Description
Knowledge is typically non-excludable in that it is not possible to prevent others from applying new knowledge even without the authorization of its creator. If a new technology is valuable, it is therefore likely to be copied or imitated, reducing the potential profits of the original inventor and potentially removing the incentive to engage in innovative activities.
UNITED NATIONS
INDUSTRIAL DEVELOPMENT ORGANIZATION
The Role of
Intellectual Property Rights
in Technology Transfer
and Economic Growth:
Theory and Evidence
working papers
The Role of
Intellectual Property Rights
in Technology Transfer
and Economic Growth:
Theory and Evidence
By
Rod Falvey
Leverhulme Centre for Research on Globalisation and
Economic Policy, School of Economics, The University of Nottingham
and
Neil Foster
Department of Economics, University of Vienna
In cooperation with
Olga Memedovic
UNIDO, Strategic Research and Economics Branch
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
Vienna, 2006
This paper has not been formally edited. The designations employed and the presen-
tation of material in this publication do not imply the expression of any opinion what-
soever on the part of the Secretariat of the United Nations Industrial Development
Organization concerning the legal status of any country, territory, city or area, or of its
authorities, or concerning the delimitation of its frontiers or boundaries. The opinions,
figures and estimates set forth are the responsibility of the author and should not nec-
essarily be considered as reflecting the views or carrying endorsement of UNIDO. The
designations “developed” and “developing” economies are intended for statistical con-
venience and do not necessarily express a judgment about the stage reached by a par-
ticular country or area in the development process. Mention of firm names or
commercial products does not imply endorsement by UNIDO. Material in this paper
may be freely quoted but acknowledgement is requested with a copy of the publication
containing the quotation or reprint.
This publication was prepared by Olga Memedovic, UNIDO staff member from the
Strategic Research and Economics Branch drawing on the background paper pre-
pared for the UNIDO Research Project “Public Goods for Economic Development”,
by Rod Falvey and Neil Foster. Rod Falvey is Professor of International Economics,
Leverhulme Centre for Research on Globalisation and Economic Policy, School of
Economics, The University of Nottingham. Neil Foster is Assistant Professor of
economics at the Department of Economics, University of Vienna. The publication
has benefited from the valuable comments provided by Professor David Greenaway
during the finalization of this publication. UNIDO intern Robert Lambertus van
Lavieren provided assistance during various stages of preparing this publication.
The authors are grateful to Michael Bailey for proofreading the final document.
Comments and suggestions on the issues raised in this paper may be addressed to:
Olga Memedovic
Strategic Research and Economics Branch
UNIDO
P.O. Box 300
1400 Vienna
Austria
Tel: (+43-1) 26026-4676
Fax: (+43-1) 26026-6864
E-mail: [email protected]
iii
Abstract
Following the conclusion of the TRIPS Agreement, much has been written on the poten-
tial costs and benefits of stronger Intellectual Property Rights (IPRs) protection in terms
of growth and technology transfer, particularly for developing countries. This paper
reviews this literature and provides new evidence linking protection of IPRs to economic
growth, innovation and technology diffusion. Results suggest that while stronger IPR
protection can ultimately reap rewards in terms of greater domestic innovation and
increased technology diffusion in developing countries with sufficient capacity to inno-
vate, it has little impact on innovation and diffusion in those developing countries with-
out such capacity and may impose additional costs. There is a considerable incentive,
therefore, for countries at different stages of development to use the flexibilities in the
TRIPS Agreement to maximize its net benefits for their development.
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Intellectual property rights and economic growth . . . . . . . . . . . . . . . . . . 9
3. Intellectual property rights and innovation . . . . . . . . . . . . . . . . . . . . . . . . 17
4. Intellectual property rights and international technology diffusion . . . . 23
Intellectual property rights and international trade . . . . . . . . . . . . . . . 26
Intellectual property rights and FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Intellectual property rights and licensing . . . . . . . . . . . . . . . . . . . . . . . . 33
Intellectual property rights and patenting . . . . . . . . . . . . . . . . . . . . . . . 34
Related literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5. Country specific evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6. Summary of empirical results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7. Policy responses to TRIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Intellectual property rights related policies . . . . . . . . . . . . . . . . . . . . . . 50
Competition policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Complementary policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Technology diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
The role of multilateral organizations . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8. Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Annex I. Construction of the Ginarte and Park IPR index . . . . . . . . . . . . . . . 71
Annex II. Threshold regression analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Annex III. Empirical method, data sources and construction . . . . . . . . . . . . . 74
Annex IV. Evidence on IPR protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
v
Contents
Introduction
Knowledge is typically non-excludable in that it is not possible to prevent others from
applying new knowledge even without the authorization of its creator. If a new tech-
nology is valuable, it is therefore likely to be copied or imitated, reducing the poten-
tial profits of the original inventor and potentially removing the incentive to engage in
innovative activities. Intellectual property rights (IPRs) encourage innovation by grant-
ing successful inventors temporary monopoly power over their innovations. The conse-
quent monopoly profits provide the returns on successful investment in research and
development (R&D), which must be large enough to compensate for the high share of
R&D investment that is unsuccessful.
Once an innovation has been created, its non-rival character suggests that its benefits
will be maximized if its use is free to all at marginal cost. Although this availability to
all will yield benefits in the short run, it will also severely damage the incentive for
further innovation. But, excessive IPR protection is likely to lead to an inadequate dis-
semination of new knowledge, which in itself could slow growth to the extent that
access to existing technology is necessary to induce further innovation. Weak IPR pro-
tection has actually stimulated R&D activity in many countries by encouraging knowl-
edge spillovers from transnational corporations (TNCs) and other domestic firms. Giving
innovators too much protection may also lead to permanent monopoly. Entry by rivals
may be impeded, and successful innovators may have reduced incentives for develop-
ing and exploiting subsequent innovations. Choice of IPR policy then reflects a balanc-
ing of these considerations. The awarding of a temporary monopoly, although second
best, is intended to restore the incentive to innovate, which in turn should encourage
long-run growth and improved product quality.
Developed countries, with many potential innovators, have tended to opt for relatively
strong IPR systems, with the aim of encouraging inventive and creative activities that
are seen as an important source of long-run economic growth. With R&D spending con-
centrated in a handful of the world’s richest countries, genuinely innovative activities
are limited in most developed and developing countries. The majority of countries in the
world have taken a different approach, providing only weak IPR protection, if any, as
a way of allowing the rapid diffusion of knowledge through imitation as a significant
vii
Executive summary
source of technological development. Providing stronger IPR protection is seen as shifting
profits from domestic imitative firms to foreign firms and reducing output in the domes-
tic economy, rather than encouraging domestic innovative activity. The counter argument
is that stronger IPR protection can help reward creativity and risk-taking even in develop-
ing economies, while weak IPR protection can make developing countries remain
dependent on dynamically inefficient firms that rely on counterfeiting and imitation.
The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) was
established during the Uruguay Round (1986-1994) of trade negotiations in order to
strengthen the international IPR regime. The TRIPS Agreement is the first comprehen-
sive and global set of rules covering IPR protection. The TRIPS Agreement specifies
minimum standards that should be attained by a designated time. The areas covered
are copyrights and related rights, trademarks, geographical indications, industrial
designs, patents, the layout designs of integrated circuits and undisclosed information
including trade secrets and test data.
Intellectual property rights and economic growth
If we look at the world as being composed of two types of countries: a developed, inno-
vating “North” and a developing, imitating “South”
1
, then the impact of stronger IPR pro-
tection benefits the innovating North, but its impact in the South where innovation is
limited or non-existent is ambiguous, depending inter alia on the channels through which
technology is transferred. Research indicates that stronger IPR protection is only found to
benefit the South when R&D is highly productive, thus resulting in significant cost reduc-
tions, and when the South comprises a large share of the overall market of the product.
Research also shows that the benefits of increased innovation through stronger IPR pro-
tection become weaker as more and more countries strengthen their IPR regimes,
because the extra market covered and the extra innovation that can be stimulated by
such protection diminishes. Since IPR holders engage in monopoly pricing that distorts
consumer choice, strengthening IPR protection can lead to welfare reductions, particu-
larly in a country that undertakes little or no R&D and would otherwise be able to free
ride on foreign innovations.
Trade channel
When technology is transferred through trade, then successful southern imitation results
in shifting the competitive advantage for the production of imitated products from the
North to the South. Stronger IPR protection in the South decreases southern imitation
and increases northern innovation in the short run, as innovation becomes more prof-
itable. In the long run, though, innovation in the North may fall, because if new prod-
ucts are produced for a longer time span in the North, fewer resources are available
for innovation there. Stronger IPR protection in the South may then reduce global
viii
1
The use of the terms “North” and “South” is a simplification of reality often used in the literature. UNIDO (2005)
notes that this simplification ignores inequality within the North and the South.
growth. But weak IPR protection in the South may have effects besides reducing the
incentive for innovation in the North. Northern exporters may be able to “mask” their
production technologies, thereby limiting the extent to which these can be imitated
through traded goods. The potential gains from technology transfer through weak IPR
protection in the South might then be offset by increases in northern masking.
Foreign direct investment channel
When foreign direct investment (FDI) is considered as a source of technology transfer,
northern innovators may shift production to the South, reducing competition for
resources in the North. Stronger IPR protection can then encourage FDI and lead to
increased innovation. However, if it is easier to imitate TNC products produced in the
South than products produced in the North, then production may be shifted back to
the North, leaving fewer resources available for innovation in the South.
Licensing channel
If technology is transferred through licensing, stronger IPR protection in the South
results in greater innovation in the North, and increased licensing to the South.
Licensing has the advantage to northern firms of higher profits due to lower produc-
tion costs in the South, but involves other costs in terms of contract negotiations, trans-
ferring the necessary technology and in the rents that the innovator must give to the
licensee to discourage imitation. By reducing the risk of imitation, stronger IPR protec-
tion in the South also reduces the costs of licensing, thus encouraging licensing and
freeing up resources in the North for innovation.
In sum, much depends upon the channels of transmission available and the ability of
the South to take advantage of the technology to which it is exposed. While IPR pro-
tection would be expected to enhance growth in countries that move toward free trade
and have a comparative advantage in innovative technology-intensive activities, its
impact on countries lacking such advantages is less clear. An overview of the literature
that directly tests whether stronger IPR protection is likely to result in higher growth
is presented in table 2. These studies tend to measure the strength of IPR protection
using indices based on the perceived strength of a country’s patent law.
The literature reviewed in table 2 provides evidence that strengthening an IPR regime
can enhance growth, depending on country characteristics. IPR protection seems to lead
to higher growth in more open economies, other things equal. It also seems to lead to
higher growth in the developed and least developed countries (LDCs), but has no sig-
nificant effect on growth in middle-income countries. The developed countries benefit
the most in terms of growth from stronger IPR protection, because stronger IPR protec-
tion encourages domestic innovation and technology transfer. Findings also imply that
the LDCs, with little capacity to imitate and innovate, benefit from growth from a stronger
IPR regime, but the available evidence is not clear on the exact channels through which
the LDCs may benefit: a stronger IPR regime is found to have little positive impact on
many technology diffusion channels, including trade, FDI and licensing.
ix
The middle-income countries are likely to have some capacity to imitate, and for them
stronger IPR protection can have two offsetting effects, encouraging technology trans-
fer through increased imports and FDI, on the one hand, but reducing technology trans-
fer by limiting the extent of imitation on the other.
Intellectual property rights and innovation
The main benefit claimed for strong IPR protection is that by allowing innovators to
appropriate a share of the benefits of their creative activities, R&D is encouraged, which
leads to innovation and higher long-run growth. The cross-country evidence reviewed
in this paper linking IPRs to domestic innovation (section 3 of the paper), technology
diffusion (section 4) and growth (section 2) is summarized in table 4.
The impact of IPR protection on domestic innovation is likely to vary with a country’s
level of development and its factor endowments. More generally, we may expect IPRs
to impact on domestic innovation differently in countries with significant innovative
capacity as opposed to those with few resources available for domestic innovation. The
evidence summarized suggests that stronger IPR protection can encourage domestic
innovation in countries that have significant domestic capacity for innovation, but that
it has little impact on innovation in countries with a small innovative capacity.
Intellectual property rights and international
technology diffusion
International technology transfer or diffusion refers to the process by which a firm in
one country gains access to and employs technology developed in another country. Some
transfers occur between willing partners in voluntary transactions, but many take place
through non-market transactions or spillovers.
The impact of stronger IPR protection on technology diffusion is ambiguous in theory
and depends on a country’s circumstances. On the one hand, stronger IPR protection
could restrict the diffusion of technology, with patents preventing others from using
proprietary knowledge and the increased market power of IPR holders potentially reduc-
ing the dissemination of knowledge due to lower output and higher prices. On the other
hand, IPRs could play a positive role in knowledge diffusion, since the information avail-
able in patent claims is available to other potential inventors. Moreover, strong IPR
protection may encourage technology transfer through increased trade in goods and
services, FDI, technology licensing and joint ventures. Despite this theoretical ambigu-
ity, the diffusion of technology from countries at the technological frontier to other
countries is considered the main potential benefit of the TRIPS Agreement, particularly
for developing countries that tend not to innovate significantly. The findings of several
studies relating IPRs to technology diffusion through international trade, FDI, licensing
and patenting are summarized in table 6 (annex IV). The evidence suggests that stronger
IPR protection can encourage technology transfer through a number of channels, though
once again its impact has been found to depend upon other factors related to a country’s
imitative ability and level of development.
x
Country specific evidence
Based on the experience of the Republic of Korea, it is argued that strong IPR pro-
tection will hinder rather than facilitate technology transfer and indigenous learning
activities in the early stages of industrialization, when learning takes place through
reverse engineering and duplicative imitation of mature foreign products. It is only
after countries have accumulated sufficient indigenous capabilities and an extensive
science and technology infrastructure capable of undertaking creative imitation that
IPR protection becomes an important element in technology transfer and industrial
activities. Similarly, the development experience of India indicates the importance of
weak IPR protection in building up local capabilities, even when countries are at very
low levels of development.
Research findings indicate that the static effects of stronger IPR protection on prices,
employment and output are likely to be negative for most industries in the Lebanon.
It is suggested however that dynamic gains from stronger IPR protection are possible,
through increased FDI, increased product development by local firms (particularly in
cosmetics, food products, software applications, publishing and film production), and
the increased ability to enter into joint ventures or product licensing. Further, to the
extent that these lead to additional technology transfer and local product development,
the average quality of local products may rise.
Survey evidence from China reveals that managers of foreign enterprises are reluctant
to locate R&D facilities in China for fear of misappropriation and patent infringement.
Enforcement problems and weak penalties were also a concern. These factors led firms
that transferred technology to China not to use the latest technology, but technologies
that were at least five years behind the frontier. Chinese firms were also found to suf-
fer from trademark infringement, which in the long run is likely to be particularly dam-
aging to enterprise development.
Summary of empirical results
Following the literature reviewed by this paper, it seems clear that the implications of
stronger IPRs depend, inter alia, on a country’s level of development (measured by per
capita gross domestic product (GDP) or human capital). For most high-income coun-
tries, strengthening IPRs raises growth at least partly, due to increased innovation and
technology diffusion. The IPR regimes in these countries already meet or exceed the
TRIPS standards, leaving them free to strengthen further their IPR regime if they wish.
For middle-income countries, the evidence suggests that strengthening IPRs has little
effect on growth. On one hand, a stronger IPR regime encourages both domestic inno-
vation and technology diffusion through foreign patenting and international trade and
both domestic innovation and technology diffusion can impact positively upon growth.
On the other hand, the beneficial impact of stronger IPR protection on domestic inno-
vation and technology diffusion is to a certain extent offsetting the growth-enhancing
xi
benefits otherwise obtained from imitation and now precluded by the stronger IPR
regime. The IPR regimes in these countries will need to be strengthened in order to
meet the TRIPS standards. The policy focus of these countries should be to encourage
domestic firms to shift from imitation to innovation and to facilitate other activities
with growth-enhancing technology spillovers.
For low-income countries, evidence suggests that strengthening IPRs encourages growth,
but the exact channels through which this occurs are not yet identified. In these coun-
tries, stronger IPRs appear to have no effect on innovation and the evidence reviewed
suggests that the impact on international trade is negative.
In the lowest income countries, while stronger IPR protection is found to encourage
foreign patenting it had no significant effect on growth. These are countries whose IPR
regimes will need to be strengthened to meet the TRIPS standards. It may be that most
will not have significant imitative or innovative capability in the near future. Those
which do must be concerned that TRIPS will inhibit their firms from passing through
the imitative stage that seems to be the precursor to gaining innovative capability in
relatively high-tech industries. The TRIPS obligations may make WTO membership less
attractive for those countries with imitative aspirations.
International trade
A country’s openness to international trade seems also to affect the relationship between
IPRs and growth. The evidence suggests that stronger IPRs have a significant and pos-
itive impact on growth in more open economies. The exact mechanism through which
this occurs has yet to be revealed, but it appears to involve the substitution of domes-
tic innovation for technology produced abroad, since stronger IPRs seem to lead to less
domestic patenting and more foreign patenting. And it is not just that economies that
are more open receive more foreign patents but that the growth-enhancing effects of
foreign patenting also appear to be stronger in economies that are more open.
In addition, IPRs are also found to influence trade. Evidence suggests that stronger
IPR protection leads to larger trade flows, albeit mainly for countries with imitative
capability and not necessarily in products of industries considered high-tech or patent
sensitive.
Licensing and FDI
Since most innovation occurs in a few advanced countries, FDI and technology licens-
ing are often perceived as the major formal channels for international technology trans-
fer. But while there is some evidence that stronger IPRs encourage licensing, the
evidence on whether stronger IPRs encourage FDI is largely inconclusive. Most host
countries anticipate that FDI or licensing will yield further benefits from technology
spillovers to domestic firms. By their nature, such spillovers are difficult to measure,
so perhaps it is not surprising that there is little conclusive evidence of growth-
enhancing spillovers through inward FDI, at the economy-wide, industry or firm level.
xii
Foreign patenting
Considering technology diffusion through foreign patenting, the evidence indicates that
a country’s market size may be important in determining whether increased foreign
patenting encourages or inhibits growth. Results for developing countries reported in
the paper suggest that foreign patenting has a positive impact on growth in countries
with relatively high levels of IPR protection, for relatively open economies, and for coun-
tries with relatively large markets. These findings combined with the findings that
stronger IPR protection encourages foreign patenting in developing countries are con-
sistent with broad conclusions in the literature that stronger IPR protection encourages
technology diffusion. Benefits of technology diffusion are greater in more open
economies, countries that are more developed, and in countries with larger markets and
where foreign firms have less market power.
Policy responses
From the summary of empirical evidence it follows that the policy implications should
fall along the lines of a country’s level of development and its level of imitative or
innovative capacity. In low-income countries, the policy priority should be to improve
the investment environment, with liberal trade policies to encourage imports of tech-
nology embodied in goods. Such countries should not be required to apply and enforce
strong IPR obligations; particularly where this would increase the cost of importing
IPR protected goods. Developed countries can also play a role here through the pro-
motion of differential pricing schemes to lower the consumption cost of technology-
intensive imports to low-income countries. For other developing countries, with
relatively high levels of innovative potential, the stronger IPR protection required by
TRIPS can encourage domestic firms to switch from imitation to innovative activities.
By encouraging technology diffusion through international trade and foreign patent-
ing, stronger IPR protection will also help offset any adverse growth effects from lost
imitative opportunities.
In sum, policies related to the implementation of the TRIPS standards should be country-
specific. Ranges of policies that can assist countries in enhancing the benefits from
TRIPS have been discussed in the literature. These include:
Intellectual property rights related policies
Policies related to patent fees, the scope of patentability and the novelty requirements
in patents can all contribute to the development of a domestic innovative sector and
to the international diffusion of knowledge. The fees for patent applications and for
the renewal of patents and trademarks can be configured in such a way that both inno-
vation and diffusion will be promoted. Developing countries can also limit the scope
of patents and encourage rapid publication of patent applications, allowing domestic
firms to invent around the patent.
xiii
Countries could also set high standards for the novelty requirements of patents in order
to prevent routine discoveries from being patented. This could be combined with a sys-
tem of utility models to encourage local firms to invent around patents and to improve
their manufacturing methods.
Competition policies
By creating market power for patent holders, stronger IPR protection can lead to lower
sales at higher prices, which in turn can limit the extent of technology diffusion. A
number of policies consistent with TRIPS can offset these effects, including price con-
trols through reference prices or administrative ceilings, allowing parallel imports, and
compulsory licences, entitling a domestic licensee to exploit the patent for a fixed period
during the patent life.
Complementary policies
There are other policy options available that may enhance the impact of IPR protec-
tion on innovation. Tax policies and regulatory regimes can be structured so as not to
discourage innovation. Investment in education, particularly in science and technology,
may also encourage domestic innovation. Evidence suggests that the development of a
local innovative sector through these means can also enhance the benefits from inter-
national technology diffusion.
Technology diffusion
For most developing countries advanced technologies will be imported. International
technology transfer occurs through imports, FDI, licensing and patent applications by
non-residents. Policies aimed at improving infrastructure for communication and trans-
port and maintaining macroeconomic stability along with open trade and investment poli-
cies can encourage such flows, allowing countries improved access to foreign technology.
The role of multilateral organizations
Multilateral organizations can assist developing countries in meeting the terms of the
TRIPS Agreement by promoting capacity building in IPRs, to obtain the maximum net
benefit from TRIPS. Capacity building in IPRs should focus less on the specification of
protective laws and regulations and more on the technical, judicial and legal expertise
underlying effective technology transfer.
Multilateral organizations can play a significant role in facilitating research on the eco-
nomic effects of IPR protection and in encouraging the dissemination of its findings
to all interested parties. More generally, multilateral organizations have a role to play
in fulfilling information needs by encouraging collaboration and information sharing
among governments and by serving as a distributor of knowledge about successful
technology acquisition programmes that have been undertaken in the past. Technical
standards play an important role in diffusing production and certification technologies,
xiv
and learning technical standards is often tantamount to learning technology. Here mul-
tilateral organizations could create a pool of experts to aid standard setting bodies in
developing countries.
Given the importance of the presence of innovative capacity for successful interna-
tional technology diffusion, multilateral organizations could play a role in encouraging
the development of a research culture in developing countries. This could include the
development of training programmes in how technology is transferred, as well as the
financing of education programmes more generally, particularly those that can aid the
diffusion of technology. Donor countries and multilateral organizations could consider
establishing specific trust funds to finance the training of scientific and technical
personnel to facilitate the transfer of technologies and to encourage R&D in develop-
ing countries.
Multilateral organizations, the WTO and UNIDO in particular, could increase the scope
of monitoring developed country efforts in the transfer of technology and could add an
evaluative mechanism for the effectiveness and extent of technology transferred. Finally,
some researchers have asserted that the most powerful indirect incentive for technol-
ogy transfer would be for developed countries to grant significant market access for
products in which poor countries have a comparative advantage. They argue that a link
exists between technology transfer and market access due to the role that market size
and growth play in attracting trade and FDI, and the associated incentives to invest in
new technologies if export markets were more assured. Multilateral organizations, par-
ticularly the WTO, have an obvious role to play here.
xv
The argument underlying public policy intervention to protect IPRs is that, without
such protection, competitive market systems fail to provide private agents with suffi-
cient incentives to undertake the costly and risky investments that generate the new
ideas and technologies (knowledge) now widely recognized as the main source of sus-
tained economic growth. This is because knowledge has “public good” attributes.
Knowledge is typically non-excludable, in that it is not possible to prevent others from
applying new knowledge even without the authorization of its creator. If a new tech-
nology is valuable, it is therefore likely to be copied or imitated, reducing the poten-
tial profits of the original inventor and potentially removing the incentive to engage in
innovative activities. Where “imitation” has lower costs than “innovation”, imitators
have the advantage over innovators unless the latter can restrict access to their inno-
vation. This characteristic provides the argument for strong IPR protection. IPRs cre-
ate ownership of intellectual property by giving innovators the legally enforceable power
to prevent others from using an intellectual creation or to set the terms on which it
can be used. That is, IPRs encourage innovation by granting successful inventors tem-
porary monopoly power over their innovations. The consequent monopoly profits pro-
vide the return on successful investment in R&D.
The other public good aspect of knowledge compounds the costs of granting this monop-
oly power. Knowledge tends to be non-rival, in that the marginal cost for an additional
firm or individual to use the knowledge is often negligible. Once an innovation has
been created, its non-rival character suggests that benefits will be maximized if its use
is free to all at marginal cost. Although a policy of free access will yield benefits in the
short run, it will severely damage the incentive for further innovation. IPRs allow suc-
cessful innovators to appropriate some of the consumer surplus their innovation gen-
erates, both as a reward for their innovative efforts and to provide an incentive to future
investors. Because research is a risky activity, returns on successful R&D (which pro-
duces intellectual property) must be large enough to compensate for the high propor-
tion of R&D that is unsuccessful, generating in this way a normal return on R&D as
a whole.
2
1
Introduction 1.
2
Evidence suggests that IPR protection stimulates innovation and that the social rate of return to innovation appears
to be considerably higher than the rate of return to the innovator (Mansfield et al., 1977).
2 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Choice of IPR policy then reflects a balancing of these considerations. The awarding of
a temporary monopoly, although second-best, is intended to restore the incentive to inno-
vate, which in turn should encourage long-run growth and improved product quality.
It is not an all or nothing decision, however. Even in the absence of IPR protection there
may exist natural incentives to innovate depending upon market lead times, marketing
strategies and the difficulties in copying and imitating (Maskus, 2000a), and these fea-
tures are likely to be more important than IPR protection under certain circumstances.
