Global Dimensions of Intellectual Property Rights in Science and Technology (1993) / Chapter Skim
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5 Unauthorized Use of Intellectual Property: Effects on Investment, Technology Transfer, and Innovation
5 Unauthorized Use of Intellectual Property: Effects on Investment, Technology Transfer, and Innovation
Pages 107-145
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From page 107... ...
More specifically, it considers the economic effects on developing countries, in terms of influencing foreign direct investment and technology transfer, and examines the economic effects on innovating firms, in terms of lost revenues and investment opportunities. The chapter also indicates what information exists and is needed to evaluate the relationships among intellectual property rights protection, unauthorized use, and technological innovation.
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From page 108... ...
Particularly for the individual inventor, patent protection is claimed to be a strong incentive. Second, patents are viewed as a major incentive for firms to carry out further work and make the necessary investment in pilot plants and other items that are needed to bring the invention to commercial use.
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From page 109... ...
has pointed out, some countries seek patent protection abroad, but offer weak protection to foreign inventors at home.
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From page 110... ...
Also, the industrialized countries sometimes assert that the establishment of stronger intellectual property rights would help to promote indigenous technological and innovative activities in the developing countries, although it is generally conceded that this is only one of many relevant factors influencing the indigenous rate of innovation.) {For a discussion of recent pressures on developing countries to strengthen intellectual property rights, see Mody (1990)
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From page 111... ...
As is well known, foreign direct investment is generally regarded as an important means of transferring technology to developing countries.2 From both policy and analytical perspectives, it is important to obtain a better understanding of the effect, if any, that a developing country's system of intellectual property rights protection has on the transfer of technology to that country through foreign direct investment. According to some observers, relatively weak intellectual property rights protection in a developing country may reduce the likelihood that multinational firms will invest there.
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From page 112... ...
VI. INTELLECTUAL PROPERTY RIGHTS PROTECTION AND DIRECT FOREIGN INVESTMENT To test the foregoing hypotheses concerning the effects of intellectual property rights protection on the transfer of technology via foreign direct investment by American firms, I chose a random sample of 100 major U.S.
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of a, o so 4 o ~ a, Go ce G' m ~ _ o 3 ~ Cq V)
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Based on these results, it seems likely that, to the extent that foreign direct investment by U.S. firms is largely devoted to sales and distribution outlets and to rudimentary production and assembly facilities, a country's intellectual property rights protection will have little effect on the total amount invested by U.S.
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115 so ._ o o ._ C)
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From page 116... ...
Also, firms prefer direct investment over licensing when the technology is sophisticated and foreigners lack the know-how to assimilate it, or when a firm is concerned about protecting quality standards. For example, if a firm licenses technology to a less-than-capable foreign firm and if the foreign firm produces defective merchandise, it may reflect adversely on the firm whose technology was used.
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117 4 ._ so o a' o o Em Cal o ._ o Pa so o so ~ o V Ct U)
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118 ;^ o o ._ Cal .
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Also, as is well known, direct investment has been discouraged by the governments of some countries. Particularly in the developing countries, sometimes there has been considerable hostility toward multinational firms.
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120 ._ au o au 3 o o EM Cal ._ so o ._ o so ;^ ~ En.
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To some extent, the lack of correlation seems to reflect the fact that intellectual property rights protection plays a somewhat different role in each of these industries, as discussed below.7 7Note that the percentage of firms in the metals and transportation equipment industries with foreign subsidiaries or joint ventures in at least one of these countries is as large as this percentage in the electrical equipment and machinery industries; so differences in this regard are not responsible for the lack of correlation.
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From page 122... ...
, who formulate an index of patent protection based upon conformity of a country's patent laws to the minimum standards proposed in the Guidelines for Standards for the Protection and Enforcement of Patents of the U.S. Chamber of Commerce Intellectual Property Task Force.
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From page 123... ...
In assessing negative marketplace impact, the following factors were considered market size, share of market lost, export market losses in third countries, reduction in margins through price competition and price controls set by reference to the price of infringing material, goods, or services; use of confidential test data by others, without the respondent's authorization, in securing government approvals; lost manufacturing efficiency because of reduced volume; loss of reputation and diminished value for the company name because of counterfeiting or other infringing activity; and increased product liability costs; the added costs of intellectual property enforcement attempts; the difficulty of doing business in a straightforward, efficient manner; and opportunity losses where inadequate intellectual orooertv protection acted as a deterrent to business activity. 123 The commission's rankings are based on data for 1986 obtained from 161 American firms in a variety of manufacturing and nonmanufacturing industries.
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From page 124... ...
In India, no product patents are granted for drugs, chemicals, alloys, optical glass, semiconductors, and intermetallic compounds. In Thailand, firms have complained about the lack of patent protection for chemicals, nh~rmnr.~.~ti~.nl~ form and hevera~es.
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In some countries, the patent holder must work the invention within one to three years after the patent is granted; otherwise, the patent is subject to compulsory licensing or may lapse. Firms object that they cannot manufacture their products in every nation where they expect patent protection.
