Intellectual Property Rights and Technology Transfer to Developing Host Countries

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Image by KMJ

Image by KMJ

The international structure of intellectual property rights (IPRs) has undergone substantial changes since the mid-1990s, when several developing countries (e.g. the Republic of Korea, China, Taiwan, Argentina, Mexico, etc.) began to adopt considerably stronger IPR regimes. Arguably the most important catalyst for these changes has been the 1995 TRIPS agreement, which compels current and future WTO members to “adopt and enforce strong, non-discriminatory minimum standards of intellectual property protection.” Questions remain, however, about the impact that the adoption of TRIPS (and the general strengthening of domestic IPR regimes) will have on the transfer of technology by multinational enterprises (MNEs) into the developing world. Especially in light of the new “technological paradigm,” which over the last forty years has led to a reduction in economic space, a dramatic increase in competition, and the reorientation of global economic strategies towards information-based technologies, these technology transfers could help shape the overall development trajectory of the world’s poorest countries. Therefore, studying the effect of strong versus weak IPR regimes on developing host countries can provide insight into the regulatory strategies that are most suitable to and beneficial for the developing world.

Disadvantages of Strong IPRs for Developing Host Countries 

First, it is worth noting that the impact a strengthened IPR system will have on technology transfers into a given developing country depends on a multitude of different factors, including that country’s locational advantages and primary industry orientations. Though that fact may seem obvious, it leads to the parallel inference that strong IPRs alone (i.e. those which are not accompanied by, for example, “political and economic stability, adequate infrastructure, [and] a strong educational system”) will not generate adequately strong incentives to convince firms to make significant technical investments. Therefore, a developing nation whose specific locational advantages or disadvantages make it a poor target for technology inflows irrespective of the strength of its IPR regime might be better off foregoing a strict IPR system in order to avoid its non-technical downsides (e.g. less available/affordable medicines, agricultural inputs, etc.).

This opportunity cost-type argument also squares with Hymer’s law of uneven development. Hymer forecasted that the strict organizational structure within MNEs would “tend to reproduce a hierarchical division of labor between geographical regions that corresponded to the vertical division of labor within the firm.” Stephen Hymer, The Multinational Corporation and the Law of Uneven Development, in International Firms and Modern Imperialism (Hugo Radice ed., 1975). In other words, MNEs will focus their high-technology operations in particular developed nation hubs, leading to global economic centralization. Thus, Hymer’s theory predicts that developing countries will be unable to influence the transfer of technology by MNEs, and may choose to focus their regulatory attentions elsewhere. Alternatively, some commentators have argued more recently that the “evolution of organizational systems for cross-border knowledge exchange” has ensured that leakage of “component knowledge developed locally in a developing country” provides little value without an understanding of its broader technical context. John Cantwell & Yanli Zhang, The Innovative Multinational Firm: the Dispersion of Creativity, and its Implications for the Firm and for World Development, in Images of the Multinational Firm 45 (Simon Collinson et al. eds., 2009) [hereinafter Innovative Multinational]. Therefore, stronger IPR regimes might actually be completely irrelevant to MNEs’ decisions to transfer particular types of (especially high-technology) innovation.

More substantively, commentators have criticized the adoption of strong IPRs by developing countries because they “impede efforts to reverse-engineer foreign technologies” while raising the cost and increasing the complexity of technology transfers, most of which occur through licensing agreements, not FDI. In development terms then, stronger IPRs could actually reduce developing countries’ ability to access global information and place them at a competitive disadvantage in international markets. These costs can be thought of as rents which developing countries are compelled to pay by strict IPR regimes in order to procure protected global knowledge. And, unless a developing country already possesses a substantial, absorptive innovative capacity, any gains it realizes from the domestic innovation that occurs as a result of its strengthened IPR regime will likely be overshadowed by these structural costs.

Benefits of Stronger IPRs for Developing Host Countries

In response to Hymer, Cantwell argues that modern structural shifts in MNEs, which have grown from simple “centralized hierarchies” to complex “networked [systems] that have distributed centers of excellence,” discount his non-nuanced understanding of modern development. However, while Cantwell believes that the “fragmentation of production and modularization of technologies” leave unprecedented opportunities for developing nations to catch up technologically through MNE activities, he does not say that strong IPRs are necessarily the best way to do so. Innovative Multinational.

Perhaps the strongest empirical support of strict IPR regimes in developing countries comes from Branstetter, whose statistics purport to show that “improvements in IPRs result in real increases in technology transfer within multinational enterprises.” Similar findings were reported by Mansfield and Park & Lippoldt, who argue that, especially in high-technology industries, FDI inflows and resulting technology transfers are highly positively correlated with the host country’s system of intellectual property protection. Notably, Park & Lippoldt found that “this relationship holds for all groups of countries—developed, developing, and least developed,” though others have found little correlation between strong IPRs and information technology transfers within less developed nations. However, UNCTAD seems to agree that strong IPRs could increase tech flows into developing countries; hence its contention that “the protection of IPRs at the international level . . . are of particular relevance for R&D-related FDI.”  That said, UNCTAD does hedge its assertion by advising that developing countries should try to “make use of the flexibilities” within global IPR regimes to ensure that IPRs are implemented in a development-friendly way.

More fervently, Lai & Qiu argue that, given the opportunity to negotiate, developing nations should consider raising their IPR standards because doing so is “globally welfare-improving.” Although they admit that strong IPRs will hurt developing countries, Lai & Qiu argue that the developed world’s gain will exceed the developing world’s loss, leaving the latter to bargain for a share of the resulting surplus (e.g. through decreased import tariffs). Thus, even after ratification of the TRIPS agreement, ongoing IPR negotiations at the GATT/WTO level for Lai & Qiu entail a constructive means by which developing nations can trade IPRs for alternative economic gains.

Conclusion

The available data on technology transfers as a result of strengthened IPRs in developing nations, though difficult to evaluate, seems to indicate that the developing world will lose out by increasing IPR protections. Developing nations’ locational factors, along with their relative inability to absorb and implement available international technologies, ensures that the rents associated with strong IPRs do not outweigh the limited benefits they can accrue. And, although Lai and Qiu’s vision of an IPR-centric bargaining process has some merit, it both presupposes a fair negotiation process between developed and developing nations and, more importantly, is fundamentally predicated on the notion that, in the end, IPRs constitute a loss to developing countries.

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