Excessive IPR protection is likely to lead to an inadequate dissemination of new know-
ledge, which in itself could slow growth to the extent that access to existing technology
is necessary to induce further innovation.
3
Other costs to society of strong IPR protec-
tion include rent seeking behaviour, the wasteful duplication of investment in R&D (i.e.
patent races) and the costs of judicial actions to enforce property rights (Maskus, 2000a).
Giving innovators too much protection may also limit the spread of new ideas and lead
to permanent monopoly. Entry by rivals may be impeded, and successful innovators
may have reduced incentives for developing and exploiting subsequent innovations.
4
If IPRs were set and enforced by a global authority then, in principle, this authority
would be in a position to determine the appropriate strength of IPR protection for the
world as a whole. But IPRs are conferred by national governments and valid only within
the relevant jurisdiction. Consequently, national IPR systems have largely focussed on
what was perceived to be in the best interests of the country concerned, and different
countries perceived the trade-off between profits and innovation differently. Thus (devel-
oped) countries, with many potential innovators, have tended to opt for relatively strong
IPR systems, with the aim of encouraging inventive and creative activities, which are
seen as an important source of long-run economic growth.
5
With R&D spending con-
centrated in a handful of the world’s richest countries however, genuinely innovative
activities are limited in most developed and developing countries, and the majority have
taken a different approach, providing only weak IPR protection, if any, as a way of
allowing the rapid diffusion of knowledge. For many of these countries imitation can
be a significant source of technological development, and providing stronger IPR pro-
tection is seen as shifting profits from domestic imitative firms to foreign firms and
reducing output in the domestic economy, rather than encouraging domestic innova-
tive activity (Deardoff, 1992). The counter-argument is that stronger IPR protection can
help reward creativity and risk-taking even in developing economies, with those coun-
tries that retain weak IPR protection remaining dependent on dynamically inefficient
firms that rely on counterfeiting and imitation (Maskus, 2000a).
With the globalization of markets and the resulting increases in trade and investment
flows across borders, particularly flows of technology and technology-intensive products,
6
3
Hence the argument, discussed below, that in many countries weak IPR protection actually stimulated R&D activ-
ity by encouraging knowledge spillovers from transnational companies (TNCs) and other domestic firms (Cohen and
Levinthal, 1989).
4
Gilbert and Newey (1982) show that under certain conditions a monopolist may accumulate patents and allow
them to “sleep”, thus deterring entry into an industry.
5
Indeed there has been a general strengthening and broadening of IPRs over time in developed countries (Mazzoleni
and Nelson, 1998).
6
The share of knowledge-intensive or high-tech products in total world goods trade doubled between 1980 and
1994 (Fink and Primo Braga, 2005).
INTRODUCTION 3
this difference in national IPR standards has taken on additional significance. Firms
have looked increasingly to foreign markets to sell their goods and to foreign destina-
tions as platforms for production, making it easier for intellectual property to be
accessed and copied in countries that provide weak IPR protection. This is one of the
major reasons why firms investing heavily in R&D put pressure on national govern-
ments to strengthen the international IPR regime. The outcome was the Agreement on
Trade Related Aspects of Intellectual Property Rights (TRIPS), a product of the Uruguay
Round (1986-1994) of trade negotiations. The TRIPS Agreement is the first compre-
hensive and global set of rules covering IPR protection.
7
It sets minimum standards of
protection to be provided by each World Trade Organization (WTO) member in each
of the main areas of intellectual property covered, as well as requiring countries to
develop mechanisms to enforce these rights. The TRIPS Agreement does allow coun-
tries to pursue different policies with respect to IPR protection, but does specify min-
imum standards that should be attained by a designated time. Box 1 highlights some
of the major requirements of TRIPS. The areas covered are copyrights and related rights,
trademarks, geographical indications, industrial designs, patents, the layout designs of
integrated circuits and undisclosed information including trade secrets and test data.
Table 1 provides more information on these forms of intellectual property and how they
are covered by international agreements.
From the preceding discussion it might be difficult to see why developing countries
agreed to TRIPS. One factor was pressure from advanced countries (the United States
and the European Union (EU) in particular). Developing country governments also
thought that agreeing to TRIPS would encourage negotiations allowing developing coun-
tries wider access to agricultural and textile markets in developed countries. In addi-
tion business interests within many developing countries encouraged their governments
to adopt stronger IPR protection in order to protect their own innovative activities tai-
lored to the domestic market (Sherwood, 1997; Maskus, 1998a). Stronger IPR protec-
tion can also encourage increased imports, inward foreign direct investment (FDI) and
technology licensing, all of which can lead to increased technology transfer.
8
Indeed
Article 7 of the Agreement states that “[T]he protection and enforcement of intellec-
tual property rights should contribute to the promotion of technological innovation and
to the transfer and dissemination of technology, to the mutual advantage of producers
and users of technological knowledge in a manner conducive to social and economic
welfare, and to a balance of rights and obligations”. The various areas of IPR protec-
tion covered by TRIPS are likely themselves to have differing impacts on innovation
and technology diffusion, and some of these differences are discussed in box 2.
Following the TRIPS Agreement, a body of research has developed focussing on the
potential impact of TRIPS, and of IPRs more generally, on various aspects of economic
activity. Here we review the existing literature linking IPR protection to both economic
7
There have been international agreements on IPRs since the nineteenth century. Until recently the main instru-
ments of international law regarding the substantive protection of IPRs were the Paris Convention for the Protection
of Industrial Property (1883) and the Berne Convention for the Protection of Literary and Artistic Works (1886). The
TRIPS Agreement has been analyzed extensively by Primo Braga (1996), UNCTAD (1996) and Maskus (1997).
8
It is now widely accepted, for example, that the assimilation of foreign technology was a critical component of
the Asian Miracle (see, for example, Nelson and Pack, 1999).
Box 1. Substantive requirements of TRIPS in the WTO
General obligations Comments
1. National treatment Applied for persons
2. Most favoured nation Reciprocity exemptions for copyright;
prior regionals/bilaterals allowed
3. Transparency
Copyright and related rights
4. Observes Berne Convention Does not require moral rights
5. Minimum 50-year term Clarifies corporate copyrights
6. Programmes protected A significant change in global norms
as literary works
7. Data compilations
protected similarly
8. Neighbouring rights
protection for phonogram
producers, performers
9. Rental rights A significant change in global norms
Trademarks and related marks
10. Confirms and clarifies
Paris Convention
11. Strengthens protection of Deters use of confusing marks and
well known marks speculative registration
12. Clarifies non-use Deters use of collateral restrictions
to invalidate marks
13. Prohibits compulsory licensing
14. Geographical indications Additional protection for wines and spirits
Patents
15. Subject matter coverage Patents provided for products and
processes in all fields of technology
16. Biotechnology Must be covered but exceptions allowed
for plants and animals developed by
traditional methods
17. Plant breeder’s rights Patents or effective sui generis system
required
18. Exclusive rights of importation
19. Severe restrictions on Domestic protection can no longer be
compulsory licensing required; non-exclusive licences with
adequate compensation
20. Minimum 20-year patent
length from filing date
21. Reversal of burden of
proof in process patents
22. Industrial designs Minimum term of protection: 10 years
Integrated circuits designs
23. Protection extended to articles A significant change in global norms
incorporating infringed design
24. Minimum 10 year protection
4 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
INTRODUCTION 5
Undisclosed information
25. Trade secrets protected against New in many developing countries
unfair methods of disclosure
Abuse of IPRs
26. Wide latitude for competition Cannot contradict remainder of WTO
policy to control competitive agreement
abuses
Enforcement measures
27. Requires civil, criminal measures Will be costly for developing countries
and border enforcement
Transitional arrangements
28. Transition periods Five years for developing and transition
economies; 11 years for poorest countries
29. Pipeline protection Not required but a provision for
for pharmaceuticals maintaining novelty and exclusive
marketing rights
Institutional arrangements
30. TRIPS Council Agreement to be monitored and reviewed
31. Dispute settlement Standard approach with five-year
moratorium in some cases
Source: Maskus (2000a)
growth and international technology diffusion.
9
The paper is structured as follows. In
section 2 we discuss the existing literature on IPR protection and growth. Section 3
considers the importance of IPR protection in encouraging domestic innovation, while
section 4 considers its importance for the international diffusion of technology. Here a
number of specific channels for diffusion are emphasized, including trade, FDI, licens-
ing and patenting. Section 5 considers some country studies of the role of IPR protec-
tion in development. The inferences one can draw from this empirical literature are
summarized in section 6. Section 7 then offers some policy conclusions. Section 8 pro-
vides some overall conclusions.
9
The details of this literature are discussed under the appropriate subheadings below, but it is worth noting here
that Maskus (2000a) and Fink and Maskus (2005) provide book-length treatments on the impact of IPR protection on
economic performance, and that the website www.iprsonline.org provides links to a large number of research papers,
including papers covering such important topics as patenting in biotechnology and the access and pricing of drugs in
developing countries. Space restrictions preclude discussions of some of the more controversial aspects of IPR protec-
tion. Finger and Schuler (2005) consider how IPR protection can protect knowledge that exists or might be created in
developing countries.
6 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
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INTRODUCTION 7
Box 2. Aspects of TRIPS and their impact on innovation
and technology diffusion
Included in the TRIPS Agreement are the following aspects of intellectual property
protection:
• Patents—give their owners the right to exclude all others from making, selling,
importing, or using the product or process named in the patent without author-
ization for a fixed period of time. Three forms of patents may be applied for;
(a) invention patents require significant non-obviousness and as such a discrete
advance in technology; (b) utility models tend to be awarded for incremental
improvements of existing products and technologies; (c) industrial designs pro-
tect the aesthetic or ornamental aspects of a commercial article.
• Copyrights—protect the rights of creators of literary and artistic works to com-
municate, display, or perform those works in some medium, plus the rights to
make and sell copies.
• Trademarks and service marks—protect the rights to use a particular distinctive
mark or name to identify a product, service or company.
• Geographical indications—are related to trademarks and certify that a consumer
product was made in a particular place and that it embodies the physical
characteristics of that location.
• Trade secrets—are proprietary information about production processes, includ-
ing items such as customer lists and organizational methods. Standard liability
laws guard against unauthorized disclosure through commercially unfair means.
• Layout designs of integrated circuits—covers the layout design of integrated
circuits, the chips on which they are masked, and products that incorporate the
chip. TRIPS specifically permits reverse engineering of integrated circuits.
The importance of these different aspects of IPR protection for innovation and
technology diffusion are likely to vary. Here we discuss some of these differences.
Patents are expected to increase both innovation and technology diffusion. By pro-
viding an incentive to undertake R&D and the associated costs of inventing a new
technology or product, patents should encourage innovation. The empirical evi-
dence linking patent rights to innovation is mixed however (see section 3). Through
the publication of claims, patents add to the stock of public knowledge and can
encourage technology diffusion. The evidence in favour of such diffusion is stronger
(see section 4).
Literary and artistic ideas protected by copyrights are without industrial applicabil-
ity. While not encouraging industrial innovation, copyright protection is aimed at
encouraging creative works that provide social, cultural and economic benefits to
society. On the other hand, copyright protection limits the dissemination of liter-
ary works and raises the static costs of education, research and education.
Trademarks and geographical indications do not protect the creation of additional
knowledge, nor in theory do they restrict imitation or copying of protected goods
as long as they are sold under a different mark. Like copyrights therefore they are
unlikely to directly raise innovation or encourage technology transfer. Similar argu-
ments can be made for the protection of integrated circuit designs, though TRIPS
specifically allows for the reverse engineering of such designs. Trademarks are how-
ever likely to lower research costs, protect consumers from fraud regarding the
origin of a product and safeguard commercial reputations for quality. Since trade-
marks and geographical indications are used as a signal of quality, they may also
8 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
encourage firms to maintain or improve quality over time, as well as generating
further product differentiation. There is also some anecdotal evidence that under
the right circumstances trademarks can contribute to business development among
low- and middle-income producers in the developing world (see for example Maskus
et al., 2000c; Maskus, 2005).
Trade secrets are rationalized as a mechanism to foster innovations that do not
comply with the strict requirements for the patentability of products and processes.
Firms may choose not to patent an innovation for a number of reasons; (a) the
innovator may judge their creation to be unpatentable in legal terms, but hard to
imitate; (b) a firm may prefer not to disclose its processes, as required by patents,
because disclosure could reduce expected profits; (c) firms may wish to avoid the
costs of patenting. Trade secrets do not incur costs in the form of application and
grant procedures, yet they also do not add to the base of knowledge available to
the public. As such, trade secrets would not be expected to raise the diffusion of
technology significantly, though the potential exists for trade secrets to be reverse-
engineered. Trade secrets may however encourage innovation, especially of the
small, incremental type.
Source: Based on Maskus (2000a, pp. 20-23 and 36-50).
In the modern literature on economic growth, technological progress is viewed as the
prime determinant of long-run growth. This technological progress arises from the activ-
ities of economic agents carried out in order to profit from the introduction of new
products (Romer, 1990; Grossman and Helpman, 1991, Ch. 3) or the improvement of
existing ones (Grossman and Helpman, 1991, Ch. 4; Aghion and Howitt, 1992). Agents
invest in R&D in the expectation of profiting from the resulting inventions. But besides
creating new products, innovative activity adds to society’s stock of knowledge, upon
which subsequent innovations are based. This process is assisted where the informa-
tion that IPRs protect is made available to other potential inventors as in patent claims.
10
The global rate of growth then depends upon the rate of innovation and the stock of
knowledge, and IPR protection can increase growth by encouraging both.
When it comes to exploring these issues in a multi-jurisdiction context, the most rel-
evant analyses are those that examine a world composed of two types of countries: a
developed, innovating “North” and a developing, imitating “South”. The main con-
cerns have been whether increased IPR protection in the South would increase (a) the
rate of (global) growth, (b) the rate of technology transfer from the North to the South,
and, (c) welfare levels in both locations. A straightforward partial equilibrium analy-
sis reveals that while the North always benefits from stronger IPR protection in the
South, the South itself is found to benefit only when R&D is highly productive, such
that the R&D induced by stronger IPR protection in the South results in significant
cost reductions, and when the South comprises a large share of the overall market for
the good (Chin and Grossman, 1990). In these circumstances the additional monop-
oly profits available in the South provide a significant additional incentive for north-
ern investment in R&D, and the welfare of the South increases due to the increased
benefits in consumption resulting from northern R&D. But as Deardoff (1992) shows,
the benefits of increased innovation through stronger IPR protection become weaker
as more and more countries strengthen their IPR regimes, since the extra market
covered and the extra innovation that can be stimulated by such protection dimin-
ishes. Since IPR holders engage in monopoly pricing that distorts consumer choice,
9
Intellectual property rights
and economic growth 2.
10
Mansfield (1985) provides evidence suggesting that the learning process from patent claims is relatively rapid,
taking 10-12 months in the United States. These benefits should not be overstated however since patents do not nec-
essarily disclose sufficient information for the invention to be manufactured and many developing countries lack the
capacity to adopt and adapt new techniques.
strengthening IPR protection can lead to welfare reductions, particularly in a country
that undertakes little or no R&D and would otherwise be able to free ride on foreign
innovations.
11
Countering this is the notion that the North and the South may have
different requirements and priorities when it comes to technology (Diwan and Rodrik,
1991). The South may then have an incentive to provide IPR protection in order to
facilitate the invention of the particular technologies that meet its needs, which might
otherwise be neglected.
More recent work has considered dynamic general equilibrium models of innovation
and growth. Several aspects are then shown as potentially important. One is the com-
petition for scarce resources between R&D (investments in innovation) and the produc-
tion of the new and improved goods that arise from the innovation. The channels
through which technology can be transferred from one country to another then become
significant. In the simplest case, where only goods are traded, successful southern imi-
tation results in the competitive advantage for the production of imitated products shift-
ing to the South. Stronger IPR protection in the South then decreases southern imitation
and increases northern innovation in the short run, as innovation becomes more prof-
itable. But, as Helpman (1993) notes, in the long run innovation in the North may fall,
because if new products are produced for a longer time span in the North, fewer
resources are available for innovation there. Stronger IPR protection in the South may
then reduce global growth. But weak IPR protection in the South may have effects
besides reducing the incentive for innovation in the North. Northern exporters may be
able to mask their production technologies, thereby limiting the extent to which it can
be imitated through traded goods (Taylor, 1993). The potential gains from technology
transfer through weak IPR protection in the South might then be offset by increases
in northern masking.
Where FDI is an option, the resource competition effect noted by Helpman is moder-
ated (Lai, 1998). The innovator can now shift production of new goods to the South,
reducing the competition for resources in the North. Stronger IPR protection in the
South may further increase the speed of foreign investment and the return to innova-
tion. This analysis becomes more complicated, however, if one assumes, as seems rea-
sonable, that southern firms can more easily imitate the products of transnational
corporations (TNCs) when they are produced in the South than products produced in
the North. Stronger IPR protection in the South then makes imitation more costly, and
southern firms find themselves devoting greater resources to imitation, but with a lower
rate of success. The additional resources drawn into imitation in the South leave less
available for production, causing FDI to contract. In response production is shifted back
towards the North leaving fewer resources in the North available for innovation, which
lowers the rate of innovation overall (Glass and Saggi, 2002).
10 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
11
Results such as these have led many commentators to argue that the main impact of TRIPS will be to shift
wealth from developing countries to firms in developed countries. Rodrik (1994) for example states that “irrespective
of assumptions made with respect to market structure and dynamic response, the impact effect of enhanced IPR in
LDCs will be a transfer of wealth from LDC consumers and firms to foreign mostly industrial-country firms” (p. 449).
Extending the options further, the impact of stronger IPR protection in the South on
incentives for firms in the North to innovate and to license advanced technologies to
firms in the South has also been examined (Yang and Maskus, 2001a). Licensing has
the advantage of higher profits due to lower production costs in the South, but involves
other costs in terms of contract negotiations, transferring the necessary technology and
in the rents that the innovator must give to the licensee to discourage imitation. By
reducing the risk of imitation, stronger IPR protection in the South reduces the costs
of licensing (and its policing), thus encouraging licensing to the South and freeing up
resources for innovation in the North.
Perhaps the most important conclusion that follows from this brief review of the rele-
vant theoretical literature is that the implications of stronger IPR protection in the
South on either the incentives for innovation in the North or the rate of technology
transfer from the North to the South are not clear cut. Much depends on the channels
of transmission available and the ability of the South to take advantage of the technol-
ogy to which it is exposed. For individual countries the impact of IPR protection on
growth is likely to depend upon country characteristics, most notably factor endow-
ments. This leads to a further consideration. Many models of endogenous growth have
one dynamic sector that exhibits learning-by-doing externalities or spillover effects and
another traditional sector that does not. Then, depending on whether opening up to
trade shifts resources toward or away from the dynamic sector, a country’s rate of eco-
nomic growth may increase or decrease with globalization. The reallocation of resources
will depend upon a country’s initial factor endowments, amongst other things. While
IPR protection would be expected to enhance growth in countries that move toward
free trade and have a comparative advantage in the dynamic sector, its impact on coun-
tries with a disadvantage in this sector is less clear.
There is a small literature that directly tests whether stronger IPR protection is likely
to result in higher growth. The results from this literature are summarized in table 2.
This literature is not generally concerned with testing for the specific channels through
which technology is being transferred among countries, or for the mechanisms through
which growth might be enhanced, but simply whether, where and when a positive effect
is discernable. The approach adopted is to include a measure of the strength of IPR
protection in a standard cross-country empirical growth framework. Two indices of IPR
protection are commonly used in the literature, and both are based on the perceived
strength of a country’s patent law. The index of Rapp and Rozek (1990) [RRI] is based
on the adherence of each country’s patent laws in 1984 to the minimum standards pro-
posed by the United States Chamber of Commerce (1987). These standards include
guidelines for patent examination procedures, term of protection, compulsory licensing,
coverage of inventions, transferability of patent rights and effective enforcement against
infringement. The index is on a six-point scale with higher numbers indicating stronger
IPR protection. The index of Ginarte and Park (1997)
12
[GPI] is also on a six-point scale
and is constructed using similar criteria to the RRI. Their scoring method differs how-
ever, with five categories of the national patent law considered: the extent of coverage,
INTELLECTUAL PROPERTY RIGHTS AND ECONOMIC GROWTH 11
12
Annex I provides more information on the construction of the Ginarte and Park index.
membership of international patent agreements, provisions for loss of protection, enforce-
ment mechanisms and duration of protection. While the two indices are highly corre-
lated (Rafiquzzaman, 2002), for empirical purposes the GPI has the advantage over the
RRI in that it is constructed quinquennially from 1960 to 1990.
13
12 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Table 2. Summary of research on IPRs and growth
Study Sample and method Dependent variable(s) IPR index Results
Gould and
Gruben (1996)
Thompson and
Rushing (1996)
Thompson and
Rushing (1999)
Park (1999)
95 countries; cross
section with data
averaged over the
period 1960-1988
112 countries; cross
section with data
averaged over the
period 1970-1985
55 countries;
seemingly
unrelated
regression
techniques on a
cross-section of
data over the
period 1971-1990
60 countries;
seemingly
unrelated
regression
techniques on a
cross-section of
data over the
period 1960-1990
Growth of real
GDP per capita
Growth of real
GDP per capita
Growth of real
GDP per capita;
ratio of total
factor productivity
(TFP)
a
in 1971 to
that in 1990; the
Rapp and Rozek
Index of IPRs
Growth of real
GDP, fraction of
GDP invested in
physical capital,
fraction of GDP
invested in human
capital, fraction
of GDP invested
in R&D
Rapp and
Rozek Index
Rapp and
Rozek index
Rapp and
Rozek index
Ginarte and
Park index
IPR protection has a positive
impact on growth, which is
slightly stronger in more
open economies
IPR protection has a positive
impact on growth only in
countries that have reached
a certain initial level of GDP
per capita
IPR protection has a positive
impact on TFP in relatively
rich countries, which in turn
impacts positively upon out-
put growth
IPR protection has no direct
impact on growth. IPR
protection has an indirect
positive impact on growth
through physical capital
investment and R&D in the
most advanced countries
13
Both of these indices are based primarily on the statutes themselves, but not on their enforcement or implemen-
tation. Consequently these indices will overestimate the level of protection in a country where strong anti-infringement
laws exist, but are not enforced as may be the case in many developing countries that inherited IPR laws from their
colonial powers, but do not have the administrative capacity or inclination to enforce them (Gould and Gruben, 1996).
14
The level of IPR protection is highly correlated with a country’s level of economic development. Ginarte and Park
(1997) examine the determinants of their index and find that higher levels of GDP per capita, shares of R&D in GDP,
openness and levels of human capital are positively related to the strength of IPR protection.
15
Their hypothesis is based on firm-level evidence from Brazil by Braga and Willmore (1991) who found a negative
relationship between the degree of trade protection and a firm’s propensity to develop new technology or purchase it abroad.
a
Total Factor Productivity (TFP) is a derived measure of technology change.
While issues remain over the direction of causality
14
the results of the various studies lead
to fairly consistent conclusions. Gould and Gruben (1996) employ the RRI to examine the
importance of stronger IPR protection for growth in a sample of up to 95 countries with
data averaged over the period 1960-1988. They also examine whether the impact of IPR
protection on growth depends upon the degree of openness to trade, the underlying argu-
ment being that in closed economies stronger IPR protection may not have the desired
effect of encouraging innovation and higher growth, as firms may not have the incentive
to innovate if their market is guaranteed.
15
The model of Rivera-Batiz and Romer (1991)
provides a theoretical rationale for this hypothesis, with firms in closed economies finding
it more profitable to copy foreign technology than develop new technology.
Gould and Gruben regress the average growth of real GDP per capita on the RRI and
a number of standard explanatory variables, including initial GDP per capita, the invest-
ment to GDP ratio, the secondary school enrolment ratio and initial levels of literacy.
They find that stronger IPR protection has a positive impact on growth, which is mar-
ginally statistically significant. Gould and Gruben then go on to examine the relation-
ship between IPR protection and growth in open versus closed economies. Openness
is measured using three variables. The first two are the Black Market Premium (BMP)
and distortions in real exchange rates. Countries with high BMPs and high real exchange
rate distortions tend to be highly distorted and inward orientated (De Long and Summers
(1991) and Dollar (1992) respectively). The third measure is a composite index of a
country’s trade regime developed by Gould and Ruffin (1993) comprising a number of
existing trade orientation indices as well as a country’s BMP, real exchange rate dis-
tortions and the ratio of import taxes to imports. Each of these are interacted with the
RRI and included in the growth regression. From their results, Gould and Gruben con-
clude that IPR protection has a slightly larger effect on growth in more open economies.
These last conclusions are tentative, however, since, as Gould and Gruben acknowledge,
openness is multifaceted, which makes using a single measure problematic, particularly
since the measures of openness that have been employed in the empirical literature
tend not to be highly correlated (Pritchett, 1996).
16
Thompson and Rushing (1996) conduct a similar exercise, regressing the average growth
of real GDP per capita between 1970 and 1985 on the ratio of investment to GDP, the
secondary school enrolment ratio, population growth, initial GDP per capita and the
RRI for 112 countries. While they find a positive relationship between the RRI and
growth, it is not statistically significant. They then go on to consider whether IPR pro-
tection may have an impact upon a country’s growth rate, but only once a country has
reached a certain (but unknown) level of development, as measured by initial GDP per
capita. For this they employ threshold regression techniques finding a threshold at an
initial level of GDP of $3,400 (in 1980 dollars). For countries below this value there is
no significant relationship between IPR protection and growth, but above, the relation-
ship is positive and significant.
