Will stronger intellectual property rights protection encourage global transfer of technology to developing countries or is it a hindrance?

University Degree Business and Administrative studies

INTELLECTUAL PROPERTY RIGHTS AND TECHNOLOGY TRANSFER: AN ECONOMIC PERSPECTIVE

ABSTRACT

Will stronger intellectual property rights protection encourage global transfer of technology to developing countries or is it a hindrance? And will really global transfer of technology lead to more foreign direct investment in the developing world? This issue has divorced the developing and the developed nations into two groups. In this paper we are going to discuss the effect of intellectual property right on technology transfer and in the economic perspective of technology transfer to the developing world and the divergent views of the developed and developing nations.

In this paper I will argue that:

a) IPR protection would hinder rather than facilitate technology transfer to and indigenous learning activities in the early stage of industrialization when learning takes place through reverse engineering and duplicative imitation of mature foreign products;

b) Only after countries have accumulated sufficient indigenous capabilities with extensive science and technology infrastructure to undertake creative imitation in the later stage that IPR protection becomes an important element in technology transfer and industrial activities.

The paper underscores the point that Japan, Korea, and Taiwan, not to mention the United States of America and Western European countries during their industrial revolutions, could not have achieved their current levels of technological sophistication and economic growth if strong IPR regimes had been forced on them during the early stage of their industrialization.

INTRODUCTION

Since the mid-twentieth century, many developing nations have been engaged in intense efforts to import the developed technologies of the industrialized countries and bridge the large economic gap that exists between the developed and developing worlds. The rationale behind this approach is that the studying of the imported technology will be the best means of promoting domestic research and development, which in turn is the core of a developing country’s ability to generate its own technology and help it to bridge the economic chasm between itself and the developed world.

The protection of intellectual property rights (IPRs) has increasingly become a vital issue in multilateral trade negotiations. The present debate on IPRs is dominated principally by two extreme positions. Some campaign IPRs as an effectual tool for advancing technology as a launch pad for technology transfer to developing countries. Others take the divergent position that IPRs as of now conceived solely defend the welfare of advanced countries. For example, some economists claim that the present international IPR regime has decidedly shifted the global rules of the game in favour of advanced countries, and that the promise of long-term benefits for many developing countries, particularly the poorest countries, from the Agreement on Trade-related Aspects of Intellectual Property Rights (hereinafter TRIPS) seems uncertain and costly to achieve1.

These critics argue that although the declaration in TRIPS that “the protection and enforcement of IPRs should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare,”2. The Agreement in actuality mainly reflects the interest of advanced countries on this matter.

Opponents of the Agreement hoist serious questions on the potential role of IPRs in technology transfer and investment flows to developing countries. For instance, a recent report submitted to the Council for TRIPS by Kenya states that strong IPR protection, on the scale required by TRIPS, does not by itself lead to increased FDI; nor does it encourage technology transfer or local innovation in developing countries. 3

However, a set of the studies, including one commissioned specifically for the UNCTAD-ICSTD project (Maskus, 2000, Lall and Albaladejo, 2001) provides new insight on the relationship between IPRs, technology transfer and FDI to developing countries. They find that the effects of IPRs on technology transfer to and local innovation in developing countries vary according to countries’ levels of economic development and to the technological nature of economic activities.

This paper provides a rudimentary overview of how Transfer of Technology may be promoted or hindered by an effective system of intellectual property rights (IPRS or TRIPS). And this paper specifically looks at the aspect of technology transfer with respect to the highly developed countries and the developing countries that too in terms of economic growth and finds that stronger IP protection is needed but as it is a key aspect of economic development but the countries like the US, Germany, Japan would not have had achieved same growth rates if there were stringent IP laws during there development stages.

