3.5.2 Private Investment and Intellectual Property Rights
As illustrated in the previous chapter, the private sector plays an increasingly
important role in international investment and technology development. This
growing role has been supported by various domestic and international developments,
including liberalisation of markets, development of stronger domestic legal
and financial systems, and tariff reductions under the Uruguay Round of the
GATT. In the context of technology transfer, a particularly important - and
complex - set of issues are those relating to intellectual property rights (IPRs).
IPRs may play an important role in ensuring economic returns to investors (including
R&D resources they have devoted to developing and improving technologies),
and to an extent enabling the transfer of and availability of protected technologies
(see Box 3.6).
|Box 3.6: Intellectual property rights and the
economics of technology patents: A primer (Source: Derived from Achanta
and Ghosh (1993); Besen and J.Braskin (1991)
|In very general terms, intellectual property rights protect human innovation
and intellectual effort. IPRs include patents (utility patents, design patents,
plant patents), plant breeder rights, trade secrets, trademarks and copyrights.
Patents are specific rights granted by governments to inventors which enable
the right holder - the inventor - to exclude third parties from utilising
or exploiting or commercialising the protected invention in the countries
where these are registered. To be protected under patent law, inventions
need to be new, have an inventive step and industrial application.
From an economic perspective, IPRs enable entrepreneurs to cover research
and development expenses and ensure some profit from the use of the protected
idea or invention returns to the innovator. From a sociological or anthr
opological perspective, IPRs serve to reflect those ideas most valued
by a culture, although certainly this should not imply that IPR protected
innovations are necessarily those most valuable to society.
The standard economic justification for granting property rights over
intellectual property is that this furnishes incentives for creative work.
IPR regimes are premised on the belief that prospective financial returns
in fact drive private creators of intellectual property. They do not necessarily
guarantee that innovation takes place at least social cost, which will
depend among other things upon the extent to which creators may borrow
ideas or concepts from earlier work.
From a societal perspective, one economic objective of an IPR regime
could be to maintain a proper balance between creating and disseminating
intellectual property. If innovations are not widely used, the net society
benefits may be less than in a case where fewer resources are employed
in creativity but the intellectual property is more widely disseminated.
This focuses attention on the appropriate scope of protection: the optimal
duration of IPR protection, and the optimal trade-off between the duration
and breadth of IPR protection.
Another way of looking at this is that a lack of IPR protection will
enable everyone to access a technology, but this comes at a dynamic cost
of deterring further innovation, and thus may stifle (positive) development.
These interests may differ between developed and developing countries.
Hence, it is unavoidable that there are disputes over the appropriate
degree of protection when it comes to international transfers. These issues
were debated very widely in the context of the GATT debates that led ultimately
to the TRIP agreement.
International development of IPRs and the TRIP agreement
IPRs were originally regulated exclusively at the national level and subject
to national legislation. Regimes for IPR tended to vary widely, especially between
developed and developing countries, due to differing interests, cultures and
administrative capacities. Industrialised countries tend to see IPRs as a primary
means for promoting technology development by offering inventors protection
to reap profits from their labours. Developing countries tended to be more concerned
to access existing technologies at affordable costs, and to make them more widely
available. Not surprisingly, developing countries tended to have far weaker
IPR laws than industrialised countries. The World Intellectual Property Organisation
(WIPO) sought to foster and harmonise IPR protection and disseminate information.
Its mandate includes, subject to the competence of other organisations, promoting
creative intellectual activity and facilitating the transfer of technology related
to industrial property.
Continuing differences in IPR treatment became a source of considerable international
dispute in the 1980s, and the US especially threatened some developing countries
with retaliatory trade action if they did not improve IPRs protection (Doane,
1994). At the same time, developing countries began to believe that stronger
IPRs regulation could help them to attract more foreign technology and to develop
stronger markets (Kwon, 1995). These developments have led to more common international
standards for IPR protection during the 1990s.
In particular, the 1994 Agreement on Trade Related Aspects of Intellectual
Property (TRIP), negotiated in the context of the Uruguay Round, is leading
to increased homogeneity of laws around the world in accordance with minimum
standards. According to Worthy (1994) the agreement "is a major breakthrough
in the international protection of intellectual property rights, because of
its substance and because of the wide measure of international acceptance it
achieved". TRIP was adopted in the context of a trade negotiation and therefore
was accepted as part of a "package". The main provisions are:
- The establishment of minimum standards for the protection and enforcement
of a wide variety of intellectual property rights, including the extension
of copyright principles to computer code and certain kinds of databases;
- A principle of "national treatment", preventing IPR discrimination
in favour of domestic industries;
- A principle of "most favoured nation", preventing IPR discrimination
between investors from different signatories to the TRIP agreement.
