NOTES
3.3 AN INTERNATIONAL IP SYSTEM AND TECHNOLOGY TRANSFER
3.3.2 Indirect Effects of IPRs on Technology Transfer – the Extent to which a Stronger IP Environment Influences Technology
This section has focused on the direct effects of IPRs on TT and assessed the extent to which the granting of IPRs to foreigners requires them to make their technology accessible and available in developing countries. It concludes that a developing country may find this aspect inadequate and unsatisfactory mainly due to three reasons.
First, any information disclosed by a foreign IP owner in exchange for extending his or her rights in a developing country, such as that given to the patent office, does probably already exist in his or her home country. Therefore, a developing country can behave as a free-rider, that is, it can obtain the same information from the original home country without the cost of granting IP protection to that foreigner. Furthermore, the problem of piracy suggests that numbers of IP products, many of which are extremely costly in terms of R&D expenditures, can be easily copied. In these cases developing countries, particularly those with copying capabilities, would find it unnecessary to obtain any disclosed information at all.
Second, for those products that do require technological disclosure it is often the case that any information submitted by foreign IP owners, such as the particulars of an invention, is insufficient in the sense that additional know-how is required in order to exploit these technologies in full.
Finally, the problem of non-working patents suggests that many foreign IP owners decide not to utilize their inventions in the granting country. Whether this decision can be attributed to simple monopolistic calculations or to technological obsolescence is unclear. What is clear is that the use of compulsory licences in order to tackle this problem is negligible.
Having considered the direct implication of IPRs on TT there is a need to examine the more indirect and dynamic aspect of that link.
3.3.2 Indirect Effects of IPRs on Technology Transfer – the Extent
Licensing agreements are probably the best known example for TT under IP protection. A licence, in itself, does not involve any type of technological disclosure; it only grants the licensee legal permission to use the technology owned by the licensor. Yet, once granted, a licence is usually accompanied by the disclosure of additional and complementary know-how, which in many cases is essential for the successful utilization of the acquired technology. For this reason technology licences are considered a strong tool for TT.62
It should be noted however that licensing agreements, by nature, are usually restrictive and impose considerable limitations on the competitive ability of the licensee. Most common are restrictions on the degree, extent, quantity, duration and territorial (export limitations) uses of newly acquired technologies.63 For trademarks, it is often required that the licensee will also invest in advertising activities in order to maintain the productʼs reputation in the market.64 This may pose additional costs since, in the long run, ʻthe licenseeʼs efforts will result in greater prestige for the licensor and not for the licenseeʼ, particularly when the former has the option to terminate the contract of the latter.65
Nevertheless, it is quite likely that the overall benefits of licensing agreements as a vehicle for TT are in excess of the costs they impose. As Vernon argues:
ʻFor an under-developed country this added cost might clearly be outweighed by the gains, for we must not underestimate the stimulating impact in such a country which may be generated by the introduction of new information, new attitudes and new methodsʼ.66
Joint ventures, which can generally be described as different types of local and foreign partnerships, are also said to be influenced by the IP environment of a given country. According to Mansfield some IP advocates argue that in countries with weak IP protection, technologies would tend to be transferred almost exclusively through wholly-owned subsidiaries and much less through joint ventures.67 Since joint ventures are extremely heterogeneous they cannot easily be treated as a single entity. A useful distinction is offered by Vernon who differentiates between joint ventures on the basis of their contribution, in terms of TT, to the local partner.68 At the one end of the spectrum there are those ventures in which ʻthe local partner is no more than a figureheadʼ, while at the other end there are partnerships in which ʻthe local partner aggressively attempts to master the technology being provided from the foreign sourceʼ.69 The latter is more important to the local partner as it provides them with opportunities not only to adapt new products and processes to local conditions, but also to raise its technological capabilities through ʻlearning by doingʼ, that is by acquiring learning skills and experience regarding the utilized technologies.
Foreign direct investment (FDI) is the vaguest among these issues mainly because the concept is not treated very clearly in the relevant literature. Some authors dealing with IPRs and FDI prefer to have little or no discussion on its contents while others choose to focus on one particular aspect, such as on
manufacturing, investment capital, licensing, and so on.70 The result is, as will be demonstrated shortly, that opinions about the relationship between IPRs and different types of FDI vary considerably.
Having mentioned some of the more relevant types of TT with regard to IP protection, it is now possible to review the available empirical data. Two major problems are common to the attempts to present empirical assertions on the link between a stronger IP environment in developing countries and a greater attractiveness to TT. First, there is difficulty in capturing and assessing the dynamic aspect of the IP–TT link. More specifically, it is often argued that any attempt to quantify the IP–TT link empirically is bound to underestimate the more long-term and wider effects of a stronger IP environment on the rate and magnitude of TT. Secondly, since IPRs are only one of many factors accounting for MNCs decisions to invest in developing countries, it is very difficult to isolate the quality, not to mention the quantity, of TT that is affected only by the IP variable.