PERSPECTIVES ON INTELLECTUAL PROPERTY RIGHTS AND TECHNOLOGY TRANSFER: DEVELOPED &DEVELOPING NATIONS

The different approaches of the developing and the developed countries towards intellectual property and technology transfer are important to consider for the understanding of this issue, which has separated nations in two groups. It is well known that developing countries and developed countries frequently have different views regarding the protection of intellectual property rights. The conventional view of many developing countries is that technological information belongs to the common heritage of mankind and accordingly intellectual property rights should not limit access to it. These countries tend to have weak intellectual property rights protection claiming that they need to get access to the technology created in the developed countries to be able to develop, which is easier if they have weak intellectual property right laws. 4

The pirates are more successful in the developing countries because they can better serve the needs of the developing countries, for example, by offering low prices on products. This is also equally true in the case of generic medicines. The governments may also have low economic assets which would make them hesitant to invest in foreign intellectual property because they consider that too much of a burden for their economy.5

The developing countries use technology transfer mechanisms such as imitation as a mean to increase their development. Imitation and copying was also used by the now developed countries ...

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The developing countries use technology transfer mechanisms such as imitation as a mean to increase their development. Imitation and copying was also used by the now developed countries during their technological development, and had in fact an important role for the industrialization of those countries. Developing countries have expressed concerns that strengthened intellectual property rights would lead to difficulties in obtaining transfer of technology this way.6

The most common form of international technology transfer for MNEs has been to invest technology in their subsidiaries abroad, because then they can effectively control the information transferred. The motives for these companies to invest in developing countries are among other reasons to use the cheap labour available, to control and establish new markets, and to discover new raw material.7 Companies’ preference for internalized technology transfer, FDI, is also due to the low price and the fast process if compared to externalized technology transfer, such as joint ventures and licences. Technology transfer will also lead to technology diffusion and spill overs to companies and institutions in the recipient country. 8

INTELLECTUAL PROPERTY RIGHTS PROMOTE TECHNOLOGY TRANSFER & FDI

The most common argument for stronger intellectual property rights in developing countries has been, and is, that developed countries are more positive towards technology transfer to countries with effective intellectual property rights. The developed countries fear that weak intellectual property rights would lead to lack of control over the transferred technologies, which would make them an easy target for piracy.9

This view is confirmed in two extensive studies made by Edwin Mansfield for the World Bank in 1994 and 1995 examining FDI, intellectual property rights and technology transfer. He performed a survey on 94 major US firms covering six different industries asking them how important intellectual property rights protection was when they considered FDI in other countries. The results of the survey showed that the US firms in the survey “tend to regard intellectual property protection as being more important in decisions regarding the transfer of advanced technology than in investment decisions”.10

Mansfield’s study of 1995 focused on direct investment and technology transfer to developing countries by companies in Germany and Japan. The results showed that countries intellectual property right laws had a major effect on the size and type of the technology transfer and the direct investment to these countries by high technology industries such as chemicals, pharmaceuticals, machinery, and electrical equipment, in Japan, US and Germany.11

These studies show that a country’s strength of intellectual property rights is an aspect which firms in developed countries pay attention to when they consider investing. Mansfield’s studies were performed a while ago but the large companies’ course of action has probably not changed in a substantial manner. Their views regarding the importance of strong intellectual property rights protection have probably been reinforced due to the increased technological progress. There are several scholars who support Mansfield findings.

Pamela J Smith has made two studies analysing the effects of foreign patent rights on US exports. She found that weak patent rights are restraining US export, but this is only the case for countries which extensively use imitation. Strengthened intellectual property rights in those countries, as conveyed by the TRIPS Agreement, would lead to decreased possibility to imitate and therefore increased US export.12

Smith has further found that effective intellectual property rights increase information flows between countries which uses imitation heavily and also leads to enhanced establishment of abroad affiliates and licensing.13

Maskus and Penubarti (1995) study showed that exporting firms pay attention to a country’s national patent laws and that patent protection affects imports in both small and large developing countries positively14.

These are some of several studies that assert that intellectual property rights are of major importance for transfer of technology. As mentioned above, many of the studies on this issue were performed with different methods and therefore it is difficult to make general conclusions.

But my view on this topic is that companies develop technology which they naturally want to protect so that their research work is rewarded (for their commercial interest). The reward is also important for the financing of future R&D. Enhanced intellectual property rights may increase FDI, and could also imply other benefits for developing countries.

