NOTES
3. Economic and political explanations for the emergence of a stronger
3.2 THE EFFECTS OF AN INTERNATIONAL IP SYSTEM ON TRADE IN IP-RELATED PRODUCTS
of IP protection such as patents, copyrights, trademarks and so on) and on royalty payments. Second, it focuses on the extent to which an international IP system affects the rate of technology transfer from developed to developing countries. Again, more emphasis is placed on the international patent system although trademarks and copyrights will also be discussed. Third, it considers the link between the political decision of developed countries to retaliate against countries with weak IP protection and the commitment of the latter to a stronger international IP agenda.
The main conclusion is that, among the three issues mentioned above, trade retaliation seems to provide the most plausible explanation as to why countries with weak IP capabilities, and legislation, commit themselves to a stronger international IP system.
3.2 THE EFFECTS OF AN INTERNATIONAL IP SYSTEM ON TRADE IN IP-RELATED PRODUCTS
3.2.1 Theoretical Implications
An international IP system has two features that are particularly relevant to the ability of member countries to trade in IP-related products.
First, it creates a monopolized trading environment in the sense that it allows IP owners, regardless of their nationality, to be the sole exporters of their products to other member countries. For example, once a firm is able to obtain a patent for a given invention, such as, a new pharmaceutical drug, in a foreign member country it becomes the sole exporter of this drug to the country granting the patent. In other words, it would be illegal for domestic firms to manufacture or even sell the patented drug without the permission of the foreign patenting firm. Second, since IPRs create a temporary monopoly in knowledge products, they effectively allow IP owners to charge prices that are in excess of what they would otherwise have charged in the absence of such protection.2
Referring to the first feature, the argument is that the more capable a country is in the realm of IP – that is, that its domestic firms and entrepreneurs are able to develop new types of IP products and to exploit them internationally – the more likely it is to increase its net benefit by entering such a system. This conclusion is fairly straightforward and easy to explain. A country with strong IP capabilities will benefit from entering an international IP system as it essentially becomes an exporter of IP products. This in turn will improve its terms of trade and will increase its national income.3 As Penrose argues: ʻIf the patented exports are at all important, the increased proceeds permit the exporting countries to import more goods in exchange for their exports…and the improvement in their terms of trade thus results in an increase in the real income of the countryʼ.4
The second feature presumes that a country with strong IP capabilities will also increase its national income due to the ability of its nationals to charge higher prices for their exported products. Conversely, if a given country has little or no IP capabilities, it would be better off not joining the international IP system at all.5 Upon deciding not to join an international IP system, a country with weak IP capabilities enables its domestic firms to exploit different IP products freely, once they have been purchased, and thus to import fewer of these products in the future. Theoretically speaking, by exporting those products that its firms can imitate and exploit, a county with low IP capabilities can increase its prospects of becoming a potential competitor in the international IP marketplace.
In this respect, a formal model developed by Chin and Grossman compares the welfare economics (focusing on consumer and producer surpluses) of northern and southern countries, when patents originating from the former are either protected or infringed by the latter.6 The model assumes that IP capabilities are found only in the north. The south, though, is capable of successfully imitating the newly developed products. The authors conclude that it is generally in the interest of southern countries not to provide patent protection to northern firms, particularly in the absence of licensing agreements, that is when there is no voluntary diffusion of technology from northern to southern firms.7 They argue that even with licensing agreements, a southern country should grant patent protection for northern firms only if its own firms have superior bargaining power when negotiating such agreements and when its share of world consumption of the patented technology is sufficiently high.8
By not entering an international IP system, the country in question could also increase its national income by a sum that is equal to the excess in prices its residents would have paid foreign firms for their knowledge products if their IPRs were recognized.9
It should thus be noted that the ability to reduce the level of imports and the excess of monopolistic prices in IP-related products also depends on the way in which both domestic and international IP legislation is set. If an international patent system prohibits the re-exportation of patented products by those other
then the patentee then foreign firms may find it in their interest to reduce the prices of their patented goods in the non-patenting country to marginal cost.10 In this case, and assuming that domestic and foreign products are equal in price and quality, the attraction of purchasing foreign patented goods is still high and the level of imports is determined by non-price calculations.