In a later paper (Thompson and Rushing, 1999), they extend their analysis to a sys-
tem of three equations. The three dependent variables are: the growth rate of real GDP
per capita, the ratio of total factor productivity (TFP) in 1971 to that in 1990 and the
RRI. The system is estimated using Seemingly Unrelated Regression (SUR) techniques
for 55 developed and developing countries. They once again split their sample in two
depending on the initial level of GDP per capita. It is found that increases in TFP have
a positive and significant impact on GDP growth. The IPR index is found to have an
insignificant impact on TFP for the full sample of countries, but a positive and signif-
icant impact for the richest subsample. The results suggest that in the most developed
countries stronger IPR protection impacts upon growth by enhancing TFP.
INTELLECTUAL PROPERTY RIGHTS AND ECONOMIC GROWTH 13
16
Rodriguez and Rodrik (2000) provide a critique of the most popular measures of openness.
Recently, Falvey, Foster and Greenaway (2004a) extend and update the single equation
analysis by employing the recently developed threshold techniques of Hansen (1996,
1999 and 2000). These allow the positioning and significance of a threshold (i.e. a
structural break)
17
to be identified, as well as the possibility of having more than one
threshold. They use the GPI and a panel of up to 80 countries with data averaged over
four five-year periods between 1975 and 1994. They follow the approach of Thompson
and Rushing, arguing that the impact of IPR protection is likely to depend upon the
level of development of a country as well as the structure of its economy. They use ini-
tial GDP per capita and manufacturing value added (since manufacturing tends to be
the most R&D intensive sector) as alternative indicators of imitative/innovative ability.
Columns 2 and 3 of table 3 reproduce a selection of their results.
18
Column 4 extends
these results by considering thresholds on a commonly used measure of openness,
namely the trade to GDP ratio. This allows us to examine the results of Gould and
Gruben in more detail.
The two measures of imitative/innovative ability yield consistent results, indicating a
three-regime, model (i.e. two structural breaks). For countries in either the low or the
high regimes a positive and significant impact of IPR protection is found. But for coun-
tries in the middle regime no significant relationship between IPR protection and growth
appears to exist. These results suggest that it is the least and most developed coun-
tries in the sample that benefit in terms of growth from stronger IPR protection.
19
It
is argued that the most developed countries benefit because stronger IPR protection
encourages innovation and technology transfer. The least developed have little capacity
to innovate or imitate, and benefit because stronger IPRs encourage technology transfer
through other channels.
20
Those countries in the middle of the distribution are likely
to have some capacity to imitate, and there stronger IPR protection can have two off-
setting effects, encouraging domestic innovation and technology transfer through
increased imports and FDI, on the one hand, but reducing technology transfer by lim-
iting the extent of imitation on the other. In no case, however, do the authors find evi-
dence of stronger IPR protection having a negative impact on growth.
The results for thresholds based on the trade to GDP ratio (column 4) are consistent
with those of Gould and Gruben (1996). There is a positive relationship between the
strength of IPR protection and growth in all regimes, but only in the high regime
14 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
17
The current paper makes extensive use of the threshold techniques of Hansen. Threshold regression models are
particularly useful when we expect a relationship between two variables to be contingent upon the value of a third vari-
able. As such they are particularly useful for the study of IPRs where available theory suggests that the relationship
between IPR protection and a number of variables including growth, innovation, imitation, trade and FDI are all likely
to depend upon third variables. Annex II describes the threshold regression model in more detail.
18
Annex III describes the data used for this analysis along with the sample of countries considered and provides
more information on the specification for the growth model estimated. Following Falvey, Foster and Greenaway (2004a)
we include the inflation rate, as an indicator of macroeconomic stability, in the growth regressions reported in table 3
alongside other standard explanatory variables.
19
The authors note that this is reflected in the levels of IPR protection chosen, with lower average values found
for countries in the middle regime than in the low and high regimes. Maskus and Penubarti (1995) similarly show that
patent protection tends to decline as countries move beyond the poorest stage into the middle-income stage in which
they have greater imitative ability.
20
The available evidence is not clear on the exact channels through which the least developed countries benefit
from stronger IPRs, since there exists little evidence of a positive relationship between trade and IPR protection for the
poorest countries, while FDI flows into the least developed countries tend to be relatively small.
(i.e. for the most open countries) is the relationship statistically significant. Bearing in
mind the caveats over measuring openness, this result provides a further indication that
increased exposure to international trade can enhance the benefits of IPR protection.
Finally, there has been at least one attempt to explore the way in which IPR protec-
tion can influence the factors that directly contribute to the growth of GDP per worker.
Park (1999) uses SUR methods to estimate a system of four equations. The four depend-
ent variables are output growth, the fraction of GDP invested in the capital stock, the
fraction of GDP invested in human capital and the fraction of GDP invested in R&D.
The latter three variables are included as explanatory variables in the output growth
equation, while the GPI is included as an explanatory variable in all four equations.
The model was estimated for 60 countries with data averaged over the period 1960-1990.
The results suggest that, while IPR protection has an insignificant direct impact on out-
put growth, it does have a significant indirect effect through its impact on physical cap-
ital and R&D investment. Splitting the sample in two based on the average level of
INTELLECTUAL PROPERTY RIGHTS AND ECONOMIC GROWTH 15
INITGDP
GDI
POPGROW
SYR15
TRADEPGDP
INFLATION
IPR
TH ? ?
1
IPR
?
1
? TH ? ?
2
IPR
TH > ?
2
OBSERVATIONS
TH1
(percentile)
TH2
(percentile)
p-value
F-Stat
ADJUSTED R
2
-0.10
(-6.54)***
0.04
(6.05)***
1.01
(1.42)
0.008
(1.47)
0.06
(3.54)***
-0.001
(-3.74)***
0.02
(2.05)**
0.003
(0.40)
0.01
(1.83)*
293
6.51
(25
th
)
9.29
(77
th
)
0.01**
7.10***
0.66
-0.11
(-6.18)***
0.05
(5.49)***
1.47
(1.89)*
0.003
(0.45)
0.04
(2.39)**
-0.001
(-3.61)***
0.02
(2.10)**
0.01
(1.59)
0.02
(2.21)**
233
9.83
(15
th
)
21.91
(71
st
)
0.07*
6.17***
0.65
-0.10
(-6.10)***
0.03
6.54)***
0.93
(1.43)
0.007
(1.21)
0.05
(3.05)***
-0.001
(-5.11)***
0.005
(0.60)
0.01
(1.38)
0.02
(2.10)**
293
0.34
(18t
h
)
0.77
(84
th
)
0.04**
6.57***
0.63
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated threshold,
regardless of whether it was the first estimated threshold. All equations include a full set of unreported country
and time dummies. t-values are reported in brackets. All models estimated using robust standard errors. *, **,
*** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the significance
of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with 1,000 replications.
Table 3. IPR protection and economic growth
GROWTH INITGDP MANVAL TRADEGDP
GDP per worker, Park finds that IPR protection affects growth indirectly through these
inputs in the richest half of the sample only, with no significant impact found for the
poorest half.
In summary, the results reviewed in this section provide evidence that strengthening
an IPR regime can be growth-enhancing, depending on country characteristics. IPR
protection seems to lead to higher growth in more open economies, other things
equal. It also seems to lead to higher growth in the richest and poorest countries,
but has no significant effect on growth in middle-income countries, all other things
being equal.
16 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
The main benefit claimed for strong IPR protection is that by allowing innovators to
appropriate a share of the benefits of their creative activities, R&D is encouraged which
leads to innovation and higher long-run growth. In this section we examine the cross-
country evidence linking IPRs to domestic innovation. The results are summarized in the
upper part of table 4, which summarizes the literature linking IPR protection to innova-
tion, technology diffusion and growth. At the aggregate level Kanwar and Evenson (2003)
examine directly whether stronger IPR protection (measured by the GPI) results in
increased R&D expenditure.
21
They estimate a panel model for up to 32 countries for the
period 1981-1995, and find that stronger IPR protection has a positive and significant
impact on the share of R&D investment in GDP. Given that it has been shown elsewhere
that R&D spending impacts positively upon TFP and output growth (see, for example, Coe
and Helpman, 1995), these results provide indirect evidence of the importance of IPR
protection in growth and are consistent with the results of Park (1999) considered above.
R&D expenditure is a measure of the input into innovative activity. Patent applications
are a measure of the output, and patents are recognized as the most important form
in which industrial innovation is protected. Such protection is more important for some
industries than others, however. The evidence suggests that firms in most industries in
advanced countries do not find patents to be a particularly effective means of appro-
priating the returns to R&D (see Cohen (1995) for a review). Mansfield (1986) for
example showed that although 65 per cent of pharmaceutical and 30 per cent of chem-
ical inventions would not have taken place without patent protection, in most indus-
tries patent protection was unimportant.
22
One reason put forward for its limited role
is that patent protection often does not affect the rate of entry significantly (Mansfield
et al., 1981). Mazzoleni and Nelson (1998) pick up this latter point and argue that
much of this survey evidence showing IPRs to be relatively unimportant can be faulted
for focusing almost exclusively on large, established firms operating within particular
industries. The studies tend to ignore the role of stronger IPRs on new entrants, small
17
Intellectual property rights
and innovation 3.
21
Note the potential for reverse causality in the relationship between R&D spending and IPR protection. Not only
may IPR protection stimulate R&D and innovative activities, but we may also expect that the demand for IPR protec-
tion is stronger in countries that are more innovative.
22
Mansfield et al. (1981) found that about a half of innovations considered in their study would not have been
introduced without patent protection. Once again the bulk of these were in the drug industry, with less than a quarter
of non-drug innovations being affected by patent protection. Other studies reaching similar conclusions include Scherer
et al. (1959), Taylor and Silberston (1973), Arundel and van de Paal (1995) and Cohen et al. (1997).
firms, organizations outside of any particular industry (e.g. universities) and for the
development of new industries (e.g. biotechnology). Cohen and Levinthal (1989) argue
further that in some cases, overly strong IPR protection has been found to restrict the
innovation process, with researchers finding it difficult to further develop a technology
without infringing the rights of existing patent holders. Little evidence on the impor-
tance of IPR protection for innovation in developing countries is available, though Primo
Braga et al. (2000) note that the criteria of novelty in patent grants is unlikely to be
apt for promoting the small, incremental and adaptive innovations that are typical in
developing countries.
18 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Table 4. Summary of effects of stronger intellectual property rights on
innovation, technology diffusion and growth
Domestic intellectual property rights Technology spillovers
Domestic Innovation
Domestic R&D
Domestic patenting
Channels of inter-
national technology
diffusion
Foreign direct
investment
Technology licensing
Foreign patenting
Trade
Domestic growth
Stronger IPRs increase domestic R&D spending
Evidence mixed in general. But threshold analysis
shows stronger IPRs (a) increase domestic
patenting in countries with innovative/imitative
capacity; (b) reduce domestic patenting in more
open economies
Evidence mixed in general, but strong IPRs
seem to be important for some TNC activities
(production and R&D) and in industries where
products can be imitated (chemicals, pharma-
ceuticals). Some evidence that TNCs more will-
ing to transfer technology to countries with
stronger IPRs
Limited evidence, but what evidence there
is suggests stronger IPRs increase licensing,
particularly in countries with innovative/
imitative capacity
Positive effect stronger in more open
economies and in countries with higher
innovative/imitative capacity
Impact of IPRs on trade flows depends upon
market size and the imitative ability of the
importing country. Positive effect of IPRs on
trade in manufacturing goods (except goods
difficult to imitate) in countries that have
imitative capacity. Possible negative effects in
small markets with weak imitative ability
Evidence that stronger IPRs increase growth in
developed countries and developing countries
with low innovative/imitative capacity. No effect
evident for developing countries with high
innovative/imitative capacity
Evidence that higher R&D spending
facilitates technology transfer and
raises growth
Evidence relating domestic patenting
to growth is mixed. In developing
countries there is little evidence of
a positive impact of domestic
patenting on growth
Evidence generally mixed on
whether inward FDI provides tech-
nology spillovers, although some
evidence of spillovers to host coun-
try firms with absorptive capacity.
Some evidence of spillovers from
outward FDI
Little evidence
Evidence of positive (negative) spill-
overs from foreign patenting for
developing countries with strong
(weak) IPRs, high (low) innovative/
imitative capacity and large, open
(small, closed) markets
Trade has been found to promote
technology spillovers both between
developed countries and from
developed to developing countries
There are a small number of econometric studies using data on domestic patent appli-
cations to examine the role of IPRs in promoting innovation. Many such studies sug-
gest that stronger IPR protection results in little or no measured increase in domestic
innovation, at least as measured by patent applications (Lerner, 2001, 2002; Branstetter
et al., 2004).
23
A recent paper by Chen and Puttitanun (2005) however shows that stronger IPR pro-
tection has a positive impact upon innovation in developing countries. Chen and
Puttitanun develop a model that has both an import and a local sector, with a local
and a foreign firm in the import sector and two local firms in the local sector. In the
import sector the foreign firm has a patented technology, while one of the local firms
has the ability to develop patentable technology in the local sector. Stronger IPR pro-
tection by reducing the ability to imitate can lead to lower competition and higher
prices in the import sector, but may encourage innovation in the local sector. The the-
oretical model suggests that domestic innovation in a country increases in its protec-
tion of IPRs and its level of development, and that a country’s level of IPR protection
may at first increase and then decrease in its level of development. The model is tested
empirically on a sample of 64 developing countries using panel data over the period
1975-2000. The empirical model is a system of two equations, one for IPRs and one
for innovation. IPRs are measured using the GPI index, while innovation is measured
using patent applications filed at the United States patent office by developing coun-
try residents. Empirical results confirm the U-shaped relationship between IPRs and a
country’s level of development and that stronger IPR protection encourages innovation.
Including interaction terms between IPRs and the level of development suggests that
IPR protection has a stronger impact on innovation in countries with higher levels of
development. In a related paper, Schneider (2005) examines the importance of IPR pro-
tection, high-tech imports and FDI on innovation and on per capita GDP growth. Once
again innovation is measured using the number of United States patent applications
made by residents of a given country. The model is estimated on panel data for 47 devel-
oped and developing countries over the period 1970-1990. The results again suggest
that innovation responds positively to IPR protection. Splitting the sample into devel-
oped and developing countries, Schneider finds that while IPRs have a positive impact
on innovation in developed countries, the impact in developing countries is negative,
and often significant.
While both R&D expenditure and patent applications have advantages and disadvan-
tages as measures of innovative activity, patent application data has the advantages of
being relatively reliable, available over a relatively long time period and for a relatively
large number of developing countries. To examine whether the strength of IPR protec-
tion encourages domestic innovation we regress the ratio of the number of domestic
patent applications to the labour force (DOMPAT) on the GPI measure of IPR protec-
tion (IPR) and control variables.
24
The latter include initial GDP per capita (INITGDP)
INTELLECTUAL PROPERTY RIGHTS AND INNOVATION 19
23
Whilst finding that domestic innovation does not respond significantly to IPR protection, both Lerner (2001,
2002) and Branstetter et al. (2004) find that foreign patent applications respond to IPR reforms suggesting that one
benefit of increased IPR protection is through technology transfer. This channel is discussed in section 4 below.
24
Once again information on data sources and construction is provided in annex III.
and the average years of secondary schooling in the population over 15 (SYR15) as
measures of the level of development and to account for the ability of a country to
innovate and to absorb foreign technology, respectively, and the ratio of total trade to
GDP (TRADE) to capture the impact of openness to trade on domestic innovation. The
model is estimated for up to 47 countries with data averaged over four five-year peri-
ods between 1975 and 1994.
25
To give some indication of the relationship between domestic patent applications and
both a country’s level of development and its protection of intellectual property,
figures 1 and 2 plot the domestic patenting variable against initial GDP per capita and
the GPI respectively. While a strong positive relationship between initial GDP and
patenting is clearly observed, any relationship between IPR protection and patenting is
not easily discernable. Table 5 reports the results from the regression analysis for the
full sample of 47 countries.
26
The second column reports results when the IPR variable
is included linearly. The results suggest that domestic patenting is higher in countries
with higher levels of initial GDP per capita (as is consistent with figure 1), but that
higher levels of secondary education or openness to trade have no significant impact
on the level of domestic patenting. Most importantly, we do find that domestic patent-
ing responds positively to stronger IPR protection.
The importance of domestic innovation is likely to vary with a country’s level of devel-
opment and its factor endowments. We may expect IPRs to impact on innovation dif-
ferently in countries with significant innovative capacity as opposed to those with few
resources available for domestic innovation. Similarly, as discussed above, we may
expect the importance of IPR protection in stimulating innovation to be dependent
upon the level of openness of the country. To explore the possibility of non-linearities
in the relationship between IPR protection and domestic innovation, we employ the
threshold regression techniques discussed in annex II allowing for thresholds on the
level of development (as measured by INITGDP), education (as measured by SYR15)
and openness (as measured by TRADE). These results are reported in the final three
columns of table 5.
In column 3 a single threshold on IPR is found depending on the value of initial GDP
per capita, indicating that there are two regimes with respect to a country’s level of
development. At low levels of development (i.e. below the threshold) increased IPR pro-
tection has no significant impact on the level of domestic patenting. But above the
threshold an increase in IPR protection does have a statistically significant positive
impact on the level of domestic patenting. Column 4 reports the results for thresholds
20 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
25
The estimated regression model also includes a full set of country and time dummies to account for unobserv-
able heterogeneity over time and across countries. Estimating the linear model using either random effects or pooled
data does not affect the coefficient on the IPR variable a great deal.
26
In a number of specifications we also include the square of the IPR variable to account for any non linearities
in the relationship between IPR protection and domestic patenting. Measures of “economic freedom” and the interac-
tion between the IPR index and a dummy for France, Germany, Japan and the United States were also considered, the
latter variable because R&D is highly concentrated within advanced countries. Eaton and Kortum (1999) note that in
the late 1980s, 80 per cent of OECD research scientists and engineers were employed in these four economies and the
United Kingdom (which is not in our sample). These variables tended to be insignificant, however, and are not reported
in the final tables.
based on SYR15, which are consistent with those based on initial GDP per capita. A
single threshold on the IPR variable is found with an insignificant coefficient found in
the low regime and a positive and significant coefficient found in the high regime. The
results for the first two threshold variables support the view that stronger IPR protec-
tion can encourage domestic innovation in countries that have significant domestic
capacity for innovation, as measured either by initial GDP per capita or the stock of
human capital, but that it has little impact on innovation in countries with few such
resources.
Column 5 reveals that there are three regimes for the TRADE variable. While the esti-
mated coefficients are positive in all cases, they decline in magnitude as we move up
the regimes. Only for countries whose openness to trade lies below the higher thresh-
old will stronger IPR protection generate increased domestic patenting. This sense of
a negative relationship between openness and domestic patenting is reinforced when
we observe that the estimated coefficient on the variable TRADE is negative when
significant.
27
INTELLECTUAL PROPERTY RIGHTS AND INNOVATION 21
27
The evidence considered in section 4.4 below indicates that what occurs is a substitution of domestic by foreign
patenting in more open economies.
INITGDP
SYR15
TRADE
IPR
IPR
TH ? ?
1
IPR
TH > ?
1
IPR
?
1
? TH ? ?
2
IPR
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
0.21
(2.43)**
0.02
(0.67)
-0.04
(-0.99)
0.08
(1.77)*
188
199.0***
0.97
0.12
(2.67)***
0.003
(0.07)
-0.05
(-1.75)*
-0.05
(-1.25)
0.10
(2.56)**
8.59
(53
rd
)
0.00***
188
154.3***
0.98
0.15
(2.04)**
-0.01
(-0.32)
-0.04
(-0.91)
0.04
(0.91)
0.10
(2.24)**
2.68
(76
th
)
0.00***
188
149.4***
0.98
0.20
(2.76)***
0.03
(0.85)
0.006
(0.21)
0.14
(2.94)***
0.09
(1.93)*
0.05
(1.12)
0.24
(11
th
)
0.67
(74
th
)
0.00***
188
7037.2***
0.98
Table 5. Domestic patenting decision
DOMPAT LINEAR INITGDP SYR15 TRADE
22 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
-12
-10
-8
-6
-4
-2
0
2
2 4 6 8 10 12
Log initial GDP per capita
L
o
g
d
o
m
e
s
t
i
c
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
Figure 1. Domestic patent applications per 1,000 of workforce
against initial GDP per capita
-12
-10
-8
-6
-4
-2
0
2
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
IPR index
L
o
g
d
o
m
e
s
t
i
c
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
Figure 2. Domestic patent applications per 1,000 of workforce
against the Ginarte and Park IPR index
The importance of technology for raising productivity and living standards has long
been recognized. Innovation and technological progress can raise productivity through
the introduction of new goods (capital and intermediate inputs in particular), the
improvement of existing goods and by reducing the costs of production. More broadly,
technological progress encompasses changes in production processes, organizational
structures, management techniques and the like that raise productivity. Resources for
such innovations tend to be highly concentrated in a small number of advanced OECD
countries,
28
which have the requisite skills and institutions in place to undertake inno-
vation and invest heavily in R&D. As a result firms in these countries register the bulk
of patents. For countries whose firms are not at the technological frontier, the diffu-
sion of technology from the frontier is likely to be an important source of productivity
growth, through both imitation and also through follow-on innovation and adaptation
(Evenson and Westphal, 1995).
As we saw above, the impact of stronger IPR protection on technology diffusion is
ambiguous in theory and will depend on a country’s circumstances. On the one hand,
stronger IPR protection can restrict the diffusion of technology, with patents prevent-
ing others from using proprietary knowledge and the increased market power of IPR
holders potentially reducing the dissemination of knowledge due to lower output and
higher prices. On the other hand, IPRs can play a positive role in knowledge diffusion,
since the information available in patent claims is available to other potential inven-
tors. Moreover, strong IPR protection may encourage technology transfer through
increased trade, FDI, technology licensing and joint ventures. Despite this theoretical
ambiguity, the diffusion of technology from countries at the technological frontier is
considered to be one of the main potential benefits of the TRIPS Agreement, particu-
larly for developing countries that tend not to innovate significantly.
International technology transfer or diffusion refers to the process by which a firm in
one country gains access to and employs technology developed in another country. Some
transfers occur between willing partners in voluntary transactions, but much comes
through non-market transactions or spillovers. Technology flows across borders via a
23
Intellectual property rights and
international technology diffusion 4.
28
The share of R&D financed by enterprises in advanced countries was 98 per cent in the 1980s and 94 per cent
in the 1990s (UNIDO, 2002).
number of formal and informal channels, making measurement difficult. One such chan-
nel is trade in goods and services, with imports of goods having the potential to transfer
knowledge through reverse engineering, but also through the cross-border learning of
production methods, product design, organizational structure and market conditions.
29
Trade in capital and intermediate goods in particular is likely to be an important source
of technology diffusion in this way. A second channel is FDI, inward FDI in particu-
lar, with TNCs expected to deploy advanced technology to their subsidiaries that may
be diffused to host-country firms. Licensing, which involves the purchase of production
and distribution rights for a product and the knowledge required to make effective use
of these rights, is a further channel for technology diffusion. Joint ventures combine
many of the properties of FDI and licensing and hence will also involve technology
transfer. The movement of skilled workers across borders can also act as a channel for
international technology diffusion. These formal channels of technology diffusion are
likely to be interdependent, with firms making their decision on which channel(s) to
serve foreign markets based on the expected return to their technological assets.
Informal channels of technology diffusion include imitation; the movement of person-
nel from one firm to another taking with them specific knowledge of their original firm’s
technologies; data in patent applications and the temporary migration of people, such
as scientists and students to universities and research institutes in advanced countries.
What is specific to the informal channels, and is part of their attraction, is that there
is no formal compensation to the original owner of the technology transferred. But
there will still be costs. Imitation for example requires resources that may be drawn
from local innovation.
30
The formal and informal channels are also related. It is likely
that, in order to be able to reverse engineer and imitate advanced technology, some
level of trade or temporary migration is required for example. The interdependence
among formal channels and between formal and informal channels raises difficult issues
for empirical studies.
The fact that technology or knowledge is typically intangible means that its measure-
ment is not straightforward. Several measures have been employed in the empirical lit-
erature (see Keller, 2004), each with their own strengths and weaknesses. R&D
expenditure data are often used, since R&D expenditures are the main input towards
innovative activity. But such a measure fails to take into account that innovation is
risky, so that a significant portion of R&D projects are unsuccessful, and there is the
possibility of discovering new technology by chance. Patent counts, which are a meas-
ure of the output of innovative activity, have also been used. The weaknesses of patent
count data include the substantial variation in the value of patents, with the majority
worth very little, as well as the fact that many innovations are not patented. On a
broader scale, measures of the changes in a country’s or firm’s TFP can be used as an
24 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
29
Exports are also likely to be an important channel for technology diffusion. Grossman and Helpman (1991), for
example, argue that sellers gain from the knowledge base of their buyers, especially where buyers suggest ways to
improve the product or the process of manufacture. Firm-based evidence relating productivity to exporting supports this
hypothesis (e.g. Bernard and Jensen, 1999). At the aggregate level Funk (2001) and Falvey, Foster and Greenaway
(2004b) provide evidence suggesting that exports may act as a channel for technology spillovers.
30
Mansfield et al. (1981) show that the costs of imitation, while lower than the cost of innovation, are significant.
Patenting innovations was found to raise the costs of imitation further, though even for products that were patented,
60 per cent were imitated within four years.
indicator of technology change. This indicator is constructed by subtracting the contri-
bution of changes in major factor (and material) inputs to changes in output with the
remainder being assigned to changes in technology. Thus TFP is a derived measure of
technology.