Stronger intellectual property rights in developing countries could promote the development of indigenous inventions. Developed countries may also become more willing to perform research on pharmaceutical products, which remedy common diseases in developing countries, if these countries have an effective intellectual property rights system. These benefits may lead to increased flows of technology from developed to developing countries.15

INTELLECTUAL PROPERTY RIGHTS HINDER TECHNOLOGY TRANSFER

Many scholars do not agree to the fact that intellectual property rights are of major importance for companies’ investment decisions abroad. There are studies performed which show that intellectual property rights protection is of less importance. To begin with, Nogués (1993) noted “the decision to licence and transfer technology depends much more on the legal strength of the licensing agreement and the adaptable capacity of the buyer to absorb technology”. He found that, because of lack of evidence, it could not be asserted that companies would be more willing to transfer their newest technological information if intellectual property rights were available. Nogués asserts that intellectual property rights are important for companies’ investment decisions when it concerns R&D, but less important for investment decisions in products since these decisions depend more on the country’s investment climate.16

Primo Braga and Fink (2000) established in their study that the impact of intellectual property rights on trade flows of high technology was not of significant importance. They pointed out that stronger intellectual property rights could have a positive effect on imports since the risk of piracy would be reduced. Nevertheless, companies may also decrease its exports if the intellectual property rights system is enhanced as they get more market power where copying and imitation is limited.17

Glass and Saggi (2002) found that stronger intellectual property rights in the developing nations would reduce the risk of imitation but not more than imitation performed by firms in the developed world. They critically pointed out that stringent intellectual property rights make imitation more costly since it demands more labour. This leads to a waste of resources which in their turn diminishes FDI and innovation.18

Stronger intellectual property rights can further reduce developing countries local R&D. Effective intellectual property rights laws attracts companies from abroad but if the majority of patents granted in the country is mainly owned by foreign companies it could diminish innovation, since the foreign companies increases their bargaining power.19

TECHNOLOGICAL TRANSFER AND ECONOMIC GROWTH:

Technology plays a pivotal role in creating job resources and also wealth creation, for shared prosperity in an interdependent world. The impact of technology on economic growth and development is well acknowledged. Many international arrangements particularly facilitate the efficient and effective generation, application, transfer, and diffusion of technology. As knowledge increasingly becomes a key resource for economic development, there is a need to identify means to facilitate the transfer of technology to the presently technology-poor developing countries.

Transfer of technology, international trade liberalization and foreign direct investment, are closely interlinked. Acquirement, adaptation, and circulation of technology will improve competitiveness in the traditional manufacturing sectors, which are the bastion of many developing country economies.

In my view, technological development is perhaps the only way for developing countries to improve their terms of trade (macro-economics) in traditional manufacturing exports. Otherwise, they will remain locked into low value-added production and exports.

“Strong IP protection is essential to integrating the developing world fully into the global economy.” (CIPR report)

Strong IP protection is also a decisive driver of foreign funding for research and development, technology transfer projects, and improvements to telecommunications infrastructure, all of which are essential to economic progress in the emerging economies.

The countries which are pursing IP protection are more likely to have investments from software firms and other industries (from the developed world as well as local companies) that rely on innovation and IP protection. For instance, a recent International Data Corporation study found that where developing nations strengthened their IP laws and stepped up enforcement efforts - for example, in Argentina, Brazil, Chile, China, Colombia, Costa Rica, Czech Republic, India, Malaysia, Mexico, and South Africa - local information technology industries experienced rapid growth, many at a pace that exceeded the corresponding growth rates in several developed nations.20

A similar study of late found that in ten Eastern European countries, while the software industry in these countries already generated 137,000 direct jobs and indirectly accounted for a further 575,000 jobs in 2000, those figures could more than double by 2004 if these countries succeeded in reducing software piracy to the Western European rate of 34 percent. These and similar data demonstrate that all nations, regardless of their stage of development, can benefit from strong IP protection.21

The adoption of weak IP regimes by emerging economies, by contrast, would endanger IP-based industries and investments and force developing world populations to rely even more heavily on IP developed in other countries and which is costly because they are all under stringent IP protection of the developed world. The inventors and innovators in the developing countries will to emigrate to jurisdictions with stronger IP protection so as to capitalize on their opportunities to realise the full economic value of their intellectual contributions. Such a "brain drain" of the best and brightest from developing nations - which is already a significant problem for many countries - will only aggravate the economic challenges facing the developing world. India is perfect example of the above said statement because nearly 100 thousand people mostly well educated technocrats move to US in search jobs which are highly paid.22