Alternatively, if the country in question does not adopt the principle of national treatment and grants patent protection only to its residents, then domestic firms, exploiting patented products from abroad, can apply for patent protection in that country and become the new patent owners of these products. Such firms would now be able to charge prices for their products that are equal to or even higher than those charged by the original foreign patentees, hence making other residents worse off than before. In this case, the country in question will face the paradox of increasing its national income while worsening its overall social welfare.
Naturally, the decision of a country with low IP capabilities not to grant IPRs to foreigners depends on its access to foreign markets, that is, its domestic firms are able to purchase alternative IP products in the first place. Indeed, such a country may be forced to strengthen its IP commitments when facing the threat of trade retaliation by countries with strong IP capabilities. However, since the issue of trade retaliation is determined by political calculations as much as by economic ones it merits a separate discussion later on in this chapter.
Some would also argue that in order for a country with weak IP capabilities to become less dependent on the importation of IP-related products it must also obtain know-how capabilities essential for the commercial exploitation of such products. This argument is discussed in depth in the following section. Yet it is still generally agreed, and frequently argued by developed countries, that in most cases it is fairly easy and inexpensive to imitate cutting-edge IP products, such as pharmaceutical drugs and computer software.
Finally, it should also be noted that when a country decides not to join an international IP system, it might face the problem of ʻtalent migrationʼ. Since the decision not to join is likely to prevent the more creative and innovative domestic firms from receiving monopoly privileges abroad, they may decide to base their activities elsewhere.11 In this case, that country will have to consider the extra IP products it would have to import.
All things considered, it is theoretically clear that, with regard to trade in IP- related products, the incentive of countries with low IP capabilities to protect the IPRs of foreign firms is much weaker than that of countries with considerable capabilities in this field. This is why Vernon, as early as the 1950s, argued that an ʻunder-industrialised nation would be derelict of its own interests if it failed to consider the possibility that unlimited patent protection to foreigners might worsen its terms of tradeʼ.12 Thus, he concludes, ʻsuch nations might reasonably
look upon the grant of patent monopolies to foreigners rather differently from an industrialised nationʼ.13
3.2.2 Empirical Implications
With the theoretical framework of the effects of an international IP system on trade in IP-related products having been set out, it is important to examine some of the empirical data available for this area. In this respect, the extent to which IPRs are distributed between member countries is critical to the economic assessment of trade in IP-related products.
Here, the evidence is quite striking and shows the dominance in IP of developed countries. UNCTAD, in one of the most comprehensive studies of the international patent system, found that in the years 1964 and 1972 nationals of developed countries owned 97 per cent and 95.6 per cent respectively of all patents granted to foreigners.14 In contrast, the foreign ownership of patents by nationals of developing countries in these years amounted to less than 1 per cent.15 UNCTAD also emphasizes the fact that in both 1964 and 1972, five developed countries owned approximately 80 per cent of patents granted to foreigners, with the US holding around 40 per cent of these patents. The other 40 per cent were distributed between Germany (then the Federal Republic of Germany), Switzerland, the United Kingdom and France.16 Data gathered in 1996 and 2000 (based on WIPOʼs statistics) suggests that developed countries are able to maintain their dominance in the foreign ownership of patents with a total of 95 per cent and 93 per cent respectively.17 As in previous periods, the five leading countries owned around 76 per cent of these patents, with the US holding a total of 26 per cent.18
