Methodological and Technological issues in Technology Transfer

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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:

  1. 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;
  2. A principle of "national treatment", preventing IPR discrimination in favour of domestic industries;
  3. 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 technologies.

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 patent owner.

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 are satisfied).

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., 1995).

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 and analysis.

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