The TRIP regime on patents is particularly relevant to technology transfer;
it sets a minimum of 20 years for patent protection, it sets minimums for patentable
subject matter, and it sets minimum standards as to the conditions that must
be met for patents to be issued. It also establishes agreement on procedures
that must be followed before countries can grant compulsory licences.
The TRIP agreement allowed developing countries four years (from January 1996)
in which to make necessary changes, with an additional five years for least
developed countries or others facing serious implementation difficulties.
Effects of stronger IPR protection
The benefits that may derive from legal systems having strong intellectual property
rights include the following: an increase in innovation due to the incentive
and reward that IPRs provide; fair treatment of innovators who can own the creative
"sweat of the brow" and exert influence over how their technology
is used; public disclosures of patented technologies, sharing of secrets under
confidentiality agreements; ease of purchase, sale, or license; and enhanced
investment due to the assurance that investors can recapture their investment
in a technology subject to such protection.
Great IPR protection should give greater confidence for R&D investment
in new technologies and processes. It should also lead to greater investment,
including with new technology by western companies in developing countries,
although empirical research suggests this may not be as significant as hoped
for (Kwon, 1995). Trebilcock and Howse (1995), in a survey of foreign investors,
note that intellectual property protection was rated the least important of
five factors affecting investment decisions in Thailand. Certainly, although
in theory strong IPR systems should promote foreign investment, in the case
of certain technologies it is not enough to have these systems in place. There
is a need for the planning of technological development and better identification
of technological needs. Furthermore, all countries do not necessarily need cutting
edge technology to satisfy specific needs, particularly with respect to clean
In other respects, stronger IPR systems can impede technology development and
transfer. The World Bank's 1998 World Development Report cautions that "there
is now a risk of excessively strict IPRs adversely affecting follow-on innovations
and actually slowing down the pace (of technological development)". The
report goes on to identify patents which cover "not just products but broad
areas of technology" as a particular concern. Concerning international
transfer, a country that seeks to obtain a beneficial new technology for its
inhabitants may find that the owner of the technology is unwilling to provide
it on terms that the country (or host companies involved) can afford, whether
or not there is IPR protection.
Thus, there is no absolute "right" degree of IPR protection, and
notwithstanding the TRIP agreement, IPR regimes differ according to national
circumstances and the agreements that governments have entered into, the technologies
involved, and their national objectives. In addition, the appropriate response
might be to negotiate specific guarantees with investors, rather than increasing
intellectual property protection across the board (Trebilcock and Howse, 1995).
In certain sectors and markets, including some energy and environmental sectors,
the main advantages to investors may accrue simply from continued technological
innovation and managerial expertise, in which case IPR issues may not be very
important to them, and rigorous application of IPR may simply impede valuable
technology transfer with little compensating benefit (Trumpy, 1997). In other
cases, the reverse may be true.
International law recognises the right of a country to take legislative measures
to provide for the granting of compulsory licenses to prevent the abuses that
might result from the exercise of the exclusive rights conferred by the patent.
While the Paris Convention for the Protection of Industrial Property of 1883,
and WTO through TRIP referred above deal with the subject broadly, the North
American Free Trade Agreement (NAFTA) of 1993 and OECD's proposal for a Multinational
Agreement on Investments (MAI) severely restrict the use of compulsory licensing
of patents. This issue has been addressed in several international fora, including
UNCTAD, the Rio Summit, UNGASS and discussions within CSD. A survey conducted
in 1999 indicated that a number of countries both among the Annex I and non
- Annex I countries have legislation listing the circumstances under which provisions
for compulsory licensing could be invoked (Health Care and IP, 1999).
IPRs and developing countries
As noted in the context of TRIP negotiations, developing countries have particular
concerns about IPRs. The great majority of patents are owned and continue to
be generated from the industrialised world; developing countries and their companies
tend to have fewer resources to purchase licences and fear that stronger IPRs
impede their access to such technologies. Indigenous companies or communities
may find that traditional approaches are not familiar to investors, and will
have difficulty competing with larger companies that have extensive experience
obtaining and dealing with IPRs. The culture of competition may also make it
difficult to obtain relevant data in the short term.In other words, it is probable
that stronger IPR protection may to some degree enhance vertical technology
transfer through foreign investment, but may in some circumstances impede horizontal
dissemination of protected technologies through developing country societies.