31
Since technology itself is difficult to measure, we also tend to find that measures of tech-
nology diffusion are imperfect. Several approaches have been employed.
32
One approach,
following the seminal contribution of Coe and Helpman (1995), has been to examine
whether R&D conducted in a country impacts upon TFP in other countries. The start-
ing point for this kind of analysis is to construct a stock of knowledge for each coun-
try using past R&D expenditures and then to weight these stocks by some variable
indicating the access that other countries have to this knowledge. Weights used in the
literature include imports (Coe and Helpman, 1995; Coe, Helpman and Hoffmaister,
1997), capital goods imports (Xu and Wang, 1999), inward and outward FDI (Xu and
Wang, 2000) and exports (Funk, 2001; Falvey, Foster and Greenaway, 2004b).
A second approach has been to use patent count data. In addition to the decision to
patent results in the publishing of the technical information relevant to the patent, as
discussed above, Eaton and Kortum (1996) also argue that the decision of where to
patent affords further information regarding where innovators see their ideas being used.
Since patent laws are national in scope and since obtaining patent protection is costly,
inventions are typically only patented in a small number of countries. Eaton and Kortum
argue that this choice of where to patent is determined by market size and by where
the invention is likely to be useful. They use a cross-section of 19 OECD countries to
explain the number of patents taken out in one country (destination) by inventors in
another country (source). The results suggest that technology diffusion is larger, the
smaller the distance between two countries, the larger the ability of the destination to
absorb technology (as measured by the level of human capital), and the higher the rel-
ative productivity of the destination. A higher ratio of imports to GDP is not always
found to facilitate the diffusion of knowledge.
A third approach that has proved popular in the growth literature more broadly, has
been to follow Nelson and Phelps (1966) who argue that the rate of technology absorp-
tion depends upon the “technology gap”, usually measured by the ratio of GDP per
capita of a country to that of the technological leader (usually the United States).
Benhabib and Spiegel (1994), for example, regress the growth rate of GDP on standard
variables including the interaction between the technology gap and a measure of human
capital. They find a positive and significant coefficient on this interaction term and con-
clude that human capital speeds the adoption of foreign technology.
But most studies considering the impact of IPR protection on technology diffusion tend
to take one of the channels through which technology might be diffused and to exam-
ine whether IPR protection impacts upon the volume of activity in this channel. If it does,
then it is inferred that IPR protection affects technology flows. This is the literature
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 25
31
See Keller (2004) for a discussion of the issues involved in the construction of TFP
32
See Keller (2004) for a review of the evidence on international technology diffusion.
reviewed below. We examine research linking IPR protection to trade, FDI, licensing
and patenting (section 4). A final subsection discusses other related literature. The gen-
eral conclusions from these studies are summarized in the lower part of table 4, while
table 6 (annex IV) summarizes the findings of several studies relating IPRs to the var-
ious channels of technology diffusion.
Intellectual property rights and international trade
Coe, Helpman and Hoffmaister (1997) identify four channels through which knowledge
produced in one country and transmitted through imports can affect productivity and
growth in others. Firstly, through the importation of intermediate and capital goods,
which may enhance the productivity of domestic resources. Secondly, through the cross-
border learning of production methods, product design, organizational structures and
market conditions that can result in a more efficient allocation of domestic resources.
Thirdly, through the imitation of new products. Finally, through the development of
new technologies or the imitation of foreign technology.
Coe and Helpman (1995) examine the impact of international R&D spillovers and the
importance of imports in facilitating these spillovers for 22 OECD countries. They con-
struct a stock of R&D for each country as described above. A measure of the stock of
foreign knowledge that is available to each destination country is then constructed by
weighting the R&D stocks of its source (exporting) trade partners by the bilateral import
shares.
33
TFP is then regressed on both the foreign and domestic stocks of knowledge.
34
The results suggest that both domestic and foreign knowledge stocks are important
sources of productivity growth, although the former has a much larger impact in the
larger countries. Smaller countries, it is argued, tend to be more open and benefit to
a greater extent from foreign knowledge spillovers.
35
This type of analysis has been
extended to consider North-South foreign knowledge spillovers by Coe, Helpman and
Hoffmaister (1997) who find evidence that spillovers from the advanced North to the
developing South are also an important source of productivity growth, with imports
again being an important channel for such diffusion.
Simply providing access to foreign technology through imports may not be sufficient in
itself for technology diffusion. Other conditions may be necessary before a country is
able to absorb and implement such technology in its domestic production. Using the
Coe and Helpman framework, Crespo-Cuaresma, Foster and Scharler (2004) find that
the benefits of foreign R&D spillovers are stronger in OECD countries that conduct sig-
nificant R&D and that have relatively high levels of absorptive capacity as measured
by education variables.
26 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
33
This literature is not without controversy, particularly over the appropriate weighting of the spillover variable and
whether the volume or indeed the composition of imports is important in facilitating spillovers (Keller, 2004). See
Falvey, Foster and Greenaway (2002) for a discussion of the interpretation and testing of alternative weighting schemes.
34
In their preferred specification the stock of foreign knowledge is interacted with the overall import share to take
account of the level as well as the distribution of imports.
35
This outcome is not replicated when patent count data is employed, however. Eaton and Kortum (1996) find only
limited evidence of a role for imports in facilitating technology diffusion among OECD countries as mentioned above.
While the available evidence suggests that trade is an important channel for techno-
logy diffusion, the question that remains is to what extent are trade flows influenced
by IPRs. Maskus (2000a) discusses the problems faced in trying to identify the effects
of IPR protection on international trade. Firstly, the effects of patent strength are partly
embedded in the prices at which goods are traded, and these effects cannot be sepa-
rated from other components of pricing behaviour. Secondly, as noted above, the deci-
sion to export may be but one of the options available. The effects of stronger IPRs
on exports will also depend on whether FDI and licensing are viable alternatives and
how stronger IPRs affect the choice among them (Ferrantino, 1993). Thirdly, IPR pro-
tection creates market power in the distribution and sale of new goods and technolo-
gies, implying that market structure also matters.
Bearing these problems in mind, there are two direct impacts of IPR protection on
international trade that are likely to be of particular importance. On the one hand,
firms should be encouraged to export their patented goods into foreign markets with
strong IPR protection, since such protection reduces the risk of piracy that can dimin-
ish the profitability of the firm’s activity in that country. In this respect, stronger IPR
protection would be expected to raise imports into a country. On the other hand,
because it reduces the ability of domestic firms to imitate, stronger IPR protection
increases the market power of the importing firm, which may encourage this firm to
act in a monopolistic manner by lowering sales. Maskus and Penubarti (1995) thus
argue that there is a “trade-off between the enhanced market power for the firm cre-
ated by stronger patents and the larger effective market size generated by the reduced
abilities of local firms to imitate the product.” (p. 229). They argue that of the two
countervailing effects, the market expansion effect is likely to dominate in larger coun-
tries with strong imitative abilities, while the market power effect would dominate in
smaller countries with weak imitative abilities. As Maskus (2000a) notes however, the
market power and market size effects may be moderated by other circumstances. Weak
IPR protection need not remove an innovative firm’s market power since imitation in
the local market is likely to be costly and take time. Similarly strong IPR protection
need not create a monopoly because legitimate substitutes are likely to be available in
the domestic economy. Taylor (1993) argues that a third factor may be important for
larger markets with significant imitative abilities at least, with stronger IPR protection
encouraging exports by reducing the need for firms to try and deter local imitation,
thus reducing costs for exporting firms.
The above discussion suggests that the impact of IPR protection on trade is likely to
depend importantly upon the level of development and upon the imitative ability of
the importing country. In countries with little capacity to imitate advanced goods,
stronger IPR protection may lead to market power effects, whereas in countries with
the ability to imitate advanced goods strong IPR protection may be important for
exporters in advanced countries, with such protection reducing the risk of imitation
and encouraging trade.
Given the theoretical ambiguity of the IPR-Trade relationship, a number of studies have
examined the question empirically. Maskus and Penubarti (1995) use an augmented
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 27
version of the Helpman-Krugman model of monopolistic competition to estimate the
effects of patent protection on 1984 bilateral trade for 28 manufacturing sectors. They
examined trade from 22 OECD countries to a sample of 71 countries at all stages of
development. Their explanatory variables include the importing country’s per capita
gross national product (GNP) and trade restrictions (BMP and tariff revenue as a per-
centage of dutiable imports) alongside the RRI of IPR protection. They also include the
interaction between the IPR index and dummies indicating whether the importing devel-
oping country has a small or a large market to account for market size effects and tech-
nological capacity. Their results indicate that higher levels of IPR protection have a
positive impact on bilateral manufacturing imports into both small and large develop-
ing economies, though the impacts were statistically weaker in the smaller economies.
Whilst suggestive of the importance of technological capacity or imitative ability for the
relationship between IPR protection and trade, their results find little support for a
positive impact of IPR protection in the most patent sensitive industries.
Adding a measure of IPR protection to a standard equation explaining trade flows is a
clear first step to determine if this channel is important for technology diffusion. Fink
and Primo Braga (2005) add the GPI measure of IPR protection to a standard gravity
equation
36
explaining either total non-fuel or high-tech trade flows for a large cross-
section of countries for the year 1989. The rationale for using high-tech trade in addi-
tion to total non-fuel trade is based on the a priori expectation that the effects of IPR
protection are stronger for knowledge-intensive trade. To deal with the econometric
problem of zero trade flows, their model consists of one equation explaining the prob-
ability of zero observations and a second equation explaining the magnitude of posi-
tive trade flows. They find that stronger IPR protection has a small but significantly
positive impact on the probability that countries trade with each other and a signifi-
cantly positive impact on bilateral trade flows for both total non-fuel imports and
exports. For high-tech trade however, stronger IPR protection is found to have a sig-
nificantly negative impact on the probability that two countries trade with one another
and a negative and insignificant impact on bilateral trade flows. This latter result is
contrary to what one might have expected, and Fink and Primo Braga suggest several
possible explanations, based on the considerations noted above. Firstly, strong market
power effects, in the case of high-tech goods, may offset positive market expansion
effects caused by stronger IPR protection. Secondly, stronger IPR regimes may cause
high-tech firms to serve foreign markets by FDI, partly substituting for trade. Thirdly,
the high-tech aggregate may include many goods that are not sensitive to the desti-
nation country’s patent regime, as other means of appropriating the benefits of the
investment in R&D may be more important. Fourthly, they were unable to include
tariff and non-tariff barriers, which may be important determinants of trade flows for
some industries.
In a similar gravity equation exercise, Smith (1999) examines the impact of IPR protec-
tion on exports from the 50 United States plus the District of Columbia to 96 countries.
28 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
36
Including the GDP and populations of both trade partners, distance between trade partners and dummies for
common border, common language and various Preferential Trading Arrangements (PTAs) as standard explanatory
variables.
Smith splits her sample of importing countries into four groups depending on their imi-
tative ability defined according to their strength of patent rights
37
and R&D spending
as a percentage of GNP.
38
Dummies for these four groups were then interacted with
the IPR measure. She finds a negative relationship between IPR protection and exports
from the United States to those countries with the weakest threat of imitation. For
those countries with the strongest threat of imitation however a positive relationship
between IPR protection and trade exists. Overall, she concludes that United States
exports depend upon IPR protection in importing countries, but that the direction of
the relationship depends on the threat of imitation. Weak IPRs are a barrier to United
States exports, but only for countries that pose a strong threat of imitation.
The results of these studies suggest that stronger IPR protection can lead to signifi-
cantly higher trade flows, though not necessarily in goods and industries considered
high-tech or patent sensitive. Fink and Maskus (2005) draw the following conclusions
from this empirical literature. Firstly, they argue that transnational trading firms do
not base their export decisions on IPRs in the poorest countries, where the local threats
of imitation and reverse engineering are weakest. Secondly, patent rights matter impor-
tantly in middle-income, large developing countries, where such imitation is more likely.
Stronger IPR protection in these countries encourages foreign firms to expand their
trade volumes by reducing the threat of imitation. Thirdly, the products of many high-
tech industries are difficult to imitate, so trade flows in these industries are in fact less
sensitive to IPR protection than in other medium-technology industries.
39
Fourthly, high-
tech firms may decide to serve foreign markets through FDI and licensing, so that
exports in such industries may be little affected by variations in the degree of IPR pro-
tection. Moreover, while stronger IPR protection may increase imports of high-tech
goods, it also increases imports of low-tech consumer goods and may lead to the decline
of indigenous industries relying on imitation.
Intellectual property rights and FDI
Foreign direct investment occurs when a TNC has a sufficient cost or technological
advantage over firms in the host country to offset the higher costs of operating inter-
nationally.
40
FDI can be vertical, in which case the subsidiary produces inputs or under-
takes assembly from components that are likely to be exported within the TNC, or
horizontal, in which case the subsidiary produces products and services similar to those
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 29
37
Both the Rapp and Rozek and the Ginarte and Park indices are used with similar outcomes.
38
The four groups are defined (in increasing order of imitative ability) as: (a) Countries with weak imitative abilities
and strong IPR protection: (b) Poor countries that have low technological capabilities and thus a low threat of imitation,
but that also have low levels of IPR protection: (c) Industrial countries that tend to have strong technological capabili-
ties leading to a strong imitation threat, but that at the same time tend to have high IPR protection, which dampens
this threat, and: (d) Industrializing countries that have an effective threat of imitation and that also have low levels of
IPR protection. Maskus (2000a) suggests caution is warranted in interpreting Smith’s results since, “in the developing
economies R&D data are highly suspect and not comparable to those in developed countries” (p. 118). In addition, the
division of countries into four groups is somewhat subjective, with a number of anomalous designations.
39
Cohen (1995) argues that in many high-tech industries, such as aerospace and robotics, the complexity of the
technology makes imitation via reverse engineering extremely difficult, rendering IPR protection unnecessary.
40
See Maskus (2000a) for a detailed discussion of the determinants of FDI, and the role of IPR protection in the
decision to invest abroad.
produced by the parent firm. Increasingly, FDI is undertaken in industries in which
knowledge and technology are important. This is because technology advantages can
be transferred relatively easily across borders, and because technology acts as a public
good within the firm, where it can be employed in several locations without reducing
its availability for others. The decision on where to invest will depend on locational
considerations that include local market size, resource availability, distance from mar-
kets and production costs. Where technology is relevant to the FDI decision an ade-
quate supply of labour with the appropriate skills will also be important.
While FDI can be an important channel for technology diffusion when firm-specific
technology is transferred across borders, one important advantage of FDI relative to
licensing or joint ventures from the TNC’s perspective is that FDI keeps the technol-
ogy internal to the firm. This may limit the diffusion of technology within the host
country. Even so a number of considerations suggest that the presence of TNCs in a
country will provide spillover benefits to domestic firms.
41
Fosfuri, Motta and Ronde
(2001) for example argue that such benefits may appear through labour training and
turnover, while Rodríguez-Clare (1996) suggests that the provision of high quality
intermediate inputs may provide an important externality when they also become
available to domestic firms. Imitation through reverse engineering may also be facil-
itated when the product is produced locally (Das, 1987). Domestic firms may find it
easier to export once foreign TNCs establish distribution networks, a transport infra-
structure and satisfy the relevant regulatory arrangements (Aitken, Hanson and
Harrison, 1997).
Empirical evidence linking FDI to technology diffusion is mixed. In general, there is
little evidence of substantial FDI spillovers for developed or developing countries.
42
Xu
and Wang (2000) extend the approach of Coe and Helpman (1995) for a sample of up
to 21 OECD countries over the period 1971-1990, by adding both inward and outward
FDI flows as weights on foreign knowledge stocks. They find little evidence of spillovers
through inward FDI, but some evidence of spillovers through outward FDI. Globermann,
Kokko and Sjöholm (2000) using data on patent applications by Swedish TNCs and
non-TNCs also find evidence that outward FDI is the more important source of tech-
nology transfer. An alternative approach has been to consider patent citations as an
indicator of the extent of spillovers. Using data on Japanese FDI into the United States,
Branstetter (2001) finds evidence that FDI encourages technology spillovers through
subsidiaries bringing technology from their countries of origin and through TNCs facil-
itating learning of foreign technologies.
Görg and Greenaway (2004) summarize the results from several studies of FDI
spillovers at the firm or industry level. Here firm or industry productivity is regressed
on control variables plus a variable which proxies the presence of foreign firms in the
sector, usually the share of employment in TNCs or the share of total sales by TNCs.
The results are mixed with positive, negative and insignificant impacts of foreign
30 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
41
See Blomstrom and Kokko (1998) and Saggi (2002) for a detailed discussion of the potential benefits of FDI
42
See the review by Görg and Greenaway (2004).
investment all being found. One explanation put forward for the negative impact is
that increased competition in product and factor markets can have a negative impact
on a domestic firm’s productivity (Aitken and Harrison, 1999). Görg and Greenaway
do note that there is some evidence of spillovers for firms that have a certain level
of absorptive capacity. Dougherty (1997), for example, using data on Chinese enter-
prises, finds that technology diffusion is positively related to the presence of domestic
enterprise-level R&D programmes.
Like the other channels, economic theory is unable to draw unambiguous conclusions
on the impact of IPR protection on FDI. TNCs are more likely to undertake FDI rather
than licensing or joint ventures when they have a complex technology and highly dif-
ferentiated products and when the costs of transferring technology through licensing
are high (Davidson and McFetridge, 1984; Teece, 1986; Horstmann and Markusen,
1987). In such circumstances stronger IPRs, by reducing the risks of technology leak-
age through arm’s length trade, may increase the extent of licensing and joint ventures,
thus reducing the need for FDI (Yang and Maskus, 2001a). On the other hand, it has
been argued that weak IPR protection tends to affect the general investment climate
adversely, hence discouraging FDI (Smith, 2001). The importance of IPR protection is
also likely to vary across sectors, being of secondary importance for FDI in low-tech
industries, or where the product or technology is difficult to imitate. For TNCs with
technology that is easy to copy however we would expect more attention to be paid to
the strength of IPR protection. Regardless of these arguments, it is clear that strong
IPR protection is not a necessary condition for firms to invest in particular countries.
If it were, then large countries with high growth rates but weak IPR regimes, such as
Brazil and China, would not have received the large foreign investment inflows that they
have. While flows of FDI into these countries have been large, some evidence indicates
that TNCs are unwilling to locate R&D facilities in such countries and that they may
transfer older technology (see for example Maskus et al., 2005).
The empirical evidence linking IPR protection to inward FDI is mixed. Mansfield (1994)
used survey evidence for 100 major United States firms in six industries, and asked
whether IPR protection was a concern in the location of various facilities. He found
that while IPR protection was of little concern in the location of sales and distribution
outlets, it became more important at higher stages of production. Many firms were con-
cerned about IPR protection when deciding on the location of components manufac-
tures, while the majority were concerned about IPR protection in the location of
complete product manufactures. The greatest concern about IPR protection was in decid-
ing the location of R&D facilities, which were less likely to be located in countries with
weak IPR protection.
43
Across industries IPR protection was found to be very impor-
tant for chemicals and pharmaceuticals, but was of secondary importance in other indus-
tries. This it has been argued is because FDI in many low-tech goods is likely to depend
more on input costs and market opportunities, rather than IPR protection (Maskus,
2000d). IPRs are also likely to be of secondary importance for FDI in products that are
difficult to imitate.
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 31
43
Mansfield (1995) conducted a similar exercise for German and Japanese firms, reaching similar conclusions.
The early empirical research found little evidence of links between IPR protection and
the volume of FDI. Ferrantino (1993) found no statistically significant relationship
between a country’s membership of international patent or copyright conventions (or
the length of its patent grant) and the extent of United States affiliate sales in that
country; Mansfield (1993) found that there was no significant correlation between the
extent of FDI by United States firms in a country and the perceived strength of its
intellectual property protection; and Maskus and Eby-Konan (1994) found an insignif-
icant impact of the RRI on FDI by United States TNCs. More recently, Primo Braga
and Fink (1998) found no evidence of a relationship between either FDI flows or stocks
and the GPI in a gravity model of FDI.
44
But Maskus (2000b) cautions that these stud-
ies should be discounted somewhat, since they were “limited in specification and
plagued by poor measurement” (p. 10).
There is stronger evidence that the strength of IPRs affects the type of activities TNCs
are willing to conduct in host countries. Lee and Mansfield (1996) consider the rela-
tionship between a country’s protection of IPR and the volume and composition of
United States FDI in that country. Using the same survey of 100 United States firms
as Mansfield (1994), they explain the volume of United States FDI into each of 14 coun-
tries using control variables and a variable which measures the average percentage of
firms who considered patent protection in this country to be too weak to either trans-
fer their newest technology to a wholly owned subsidiary there or to invest in a joint
venture with a local partner. The results suggest that FDI is lower in countries with
weaker perceived IPR protection, and that the percentage of FDI that was devoted to
final production and to R&D facilities was significantly lower in countries with per-
ceived weak IPR protection, suggesting that not only the volume but also the quality
of investment is affected by the strength of IPR protection. Kumar (2002) argues that
these results should be treated with caution due to the small sample size, the subjec-
tive measure of IPR protection and the low t-values on coefficients. He goes on how-
ever to discuss evidence by Seyoum (1996) who found that IPR protection is significant
in explaining inward FDI, particularly in emerging markets and Maskus (1998b) who
found that the strength of IPR protection was positively related to affiliate sales and
assets in developing countries.
The question of whether the strength of local IPRs is important for the location of over-
seas R&D activity of TNCs is taken up by Kumar (2001). Economies of scale in inno-
vation, agglomeration economies and the need to protect firm-specific technology all
discourage undertaking R&D abroad. But this may be partly countered by the need to
adapt goods to local market conditions, to take advantage of cheap inputs, and to ben-
efit from trained R&D personnel and localized knowledge. While investment in R&D
overseas is the least globalized of TNCs activities, Kumar shows that it has grown over
time, especially since the 1980s. He then relates the ratio of R&D expenditure to affil-
iate sales by United States and Japanese TNCs to control variables and the GPI in a
sample of up to 77 countries, but finds that R&D spending overseas is not affected by
the strength of IPR protection in the destination country.
32 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
44
The results discussed and reported here are based on those of Fink (2005).
Smarzynska (2004) examines whether stronger IPR protection affects the composition
of FDI flows for 24 transition economies. She estimates a Probit model of the decision
to invest in a country and in the decision to invest in production facilities abroad. She
finds that weak IPR regimes deter FDI in high-tech sectors (i.e. drugs, cosmetics and
health-care products, chemicals, machinery and equipment and electrical equipment)
with some evidence suggesting that FDI is deterred in other industries too. She also
finds evidence to suggest that stronger IPR protection encourages firms to set up local
production facilities rather than focusing solely on distribution networks, with this lat-
ter effect not restricted to high-tech sectors.
Branstetter et al. (2004) use affiliate level data on United States TNCs and aggregate
patent data to test whether legal reforms that strengthen IPRs increase the transfer of
technology by TNCs to reforming countries. The results suggest that technology trans-
fer is higher following IPR reforms, with an increase in technology transfer, as meas-
ured by intra-firm royalty payments from parent firms to affiliates located in IPR
reforming countries. They also distinguish affiliates between those whose parent com-
panies patent in the United States above and below the median. They find that tech-
nology transfer is concentrated among affiliates of parents that use patents extensively
(i.e. those that patent above the median).
In conclusion, while there are many reasons to expect inward FDI to be an important
channel for technology diffusion, the evidence of this to date at both the aggregate and
firm level is mixed. If anything at all, the evidence indicates that FDI is an important
source of diffusion in countries that have reached a certain level of absorptive capac-
ity. To the extent that FDI is an important source of diffusion, IPR protection can affect
the extent of technology diffusion through its impact on FDI flows. Again however, the
evidence linking IPRs to FDI is mixed. Stronger IPR protection has been found to
encourage FDI in certain industries, most notably chemicals and pharmaceuticals. As
with trade, IPRs may play less of a role in high-tech industries due to the difficulty in
imitating these industries’ products, while in low-tech industries other factors may be
more important in determining FDI flows. Stronger IPR protection has also been found
to affect FDI flows at certain production stages. In particular, IPRs can affect FDI flows
in component manufactures, final production and R&D facilities, reflecting the fact that
patenting is more important at some stages of production than at others.
Intellectual property rights and licensing
The relationship between licensing, technology diffusion and the strength of IPRs is
likely to be even more complex than the other channels. Maskus (2004) argues that
the reasons for this relate to the large variety of licensing agreements that may exist.
Licences may exist within a firm, a joint venture or between unaffiliated firms. They
may cover technical assistance, codified knowledge, know-how and IPRs. They may be
offered for a fixed fee, a franchise fee, a royalty schedule or a share of profits, and they
may offer the rights either to produce or distribute the product of the licensee for a
given period of time within a geographical territory.
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 33
Economic theory suggests that firms that own a complex technology, produce highly
differentiated products and face high licensing costs are more likely to undertake FDI
than licensing (Horstmann and Markusen, 1987). FDI is more efficient in these circum-
stances as it allows the costs of technology transfer to be internalized. The reasons that
technology and product licensing should be particularly sensitive to IPR protection are
evident, however. Stronger IPR protection should reduce the costs of licensing by reduc-
ing the licensor’s expense of deterring defection from contracts. They should expand
security over the protection of proprietary information in licensing deals. Stronger IPR
protection gives the licensor greater ability to set and monitor terms under which
licensees operate. A stronger IPR regime is also likely to increase the rents accruing to
the licensor, since it does not need to offer the licensee a higher share of the rents to
deter imitation. At the same time stronger IPR protection provides the licensor with
greater monopoly power, which as discussed above can reduce innovation, which in
turn may lead to reduced licensing.