Developing countries which have a developed a significant technological capability, such as Brazil, Korea and China, used weak intellectual property rights protection at the beginning of their development process, just as the developed countries did during their industrialization process. Since these countries had limited economic assets to buy technologies, they used weak intellectual property rights protection in order to get access to technological information. It could thus be asserted that weak intellectual property rights protection is more linked to increased development for countries with a weak technological base than strong intellectual property rights. If countries enhance their intellectual property rights system companies would get a more effective remedy to combat imitation, and developing countries would accordingly be more reluctant to use this form of technology transfer. In the CIPR final report it is asserted that country experiences points at intellectual property rights are important for countries capability to attract technology, but only when they have reached a certain level of development. Least developed countries thus will not benefit as much from increased intellectual property rights as developing countries which have obtained a level of technological capacity.23

Kim (2002) has made a similar conclusion. This study concludes that intellectual property rights restrain technology transfer in the beginning of the industrialization process during which a country uses reverse engineering and imitation. Kim found that intellectual property rights were not important for technology transfer until the country had managed to develop a scientific and technological infrastructure. This was true in the case countries such as Japan, Korea and the U.S they would not have been able to reach their present technological level if they had used strong intellectual property rights at the beginning of their industrial development.24

CONCLUSION

The conclusion that can be drawn from this discussion is that the effects of intellectual property rights on technology transfer are miscellaneous. Scholars are of divergent opinion whether intellectual property rights really can increase technology transfer and FDI. Many of them also point out that this area is complex and further research is needed to increase the understanding of this issue.

The innovative firms depend on IP rights to protect the integrity and economic value of their works. This is equally true for inventors located in the developing world. Without strong IP protection, both developed and developing-world companies and entrepreneurs will lack the financial incentives to invest in IP-based innovation on a sustained basis, as they will be unable to earn returns on there investments.25

My conclusion is that developing countries can reap long-term benefits from strong IPRs only after they reach a certain threshold level in their industrialization. In other words, strong IPRs would thwart developing countries from attempting industrialization at the very early stage. And under such an IPR environment, few could emerge as newly industrializing economies (NIEs), like Korea and Taiwan, in the future.

FOOTNOTES

World Bank, 2001
WIPO, 1994
SUNS, 2000
D’Amato and Long, p. 61-62
WIPO Intellectual Property Handbook-Ibid, p. 62.
Khor, 2001 p. 205-206.
WIPO Intellectual Property Handbook-Ibid, p. 41
UNCTAD World Investment Report, 1999, p. 203, 207.
Primo Braga and Fink, 1999, p. 276.
Mansfield, Edwin, Intellectual property protection, foreign direct investment and technology transfer. The World Bank and the International Finance Corporation (IFC) 1994, p. 1 and 14.
Mansfield, Edwin, Intellectual property protection, direct investment and technology transfer: Germany, Japan and the United States. International Finance Corporation (IFC) discussion paper, no.27. 1995. p. 1).
Smith, P.J, “Are weak patent rights a barrier to US exports?” Journal of International Economics, vol. 48, issue 1, June 1999, p. 170.
Smith, P.J, “How do foreign patent rights affect U.S exports, affiliate sales and licenses”? Journal of International Economics, vol. 55, issue 2, December 2001, p. 411-439.
Maskus , Keith E and Penubarti, Mohan, “How Trade-Related are Intellectual Property Rights?”, Journal of International Economics, vol. 39, issues 3-4, November 1995, p. 227-248.
Matthews, 2002, p. 110
Nogués, 1993, “Social costs and benefits of introducing patent protection for, pharmaceutical drugs in developing countries”, The Developing Economies, vol. 31, no. 1,March 1993, p. 42
Primo Braga and Fink, 2000”How stronger protection of intellectual property rights affects international trade flows”, p. 3.129

Glass and Saggi, 2002,”Intellectual property rights and foreign direct investment”, Journal of International Economics, vol. 56, issue 2, March 2002, p. 381-410.130
Khor, 2002, p. 90.
CIPR final report
CIPR final report
Source: Us consulate-India/Chennai: website
CIPR final report p. 21-22, 26
Kim, “Technology transfer and intellectual property rights: lessons from Korea’s experience”, 2002, p. 5
CIPR Final Report, p. 20.

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