Forsyth (1999) emphasises this distinction, but argues that the climate change
debate on technology transfer has tended to undervalue the potential contribution
of vertical technology investment in its own right. Besides, international financial
assistance could be made available where market-driven licensing is not feasible.
Ultimately, the impediments in any single case must be weighed against the
overall societal advantages of IPR in promoting investment and innovation. Technology
transfer is necessary to reach certain development goals, but developing countries
argue that the balance of IPR weighs to the advantage of developed countries.
In practice the incentive effects of IPR, weighed against the impediments they
may raise to technology transfer, will differ according to the technology, sector,
and country. While trade theory provides little basis for mandating uniform
standards of intellectual property protection across all countries, intellectual
property rights is an issue that is here to stay on the international trade
agenda (Trebilcock and Howse, 1995).
Finally, in some circumstances, inadequate access or abuse of IPRs may be addressed
through compulsory licensing procedures. Under Articles 30 and 31 of TRIP, member
countries may provide for compulsory licensing of patented inventions, i.e.
use of the invention without permission. Generally, compulsory licensing programmes
require the user first to seek a license, and if no license is given, then a
limited non-exclusive right to practice the invention domestically may be awarded
by the government, with an obligation to pay reasonable compensation to the
IPRs and the promotion of ESTs
The importance of IPRs needs to be set in context. Many of the technologies
for addressing climate change may not be protected anyway. This may apply both
to "soft" technologies, such as better energy management or agricultural
practices, and "hard" technologies such as building insulation. Where
there is no patent in force in the country seeking to acquire technology, the
main barriers to technology transfer will be (1) inadequate technical expertise
and know-how in the country, (2) the absence of professionals in the country
able to negotiate a suitable transfer agreement, and (3) the willingness of
the technology owner to transfer the technology. Training and education are
necessary to overcome the first two barriers. The third barrier may be overcome
with financial support and encouragement by the technology owner's country,
the technology recipient's country, or through bilateral or multilateral arrangements
(e.g. the GEF).
In other cases, relevant technologies may indeed be protected. What steps can
governments take to use IPRs to improve transfer and development of ESTs? IPR
systems can be harnessed specifically towards environmental objectives in some
circumstances (Gollin, 1991). Patents on environmentally friendly technologies
have been increasingly common since before the main environmental statutes were
implemented in the 1970s. In the US, patent regulations were amended in 1982
(37 C.F.R. q.102-c) to provide for faster processing of environmental patents
there. The practical impact of such provisions is uncertain.
In certain circumstances, existing patents may affect ability to comply with
domestic regulations. The US Clean Air Act of 1970 (42 USC 7608) permits compulsory
licensing in such circumstances: if the Attorney General identifies that a patented
technology is needed by others to comply and there are not reasonable alternatives,
then the US Courts are authorised to order licensing, "on such reasonable
terms and conditions as the courts, after hearing, may determine."
For some developing countries seeking access to patented technologies in connection
with international environmental treaties, one option might be for license fees
to be paid for by an international funding source such as the GEF and/or through
bilateral or multilateral arrangements.
Another way a country may address the concern for an unlicensed patent is to
charge increasing annual maintenance fees. If the fee becomes high enough by
5 to 10 years after patent issuance, the owner will let an uncommercialised
patent lapse (Sherwood, 1990). It will then become part of public domain.
Trademarks for environmental products can be crucial to their success and help
facilitate widespread acceptance of a product. So-called "green labelling"
programmes employ trademark or related principles (e.g. A not-for-profit organisation
allows a vendor to use an environmental seal of approval if certain requirements
This section has highlighted the complexity and specificity of the issues,
so that generalisations may not be helpful. Governments can support the exchange
of public domain information. And governments can provide incentives for private
parties to implement technology transfer programmes or joint ventures. Under
extraordinary cases of IPR abuse, compulsory licensing can be considered.
Quite apart from legal and IPR issues, cooperation plays a critical role in
promoting technology transfer. Likewise, national planning and specifically
identifying national needs becomes a pre-condition to any IPR-related discussion
as it is only when the type of technology or expertise needed has been identified
and the specific circumstance assessed that the IPR question becomes relevant.
Finally, while IPR and other developments have helped to facilitate combined
foreign investment, they have not generally oriented such investment particularly
towards sustainable development or environmentally sound technologies. That
is the function of other international agreements.