A few examples may be given. Frischtakʼs study on the link between IPRs and technological development in Brazil during the 1980s emphasizes the gaps between the dynamic and static effects of IPRs.71 With regard to the former, he concludes that there is insufficient data to suggest that the Brazilian IP regime affects either the volume and composition of FDI or the rate of foreign technology flows through licences.72 He notes that MNCs consider other factors, such as the size and growth-dynamics of Brazilʼs domestic market, its factor supply and costs, and the overall stability of its macroeconomic environment, as more important to FDI.73 This is also the case in licensing agreements where factors such as the limits on royalty payments, confidentiality clauses void upon expiration, and labour skills are considered the major obstacles for the transfer of ʻtechnology packagesʼ.74 However, when addressing the dynamic aspect of the IP–TT equation, Frischtak strongly believes that a stronger IP regime is important to Brazilʼs ability to attract greater magnitudes of FDI and technology flows.75
Sherwood, studying IPRs in Brazil and Mexico, stresses the need to divert more attention to the dynamic and unquantifiable importance of a countryʼs IP environment to foreign technology owners.76 He uses the term ʻinvisible statisticʼ to describe the numerous decisions of Brazilian firms not to approach foreign technology owners simply because they know from past experience that their requests will be refused because of weak IP protection.77
Regarding the problem of isolating TT as a function of IPRs and the attempt to identify an association, an OECD 1987 survey, based on the responses of executives from manufacturing MNCs (using multiple answers) found that lack of industrial property protection was considered as one of the major obstacles for international technology licensing in developing countries.78
Mansfield, in one of the most comprehensive and best-known survey studies on the subject, examined the importance of IPRs to FDI and TT by sampling 100 US firms. He differentiates between five types of FDI: sales and distribution outlets, rudimentary production and assembly facilities, facilities to manufacture components, facilities to manufacture complete products, and R&D facilities.79 His conclusion is that ʻthe percentage of firms indicating that intellectual property protection has a major effect on their foreign direct investment decisions depends greatly on the type of investments in questionʼ.80 His finding suggests that as the level of technological investment rises so does the importance of IPRs. Only 20 per cent of the firms reported that IPRs are important to them for investments in sales and distribution outlets, while around 80 per cent regarded them as important for investment in R&D facilities.81 Mansfield also shows that different sectors, such as the chemical and the transportation equipment industries, attach varying importance to the effect of IPRs on their decision to invest in a given country.82 Vernon, referring to some older surveys from the 1950s, expresses a more negative view and argues that US companies did not even once mention patents as a potential obstacle in their investments abroad.83
Other studies focusing on static data tend to argue that there is no clear link between IPRs and TT. A 1993 UN report is one example of this type of conclusion:
For some, a strong system of IPRs is an essential component of a climate conducive to FDI, technology transfer, and R&D by transitional corporations. For others, including many governments and experts in developing countries, a high degree of protection does not necessarily mean a higher or a better composition of FDI flows.84
According to this report, in many countries with weak IP protection, such as Argentina, Brazil and Turkey, the rate of FDI is still high, while in other countries such as Nigeria the granting of patents is not sufficient for FDI to take place.85
Schumann, examining IPRs in South East Asia, found that during the 1980s the granting of foreign licences in South Korea was extremely intensive, despite the fact that, at the time, it was part of the US intellectual property Watch List and subject to an investigation under US ʻSpecial 301ʼ.86 He concludes that although the Asian NICs may find it in their own interest to grant stronger IP protection as they move up the technological ladder, become more export oriented, and attract greater FDI, there is still no causal link between these economic factors and IPRs.87
Maskus and Konan, using 1982 data obtained from the Department of Commerce, examined the effect of IP protection on decisions concerning either the physical presence or investment of US firms in seven broad manufacturing sectors in 44 countries.88 They conclude that there is ʻlittle basis to claim that the structure of IPR protection affects foreign investmentʼ.89
IP advocates thus claim that foreign firms are more willing to invest and utilize their technologies in countries that provide them with stronger IP protection.
Although this argument is quite plausible, it is still difficult at this point to assess the extent to which a stronger IP environment increases the magnitude and composition of TT. A major difficulty is the problem of reconciling the dynamic and static aspects of the subject. A static analysis suggests that different types of IPRs vary in their effect on the decision of firms in different industrial sectors to invest and to transfer new technologies. Furthermore, even in sectors where IPRs are considered essential, such as the R&D in the pharmaceutical industry, it is still not possible to arrive at a method for assessing the quantity, in money terms, and quality, in innovative terms, of TT decisions affected only by the level of IP protection.
Nevertheless, a dynamic approach will tend to focus on the importance of IPRs not only as to the attractiveness of countries for future technological investments but also for their ability to climb up the technological ladder and to become more innovative. Such benefits cannot be easily quantified and may be either greater or smaller than any static estimate. What is clear is that IP advocates will argue that any attempt to focus only on the static aspect of the IPR–TT link is bound to degrade its importance.
Thus, the attempt to justify the decisions of developing counties to join an international IP system on the basis of TT is both difficult and problematic. The previous section has already demonstrated that the argument in favour of IPRs as a direct vehicle for TT is both logically and empirically flawed. This section suggests that although no clear-cut conclusion is currently available, it is still plausible that a stronger IPR environment may indeed have a positive effect on the overall decision of foreign firms to invest and to utilize their technologies in developing countries. Currently no method is available for concluding which of these aspects is more dominant in its effects on TT.
It is now important to depart from the economic sphere and to examine an alternative explanation rooted in the political-economy domain. The following and final section considers the argument that trade retaliation, a politically constituted behaviour, can provide a better explanation for the emergence of an international IP system that is closer to the model of developed countries.