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As pointed out in the previous section, some countries that have adopted a patent system do not extend patent protection to pharmaceuticals and chemicals (or sometimes to food)
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From page 127... ...
foreign direct investment in that country when the above variables are held constant, we assume that Ij Bo +B1Xij+B2X2j+B3X3j+B4X4j+BsX5j+B6X6j+B7x7j+g~xSj+ ej where Ij is the extent of U.S. foreign direct investment in the jth country in a given year, X~j is the population of the jth country (in 1986~; X2j is per capita GDP in the jth country (in 1986~; X3j is the level of corporate taxation in the jth country (as estimated for a wholly owned subsidiary with specified and comparable characteristics in each country)
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From page 128... ...
conducted by recognizing that there are differences among industries as well as countries in the strength or weakness of intellectual property rights protection and by seeing how these differences, as well as those among countries, seem to be related to U.S. foreign direct investment in particular countries in specific industries.
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From page 129... ...
provides no statistically significant evidence that the strength or weakness of intellectual property rights protection is related in a major or consistent way to the extent of U.S. foreign direct investment in a given country.
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Governments realize that the amount of technology transfer to their citizens and firms depends on the kinds of investments made by foreign firms, not just on the dollar volume of such investments. In particular, investments in facilities to manufacture components or complete products are likely to raise the country's technological level to a greater extent than investments in sales and distribution outlets or in rudimentary production and assembly facilities.
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From page 131... ...
In 1988, the International Trade Commission (ITC) published a study focusing on the economic effects of weak intellectual property rights 190f course, when the firm can defend the new technology through incorporation in "black boxes" or other means, such technology may be sent to countries with weak protection, but such defensive mechanisms are often unavailable or ineffective.
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From page 132... ...
No Loss Loss Total 120 739 1,334 4,130 2,288 2,060 86 665 Aerospace Building materials Chemicals Computers and software Electronics Entertainment Food and beverages Forest products Industrial and farm equipment Metals and metal products Motor vehicles and parts Petroleum refining Pharmaceuticals Publishing and printing Rubber products Scientific and photographic instruments5,090 Textiles and apparel251 Other151 Total23,845 2 5 o 6 21 31 17 12 10 0 7 7 18 25 11 12 622 29 2,194 1,295 1,909 128 511 10 1 o o o 1 o o 26 6 10 10 11 11 4 6 11 8 167 11 193 SOURCE: International Trade Commission (1988)
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For example, the International Trade Commission (1988:4-1) , says the following: The Commission could identify no better means of developing estimates than asking a broad range of firms in the industries most probably affected for the core evidence on U.S.
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In the remaining seven industries (electrical equipment, office equipment, motor vehicles, instruments, primary metals, rubber, and textiles) , patent protection was estimated to be of much more limited importance in this regard (Mansfield, 19861.
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From page 135... ...
XX. NEEDED RESEARCH ON THE EFFECTS OF STRONGER INTELLECTUAL PROPERTY PROTECTION ON TECHNOLOGICAL CHANGE IN DEVELOPING COUNTRIES It is frequently argued that stronger protection of intellectual property rights would help to promote indigenous technological and innovative activities in the developing countries.23 This may be true, particularly in those countries that already have reached a minimal level of industrialization and have a reasonable amount of scientific and technological resources.
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From page 136... ...
In developing countries such as South Korea and Taiwan, it would be interesting to estimate the effects to date on industrial R&D expenditures of the recent strengthening of patent protection regarding drugs and chemicals. Although subject to obvious limitations, the results would be useful.
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By building on that work, it may be feasible to obtain information of this sort.24 XXI. NEEDED RESEARCH ON EFFECTS OF STRONGER INTELLECTUAL PROPERTY PROTECTION IN DEVELOPING COUNTRIES ON INNOVATION IN DEVELOPED COUNTRIES Besides affecting the rate of technological change inside their own borders, the developing countries, by providing weak intellectual property rights 24Richards (1988)
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From page 138... ...
By using data obtained from market research firms specializing in the drug, chemical, and other industries, as well as data published by various Third World countries and information from members of these industries, losses in sales due to weak patent protection might be approximated. By applying the results of various studies of cash flows from innovations in these industries, the effects on the net present value criterion of various proposed innovations could be estimated.
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From page 139... ...
First, the great majority of the U.S. firms in our sample report that the strength or weakness of intellectual property rights protection has an important effect on some, but not all, types of foreign direct investment decisions.
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firms tend to transfer somewhat newer technology to countries with relatively strong intellectual property rights protection than to countries with weak protection. Fourth, according to estimates collected by the International Trade Commission from 167 U.S.
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In Technology Generation in Latin American Manufacturing Industries, J
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From page 142... ...
1988. The Impact of Stronger Patent Protections: A Case Study of the Japanese Pharmaceutical Industry.
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1991. Intellectual Property Rights, Foreign Direct Investment, and Technology Transfer.
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1979. Empirical determinants of manufacturing direct foreign investment in developing countries.
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In International Technology Transfer.
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