Little empirical literature on licensing and on the importance of IPRs exists, though
Mansfield (1994) in his study of IPR protection and FDI found that United States TNCs
were less likely to transfer advanced technologies to unaffiliated firms in countries with
weak patent rights. More recently, Yang and Maskus (2001b) estimate the impact of
international variations in IPR protection on the volume of unaffiliated royalties and
licensing fees (a measure of arm’s length technology transfer) paid to United States firms
in a panel of 23 largely developed countries in 1985, 1990 and 1995. Included along-
side the GPI (and its square) are measures of human capital (representing imitative
ability), real GDP, the labour force and a measure of openness. The results often indi-
cate a non-linear relationship between licensing and IPR protection, with stronger IPR
protection reducing licensing at low levels and increasing licensing at higher levels. This
it is argued is because countries with the lowest levels of IPR protection also have the
weakest imitative ability. As such, an increase in IPR strength in these countries, while
reducing the risk of imitation slightly, would also increase the monopoly power of the
licensor. This latter effect is likely to dominate and lead to lower licensing. Most obser-
vations in the sample however are above the turning point, suggesting that IPR protec-
tion has a positive impact upon licensing.
Intellectual property rights and patenting
Given the costs involved in registering patents, if inventors in one country register a
patent in another, it indicates that the technology could usefully be deployed in that
second country. Eaton and Kortum (1996) include the RRI measure of IPR protection
in their regression explaining the decision to patent abroad in OECD countries. They
find that countries providing stronger IPR protection are more attractive destinations
for foreign patents. They further show that productivity growth was significantly related
to foreign patents, and that except for the major innovators (France, Germany, Japan,
United Kingdom and the United States), countries in the sample obtained over 90 per cent
of their productivity growth from foreign patenting.
34 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Recent studies also consider developing countries. Park (1999) conducts a similar exer-
cise to that above relating the decision to patent inventions abroad for 16 source coun-
tries and 40 destination countries for four periods between 1975 and 1990. He regresses
the fraction of inventions in each source country that are patented in each destination
on the market size of the destination (i.e. GDP per capita), the number of scientists
and engineers per 10,000 of the workforce, the cost of filing patents and the GPI. The
results indicate a strong positive impact of IPR protection on the decision to patent,
suggesting that a 1 per cent increase in IPR protection leads to a greater than 1 per cent
increase in the rate of foreign patenting.
Xu and Chiang (2005) consider three channels of technology diffusion. These are: inter-
national trade, following the approach of Coe and Helpman (1995); foreign patenting,
following Eaton and Kortum (1996); and disembodied spillovers, following the approach
of Benhabib and Spiegel (1994). Using data over the period 1980-2000, they split their
sample of 48 countries into developed and developing countries and also into three
groups based on real GDP per capita (low, middle and high-income countries). They
show that, with few exceptions, TFP growth is positively and significantly related to
all three channels of technology diffusion. They go on to examine the determinants of
the patenting decision, finding that the level of IPR protection is positively and signif-
icantly related to foreign patenting across country groupings, suggesting that strength-
ening IPR protection may have a positive indirect upon TFP growth by increasing
foreign patent applications.
We extend this work by first considering the determinants of foreign patenting. The
approach is analogous to that used in section 3 to explain the determinants of domes-
tic patenting. Here the variable we seek to explain is FORPAT, which is the number
of foreign patent applications (also scaled by the domestic labour force) in a country.
The explanatory variables are as before. Figures 3 and 4 plot the relationship between
foreign patent applications and initial GDP per capita and the GPI index of IPRs respec-
tively to give a visual indication of the relationship between patenting by non-residents
and the level of development and of IPR protection in the recipient economy. As with
domestic patenting, a strong positive relationship between foreign patent applications
and initial GDP per capita is observed. The relationship between foreign patenting and
the IPR index also appears positive, though not as strong. The regression results are
presented in table 7. The results from the linear model suggest that the level of for-
eign patenting is higher the more developed the country is (as measured by INITGDP)
and the stronger its IPR regime. The large and highly significant coefficient on the IPR
index is consistent with the results of Park (1999) and is suggestive of the importance
of IPR protection in facilitating technology diffusion through foreign patenting. The
coefficients on the level of schooling and openness to trade are not significant.
As we did with the domestic patenting results we now allow for thresholds on INIT-
GDP, SYR15 and TRADE, and find both interesting similarities and differences with
the domestic patenting results. Considering thresholds on INITGDP and SYR15 we find
evidence of a single and a double threshold respectively. Stronger IPR protection is
found to have a consistently positive and significant impact upon foreign patenting,
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 35
except in the low regime for thresholds based on education, where the coefficient is
positive, but insignificant. The size of the coefficients indicates that the impact of
stronger IPR protection on foreign patenting is greater in countries at higher levels of
development and with higher levels of education. This is consistent with the view that
stronger IPR protection enhances technology diffusion through foreign patenting in
countries with significant levels of imitative ability. Considering the threshold results
on TRADE we find evidence of a single threshold, with the impact of IPR protection
on foreign patenting being positive and significant in both regimes. The coefficient is
36 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Figure 3. Non-resident patent applications per 1,000 of workforce against
initial GDP per capita
-8
-6
-4
-2
0
2
4
2 4 6 8 10 12
Log initial GDP per capita
L
o
g
f
o
r
e
i
g
n
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
Figure 4. Non-resident patent applications per 1,000 of workforce against
the Ginarte and Park IPR index
-8
-6
-4
-2
0
2
4
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
IPR index
L
o
g
f
o
r
e
i
g
n
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
significantly larger for more open countries however. This result is the opposite of that
for domestic patenting, where increased openness lowered the impact of stronger IPRs
on patenting. In combination these results suggest that in relatively open economies
stronger IPRs may encourage foreign patenting at the expense of domestic patenting.
This result is consistent with the theoretical model of Rivera-Batiz and Romer (1991)
discussed in section 2 above.
Having found that IPR protection can influence both domestic and foreign patenting,
we examine whether these measures of innovation and technology diffusion influence
economic growth, by adding them to a standard growth equation similar to that con-
sidered in section 2 for the sample of 47 countries for which we have data on domes-
tic and foreign patenting.
45
Our primary concern is to examine the extent to which any
growth promoting spillovers associated with foreign patenting are dependent on the
characteristics of the recipient economy. Once again we employ threshold analysis for
this purpose. The results are presented in table 8, where the second column presents
the results for the linear model, including in the regression the GPI index of IPRs,
DOMPAT and FORPAT as well as standard control variables. The coefficients on the
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 37
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated thresh-
old, regardless of whether it was the first estimated threshold. All equations include a full set of unreported
country and time dummies. t-values are reported in brackets. All models estimated using robust standard errors.
*, **, *** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the
significance of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with
1,000 replications.
INITGDP
SYR15
TRADE
IPR
IPR
TH ? ?
1
IPR
TH > ?
1
IPR
?
1
? TH ? ?
2
IPR
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
2.04
(1.79)*
-0.04
(-0.06)
0.13
(0.13)
2.46
(2.67)**
188
10.20***
0.74
1.37
(1.49)
-0.12
(-0.16)
-0.40
(-0.99)
1.96
(2.09)**
3.28
(3.66)***
9.26
(59
th
)
0.00***
188
8.66***
0.77
1.33
(1.16)
-1.47
(-2.17)**
0.37
(0.83)
0.56
(0.67)
1.21
(1.68)*
2.44
(2.73)***
2.13
(65
th
)
3.35
(86
th
)
0.01**
188
14.8***
0.78
1.97
(1.91)*
-0.17
(-0.24)
-0.52
(-1.27)
2.09
(2.47)**
2.58
(2.79)***
0.66
(73
rd
)
0.02**
188
10.88***
0.75
Table 7. Foreign patenting decision
FORPAT LINEAR INITGDP SYR15 TRADE
45
Details concerning the construction and the definitions of the variables, country coverage and the model speci-
fication are provided in annex III.
control variables are of the expected sign and are significant for initial GDP per capita
and investment only. The coefficients on the other control variables are not out of line
with the previous literature, however. The coefficient on the IPR index is positive and
significant, as was the case for the broader sample of countries considered by Falvey,
Foster and Greenaway (2004a). The coefficients on the two patenting variables, while
of the expected sign, are statistically insignificant, which may be attributable to their
collinearity with the other variables. Alternatively, it may be that patenting is an impor-
tant source of growth for subsamples of countries only. The threshold analysis exam-
ines this hypothesis for our measure of technology diffusion (FORPAT), which is the
main variable of interest.
The threshold analysis reveals several interesting results. Thresholds based on the level
of IPRs indicate that while foreign patenting has a significant positive impact on growth
at lower levels of IPR protection, there is no significant impact of foreign patenting on
38 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
INITGDP
GDI
POPGROW
SYR15
TRADE
IPR
DOMPAT
FORPAT
FORPAT
TH ? ?
1
FORPAT
TH > ?
1
FORPAT
?
1
? TH ? ?
2
FORPAT
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
-0.10
(-5.01)***
0.05
(5.42)***
0.05
(0.10)
-0.001
(-0.19)
0.01
(1.28)
0.015
(2.33)**
0.008
(0.85)
0.0003
(0.37)
187
29.19***
0.81
-0.12
(-6.10)***
0.06
(6.09)***
0.26
(0.58)
0.004
(1.0)
0.01
(1.45)
0.02
(3.26)***
0.009
(0.89)
0.003
(2.59)**
-0.001
(-1.02)
3.35
(69
th
)
0.01**
187
35.69***
0.83
-0.11
(-6.05)***
0.05
(5.89)***
0.34
(0.71)
0.006
(1.34)
0.01
(1.45)
0.02
(3.24)***
0.007
(0.69)
-0.0003
(-0.23)
0.003
(4.88)***
-0.0006
(-0.92)
9.29
(61
st
)
9.96
(81
st
)
0.07*
187
30.97***
0.83
-0.11
(-5.67)***
0.05
(5.74)***
0.21
(0.47)
0.006
(1.37)
0.01
(1.18)
0.01
(2.41)**
0.004
(0.50)
-0.001
(-1.08)
0.002
(1.67)*
0.79
(89
th
)
0.02**
187
30.11***
0.82
-0.11
(-6.37)***
0.05
(6.04)***
0.29
(0.64)
0.006
(1.20)
0.01
(1.41)
0.02
(3.35)***
0.006
(0.74)
-0.005
(-1.76)*
0.004
(5.54)***
-0.001
(-1.26)
24.51
(33
rd
)
25.41
(56
th
)
0.02**
187
41.85***
0.84
Table 8. Foreign patenting and growth: full sample
FORPAT LINEAR IPR INITGDP TRADE GDP
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated thresh-
old, regardless of whether it was the first estimated threshold. All equations include a full set of unreported
country and time dummies. t-values are reported in brackets. All models estimated using robust standard errors.
*, **, *** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the
significance of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with
1,000 replications.
growth in countries with high levels of IPRs. This result suggests that overly strong IPR
protection can limit the spread of knowledge through foreign patenting. The results for
thresholds based on initial GDP per capita indicate that only countries in the middle
regime benefit from diffusion through foreign patenting. Countries with little imitative
ability and countries with significant innovative capacity do not appear to benefit from
diffusion through patenting. Countries that are more open to international trade are
found to benefit to a greater extent in terms of growth from foreign patenting than may
be expected. Finally, we also allow for thresholds based on a measure of country mar-
ket size (i.e. the level of GDP). The results suggest that for small countries increased
foreign patenting has a negative effect on growth, a result suggestive of the importance
of market power effects in small markets. In the middle regime increased foreign patent-
ing has a positive and significant effect on growth, suggesting that market power effects
are diminished in larger countries, while for the largest countries there is no statisti-
cally significant effect of foreign patenting on growth.
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 39
INITGDP
GDI
POPGROW
SYR15
TRADE
IPR
DOMPAT
FORPAT
FORPAT
TH ? ?
1
FORPAT
TH > ?
1
FORPAT
?
1
? TH ? ?
2
FORPAT
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
-0.12
(-6.13)***
0.06
(5.37)***
1.15
(1.62)
-0.007
(-0.80)
0.008
(1.19)
0.03
(2.06)**
0.01
(0.54)
-0.0002
(-0.05)
107
23.96***
0.83
-0.12
(-7.36)***
0.05
(5.31)***
2.40
(3.99)***
-0.001
(-0.06)
-0.008
(-1.63)
0.015
(1.27)
-0.11
(-3.37)***
-0.08
(-2.53)**
-0.001
(-0.15)
0.10
(4.17)***
2.49
(63
rd
)
3.33
(83
rd
)
0.03**
107
33.8***
0.86
-0.12
(-7.01)***
0.05
(5.39)***
1.49
(2.09)**
0.003
(0.27)
0.005
(0.73)
0.03
(2.27)**
-0.007
(-0.26)
-0.02
(-2.82)***
0.01
(1.64)*
6.29
(26
th
)
0.02**
107
19.86***
0.84
-0.12
(-6.92)***
0.05
(4.98)***
1.37
(1.83)*
-0.0004
(-0.04)
0.001
(0.13)
0.03
(2.47)**
0.05
(1.64)*
-0.09
(-4.49)***
-0.02
(-2.90)***
0.01
(1.70)*
0.51
(54
th
)
0.67
(80
th
)
0.02**
107
9.29***
0.84
-0.13
(-7.20)***
0.06
(5.46)***
1.29
(1.79)*
-0.002
(-0.17)
0.006
(0.92)
0.03
(2.44)**
-0.008
(-0.31)
-0.02
(-2.77)***
0.004
(1.05)
0.014
(3.62)***
22.93
(21
st
)
24.56
(56
th
)
0.06*
107
29.20***
0.85
Table 9. Foreign patenting and growth: developing countries
FORPAT LINEAR IPR INITGDP TRADE GDP
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated thresh-
old, regardless of whether it was the first estimated threshold. All equations include a full set of unreported
country and time dummies. t-values are reported in brackets. All models estimated using robust standard errors.
*, **, *** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the
significance of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with
1,000 replications.
The analysis above includes both developed and developing countries in a single regres-
sion equation. One important debate concerning the impact of TRIPS is whether
stronger IPR protection is likely to affect developing countries differently, depending
upon their level of development, market size and imitative/innovative ability. To con-
sider these issues, we repeat the above analysis for the 27 developing countries in our
sample. The results are reported in table 9. Once again the only control variables that
are consistently of the expected sign and significant are initial GDP per capita and
investment. In the linear model we again find insignificant coefficients on both the
domestic and foreign patenting variables.
Considering the threshold results, we find that for thresholds based on the level of
IPR protection there is a positive relationship between foreign patenting and growth
for developing countries with the highest levels of IPR protection. This suggests that
stronger IPR protection in developing countries can encourage international technol-
ogy transfer. For countries with the lowest levels of IPR protection a negative rela-
tionship between foreign patenting and growth is found. For the remaining three
threshold variables we find a negative and significant relationship between foreign
patenting and growth in the low regime. These results suggest that foreign patenting
can have a deleterious impact on growth for developing countries with low levels of
imitative ability, low levels of openness and small markets. This is consistent with
many of the arguments developed in the literature arguing that market power effects
can be significant for countries that have small markets and who have few domestic
competitors or are sheltered from foreign competition. In countries that are more
open to trade, are larger in size and are more developed in terms of GDP per capita
however, the results suggest that technology diffusion through foreign patenting can
be a significant source of growth.
Related literature
While valuable and informative, the accumulation of studies of individual channels of
technology diffusion is unlikely to provide full information on the effects of increased
IPR protection on international technology transfer for several reasons. Firstly, the deci-
sions to export, undertake FDI or license are made jointly, implying that studies con-
sidering a single channel may produce biased results. Secondly, there are some channels
that are very difficult to measure—imitation and reverse engineering for example—and,
consequently, analysis of the impact of these channels does not exist. Thirdly, as noted
above, there are likely to be interactions between direct channels and indirect chan-
nels, such as imitation. In view of these considerations, some authors have looked either
at multiple channels simultaneously or attempted to model the overall costs and ben-
efits of stronger IPR protection.
There are a small number of studies that consider several channels of diffusion simul-
taneously. Maskus (1998b) considered the joint decision of TNCs, examining the impact
of patent rights on patent applications, affiliate sales, exports and affiliate assets using
a four-equation simultaneous equation model. The model was estimated with data on
40 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
the foreign operations of United States majority-owned manufacturing affiliates in
46 destination countries over the period 1989-1992. As independent variables Maskus
included the RRI, distance from the United States, investment incentives, market size,
tariff protection and the level of local R&D. Also included was the interaction between
the IPR index and a dummy for developing countries. The results suggest that patent
applications are strongly affected by IPR protection, though less so in developing coun-
tries. Stronger IPR protection also impacts positively upon exports, affiliate assets and
affiliate sales in developing countries.
In a similar vein, Smith (2001) considers the simultaneous impact of IPR protection
on United States exports, affiliate sales and licences to unaffiliated foreign firms in a
sample of 50 developed and developing countries using a variant of the gravity equa-
tion. As in her previous study, the IPR variable is interacted with dummies for weak
and strong imitative ability. The results suggest that stronger IPR protection increases
bilateral exchange across all countries. At the same time, stronger IPR protection
increases the benefits of locating abroad and leads to increases in affiliate sales and
licensing relative to exports, particularly in countries with strong imitative abilities.
Strong IPR protection also reduces the need to internalize knowledge assets within the
firm thus increasing United States licences relative to both affiliate sales and exports.
The evidence in favour of stronger IPR protection increasing United States exports is
weak once multiple channels of exchange are allowed.
McCalman (2005) seeks to quantify the impact of TRIPS, by estimating an endogenous
growth model for 27, mostly developed, countries.
46
He finds that in the short run
(i.e. when the level of technology is held constant) the majority of countries lose due
to a redistribution of wealth to foreign owners of technology. But in the long run, when
research efforts can respond to the enhanced incentives provided by TRIPS, all coun-
tries benefit. McCalman shows that the increase in income levels due to enhanced inno-
vation are sufficient to offset the redistributive impact of TRIPS, though under certain
plausible parameter values India was found to lose. Given this last result, one might
conjecture that countries with lower technological capability than India, but which were
not covered in this study, may also suffer under TRIPS.
In an interesting case study, McCalman (2002) examines the behaviour of Hollywood
film studios with respect to IPR protection in different countries. Given the large fixed
costs and relatively low duplication costs of new films, IPR protection is likely to be of
great importance to film studios. McCalman studies the speed of diffusion of 60
Hollywood films to 37 countries. The results suggest that increasing IPR protection
from a relatively low level to a moderate level increases the speed of diffusion, but fur-
ther increases to a high level reduce the speed of diffusion. The release of a film is
likely to be delayed in countries with weak IPR protection, because of the risk of piracy
that will reduce returns on that film. In countries with relatively high IPR protection
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 41
46
See also McCalman (2001) who estimates the value of income transfers between countries in response to TRIPS.
studios may be less worried about piracy, but more worried about competition with
their existing products, and so may also delay the release of a film. Overall, the results
suggest that while some IPR protection can speed the diffusion of new products (films
in this case), very strong IPR protection may in fact reduce the speed of diffusion.
42 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Cross-country studies of the type reviewed so far have the advantage that they can cover
a wide range of experience and circumstances. Yet they are subject to several common
econometric problems, including endogeneity and measurement issues, as well as the
question of the applicability of results outside the sample. The alternative approach is
to undertake case studies examining the importance of the IPR regime in an individ-
ual country’s economic development. Case studies allow greater depth of analysis and
an accumulation of case studies can provide a similar range of experience to a cross-
country study. The obvious candidates for study are those countries that have made a
successful transition from technology importers to innovators.
Maskus and McDaniel (1999) considered how the Japanese patent system affected tech-
nological progress in Japan in the post-war period. They found that the patent system in
place in Japan encouraged incremental and adaptive innovation and the diffusion of knowl-
edge into the economy. This resulted from a number of measures, but most notably the
use of utility models, which are patents of a shorter duration awarded to incremental inven-
tions that build upon more fundamental discoveries. Such utility models were found to
have a large positive impact on Japanese TFP growth.
47
While the direct impact of patent
applications on TFP growth was smaller it was still positive, and patent applications were
found to have an indirect impact on TFP growth through stimulating later utility models.
Kumar (2002) extends the discussion of the role of IPR protection in development from
Japan to Taiwan Province and the Republic of Korea. He argues that the Republic of
Korea also encouraged learning and diffusion through the utility model system, and claims
that there was a deliberate policy of softening IPR protection to facilitate imitation by
domestic enterprises. Kim (2002) argues further that in the early stages of development
the Republic of Korea acquired and assimilated mature technologies in order to under-
take duplicative imitation of existing foreign products with cheap skilled labour. Relatively
few foreign firms patented technologies in the Republic of Korea because of its small mar-
ket size and limited imitative threat. In addition to maintaining weak IPR standards, he
argues that the role of government was to promote exports and to encourage the devel-
opment of technical and engineering skills. In Taiwan Province, Kumar (2002) argues that
43
Country specific evidence
5.
47
Further case study evidence of the benefits of utility models includes Dahab (1986) who finds that utility mod-
els were important in allowing domestic producers to capture a significant share of the farm machinery industry by
adapting foreign technology to local market conditions in Brazil, and Mikkelsen (1984) who describes how such utility
models allowed the successful adaptive innovation of rice threshers in the Philippines.
44 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
IPR protection was also weak to encourage the diffusion of knowledge, with the govern-
ment openly encouraging counterfeiting as a means of developing local industries.
While there was considerable diffusion of knowledge at early stages of development
along with much incremental innovation in these two cases, eventually pressure from
abroad forced them to strengthen their IPR regimes. Based on the experience of the
Republic of Korea, Kim (2002) argues that strong IPR protection will hinder rather
than facilitate technology transfer and indigenous learning activities in the early stages
of industrialization when learning takes place through reverse engineering and duplica-
tive imitation of mature foreign products. It is only after countries have accumulated
sufficient indigenous capabilities and an extensive science and technology infrastruc-
ture capable of undertaking creative imitation that IPR protection becomes an impor-
tant element in technology transfer and industrial activities.
Kumar (2002) goes on to document the experience of India. While inheriting a relatively
strong IPR regime from colonial times that provided protection for most industries, con-
siderable pressure built up from Indian firms in the 1960s that were unable to develop
their own technology due to foreign patent holders who were restricting entry. This was
particularly the case in the chemicals and pharmaceuticals industries and led to a new
patent act that reduced the scope of patentability in food, chemicals and pharmaceuti-
cals to processes and not products. It is widely accepted that these changes helped facil-
itate the development of local technological capability in chemicals and pharmaceuticals.
48
Kumar argues that the experience of India indicates the importance of weak IPR protec-
tion in building up local capabilities, even in countries at very low levels of development.
Maskus (2000c) examines the likely effects of introducing stronger IPR protection in the
Lebanon, using survey data on 117 manufacturing and services firms. IPRs are seen as
unimportant in many industries, and where patents are applied for they tend to be for
minor improvements and disclosure does not provide for effective technology transfer.
Whilst acknowledging their shortcomings, Maskus uses partial equilibrium models to cal-
culate the impact of stronger IPR protection in different industries. For most industries
he finds that the static effects of stronger IPR protection on prices, employment and out-
put are likely to be negative. He goes on to suggest that dynamic gains from stronger
IPR protection are possible, however, through increased FDI, increased product develop-
ment by local firms (particularly in cosmetics, food products, software applications, pub-
lishing and film production), and the increased ability to enter into joint ventures or
product licensing. Further, to the extent that these lead to additional technology trans-
fer and local product development, the average quality of local products should rise.
Survey evidence from China reveals that managers of foreign enterprises are reluctant
to locate R&D facilities in China for fear of misappropriation and patent infringement
(Maskus et al., 2005). Enforcement problems and weak penalties were also a concern.
These factors led firms that transferred technology to China not to use the latest tech-
nology, but technologies that were at least five years behind the frontier. Chinese firms
were also found to suffer from trademark infringement, which in the long run is likely
to be particularly damaging to enterprise development.
48
Fink (2001) simulates the effects of the introduction of IPR protection on two therapeutic drugs in India. The
results suggest that the impact of offering IPR protection can be higher prices and significant welfare losses, but that
non-patented therapeutic substitutes to a patented drug can limit the extent of price increases and reduce welfare losses.
45
Summary of empirical results 6.
The literature reviewed above has tended to use cross-country or panel data techniques
to detect the role that stronger IPR protection might play in encouraging economic
growth and international technology transfer. As noted in the Introduction, there are a
range of channels through which growth-enhancing technology transfer might occur.
Formal channels include foreign patenting, FDI and technology licensing. All of these
channels may also generate informal technology transfer (technology spillovers), as can
other forms of international contact, including trade in goods and services and the move-
ment of workers. Whether growth-enhancing effects occur at all, and their magnitude if
they do, also depends on the characteristics of the recipient country—such as its levels
of development and human capital, openness to trade and FDI and its market size.
Because this is a relatively recent research topic the literature is still relatively small.
There are also weaknesses in both the data and the econometric methodology employed.
The results are far from definitive as a consequence. But while it would be premature
to make strong claims on the basis of the limited evidence to date, the overall pattern
of results justifies certain inferences.
It seems clear that the implications of stronger IPRs depend, inter alia, on a country’s
level of development (measured by GDP per capita or human capital). Three distinct
groups emerged from our threshold analysis—advanced countries with innovative capa-
bility; middle-income countries with imitative capability and innovative potential; and
poor countries with neither. The membership of these groups can be expected to change
over time and also depends on the activity under consideration.
