Technology Transfer and the Role of Intellectual Property Rights

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Technology Transfer and the Role of
Intellectual Property Rights

• KAMAL SAGGI
• Presentation at the WTO
• October 11th, 2005

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Overview

• What is international technology transfer
  (ITT)?
• Why is it important, especially for developing
  countries?
• Through what channels does ITT occur?
• How pervasive is it?
• Does the strengthening of global IPR protection
  increase the scope for ITT?

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International technology transfer

• Difficult to gauge the overall magnitude of ITT
  -- occurs through a multitude of channels.
• Trade (especially in capital goods).
• -- In 1975, approximately 23 of total world
  trade was trade in capital goods whereas in 1996
  this ratio was over 30.
• Explicit trade in technology Global payments
  of fees and royalties for technology transfer
  increased from 0.85 billion to 100 billion
  during 1970-2003. An explosion in market mediated
  ITT. See Figure.
• FDI deserves special attention. More later.
• Many other channels movement of people,
  scientific literature, etc.

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Role of FDI

• Today, intra-firm trade (i.e. trade between
  subsidiaries and headquarters of multinational
  firms) may account for one-third of total world
  trade and sales of subsidiaries of multinational
  firms now exceed worldwide exports of goods and
  services.
• While most FDI occurs between industrial
  countries, developing countries are becoming
  increasingly important host countries for FDI
  27 of the global stock of FDI today is in
  developing countries.

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FDI and technology transfer

• Multinational firms are concentrated in
  industries that have a high ratio of RD relative
  to sales and a large share of technical and
  professional workers. Take advantage of their
  knowledge based assets in multiple markets.
• In a typical year, roughly 75 of global royalty
  payments are intra-firm (i.e. between
  subsidiaries and parent firms). Also even
  technology transfer between independent firms
  frequently involves multinationals.
• Has the increase in FDI contributed to ITT?
• If so, how?
• Technology spillovers and linkages from FDI?

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Spillovers from FDI?

• What does the word spillover mean?
• Is it reasonable to even expect spillovers to
  occur from FDI? The OLI paradigm.
• Multinationals transfer newer technologies
  internally and license older ones.
• How might knowledge diffuse?
• Demonstration effects
• Labor turnover
• Vertical spillovers.

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Channels of spillovers

• Demonstration effects related to the idea of
  discovering ones comparative advantage.
• Labor Movement Really crucial channel. Mixed
  evidence so far.
• Vertical Linkages discuss later.
• Evidence on horizontal spillovers? Two types of
  empirical studies sectoral level and plant
  level.
• Sectoral level studies positive relationship
  between the extent of foreign presence and
  productivity.
• Self-selection problem Does FDI go to the more
  productive sectors?

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Plant level studies of FDI

• These studies cast significant doubts regarding
  spillovers from FDI.
• Typical findings
• Plants with foreign involvement are more
  productive than purely domestic plants.
  Affirmation of FDIs role in technology transfer.
• Productivity at domestic plants is negatively
  correlated with the extent of foreign presence.
  Evidence of weak negative spillovers?
• Overall, a small positive effect of FDI on
  productivity across all plants.
• Absorptive capacity stronger evidence of
  spillovers in low tech sectors.
• Local competition and investment matter.

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How to explain negative spillovers?

• Negative spillovers result - is it a cause for
  serious concern for developing countries?
• Possible explanations
• Market share decline and economies of scale.
• Time needed to adjust to foreign competition
  future entrants will be more efficient.
• Studies do not capture the vertical aspect of
  technology transfer.
• Policy implications
• Difficult to argue in favor of fiscal and
  financial incentives for FDI based on horizontal
  spillovers.
• Competition for FDI is probably not in the
  interest of the developing countries.

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Vertical spillovers from FDI

• Vertical versus horizontal spillovers.
• Multinationals ought to have a strong incentive
  to transfer technology to potential suppliers.
• Evidence?
• Both econometric studies and case studies are
  supportive.
• Multinational firms do indeed transfer technology
  to domestic suppliers and help improve their
  productivity.
• Misleading to look only at the rivals of
  multinationals to see how FDI affects
  productivity.

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Arguments for and against IPR protection

• What is the economic rationale for IPRs?
• Classic answer Trade-off between incentive for
  innovation and monopoly pricing. Dynamic
  efficiency requires static inefficiency.
• Several complications here
• Optimal IPRs need to account for the cumulative
  nature of innovation. Ideas build on ideas.
• Even w/o IPRs, innovators have first-mover
  advantage imitation is costly and it takes time.
  
• Innovation often precedes w/or IPRs financial
  securities software was not protected
  historically.
• Patents and other IPRs can generate socially
  wasteful rent-seeking much like any type of trade
  protection.

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Effect of IPR protection on ITT

• What about countries that do not have much
  innovative capacity (as yet)?
• Case for stronger IPR protection in such
  countries has to rest on global response to
  changes in local policies (i.e. such as an
  increase in ITT and inward FDI).
• Globalization also implies innovators profit from
  a bigger market and IPRs may need to be weaker
  rather than stronger!
• IPRs make sense when fixed costs of innovation
  are truly large and imitation is cheap. Both
  things may not often co-exist.

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IPRs and ITT (contd.)

• Rosy scenario stronger IPRs in developing
  countries lead to more innovation and more ITT
  from ROW through FDI and technology licensing.
• Do we have any supporting evidence for this?
• A qualified yes. TRIPS only 10 years old. We know
  patent filing behavior and production shifting
  via FDI has begun to already respond. See Figure.

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TRIPS and ITT

• Is strengthening of IPRs conducive to ITT?
• Articles 66 and 67 are supposed to facilitate
  ITT. But progress seems to have been limited.
• Historically, much ITT occurred when TRIPS was
  absent.
• Developing countries today face new constraints
  implied by the TRIPS agreement.
• Encouraging ITT will require greater cooperation
  from industrialized countries as well as policy
  reforms in developing ones.