal.

U.S. firms have spent decades trying to persuade China to crack down on IP theft. Now, due largely to the influence of entrepreneurs like Ye, China finally seems to be getting the message. With the nation producing homegrown intellectual property, IP protection suddenly seems like a pretty good idea. Says Thomas Tsao, a partner at Gobi Partners, a venture capital firm in Shanghai: "This is about domestic company vs. domestic company. There are people who are innovating and people who are pirating. China wants to reward the innovators."

Antipiracy in China doesn't exactly work like The Untouchables. So far the government has made small workaday moves like requiring all government branches to use legally obtained software and allowing courts to issue cease-and-desist orders in cases of suspected IP theft. But bigger shifts are on the way. The nation recently invited U.S. patent authorities to help teach judges and prosecutors how to find and try IP cases; it's also reviewing its laws on copyright and patents. A recent study by the powerful Ministry of Information Industry found that 37% of Chinese software companies were suffering from piracy problems. Noting that the burgeoning IT industry--and in particular the $19 billion software and systems integration sector--is a driving force in China's economic boom, the report said that the bandits must be defeated.

China watchers are cautiously optimistic. Attorney Carmen Chang, a partner at Shearman & Sterling in Menlo Park, Calif., who frequently works with Chinese and U.S. tech firms, says she still requires that almost all deals done in China allow for arbitration in the U.S. Yet she also says China's starting to get it: "China doesn't want to be the cheap manufacturing center. They want be an international global center of tech development." If antipiracy becomes a reality in China, Western businesses can start worrying more about competition than copyright theft. -- Daniel Roth