For the advanced countries, the evidence from section 2 suggests that strengthening
IPRs raises growth, and later sections indicate that this at least partly comes about
through increased innovation, as shown by increases in domestic patenting, and tech-
nology diffusion, as shown by increases in foreign patenting. These are the countries
whose IPR regimes already meet or exceed the TRIPS standards, leaving them free to
strengthen them further if they wish.
For middle-income countries, the evidence suggests that strengthening IPRs has no over-
all effect on growth. Despite this the evidence suggests that a stronger IPR regime encour-
ages both domestic innovation and technology diffusion through foreign patenting and
46 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
international trade in these countries, with evidence also indicating that both domes-
tic innovation and technology diffusion can impact positively upon growth. For such
countries therefore the potential for gains from stronger IPRs exists. The available evi-
dence indicates however that the beneficial impact of stronger IPR protection on domes-
tic innovation and technology diffusion in these countries is to a certain extent offsetting
the growth-enhancing benefits otherwise obtained from the imitation now precluded by
the stronger IPR regime. These are countries whose IPR regimes will need to be strength-
ened in order to meet the TRIPS standards. Their policy focus should be to encourage
domestic firms to shift from imitation to innovation and to facilitate other activities
with growth-enhancing technology spillovers.
For poor countries, the evidence from section 2 suggests that strengthening IPRs encour-
ages growth. Unfortunately research so far is less than enlightening on the exact chan-
nels through which this occurs. Stronger IPRs appear to have no effect on innovation
in these countries and the evidence reviewed suggests that the impact on international
trade of stronger IPR protection in these countries is negative. Moreover, while stronger
IPR protection is found to encourage foreign patenting, this has no significant effect
on growth in the lowest-income countries. These are countries whose IPR regimes will
also need to be strengthened to meet the TRIPS standards. It may be that most will
not have significant imitative or innovative capability in the near future. Those which
do must be concerned that TRIPS will inhibit their firms from passing through the imi-
tative stage that seems to be the precursor to gaining innovative capability in relatively
high-tech industries. The TRIPS obligations may make WTO membership less attrac-
tive for those countries with imitative aspirations.
A country’s openness to international trade also seems important in determining the
impact of IPR protection on growth, innovation and technology diffusion. The evidence
from section 2 suggests that, other things equal, stronger IPRs have a significant and
positive effect on growth in more open economies. The exact mechanism through which
this occurs is yet to be revealed, but it appears to involve the substitution of domes-
tic innovation for technology produced abroad, since stronger IPRs seem to lead to less
domestic patenting and more foreign patenting in more open economies. And it is not
just that more open economies receive more foreign patents. The evidence suggests that
the growth-enhancing effects of foreign patenting also appear to be stronger in more
open economies
In addition to the role of trade in the relationship between IPRs and growth, IPRs are
also found to influence trade, with evidence suggesting that stronger IPR protection
leads to larger trade flows, albeit mainly for countries with imitative capability and not
necessarily in goods and industries considered high-tech or patent sensitive.
Since most innovation occurs in a few advanced countries, FDI and technology licens-
ing are often perceived as the major formal channels for international technology trans-
fer. But while there is some evidence that stronger IPRs encourage licensing, the
evidence on whether stronger IPRs encourage FDI is largely inconclusive. IPRs do appear
to be important for some TNC activities (R&D and local production) and in some sec-
SUMMARY OF EMPIRICAL RESULTS 47
tors (chemicals and pharmaceuticals), however. Most host countries anticipate that FDI
or licensing will yield further benefits from technology spillovers to domestic firms. By
their nature such spillovers are difficult to measure, so perhaps it is not surprising that
there is little conclusive evidence of growth-enhancing spillovers through inward FDI,
either at the economy-wide, industry or firm level.
The above suggests that for some countries foreign patenting may be an important
source of technology transfer. In addition to the effects discussed so far, the evidence
indicates that a country’s market size may be important in determining whether
increased foreign patenting encourages or inhibits growth. When the full sample of
countries was considered the evidence suggests that increased foreign patenting has a
negative effect on growth in small countries, a positive effect in middle sized countries
and no effect in larger countries. Results for developing countries reported in the paper
suggest that foreign patenting has a positive impact on growth in countries with rela-
tively high levels of IPR protection, for relatively open economies and for countries with
relatively large markets. Combined with the result that stronger IPR protection encour-
ages foreign patenting in developing countries, these results are consistent with the
broad conclusions of the literature that stronger IPR protection should encourage tech-
nology diffusion and that the benefits of technology diffusion should be greater in more
open economies, countries that are more developed and in larger markets where for-
eign firms have less market.
Few developing countries agreed to TRIPS in the hope or expectation that it would
encourage domestic innovation and international technology diffusion. Indeed, since
the adoption of the Agreement, the North-South technological gap has continued to
grow (Correa, 2001). In response an international commission on IPRs established
by the British Government has questioned whether the TRIPS Agreement is likely
to provide any benefits to the world’s poorest countries.
49
The Commission argues
that stronger IPR protection is unlikely to make the poorest countries attractive loca-
tions for innovation and recommends that for such countries the deadline for adopt-
ing TRIPS standards should be extended until at least 2016.
50
This recommendation
has to an extent been taken up by the WTO’s TRIPS council which recently decided
to extend the transition period for the least-developed countries by seven and half
years from the 1 January, 2006 until the 1 July, 2013. Despite this concession the
trend for developed countries is not towards a relaxation of the TRIPS Agreement,
but towards a strengthening of IPR protection (Correa, 2001). Moreover as acknowl-
edged in the Commission’s report, for many developing countries at a certain level
of development and with a certain innovative capacity, stronger IPR protection may
be beneficial, supporting innovation and technology diffusion and in turn enhanc-
ing growth. These conclusions are consistent with those drawn from the literature
reviewed above.
In the past, countries have been able to adapt their IPR regimes to facilitate techno-
logical transfer and to promote their own industrial policy objectives. Both anecdotal
evidence and the case study evidence reviewed above, indicates that many current inno-
vators operated lax IPR systems in the past, designed to encourage technology diffu-
sion through imitation, as well as incremental innovation through utility models. While
TRIPS removes a large part of this flexibility, it does allow countries to undertake dif-
ferent policies with respect to IPR protection. In this section we discuss policies con-
sistent with TRIPS that can help countries maximize the benefits (or minimize any
losses) from TRIPS. The potential policy responses to TRIPS have been considered quite
49
Policy responses to TRIPS 7.
49
The Commission on Intellectual Property Rights (2002).
50
Article 66 allows those least developed countries that are experiencing difficulties in implementing TRIPS to seek
time extensions.
extensively elsewhere,
51
and we draw upon this work to examine policies that can affect
the relationship between IPRs and both innovation and technology diffusion.
52
From our summary of the empirical evidence it is clear that policy recommendations
should vary according to a country’s level of development and its level of imitative or
innovative capacity. The policy priority in poor countries, with weak institutions and
limited R&D capacity for example, should be to improve the investment environment,
with liberal trade policies to encourage imports of technology embodied in goods. Such
countries should not be required to apply and enforce strong IPR obligations and they
should have access to mechanisms that reduce the cost of importing IPR protected
goods. Hoekman et al (2004) argue that this could be achieved through a direct sub-
sidy or more likely a differential pricing scheme that lowers the consumption cost of
technology intensive imports. For other developing countries, with relatively high lev-
els of innovative potential, the stronger IPR protection required by TRIPS can encour-
age domestic firms to switch from imitation to innovative activities. Stronger IPR
protection in these countries by encouraging technology diffusion through international
trade and foreign patenting will also help offset any adverse growth effects from lost
imitative opportunities. We begin by looking at policy responses at the national level,
and then turn to the role of multilateral organizations.
Intellectual property rights related policies
In order for countries to benefit in terms of growth, TRIPS should encourage domes-
tic innovation and international technology diffusion, while limiting the market power
of foreign patent holders. While TRIPS sets minimum standards for IPR protection, it
does leave some room for discretion and this can be used to achieve these goals. Maskus
(2004) sets out policies with respect to patent fees, the scope of patentability and stan-
dards for the inventive step, or novelty requirement of patents, that may contribute to
the development of a domestic innovative sector and to the international diffusion
of technology.
The fees for patent applications and for the renewal of patents and trademarks can be set
to promote both innovation and diffusion. It is possible, for example, to set lower patent
application fees for small and medium-sized enterprises than for large firms, thus encour-
aging innovation by local firms. Patent renewal fees may also rise over time to encourage
firms to let patents on mature technologies lapse early, thus allowing domestic firms to
imitate older technology, which as discussed above was one factor in the development of
countries such as the Republic of Korea and Taiwan Province for example.
Developing countries can also limit the scope of the subject matter that can be patented.
TRIPS does not define “invention” nor specify the three criteria for patentability
50 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
51
See Maskus (2000a, 2004), Kumar (2002) and Hoekman et al. (2004) in particular.
52
In this paper we concentrate specifically on those policies that may affect innovation and international tech-
nology diffusion, and in turn long-run growth. Maskus (2000a, 2004) and Primo Braga et al. (2000) discuss the more
general policy responses required following TRIPS, including those related to creating the enforcement processes and
procedures and building up the capacity to process patent applications in developing countries.
(i.e. that it is “new”, involves a “non-obvious inventive step” and is “capable of indus-
trial application”). Allowable claims could therefore be made narrow and limited to sin-
gle technologies or applications, which will not block others from inventing around the
patent. Broad patents on the other hand could allow rights that go considerably beyond
the claimed invention itself and could thereby discourage subsequent innovation.
Countries could also set high standards for the inventive step in order to prevent rou-
tine discoveries from being patented. This could be combined with a system of utility
models to encourage local firms to invent around patents and to improve their manu-
facturing methods. As discussed above, utility models, which award patents to incre-
mental innovations, have been shown to encourage local domestic innovation and these
should be considered as a means of developing a domestic innovative sector. Introducing
a second tier patent regime will be of little use, however, if there are too few national
resources to create the user base.
Developing countries should also encourage the rapid publication of patent applications,
with full disclosure of the technical processes involved in producing the inventions and
how to put them to commercial use. This will maximize the spillovers to local firms,
allowing them to build upon the disclosed knowledge and possibly to invent around
the patent. This tactic will be constrained by the need to attract foreign patenting in
the first place, however.
But whatever their post-TRIPS policy choices, developing countries have to be aware of
the likely response from the developed countries that demanded the stronger IPR pro-
tection in the first place. Some will argue that any imitation unauthorized by the IPR
holder is piracy and theft. The United States Congress for example has not renounced
unilateral trade action and reserves the right of the United States Trade Representative
to initiate bilateral negotiations with countries whose IPR standards may be TRIPS com-
patible but nevertheless lower than those of the United States. Indeed, several devel-
oping countries have already complained about the continuous use of unilateral pressure
to raise IPR protection beyond the minimum levels of TRIPS (see Correa, 2001).
Competition policies
One potential outcome of TRIPS that is of particular concern to developing countries
is that stronger IPR protection strengthens the market power of foreign TNCs, which
may lead to reduced sales and higher prices,
53
and which can limit the extent of tech-
nology diffusion. In addition enhanced market power may restrict entry and can lower
the rate of innovation. As our summary of the empirical literature in section 6 indi-
cates, this may be of particular concern in countries that are relatively closed to trade
and those with small markets. Moreover, as Correa (1999) notes, in most developing
countries mechanisms aimed at controlling restrictive business practices, or the misuse
of IPRs, are either weak or non-existent.
POLICY RESPONSES TO TRIPS 51
53
Lanjouw (1997) and Maskus (1998c) for example find that stronger patent protection increases the price of pro-
tected drugs considerably when compared with copied or generic drug prices.
Enhanced market power through stronger IPR protection may facilitate other forms
of anti-competitive behaviour, including selling practices and licensing restrictions
(Primo Braga et al., 2000).
54
These include: (a) the cartelization of potential competi-
tors through cross licensing agreements that fix prices, limit output or divide markets;
(b) the use of IPR-based licensing agreements to exclude competitors in particular mar-
kets by raising entry barriers through tie-in sales or restrictions on the use of related
technology; (c) the use of IPR protection to predate competitors by threatening or ini-
tiating bad faith litigation and opposition proceedings, which may raise market entry
barriers particularly for new and small enterprises. It has been argued elsewhere, how-
ever (Maskus, 2000a), that IPR protection alone rarely creates such power unless accom-
panied by restrictions on competitive entry by other firms.
TRIPS article 40 sets out a general right for countries to establish and enforce anti-
monopoly policies for the purposes of combating abusive technology licensing practices.
There exist a range of domestic policies that are consistent with TRIPS and which can
offset such market power effects. Examples include price controls, compulsory licences,
and parallel imports. To the extent that anti-competitive practices are reliant on restric-
tions on competitive entry, however, there is a rationale for using policy to minimize
entry barriers, through limiting business regulation and through the further opening of
the economy to international trade and investment, which allows greater competition
from foreign sources.
One possibility for governments that wish to reduce the impact of IPR induced market
power on prices would be to consider price controls through reference prices or admin-
istrative ceilings. A balance between the host country’s and foreign firm’s interests needs
to be struck, allowing firms to generate “normal” profits on their underlying R&D invest-
ments (Primo Braga et al., 2000). Such practices are not uncommon in pharmaceuti-
cals, particularly where health is publicly funded. But price controls are relatively
inflexible and distort market signals. Their widespread use is to be avoided.
Compulsory licences are an alternative possibility for limiting market power. A compul-
sory licence is an involuntary contract between a patent holder and a third party author-
ized by the national authorities that entitles the licensee to exploit the patent for a
fixed period of time during the patent life, upon the payment of reasonable remuner-
ation to the right holder. Firms taking out a patent in a country which grants compul-
sory licences will know that any attempt to restrict supply to exploit its monopoly
power could be undermined in this way. Governments may resort to compulsory licens-
ing to promote public health, welfare, security, competition and other objectives. These
would need to be transparent and well defined in order not to discourage the entry of
foreign firms and the development of new technologies by domestic firms (Maskus,
2004). Moreover, the threat of compulsory licensing is only credible if a potential
licensee capable of supplying the patented product economically at a lower price exists.
While potentially useful as a means of limiting anti-competitive behaviour, there is little
52 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
54
Article 40 of TRIPS lists specific anti-competitive practices that may be encouraged by strong IPR protection
including exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing
evidence that countries have successfully used this tool to gain access to international
technologies (Maskus, 2004). Indeed, some argue that the restrictions imposed on com-
pulsory licences are so rigorous as to eliminate nearly all prospects for effective tech-
nology transfer (Correa, 2003). In particular, requirements for compensation, the need
for non-exclusive licensing, and the inability to compel transfer of know-how signifi-
cantly restrict the ability of local firms to benefit from this policy.
If patenting in different countries allows the patentee to price discriminate internationally,
then the profits of the innovating firm will be maximized by setting higher prices in mar-
kets with lower price elasticities of demand. Such market segmentation may also promote
collusive behaviour. If price differences exceed the costs of shipment between markets,
however, then profitable arbitrage opportunities arise for third parties if they ship legally
sold products in low priced markets for resale in high priced markets. This is known as
parallel importing.
55
Whether parallel importing is legal or not depends upon the princi-
pal of exhaustion adopted by the importing country.
56
Under a system of national exhaus-
tion, a title holder can prevent parallel importation of their product from a foreign country.
If rights are exhausted internationally, the title holder loses their exclusive privilege after
the first distribution of the product, thus allowing parallel imports from abroad.
57
The claim that price discrimination across segmented markets is harmful and pro-
motes collusion must be considered from the relevant perspective, however.
58
Firstly,
the market power associated with IPR protection may be slight if there is extensive
inter-brand competition in each location. Secondly, allowing unrestrained parallel
trade would establish uniform pricing by the IPR holder, subject to differences in
transport and marketing costs. Economies with large markets and inelastic demand
would face lower prices under uniform pricing, benefiting consumers. In contrast,
countries with small markets and elastic demand would face higher prices than under
price discrimination. The standard view is that this latter situation is that which per-
tains in most developing countries, suggesting that a global regime that allowed par-
allel imports may not be beneficial to them. Thirdly, foreign right holders may choose
not to sell in some countries, in the presence of parallel trade, because local demand
would be insufficient under uniform pricing, which in turn may lower the extent of
technology diffusion.
59
Fourthly, it may be that products that would command low
prices in developing countries under a regime of national exhaustion would be
exported to otherwise higher priced regions under a regime of parallel imports. Here
the trade-off would be increased export revenue at the expense of higher prices to
POLICY RESPONSES TO TRIPS 53
55
It should be stressed that parallel imports are trade in legitimate goods outside official channels of distribution,
and not trade in counterfeit goods. Maskus (2000a, chapter 7) provides a more detailed analysis of the treatment of
parallel imports.
56
This is discussed in greater detail in Falvey, Martinez and Reed (2004). TRIPS allows members to decide for
themselves the extent of exhaustion. Article 6 states that “[F]or the purposes of dispute settlement under this Agreement,
subject to the provisions of Articles 3 and 4, nothing in this Agreement shall be used to address the issue of the exhaus-
tion of intellectual property rights”.
57
A hybrid to these two extremes is a system of regional exhaustion whereby parallel trading is allowed within a
particular group of countries, but parallel imports from countries outside the region are banned.
58
Maskus (2000c) argues that if Lebanon were to adopt a policy banning parallel imports of IPR protected goods,
the resulting segmentation of its market from world markets could support higher prices.
59
Further arguments in favour of banning parallel imports relate to the possibility of parallel traders free riding on
the investment, marketing and service costs of authorized distributors, and that exclusive rights make it easier to mon-
itor marketing efforts and enforce product quality (see Maskus, 2000a, pp.208 215).
domestic consumers.
60
Finally, under certain conditions price discrimination can pro-
vide positive economic benefits at the global level.
Malueg and Schwartz (1994) show that a global ban on parallel importing could result
in perfect price discrimination, in that each market has its own price, which would
maximize firm profits and encourage further innovation.
61
Recent research however suggests that the impact of banning parallel imports on inno-
vation is theoretically ambiguous. Li and Maskus (in press) develop a model in which
a manufacturer with the ability to engage in cost-reducing innovation competes for sales
in its own market with parallel imports from a distributor in another market. They
show that distortions associated with parallel imports reduce the incentive for the man-
ufacturer to invest in innovation. The amount by which R&D is reduced is found to
depend upon both transport costs and the legal treatment of parallel imports. Valletti
(in press) develops a model in which a monopolist after conducting R&D to determine
the quality of its product serves a number of different markets. In the model, price dif-
ferences across markets can arise due to both differences in marginal costs and in con-
sumer demand in different markets. Valletti shows that the impact on the level of
investment in R&D of allowing parallel imports depends upon the reason for differen-
tial pricing. When differential pricing is due purely to consumer demand parallel imports
reduce investment in R&D, but when differential pricing is due to cost differences par-
allel imports increase in R&D investment.
The role of parallel imports is therefore quite controversial. Some argue for banning
parallel imports (Barfield and Groombridge, 1998), while others argue that such a ban
amounts to a non-tariff barrier to trade (Abbott, 1998). A more moderate view is that
they play a useful role in discouraging abusive price discrimination and collusive behav-
iour. The ambiguous impact of parallel imports on prices and technology diffusion leads
Maskus (2000a) to conclude that the best advice seems to stick with the status quo,
with each country selecting its own policy.
62
In many developing countries this would
imply a presumption that a policy of international exhaustion allowing parallel imports
should be followed.
Complementary policies
Much of the literature reviewed above indicates that the responsiveness of innovation
and the channels for international technology diffusion to stronger IPR protection are
likely to depend upon other characteristics that reflect a country’s ability to innovate
54 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
60
For developed countries therefore, there is an argument for banning parallel imports, particularly of patented
drugs. This would allow patent holders to prevent pharmaceutical products priced and sold for poor people in develop-
ing countries from being arbitraged and resold in developed countries.
61
Obviously the claim that global welfare could be higher does not mean that all countries benefit equally or even
at all. Price discrimination redistributes consumer benefits from high-price countries to low-price countries.
62
While the results discussed here hold for all forms of IPR protection, Primo Braga et al. (2000) note that in the
area of trademark protection, parallel imports may undermine the efforts of the property right owners to guarantee con-
sistent quality and to maintain pre-sales and after-sales services.
and take advantage of foreign knowledge. Here we consider complementary policies that
may encourage domestic innovation and technology diffusion.
Encouraging local technology development can have both a direct effect on produc-
tivity and growth, especially as many of the benefits of R&D are likely to be local
in nature, and an indirect effect by encouraging greater technology diffusion. But
while encouraging local technology development should be a priority for the rela-
tively more advanced developing countries, the benefits of such policies for the least
developed countries are likely to be limited, particularly if they draw scarce resources
away from other more pressing activities, such as education and health care. Evidence
suggests that the ability of domestic firms to absorb foreign technology does depend
upon the existence of an in-house R&D capacity.
63
Technology policies, capital mar-
ket regulations and tax policies could therefore be adjusted to encourage more inno-
vation and in turn technology diffusion. Developing domestic innovative capacity may
also lead to increased inflows of FDI, which could further increase technology dif-
fusion. Examples of policies to encourage domestic innovative activities include pub-
lic assistance for basic R&D and public-private research partnerships.
64
Direct
subsidies can be quite costly, however, by distorting resource allocation decisions,
encouraging firms to behave strategically in order to win subsidies, and creating
opportunities for corruption and rent seeking behaviour. Hoekman et al., (2004)
argue that the biggest problem of implementing subsidy policies is that they are dif-
ficult to control and that governments need to be able to determine which efforts
are successful and establish an effective and credible exit strategy from those that
are unsuccessful.
Investment in education may also encourage domestic innovation and the international
diffusion of technology. Although there is limited evidence on the subject, it is to be
expected that stronger IPR protection would become more important in encouraging
innovation in countries with high levels of education and training, particularly in sci-
ence and technology. In addition to encouraging innovation, countries that invest in
education are likely to encourage greater inflows of FDI in response to a strengthen-
ing of IPR protection. Moreover, by enhancing a country’s absorptive capacity, educa-
tion is likely to encourage the adaptation of foreign technology.
65
But in order to
encourage domestic innovation and technology diffusion, skills other than basic liter-
acy and mathematical skills are required. As such there is an argument for encourag-
ing higher education in science and engineering, which will improve specialist skills.
This could involve encouraging students to undertake training at foreign universities,
which in itself could act as a form of technology diffusion. At the same time, such a
policy is subject to the risk of a “brain drain”, with trained graduates not returning
to work in their country of origin.
POLICY RESPONSES TO TRIPS 55
63
Aggregate evidence from developed countries also suggests that the presence of a domestic R&D sector can allow
countries to benefit from foreign technology (see for example Crespo-Cuaresma et al., 2004; Griffith, Redding and van
Reenen, 2004)
64
Utility models as discussed earlier may also promote domestic adaptive innovation.
65
Crespo-Cuaresma et al. (2004) also present evidence for OECD countries suggesting that the benefits from for-
eign technology spillovers are stronger in countries with higher levels of human capital.
Technology diffusion
To the extent that trade flows, FDI, technology licensing and foreign patenting lead to
externalities in the form of technology spillovers, they should be encouraged. While the
evidence in favour of these channels encouraging technology diffusion is mixed, in coun-
tries with significant imitative abilities the evidence reviewed above suggests that stronger
IPR protection could increase such flows. Other factors are also likely to be important
in increasing both the flows and the knowledge spillovers through these channels. These
include sufficient levels of human capital (which can raise a country’s imitative and inno-
vative ability as discussed above), the local investment climate, market competition, gov-
ernance policies and the degree of openness to trade and foreign investment.
Available evidence suggests that FDI and licensing are attracted to locations with an effec-
tive infrastructure, stable government, and open trade and investment regimes (Wheeler
and Mody, 1992; Brainard, 1997; Carr et al., 2001). While government incentives to under-
take FDI in a country may be important in some cases, in general they are ineffective in
the absence of an adequate skilled labour force, market opportunities, infrastructure,
macroeconomic stability and political and legal predictability (Wallace, 1992).
The empirical evidence reviewed above suggests that the impact of IPR protection on
growth is stronger in more open economies. Moreover, stronger IPR protection creates
market power that is more easily abused in closed economies. In addition to a liberal
stance on inward trade and FDI improving a country’s access to foreign technologies,
intermediate inputs and producer services therefore, openness may reduce monopoly
power and encourage innovation and growth. The problem that IPR protection in small
and relatively closed economies can lead to market power effects that limit the diffu-
sion of knowledge may be partly relaxed by membership of a Regional Trade Agreement
if this increases the effective size of the market served by IPR holders.
The role of multilateral organizations
For most developing countries, achieving the benefits of access to developed country
markets that membership of the WTO can provide comes at the perceived cost of
strengthening their IPR regime in order to conform to the TRIPS Agreement. Ensuring
that developing countries obtain the maximum net benefit from TRIPS is a task fac-
ing their governments, and one in which multilateral organizations can provide assis-
tance. In this as in many other areas, the degree and type of assistance required will
depend on the circumstances of the country concerned. The empirical literature reviewed
above has highlighted the relevant country characteristics: levels of development, skill
levels, market size and openness to trade and FDI. One major potential benefit to devel-
oping countries from strengthening their IPR regimes to comply with TRIPS is through
the increased international transfer of technology this induces in some circumstances.
Multilateral organizations can also have a role to play in facilitating this transfer.
One point that should be clear from the literature reviewed above is that there is still
much to learn about the economic effects of IPR protection. Multilateral organizations
56 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
can play a significant role in facilitating research in this area and in encouraging the
dissemination of its findings to all interested parties. Primo Braga et al (2000) argue
that such research should focus on specific types of intellectual property and should
analyse the implications of IPRs under different country-specific and sector-specific cir-
cumstances. A combination of the broad multi-country studies of the type reviewed
here, and specific country and sector case studies seems appropriate.