With regard to the national share in the grants of patents in a given country, it seems that nationals of developing countries were able to increase their share from 12 per cent in 1964 to 16 per cent in 1972.19 On the other hand, the share of nationals in patents granted by developed countries seemed to decrease considerably, from 43 per cent in 1964 to 36 per cent in 1972.20 However, data from 2000 suggests that the national ownership of patents decreased both in developed and developing countries to a level of 19 per cent and 12 per cent respectively.21
As for trademarks, a different study by UNCTAD in1974 found that 98 per cent of registered trademarks granted to foreigners originated in developed countries while only 2.2 per cent originated in developing countries.22 The distribution of registered trademarks granted by developing countries in 1964 and 1974 is broadly similar to that of patents, with the US holding around 34 per cent of these trademarks and Japan, the United Kingdom, Germany and France holding another 43 per cent between them.23 Interestingly, it was also found that 72 per cent of trademarks registered abroad by nationals of developing
countries in 1974 were registered in other developing countries.24 As UNCTAD put it: ʻwhen the nationals of developing countries register trademarks abroad, they tend to choose other developing countries for such registrationʼ.25 The distribution between the share of nationals and foreigners in the registration of trademarks is again skewed in favour of developed countries, even more than patents. UNCTAD, looking at data from 1964 and 1974, found that while the foreign share of registered trademarks in developed countries has decreased from 20 to18 per cent, it has increased in developing countries from 27.5 to 50 per cent.26
Also available are empirical findings concerning income from trade in IP- related products, though mainly for developed countries. Using statistical data from OECD countries we can learn that the seven major developed countries have Table 3.1 Share of developed countries in patents granted to foreigners in
2000
Country Total Share in %
United States 98682 25.70
Japan 74033 19.30
Germany 59784 15.59
France 25408 6.63
United Kingdom 20206 5.27
Total 72.52
Switzerland 13903 3.63
Italy 11393 2.97
Netherlands 11060 2.88
Others 9991 2.61
Sweden 8826 2.30
Canada 7473 1.95
Belgium 3989 1.04
Denmark 3606 0.94
Austria 3296 0.86
Australia 3101 0.81
Norway 2001 0.52
Luxembourg 606 0.16
New Zealand 544 0.14
Total 93.32
Source: WIPO, Industrial Property Statistics – Patents granted to non-residents in 2000, Publication B (Geneva: 2002), Ref: IP/STAT/2000/B
Table 3.2 National and foreign share of patents granted in 2000
Developing Residents Non- Total % National % Foreign
countries residents share share
Argentina 145 1 442 1 587 9.14 90.86
Botswana 43 43 0.00 100.00
Brazil (1999) 424 2 795 3 219 13.17 86.83
Chile 24 160 184 13.04 86.96
China 6 475 6 881 13 356 48.48 51.52
Colombia 21 574 595 3.53 96.47
Croatia 114 265 379 30.08 69.92
Egypt 53 400 453 11.70 88.30
Gambia 51 51 0.00 100.00
Ghana 64 64 0.00 100.00
Guatemala 2 21 23 8.70 91.30
Honduras 2 61 63 3.17 96.83
Hong Kong 41 2 696 2 737 1.50 98.50
India (1999) 633 1 527 2 160 29.31 70.69
Israel 455 1 578 2 033 22.38 77.62
Kenya 2 115 117 1.71 98.29
Madagascar(1999) 6 29 35 17.14 82.86
Malawi 1 109 110 0.91 99.09
Malta 21 68 89 23.60 76.40
Pakistan 20 361 381 5.25 94.75
Philippines 8 558 566 1.41 98.59
Republic of
S. Korea 22 943 12 013 34 956 65.63 34.37
Singapore 110 4 980 5 090 2.16 97.84
Sudan 59 59 0.00 100.00
Swaziland 85 85 0.00 100.00
Thailand 153 388 541 28.28 71.72
Uganda 112 112 0.00 100.00
Uruguay 6 134 140 4.29 95.71
Venezuela 14 742 756 1.85 98.15
Zambia 46 46 0.00 100.00