IPRs and Restrictive Business Practices
In reviewing the actual practice of IPR, the issue of Restrictive Business Practice
(RBP) of the private sector deserves adequate attention and analysis. Various
types of RBPs ranging from refusal of licensing to attaching restrictive or
even prohibitive conditions for royalty and equipment sales to maximise the
monopolistic rent were reported. These RBPs are more often practiced in the
initial stage of the innovation where there are not yet many other competitors.
After the initial stage, other competitors may enter with similar technologies
leading to the abolishment of RBP.. Companies often quickly change their behaviour,
and try to sell and license their own technology in order to maximise its market
share. Businesses management theory identifies strategies for "competitive
advantage" whereby companies will manipulate the market in any manner that
can suit their global strategies (Porter, 1980; 1990; Porter et al.,
In order to maintain monopoly or competitive advantage, companies go after
their potential competitors in other countries and register their patents to
block similar technology development, and dump their products to drive out new
competitors with similar technologies from the market. Several studies have
been done that verify this strategy of using intellectual property rights as
a market advantage and as a strategy to control markets, as well as dominate
innovation within industrial sectors (Narin et al., 1998, Mowery and Oxley,
1995; and Teece et al., 1994)
According to a case study (UNCTAD, 1997a) on the experience of Korean companies
importing foreign ESTs, the types of restrictive conditions are: non-exclusive
basis, restriction on export, prohibition of consigning to a third party, sharing
of improved technology, restriction on the licensee for dealing in competitive
products or technologies. Among 523 technologies introduced in 1994, 122 (23.3%)
were accompanied with restrictive conditions.
According to Korean firms and R&D institutions, there were cases where
the private firms and even public institutions of industrialised countries refuse
to license such ESTs like HFC-134a, fuel cell and IGCC (Integrated Gasification
Combined Cycle). Some private firms sell their equipment under the condition
that the buyer cannot disassemble the equipment.
These RBPs have not been widely reported and sufficiently analysed. However,
there are some cases of RBPs related to HFC-134a, fuel cell, and IGCC technologies
that were identified in Korea.
The case of HFC-134a technology draws particular attention. In the initial
stage of HFC-134a technology introduction, companies with HFC technologies refused
to license or sell the technology. When Korea launched its programme to develop
HFC-134a technology, a (foreign) company already having this technology registered
40 process patents in Korea in 1993 in an attempt to block the development of
similar technology. As Korea neared completion of its own HFC-134a technology
development, this company changed its policy and approached a Korean company
to sell its HFC-134a technology.
The experience is not confined to CFC technology. Among 168 Japanese technologies
introduced to Korea in 1994, 15 (8.9%) were not allowed to be consigned to a
third party, and, respectively, 13 (7.7%) were granted on a non-exclusive basis
and on condition that improved technologies should be shared between two parties
during the contract period. Seven (4.2%) were prohibited to be used for export
products and 3 (1.8%) were granted on condition that the licensee cannot deal
in competitive products or technologies. Among the 209 US technologies introduced
to Korea in the same year, 10 (4.8%) were not allowed to be consigned to a third
party, and 28 (13.4%) were granted on a non-exclusive basis and on condition
that improved technologies should be shared (12 or 5.7% and 16 or 7.7% respectively).
As suggested in the above statistics, Japan seems to impose more unfavourable
conditions on technological transfer than the US (UNCTAD, 1997a).
Even though at the time of writing this Report there were not many published
reports or articles on such business practices (RBP), evidence is mounting.
The case of Korea is only one among many. Some scholars have noted the problems
at the company level Lundvall, 1993), while others have documented how companies
have prevented the introduction of new technologies into the marketplace (Shaynneran,
1996) in order to advance and retain their current own technological advantages
(Clark and Paolucci, 1997a & b; and The Economist, 1999a and b). For a comprehensive
economic historical overview of the problem, see Reinert (1995) on the abuses
of the technological change and international competitiveness. More recent studies,
including those reported in the business management literature begin to question
such competitive strategies (Saxenian, 1994; Reinert, 1995 and Clark and Paolucci,
1997 a & b).
RBPs for other technologies could be simply regarded as the exercise of the
intrinsic monopolistic power recognised by the patent system. But if these RBPs
are exercised for ESTs in general and on the issue of EST transfer to developing
countries, which would both have local as well as global environmental implications,
then the implications of RBPs in hindering technology transfer deserve research