Each developing country will need to design an IPR regime that best fits its own cir-
cumstances, subject to being TRIPS compliant. Appropriate policies were discussed
above. But this regime will also need to be modified as circumstances change and as
the country develops. Individual countries stand to benefit from the knowledge and
experience of those who have gone before them and multilateral organizations can
encourage the accumulation of this knowledge and facilitate access to it.
Along the same lines, multilateral organizations may play a role in capacity building in
this area more generally. Maskus (2004) argues that capacity building in IPRs should
focus less on the specification of protective laws and regulations and more on the tech-
nical, judicial and legal expertise underlying effective technology transfer. One possibil-
ity is the development of a repository and the publication of best practices in foreign
licensing contracts with subsidiaries, joint ventures and arm’s length partners. Multilateral
organizations have a role to play in reducing overall information problems by encourag-
ing collaboration and information sharing among governments, possibly by serving as an
intermediary for knowledge about successful technology acquisition programmes that have
been undertaken in the past (Saggi, 2003). Technical standards play an important role
in diffusing production and certification technologies, and learning technical standards
is often tantamount to learning technology. Here multilateral organizations could create
a pool of experts to aid standard setting bodies in developing countries (Maskus, 2004).
Given the importance of the presence of innovative capacity for successful international
technology diffusion, multilateral organizations could play a role in encouraging the
development of a research culture in developing countries. This could include the
development of training programmes in how technology is transferred, as well as the
financing of education programmes more generally, particularly those that can aid the
diffusion of technology (Maskus, 2004). In this area the training of scientists and engi-
neers would seem to be a priority, possibly in advanced country institutions.
66
A com-
plementary approach would also exploit the use of the Internet for online training
services (Maskus, 2004). The development of a domestic R&D sector could be encour-
aged through public-private R&D partnerships and supporting research institutions in
developing countries. Donor countries and multilateral organizations could consider
establishing specific trust funds to finance the training of scientific and technical
personnel to facilitate the transfer of technologies that are particularly important in the
provision of public services, and for encouraging research in developing countries (Roffe,
2002). Multilateral organizations may also have a role to play in supporting research
POLICY RESPONSES TO TRIPS 57
66
Indeed, negotiations over the temporary cross-border movement of people have already been launched in the
WTO with respect to the GATS agreement on trade in services. This could be extended to include people who move
temporarily to increase their education levels. (Hoekman et al., 2004).
into technologies that would be productive in developing countries for social needs,
such as water treatment, energy and the environment (Maskus, 2004).
Article 66.2 of the TRIPS Agreement provides an obligation on behalf of developed coun-
try governments to provide incentives to their enterprises and institutions to promote
technology transfer to the least-developed countries.
67
Hoekman et al (2004) suggest that
this benefit should be extended to other low-income developing countries that have lit-
tle or no innovative capacity. There is, of course, no assurance that this encouragement
will be successful. While there are clear constraints on imposing obligations on govern-
ments with respect to the disposal of private property, Maskus (2004) argues that mul-
tilateral organizations, and the WTO in particular, could increase the scope for monitoring
developed country efforts in the transfer of technology and could add an evaluative mech-
anism for the effectiveness and extent of technology transferred. Over time this approach
should build up useful information about problems and effective practices in transfer-
ring technologies. An agreement at the WTO to increase the size of the pool of tech-
nologies available in the public domain or widely accessible at affordable costs could
also be considered. This should certainly be feasible for research that is largely publicly
funded (Barton, 2003; Maskus, 2004). Developed country governments could also extend
the fiscal benefits to firms transferring technologies to disadvantaged home regions to
transfers to developing countries. Similarly they could offer the same tax advantages for
R&D performed abroad as for R&D done at home (Maskus, 2004).
Many suggestions for developed country action involve a cost, which weakens the incen-
tive to implement them. There is an argument therefore for coordinating commitments
through the relevant multilateral organization. Hoekman et al (2004) argue that the most
powerful indirect incentive for technology transfer is for developed countries to grant
significant market access for products in which poor countries have a comparative advan-
tage. They argue that a link between technology transfer and market access exists due
to the role that market size and growth play in attracting trade and FDI, and the asso-
ciated incentives to invest in new technologies if export markets were more assured.
Multilateral organizations, particularly the WTO, have an obvious role to play here.
Developed countries could also expand their programmes for the training and develop-
ment of workers in developing countries, particularly in science and technology. Maskus
(2004) argues that fiscal incentives could be introduced to encourage enterprises to
employ on a temporary basis recent science, engineering and management graduates
from developing countries. Similarly, he argues that universities could be encouraged to
recruit and train students from developing countries in science, technology and manage-
ment. Incentives for setting up degree programmes through distance learning or even
foreign establishments of university campuses may be considered. One problem with the
temporary movement of highly skilled individuals across borders is that it may become
permanent, as they perceive the personal rewards of operating in developed markets.
This can lead to a brain drain and have a detrimental impact on developing countries.
Thus complementary programmes to establish a domestic entrepreneurial environment
that attracts back skilled workers who reside in developed countries may be important.
58 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
67
Article 66.2 states that “Developed country Members shall provide incentives to enterprises and institutions in
their territories for the purpose of promoting and encouraging technology transfer to least-developed country Members
in order to enable them to create a sound and viable technological base”.
59
Concluding remarks
8.
While few would consider IPR protection to be a panacea for developing countries,
views on the importance of IPR protection tend to be polarized. On one side, it is believed
that stronger IPR protection can encourage innovation, technology diffusion and
enhance growth. On the other it is thought that stronger IPR protection leads to monop-
oly power for patent holders, reduces the incentive to innovate and limits the diffusion
of knowledge. The evidence reviewed and presented here supports neither claim.
The impact of IPR protection on growth, innovation and technology diffusion in devel-
oping countries is likely to depend upon a number of factors. While stronger IPR pro-
tection in the poorest countries is not likely to lead to substantial benefits in terms of
innovation or technology diffusion, the administrative cost of developing a patent system
and the enforcement of TRIPS, along with the potential abuses of market power in
small closed markets suggests that such countries could lose out from TRIPS. Stronger
IPR protection in the poorest countries may also inhibit or lengthen the imitative stage
of development that seems to be necessary in order to develop innovative capacity in
many industries. Policies aimed at improving the business environment and encourag-
ing imports of technology embodied in goods could potentially reduce such costs, though
their impact on other development-related goals needs to be carefully weighed.
In other developing countries the potential for benefits from TRIPS is stronger. Here
existing firms engaging in imitation could be encouraged through stronger IPR protec-
tion to shift resources towards adaptive innovation, while stronger IPR protection is
likely to increase trade and FDI flows into countries with existing imitative ability, thus
enhancing technology transfer. Policies to enhance the benefits of TRIPS would help
develop the domestic innovative sector through encouraging R&D and investment in
education, along with policies aimed at opening markets to foreign imports and encour-
aging inward FDI.
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70 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
The following is an outline of how the strength of IPR protection was constructed and
is taken from the appendix of Ginarte and Park (1997).
(1) Coverage YES NO
Patentability of pharmaceuticals 1 0
Patentability of chemicals 1 0
Patentability of food 1 0
Patentability of plant and animal varieties 1 0
Patentability of surgical products 1 0
Patentability of microorganisms 1 0
Patentability of utility models 1 0
(2) Membership in international treaties YES NO
Paris convention and revisions 1 0
Patent cooperation treaty 1 0
Protection of new varieties (UPOV) 1 0
(3) Loss of protection measures against losses YES NO
Working requirements 1 0
Compulsory licensing 1 0
Revocation of patents 1 0
(4) Enforcement YES NO
Preliminary injunctions 1 0
Contributory infringement 1 0
Burden-of-proof reversal 1 0
(5) Duration Value
Application-based standard
x ? 20 years 1
0 ? x < 20 x/20
Grant-based standard
x’ ? 17 years 1
0 ? x’ < 17 x’/17
Notes: Where x = duration of protection in years under an application-based standard and x’ = duration of
protection under a grant-based standard.
The value of each category, other than duration, is j/k where j is the number of “1”s received (or number
of conditions satisfied) and k the number of conditions to be satisfied.
Source: Ginarte and Park (1997).
71
Annex I.
Construction of the Ginarte
and Park IPR index
Annex I.
Threshold regression analysis is particularly useful when we expect the relationship
between two variables to be contingent upon the value of a third variable. In the case
of IPR protection such models can be particularly useful therefore, since IPR protec-
tion is expected to impact differently upon countries at different stages of development.
In a series of papers, Hansen (1996, 1999 and 2000) develops a technique that allows
the sample data to jointly determine both the regression coefficients and the threshold
value. In addition the technique allows one to test the significance of the threshold
value. In this Appendix we briefly describe this approach.
Estimation
We can write the threshold regression model for a single threshold as:
?
i
= ?
1
x
i
+ ?
i
q
i
? ?
1
(1)
?
i
= ?
2
x
i
+ ?
i
q
i
> ?
1
(2)
where q
i
is the threshold variable. Here the observations are divided into two regimes
depending on whether the threshold variable is smaller or larger than ?
1
. The two regimes
are distinguished by different regression slopes, ?
1
and ?
2
. Chan (1993) and Hansen
(1999) recommend estimation of ?
1
by least squares. This involves finding the value
of ?
1
that minimizes the concentrated sum of squared errors. In practice this involves
searching over distinct values of q
i
for the value of ?
1
at which the sum of squared
errors is smallest. This value of ?
1
is our estimate of the threshold, ?
1
. Once we have
a value for it, it is straightforward to estimate the coefficients of the regression model.
This approach can be extended to any number of thresholds. In the two-threshold model
we would then have the following:
?
i
= ?
1
x
i
+ ?
i
q
i
? ?
1
(1)
?
i
= ?
2
x
i
+ ?
i
?
1
? q
i
? ?
2
(2’)
?
i
= ?
3
x
i
+ ?
i
q
i
> ?
2
(3)
where ?
2
is the second threshold and the thresholds are ordered so that ?
1
< ?
2
. It is
a straightforward extension to search for the values of ?
1
and ?
2
that minimize the sum
of squared errors. At the same time however this can be computationally demanding.
Chong (1994), Bai (1997) and Bai and Perron (1998) have shown that sequential esti-
mation is consistent, thus avoiding this computation problem. This involves fixing the
72
Annex II.
Threshold regression analysis
Annex II.
ANNEX II. 73
first threshold at ?
1
and searching for a second threshold assuming that the first is
fixed. It can be shown that the estimate of ?
2
is asymptotically efficient, but that ?
1
is not. This is because the estimate ?
1
was estimated from a sum of squared errors, a
function that was contaminated by the presence of a neglected regime. Bai (1997) sug-
gests a refinement estimator for ?
1
, which involves fixing the second threshold at ?
2
and searching for the first threshold, ?
1
, now including the second threshold. We denote
this refined estimate by ?
1
.
Testing for the significance of a threshold
Having found a threshold it is important to determine whether it is statistically signif-
icant or not, that is, to test the null hypothesis H
0
: ?
1
= ?
2
. Given that the threshold
?
1
is not identified under the null, this test has a non-standard distribution and criti-
cal values cannot be read off standard distribution tables. Hansen (1996) suggests boot-
strapping to simulate the asymptotic distribution of the likelihood ratio test allowing
us to obtain a p value for this test. Firstly, one estimates the model under the null
(linearity) and alternative (threshold occurring at ?
1
). This gives the actual value of the
likelihood ratio test, (F1),
Here S
0
and S
1
are the residual sum of squares from the linear and threshold models
respectively. Then a bootstrap is created by drawing from the normal distribution of
the residuals of the estimated threshold model. Hansen (2000) recommends fixing the
regressors in repeated bootstrap samples. Using this generated sample, the model is
estimated under the null and alternative and the likelihood ratio F
1
is obtained. This
process is repeated a large number of times (in our case 1,000). The bootstrap estimate
of the p-value for F
1
under the null is given by the percentage of draws for which the
simulated statistic F
1
exceeds the actual one.
In the case of the two-threshold model we would like a test to discriminate between
one and two thresholds. An approximate likelihood ratio test of one versus two thresh-
olds is given by the following statistic,
To obtain the p-value a bootstrap procedure is once again followed with the depend-
ent variable being generated under the null hypothesis of a single threshold.
The threshold analysis in this paper begins by estimating a single threshold on each of
the threshold variables considered. If the first threshold is found to be significant using
the bootstrap procedure described above we search for a second threshold using the sequen-
tial estimation method described above. We continue this process until an insignificant
threshold is found. To maintain a reasonable sample size in each regime we adopt the
restriction that at least 10 per cent of observations must be in each regime.
F
1
=
S
0
— S
1
(?
1
)
where ?
2
=
1
S
1
(?
1
)
?
2
n(t — 1)
F
1
=
S
0
— S
1
(?
1
)
where ?
2
=
1
S
1
(?
1
)
?
2
n(t — 1)
Empirical methods
In the empirical analysis we relate both the level of IPR protection (section 2) and the
level of international technology diffusion, as measured by patent applications from non-
residents to economic growth in a relatively large sample of developed and developing
countries. The starting point for this analysis is, by now, a standard empirical growth
regression in a panel setting. Following the contributions of Levine and Renelt (1992)
and Sala-i-Martin (1997) there has been some standardization of the variables included
in empirical growth models. The core regression that we estimate is the following:
GROWTH
it
= ?
1
INITGDP
it
+ ?
2
GDI
it
+ ?
3
POPGROW
it
+ ?
4
SYR15
it
+ ?
5
TRADE
it
+ µ + ? + ?
where GROWTH is the average growth of GDP per capita over each five-year period,
INITGDP is the log of initial GDP per capita in each five-year period, GDI is the log of
the average level of investment in each five-year period, POPGROW is the average growth
rate of population in each five-year period, SYR15 is the average years of secondary
schooling in the population over 15 at the beginning of each five-year period and TRADE
is the average ratio of total trade to GDP in each five-year period. We expect positive
coefficients on GDI, SYR15 and TRADE and a negative coefficient on INITGDP and
POPGROW.
68
We also estimate a fixed effects specification, including a full set of time
and country dummies in all specifications.
In section 2 we add to these variables the measure of IPR protection developed by
Ginarte and Park (1997). We extend the linear model considering the relationship
between IPR protection and growth by conducting a threshold regression analysis, to
address whether the impact of IPR protection on growth depends upon the value of
variables measuring imitative ability (namely INITGDP and manufacturing value-added
74
Annex III.
Empirical method, data sources
and construction
Annex III.
68
The coefficient on population growth is expected to be negative and significant. In the existing (mainly cross-
section) literature however both positive and negative coefficients have been obtained, with Levine and Renelt (1992)
finding the coefficient on this variable to be “fragile”. We find that excluding the country-fixed effects and estimating
a pooled or a random effects model give us the more usual negative coefficient on population growth, though the coef-
ficient tends to be insignificant. One possibility therefore is that population growth is capturing some form of market
size effect.
ANNEX III. 75
as a share of GDP, MANVAL) and upon openness, as measured by the ratio of trade
to GDP. This follows from the arguments of Thompson and Rushing (1996) and Gould
and Gruben (1996).
The second part of our empirical analysis considers the impact of patenting by domes-
tic and foreign residents on growth and of the importance of IPR protection in influ-
encing the extent of foreign technology diffusion through patents. On the one hand,
this simply extends the above growth model to include the ratio of patent applications
by domestic residents per 1,000 of the labour force (DOMPAT) and the ratio of patent
applications by non-residents per 1,000 of the labour force (FORPAT). The variable on
domestic patents is included to account for domestic innovation, while the variable on
patenting by non-residents is included to account for international technology diffusion,
as discussed in the main text. Once again we extend the linear model to consider
threshold effects, allowing the coefficient on foreign patenting to depend upon third
variables. We consider threshold effects based on the level of IPR protection to exam-
ine whether the strength of IPR protection affects the extent of technology diffusion
through foreign patenting. We also consider thresholds on the level of initial GDP per
capita, which allow us to examine whether the extent of technology diffusion through
foreign patenting is affected by variables used to account for a country’s ability to imi-
tate existing products and to innovate. Finally, we consider thresholds based on the
ratio of trade to GDP in order to examine whether the degree of openness affects the
extent of diffusion, and the level of GDP to examine whether market size affects the
extent of technology diffusion.
In addition to examining the importance of foreign patenting for growth, we also exam-
ine whether the level of IPR protection impacts upon domestic innovative activity, as
measured by DOMPAT, and upon international technology diffusion, as measured by
FORPAT. The basic specification for our empirical model is the following;
X
it
= ?
1
INITGDP
it
+ ?
2
SYR15
it
+ ?
3
TRADE
it
+ ?
4
IPR
it
+ µ
i
+ ?
t
+ ?
it
where the dependent variable, X, is either the average ratio of patent applications by
domestic residents per 1,000 of labour force or the average ratio of patent applications
by non-residents per 1,000 of labour force and the independent variables INITGDP,
SYR15, TRADE and IPR are as defined above. In various specifications we also include
a measure of higher schooling, variables representing political and civil liberties (taken
from Freedom House) and in the case of the foreign patenting equation we include
DOMPAT. The inclusion of these variables does not alter either the sign or significance
of the main variable of interest, namely the index of IPR protection. Moreover, the coef-
ficients on the variables themselves tend not to be significant. Since we have no solid
theory on which to draw for our empirical analysis we report the results from the above
parsimonious specification. The equation as written above is once again a fixed effects
model allowing for unobserved country and time heterogeneity. We also experimented
with both a pooled and a random effects model. The sign and significance of the coef-
ficient on the IPR variable tends not to differ greatly across specifications.
Country coverage, data sources and construction
Most of the data used in our analysis was taken from Falvey, Foster and Greenaway
(2004a). This dataset considers up to 80 developed and developing countries over the
period 1975-1994 using data on four five-year averages. The sample of countries con-
sidered in our analysis is listed below. Data on patent applications is only available for
47 of these 80 countries. The 47 countries used in our analysis of domestic and for-
eign patenting are indicated by an asterisk in the list below.
76 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Developed Countries
Australia*
Austria*
Belgium*
Canada*
Denmark*
Finland*
France*
Germany*
Greece*
Ireland*
Italy*
Japan*
New Zealand*
Netherlands*
Norway*
Portugal*
Spain*
Sweden*
Switzerland*
United States of America
Developing Countries
Algeria*
Argentina
Bangladesh*
Benin
Bolivia
Botswana
Brazil*
Cameroon
Central African Republic
Chile*
Colombia*
Democratic Republic of the Congo
Republic of the Congo
Costa Rica
Dominican Republic
Ecuador*
Egypt*
El Salvador*
Fiji
Ghana
Guatemala*
Haiti
Honduras
India*
Indonesia*
Iran (Islamic Republic of)*
Israel*
Jamaica
Jordan
Kenya*
Republic of Korea*
Malawi*
Malaysia
Mauritius
Mexico*
Mozambique
Nepal
Nicaragua
Niger
Papua New Guinea
Pakistan*
Panama
Paraguay
Peru*
Philippines*
Rwanda
South Africa*
Senegal
Singapore*
Sri Lanka*
Swaziland
Syrian Arab Republic
Thailand
Togo
Trinidad and Tobago
Uganda
Uruguay*
Venezuela*
Zambia*
Zimbabwe*
ANNEX III. 77
Variable Definition Source
GROWTH
INITGDP
GDI
POPGROW
SYR15
INFLATION
TRADE
IPR
MANVAL
DOMPAT
FORPAT
GDP
Average growth rate of GDP per capita in each five-year
period
(log) of initial GDP per capita in each five-year period
Average of the (log) of gross domestic investment in each
five-year period
Average growth rate of population in each five-year
period
Average years of secondary schooling in the population
over 15 at the beginning of each five-year period
Average annual rate of increase of the CPI index in each
five-year period
Average of the ratio of total trade to GDP in each five-
year period
Index of IPR protection
Average of manufacturing value-added as a share of GDP
in each five-year period
Average number of patent applications by domestic resi-
dents per 1,000 of labour force in each five-year period
Average number of patent applications by non-residents
per 1,000 of labour force in each five-year period
Average of the (log) of the level of GDP
World Development Indicators
(2001)
World Development Indicators
(2001)
World Development Indicators
(2001)
World Development Indicators
(2001)
Barro and Lee (2000)
World Development Indicators
(2001)
World Development Indicators
(2001)
Ginarte and Park (1997)
World Development Indicators
(2001)
WIPO (various years) and World
Development Indicators (2001)
WIPO (various years) and World
Development Indicators (2001)
World Development Indicators
(2001)
Data for both the empirical growth model and the determinants of domestic and for-
eign patenting are taken from a number of available sources. Variable names, defini-
tions and sources are listed below.
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Annex IV.
Evidence on IPR protection
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UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
Vienna International Centre, P.O. Box 300, 1400 Vienna, Austria
Telephone: (+43-1) 26026-0, Fax: (+43-1) 26926-69
E-mail: [email protected], Internet:http://www.unido.org
Printed in Austria
V.05-91453—June 2006—600
doc_101084445.pdf
Knowledge is typically non-excludable in that it is not possible to prevent others from applying new knowledge even without the authorization of its creator. If a new technology is valuable, it is therefore likely to be copied or imitated, reducing the potential profits of the original inventor and potentially removing the incentive to engage in innovative activities.
UNITED NATIONS
INDUSTRIAL DEVELOPMENT ORGANIZATION
The Role of
Intellectual Property Rights
in Technology Transfer
and Economic Growth:
Theory and Evidence
working papers
The Role of
Intellectual Property Rights
in Technology Transfer
and Economic Growth:
Theory and Evidence
By
Rod Falvey
Leverhulme Centre for Research on Globalisation and
Economic Policy, School of Economics, The University of Nottingham
and
Neil Foster
Department of Economics, University of Vienna
In cooperation with
Olga Memedovic
UNIDO, Strategic Research and Economics Branch
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
Vienna, 2006
This paper has not been formally edited. The designations employed and the presen-
tation of material in this publication do not imply the expression of any opinion what-
soever on the part of the Secretariat of the United Nations Industrial Development
Organization concerning the legal status of any country, territory, city or area, or of its
authorities, or concerning the delimitation of its frontiers or boundaries. The opinions,
figures and estimates set forth are the responsibility of the author and should not nec-
essarily be considered as reflecting the views or carrying endorsement of UNIDO. The
designations “developed” and “developing” economies are intended for statistical con-
venience and do not necessarily express a judgment about the stage reached by a par-
ticular country or area in the development process. Mention of firm names or
commercial products does not imply endorsement by UNIDO. Material in this paper
may be freely quoted but acknowledgement is requested with a copy of the publication
containing the quotation or reprint.
This publication was prepared by Olga Memedovic, UNIDO staff member from the
Strategic Research and Economics Branch drawing on the background paper pre-
pared for the UNIDO Research Project “Public Goods for Economic Development”,
by Rod Falvey and Neil Foster. Rod Falvey is Professor of International Economics,
Leverhulme Centre for Research on Globalisation and Economic Policy, School of
Economics, The University of Nottingham. Neil Foster is Assistant Professor of
economics at the Department of Economics, University of Vienna. The publication
has benefited from the valuable comments provided by Professor David Greenaway
during the finalization of this publication. UNIDO intern Robert Lambertus van
Lavieren provided assistance during various stages of preparing this publication.
The authors are grateful to Michael Bailey for proofreading the final document.
Comments and suggestions on the issues raised in this paper may be addressed to:
Olga Memedovic
Strategic Research and Economics Branch
UNIDO
P.O. Box 300
1400 Vienna
Austria
Tel: (+43-1) 26026-4676
Fax: (+43-1) 26026-6864
E-mail: [email protected]
iii
Abstract
Following the conclusion of the TRIPS Agreement, much has been written on the poten-
tial costs and benefits of stronger Intellectual Property Rights (IPRs) protection in terms
of growth and technology transfer, particularly for developing countries. This paper
reviews this literature and provides new evidence linking protection of IPRs to economic
growth, innovation and technology diffusion. Results suggest that while stronger IPR
protection can ultimately reap rewards in terms of greater domestic innovation and
increased technology diffusion in developing countries with sufficient capacity to inno-
vate, it has little impact on innovation and diffusion in those developing countries with-
out such capacity and may impose additional costs. There is a considerable incentive,
therefore, for countries at different stages of development to use the flexibilities in the
TRIPS Agreement to maximize its net benefits for their development.
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Intellectual property rights and economic growth . . . . . . . . . . . . . . . . . . 9
3. Intellectual property rights and innovation . . . . . . . . . . . . . . . . . . . . . . . . 17
4. Intellectual property rights and international technology diffusion . . . . 23
Intellectual property rights and international trade . . . . . . . . . . . . . . . 26
Intellectual property rights and FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Intellectual property rights and licensing . . . . . . . . . . . . . . . . . . . . . . . . 33
Intellectual property rights and patenting . . . . . . . . . . . . . . . . . . . . . . . 34
Related literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5. Country specific evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6. Summary of empirical results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7. Policy responses to TRIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Intellectual property rights related policies . . . . . . . . . . . . . . . . . . . . . . 50
Competition policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Complementary policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Technology diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
The role of multilateral organizations . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8. Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Annex I. Construction of the Ginarte and Park IPR index . . . . . . . . . . . . . . . 71
Annex II. Threshold regression analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Annex III. Empirical method, data sources and construction . . . . . . . . . . . . . 74
Annex IV. Evidence on IPR protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
v
Contents
Introduction
Knowledge is typically non-excludable in that it is not possible to prevent others from
applying new knowledge even without the authorization of its creator. If a new tech-
nology is valuable, it is therefore likely to be copied or imitated, reducing the poten-
tial profits of the original inventor and potentially removing the incentive to engage in
innovative activities. Intellectual property rights (IPRs) encourage innovation by grant-
ing successful inventors temporary monopoly power over their innovations. The conse-
quent monopoly profits provide the returns on successful investment in research and
development (R&D), which must be large enough to compensate for the high share of
R&D investment that is unsuccessful.
Once an innovation has been created, its non-rival character suggests that its benefits
will be maximized if its use is free to all at marginal cost. Although this availability to
all will yield benefits in the short run, it will also severely damage the incentive for
further innovation. But, excessive IPR protection is likely to lead to an inadequate dis-
semination of new knowledge, which in itself could slow growth to the extent that
access to existing technology is necessary to induce further innovation. Weak IPR pro-
tection has actually stimulated R&D activity in many countries by encouraging knowl-
edge spillovers from transnational corporations (TNCs) and other domestic firms. Giving
innovators too much protection may also lead to permanent monopoly. Entry by rivals
may be impeded, and successful innovators may have reduced incentives for develop-
ing and exploiting subsequent innovations. Choice of IPR policy then reflects a balanc-
ing of these considerations. The awarding of a temporary monopoly, although second
best, is intended to restore the incentive to innovate, which in turn should encourage
long-run growth and improved product quality.
Developed countries, with many potential innovators, have tended to opt for relatively
strong IPR systems, with the aim of encouraging inventive and creative activities that
are seen as an important source of long-run economic growth. With R&D spending con-
centrated in a handful of the world’s richest countries, genuinely innovative activities
are limited in most developed and developing countries. The majority of countries in the
world have taken a different approach, providing only weak IPR protection, if any, as
a way of allowing the rapid diffusion of knowledge through imitation as a significant
vii
Executive summary
source of technological development. Providing stronger IPR protection is seen as shifting
profits from domestic imitative firms to foreign firms and reducing output in the domes-
tic economy, rather than encouraging domestic innovative activity. The counter argument
is that stronger IPR protection can help reward creativity and risk-taking even in develop-
ing economies, while weak IPR protection can make developing countries remain
dependent on dynamically inefficient firms that rely on counterfeiting and imitation.
The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) was
established during the Uruguay Round (1986-1994) of trade negotiations in order to
strengthen the international IPR regime. The TRIPS Agreement is the first comprehen-
sive and global set of rules covering IPR protection. The TRIPS Agreement specifies
minimum standards that should be attained by a designated time. The areas covered
are copyrights and related rights, trademarks, geographical indications, industrial
designs, patents, the layout designs of integrated circuits and undisclosed information
including trade secrets and test data.
Intellectual property rights and economic growth
If we look at the world as being composed of two types of countries: a developed, inno-
vating “North” and a developing, imitating “South”
1
, then the impact of stronger IPR pro-
tection benefits the innovating North, but its impact in the South where innovation is
limited or non-existent is ambiguous, depending inter alia on the channels through which
technology is transferred. Research indicates that stronger IPR protection is only found to
benefit the South when R&D is highly productive, thus resulting in significant cost reduc-
tions, and when the South comprises a large share of the overall market of the product.
Research also shows that the benefits of increased innovation through stronger IPR pro-
tection become weaker as more and more countries strengthen their IPR regimes,
because the extra market covered and the extra innovation that can be stimulated by
such protection diminishes. Since IPR holders engage in monopoly pricing that distorts
consumer choice, strengthening IPR protection can lead to welfare reductions, particu-
larly in a country that undertakes little or no R&D and would otherwise be able to free
ride on foreign innovations.
Trade channel
When technology is transferred through trade, then successful southern imitation results
in shifting the competitive advantage for the production of imitated products from the
North to the South. Stronger IPR protection in the South decreases southern imitation
and increases northern innovation in the short run, as innovation becomes more prof-
itable. In the long run, though, innovation in the North may fall, because if new prod-
ucts are produced for a longer time span in the North, fewer resources are available
for innovation there. Stronger IPR protection in the South may then reduce global
viii
1
The use of the terms “North” and “South” is a simplification of reality often used in the literature. UNIDO (2005)
notes that this simplification ignores inequality within the North and the South.
growth. But weak IPR protection in the South may have effects besides reducing the
incentive for innovation in the North. Northern exporters may be able to “mask” their
production technologies, thereby limiting the extent to which these can be imitated
through traded goods. The potential gains from technology transfer through weak IPR
protection in the South might then be offset by increases in northern masking.
Foreign direct investment channel
When foreign direct investment (FDI) is considered as a source of technology transfer,
northern innovators may shift production to the South, reducing competition for
resources in the North. Stronger IPR protection can then encourage FDI and lead to
increased innovation. However, if it is easier to imitate TNC products produced in the
South than products produced in the North, then production may be shifted back to
the North, leaving fewer resources available for innovation in the South.
Licensing channel
If technology is transferred through licensing, stronger IPR protection in the South
results in greater innovation in the North, and increased licensing to the South.
Licensing has the advantage to northern firms of higher profits due to lower produc-
tion costs in the South, but involves other costs in terms of contract negotiations, trans-
ferring the necessary technology and in the rents that the innovator must give to the
licensee to discourage imitation. By reducing the risk of imitation, stronger IPR protec-
tion in the South also reduces the costs of licensing, thus encouraging licensing and
freeing up resources in the North for innovation.
In sum, much depends upon the channels of transmission available and the ability of
the South to take advantage of the technology to which it is exposed. While IPR pro-
tection would be expected to enhance growth in countries that move toward free trade
and have a comparative advantage in innovative technology-intensive activities, its
impact on countries lacking such advantages is less clear. An overview of the literature
that directly tests whether stronger IPR protection is likely to result in higher growth
is presented in table 2. These studies tend to measure the strength of IPR protection
using indices based on the perceived strength of a country’s patent law.
The literature reviewed in table 2 provides evidence that strengthening an IPR regime
can enhance growth, depending on country characteristics. IPR protection seems to lead
to higher growth in more open economies, other things equal. It also seems to lead to
higher growth in the developed and least developed countries (LDCs), but has no sig-
nificant effect on growth in middle-income countries. The developed countries benefit
the most in terms of growth from stronger IPR protection, because stronger IPR protec-
tion encourages domestic innovation and technology transfer. Findings also imply that
the LDCs, with little capacity to imitate and innovate, benefit from growth from a stronger
IPR regime, but the available evidence is not clear on the exact channels through which
the LDCs may benefit: a stronger IPR regime is found to have little positive impact on
many technology diffusion channels, including trade, FDI and licensing.
ix
The middle-income countries are likely to have some capacity to imitate, and for them
stronger IPR protection can have two offsetting effects, encouraging technology trans-
fer through increased imports and FDI, on the one hand, but reducing technology trans-
fer by limiting the extent of imitation on the other.
Intellectual property rights and innovation
The main benefit claimed for strong IPR protection is that by allowing innovators to
appropriate a share of the benefits of their creative activities, R&D is encouraged, which
leads to innovation and higher long-run growth. The cross-country evidence reviewed
in this paper linking IPRs to domestic innovation (section 3 of the paper), technology
diffusion (section 4) and growth (section 2) is summarized in table 4.
The impact of IPR protection on domestic innovation is likely to vary with a country’s
level of development and its factor endowments. More generally, we may expect IPRs
to impact on domestic innovation differently in countries with significant innovative
capacity as opposed to those with few resources available for domestic innovation. The
evidence summarized suggests that stronger IPR protection can encourage domestic
innovation in countries that have significant domestic capacity for innovation, but that
it has little impact on innovation in countries with a small innovative capacity.
Intellectual property rights and international
technology diffusion
International technology transfer or diffusion refers to the process by which a firm in
one country gains access to and employs technology developed in another country. Some
transfers occur between willing partners in voluntary transactions, but many take place
through non-market transactions or spillovers.
The impact of stronger IPR protection on technology diffusion is ambiguous in theory
and depends on a country’s circumstances. On the one hand, stronger IPR protection
could restrict the diffusion of technology, with patents preventing others from using
proprietary knowledge and the increased market power of IPR holders potentially reduc-
ing the dissemination of knowledge due to lower output and higher prices. On the other
hand, IPRs could play a positive role in knowledge diffusion, since the information avail-
able in patent claims is available to other potential inventors. Moreover, strong IPR
protection may encourage technology transfer through increased trade in goods and
services, FDI, technology licensing and joint ventures. Despite this theoretical ambigu-
ity, the diffusion of technology from countries at the technological frontier to other
countries is considered the main potential benefit of the TRIPS Agreement, particularly
for developing countries that tend not to innovate significantly. The findings of several
studies relating IPRs to technology diffusion through international trade, FDI, licensing
and patenting are summarized in table 6 (annex IV). The evidence suggests that stronger
IPR protection can encourage technology transfer through a number of channels, though
once again its impact has been found to depend upon other factors related to a country’s
imitative ability and level of development.
x
Country specific evidence
Based on the experience of the Republic of Korea, it is argued that strong IPR pro-
tection will hinder rather than facilitate technology transfer and indigenous learning
activities in the early stages of industrialization, when learning takes place through
reverse engineering and duplicative imitation of mature foreign products. It is only
after countries have accumulated sufficient indigenous capabilities and an extensive
science and technology infrastructure capable of undertaking creative imitation that
IPR protection becomes an important element in technology transfer and industrial
activities. Similarly, the development experience of India indicates the importance of
weak IPR protection in building up local capabilities, even when countries are at very
low levels of development.
Research findings indicate that the static effects of stronger IPR protection on prices,
employment and output are likely to be negative for most industries in the Lebanon.
It is suggested however that dynamic gains from stronger IPR protection are possible,
through increased FDI, increased product development by local firms (particularly in
cosmetics, food products, software applications, publishing and film production), and
the increased ability to enter into joint ventures or product licensing. Further, to the
extent that these lead to additional technology transfer and local product development,
the average quality of local products may rise.
Survey evidence from China reveals that managers of foreign enterprises are reluctant
to locate R&D facilities in China for fear of misappropriation and patent infringement.
Enforcement problems and weak penalties were also a concern. These factors led firms
that transferred technology to China not to use the latest technology, but technologies
that were at least five years behind the frontier. Chinese firms were also found to suf-
fer from trademark infringement, which in the long run is likely to be particularly dam-
aging to enterprise development.
Summary of empirical results
Following the literature reviewed by this paper, it seems clear that the implications of
stronger IPRs depend, inter alia, on a country’s level of development (measured by per
capita gross domestic product (GDP) or human capital). For most high-income coun-
tries, strengthening IPRs raises growth at least partly, due to increased innovation and
technology diffusion. The IPR regimes in these countries already meet or exceed the
TRIPS standards, leaving them free to strengthen further their IPR regime if they wish.
For middle-income countries, the evidence suggests that strengthening IPRs has little
effect on growth. On one hand, a stronger IPR regime encourages both domestic inno-
vation and technology diffusion through foreign patenting and international trade and
both domestic innovation and technology diffusion can impact positively upon growth.
On the other hand, the beneficial impact of stronger IPR protection on domestic inno-
vation and technology diffusion is to a certain extent offsetting the growth-enhancing
xi
benefits otherwise obtained from imitation and now precluded by the stronger IPR
regime. The IPR regimes in these countries will need to be strengthened in order to
meet the TRIPS standards. The policy focus of these countries should be to encourage
domestic firms to shift from imitation to innovation and to facilitate other activities
with growth-enhancing technology spillovers.
For low-income countries, evidence suggests that strengthening IPRs encourages growth,
but the exact channels through which this occurs are not yet identified. In these coun-
tries, stronger IPRs appear to have no effect on innovation and the evidence reviewed
suggests that the impact on international trade is negative.
In the lowest income countries, while stronger IPR protection is found to encourage
foreign patenting it had no significant effect on growth. These are countries whose IPR
regimes will need to be strengthened to meet the TRIPS standards. It may be that most
will not have significant imitative or innovative capability in the near future. Those
which do must be concerned that TRIPS will inhibit their firms from passing through
the imitative stage that seems to be the precursor to gaining innovative capability in
relatively high-tech industries. The TRIPS obligations may make WTO membership less
attractive for those countries with imitative aspirations.
International trade
A country’s openness to international trade seems also to affect the relationship between
IPRs and growth. The evidence suggests that stronger IPRs have a significant and pos-
itive impact on growth in more open economies. The exact mechanism through which
this occurs has yet to be revealed, but it appears to involve the substitution of domes-
tic innovation for technology produced abroad, since stronger IPRs seem to lead to less
domestic patenting and more foreign patenting. And it is not just that economies that
are more open receive more foreign patents but that the growth-enhancing effects of
foreign patenting also appear to be stronger in economies that are more open.
In addition, IPRs are also found to influence trade. Evidence suggests that stronger
IPR protection leads to larger trade flows, albeit mainly for countries with imitative
capability and not necessarily in products of industries considered high-tech or patent
sensitive.
Licensing and FDI
Since most innovation occurs in a few advanced countries, FDI and technology licens-
ing are often perceived as the major formal channels for international technology trans-
fer. But while there is some evidence that stronger IPRs encourage licensing, the
evidence on whether stronger IPRs encourage FDI is largely inconclusive. Most host
countries anticipate that FDI or licensing will yield further benefits from technology
spillovers to domestic firms. By their nature, such spillovers are difficult to measure,
so perhaps it is not surprising that there is little conclusive evidence of growth-
enhancing spillovers through inward FDI, at the economy-wide, industry or firm level.
xii
Foreign patenting
Considering technology diffusion through foreign patenting, the evidence indicates that
a country’s market size may be important in determining whether increased foreign
patenting encourages or inhibits growth. Results for developing countries reported in
the paper suggest that foreign patenting has a positive impact on growth in countries
with relatively high levels of IPR protection, for relatively open economies, and for coun-
tries with relatively large markets. These findings combined with the findings that
stronger IPR protection encourages foreign patenting in developing countries are con-
sistent with broad conclusions in the literature that stronger IPR protection encourages
technology diffusion. Benefits of technology diffusion are greater in more open
economies, countries that are more developed, and in countries with larger markets and
where foreign firms have less market power.
Policy responses
From the summary of empirical evidence it follows that the policy implications should
fall along the lines of a country’s level of development and its level of imitative or
innovative capacity. In low-income countries, the policy priority should be to improve
the investment environment, with liberal trade policies to encourage imports of tech-
nology embodied in goods. Such countries should not be required to apply and enforce
strong IPR obligations; particularly where this would increase the cost of importing
IPR protected goods. Developed countries can also play a role here through the pro-
motion of differential pricing schemes to lower the consumption cost of technology-
intensive imports to low-income countries. For other developing countries, with
relatively high levels of innovative potential, the stronger IPR protection required by
TRIPS can encourage domestic firms to switch from imitation to innovative activities.
By encouraging technology diffusion through international trade and foreign patent-
ing, stronger IPR protection will also help offset any adverse growth effects from lost
imitative opportunities.
In sum, policies related to the implementation of the TRIPS standards should be country-
specific. Ranges of policies that can assist countries in enhancing the benefits from
TRIPS have been discussed in the literature. These include:
Intellectual property rights related policies
Policies related to patent fees, the scope of patentability and the novelty requirements
in patents can all contribute to the development of a domestic innovative sector and
to the international diffusion of knowledge. The fees for patent applications and for
the renewal of patents and trademarks can be configured in such a way that both inno-
vation and diffusion will be promoted. Developing countries can also limit the scope
of patents and encourage rapid publication of patent applications, allowing domestic
firms to invent around the patent.
xiii
Countries could also set high standards for the novelty requirements of patents in order
to prevent routine discoveries from being patented. This could be combined with a sys-
tem of utility models to encourage local firms to invent around patents and to improve
their manufacturing methods.
Competition policies
By creating market power for patent holders, stronger IPR protection can lead to lower
sales at higher prices, which in turn can limit the extent of technology diffusion. A
number of policies consistent with TRIPS can offset these effects, including price con-
trols through reference prices or administrative ceilings, allowing parallel imports, and
compulsory licences, entitling a domestic licensee to exploit the patent for a fixed period
during the patent life.
Complementary policies
There are other policy options available that may enhance the impact of IPR protec-
tion on innovation. Tax policies and regulatory regimes can be structured so as not to
discourage innovation. Investment in education, particularly in science and technology,
may also encourage domestic innovation. Evidence suggests that the development of a
local innovative sector through these means can also enhance the benefits from inter-
national technology diffusion.
Technology diffusion
For most developing countries advanced technologies will be imported. International
technology transfer occurs through imports, FDI, licensing and patent applications by
non-residents. Policies aimed at improving infrastructure for communication and trans-
port and maintaining macroeconomic stability along with open trade and investment poli-
cies can encourage such flows, allowing countries improved access to foreign technology.
The role of multilateral organizations
Multilateral organizations can assist developing countries in meeting the terms of the
TRIPS Agreement by promoting capacity building in IPRs, to obtain the maximum net
benefit from TRIPS. Capacity building in IPRs should focus less on the specification of
protective laws and regulations and more on the technical, judicial and legal expertise
underlying effective technology transfer.
Multilateral organizations can play a significant role in facilitating research on the eco-
nomic effects of IPR protection and in encouraging the dissemination of its findings
to all interested parties. More generally, multilateral organizations have a role to play
in fulfilling information needs by encouraging collaboration and information sharing
among governments and by serving as a distributor of knowledge about successful
technology acquisition programmes that have been undertaken in the past. Technical
standards play an important role in diffusing production and certification technologies,
xiv
and learning technical standards is often tantamount to learning technology. Here mul-
tilateral organizations could create a pool of experts to aid standard setting bodies in
developing countries.
Given the importance of the presence of innovative capacity for successful interna-
tional technology diffusion, multilateral organizations could play a role in encouraging
the development of a research culture in developing countries. This could include the
development of training programmes in how technology is transferred, as well as the
financing of education programmes more generally, particularly those that can aid the
diffusion of technology. Donor countries and multilateral organizations could consider
establishing specific trust funds to finance the training of scientific and technical
personnel to facilitate the transfer of technologies and to encourage R&D in develop-
ing countries.
Multilateral organizations, the WTO and UNIDO in particular, could increase the scope
of monitoring developed country efforts in the transfer of technology and could add an
evaluative mechanism for the effectiveness and extent of technology transferred. Finally,
some researchers have asserted that the most powerful indirect incentive for technol-
ogy transfer would be for developed countries to grant significant market access for
products in which poor countries have a comparative advantage. They argue that a link
exists between technology transfer and market access due to the role that market size
and growth play in attracting trade and FDI, and the associated incentives to invest in
new technologies if export markets were more assured. Multilateral organizations, par-
ticularly the WTO, have an obvious role to play here.
xv
The argument underlying public policy intervention to protect IPRs is that, without
such protection, competitive market systems fail to provide private agents with suffi-
cient incentives to undertake the costly and risky investments that generate the new
ideas and technologies (knowledge) now widely recognized as the main source of sus-
tained economic growth. This is because knowledge has “public good” attributes.
Knowledge is typically non-excludable, in that it is not possible to prevent others from
applying new knowledge even without the authorization of its creator. If a new tech-
nology is valuable, it is therefore likely to be copied or imitated, reducing the poten-
tial profits of the original inventor and potentially removing the incentive to engage in
innovative activities. Where “imitation” has lower costs than “innovation”, imitators
have the advantage over innovators unless the latter can restrict access to their inno-
vation. This characteristic provides the argument for strong IPR protection. IPRs cre-
ate ownership of intellectual property by giving innovators the legally enforceable power
to prevent others from using an intellectual creation or to set the terms on which it
can be used. That is, IPRs encourage innovation by granting successful inventors tem-
porary monopoly power over their innovations. The consequent monopoly profits pro-
vide the return on successful investment in R&D.
The other public good aspect of knowledge compounds the costs of granting this monop-
oly power. Knowledge tends to be non-rival, in that the marginal cost for an additional
firm or individual to use the knowledge is often negligible. Once an innovation has
been created, its non-rival character suggests that benefits will be maximized if its use
is free to all at marginal cost. Although a policy of free access will yield benefits in the
short run, it will severely damage the incentive for further innovation. IPRs allow suc-
cessful innovators to appropriate some of the consumer surplus their innovation gen-
erates, both as a reward for their innovative efforts and to provide an incentive to future
investors. Because research is a risky activity, returns on successful R&D (which pro-
duces intellectual property) must be large enough to compensate for the high propor-
tion of R&D that is unsuccessful, generating in this way a normal return on R&D as
a whole.
2
1
Introduction 1.
2
Evidence suggests that IPR protection stimulates innovation and that the social rate of return to innovation appears
to be considerably higher than the rate of return to the innovator (Mansfield et al., 1977).
2 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Choice of IPR policy then reflects a balancing of these considerations. The awarding of
a temporary monopoly, although second-best, is intended to restore the incentive to inno-
vate, which in turn should encourage long-run growth and improved product quality.
It is not an all or nothing decision, however. Even in the absence of IPR protection there
may exist natural incentives to innovate depending upon market lead times, marketing
strategies and the difficulties in copying and imitating (Maskus, 2000a), and these fea-
tures are likely to be more important than IPR protection under certain circumstances.
Excessive IPR protection is likely to lead to an inadequate dissemination of new know-
ledge, which in itself could slow growth to the extent that access to existing technology
is necessary to induce further innovation.
3
Other costs to society of strong IPR protec-
tion include rent seeking behaviour, the wasteful duplication of investment in R&D (i.e.
patent races) and the costs of judicial actions to enforce property rights (Maskus, 2000a).
Giving innovators too much protection may also limit the spread of new ideas and lead
to permanent monopoly. Entry by rivals may be impeded, and successful innovators
may have reduced incentives for developing and exploiting subsequent innovations.
4
If IPRs were set and enforced by a global authority then, in principle, this authority
would be in a position to determine the appropriate strength of IPR protection for the
world as a whole. But IPRs are conferred by national governments and valid only within
the relevant jurisdiction. Consequently, national IPR systems have largely focussed on
what was perceived to be in the best interests of the country concerned, and different
countries perceived the trade-off between profits and innovation differently. Thus (devel-
oped) countries, with many potential innovators, have tended to opt for relatively strong
IPR systems, with the aim of encouraging inventive and creative activities, which are
seen as an important source of long-run economic growth.
5
With R&D spending con-
centrated in a handful of the world’s richest countries however, genuinely innovative
activities are limited in most developed and developing countries, and the majority have
taken a different approach, providing only weak IPR protection, if any, as a way of
allowing the rapid diffusion of knowledge. For many of these countries imitation can
be a significant source of technological development, and providing stronger IPR pro-
tection is seen as shifting profits from domestic imitative firms to foreign firms and
reducing output in the domestic economy, rather than encouraging domestic innova-
tive activity (Deardoff, 1992). The counter-argument is that stronger IPR protection can
help reward creativity and risk-taking even in developing economies, with those coun-
tries that retain weak IPR protection remaining dependent on dynamically inefficient
firms that rely on counterfeiting and imitation (Maskus, 2000a).
With the globalization of markets and the resulting increases in trade and investment
flows across borders, particularly flows of technology and technology-intensive products,
6
3
Hence the argument, discussed below, that in many countries weak IPR protection actually stimulated R&D activ-
ity by encouraging knowledge spillovers from transnational companies (TNCs) and other domestic firms (Cohen and
Levinthal, 1989).
4
Gilbert and Newey (1982) show that under certain conditions a monopolist may accumulate patents and allow
them to “sleep”, thus deterring entry into an industry.
5
Indeed there has been a general strengthening and broadening of IPRs over time in developed countries (Mazzoleni
and Nelson, 1998).
6
The share of knowledge-intensive or high-tech products in total world goods trade doubled between 1980 and
1994 (Fink and Primo Braga, 2005).
INTRODUCTION 3
this difference in national IPR standards has taken on additional significance. Firms
have looked increasingly to foreign markets to sell their goods and to foreign destina-
tions as platforms for production, making it easier for intellectual property to be
accessed and copied in countries that provide weak IPR protection. This is one of the
major reasons why firms investing heavily in R&D put pressure on national govern-
ments to strengthen the international IPR regime. The outcome was the Agreement on
Trade Related Aspects of Intellectual Property Rights (TRIPS), a product of the Uruguay
Round (1986-1994) of trade negotiations. The TRIPS Agreement is the first compre-
hensive and global set of rules covering IPR protection.
7
It sets minimum standards of
protection to be provided by each World Trade Organization (WTO) member in each
of the main areas of intellectual property covered, as well as requiring countries to
develop mechanisms to enforce these rights. The TRIPS Agreement does allow coun-
tries to pursue different policies with respect to IPR protection, but does specify min-
imum standards that should be attained by a designated time. Box 1 highlights some
of the major requirements of TRIPS. The areas covered are copyrights and related rights,
trademarks, geographical indications, industrial designs, patents, the layout designs of
integrated circuits and undisclosed information including trade secrets and test data.
Table 1 provides more information on these forms of intellectual property and how they
are covered by international agreements.
From the preceding discussion it might be difficult to see why developing countries
agreed to TRIPS. One factor was pressure from advanced countries (the United States
and the European Union (EU) in particular). Developing country governments also
thought that agreeing to TRIPS would encourage negotiations allowing developing coun-
tries wider access to agricultural and textile markets in developed countries. In addi-
tion business interests within many developing countries encouraged their governments
to adopt stronger IPR protection in order to protect their own innovative activities tai-
lored to the domestic market (Sherwood, 1997; Maskus, 1998a). Stronger IPR protec-
tion can also encourage increased imports, inward foreign direct investment (FDI) and
technology licensing, all of which can lead to increased technology transfer.
8
Indeed
Article 7 of the Agreement states that “[T]he protection and enforcement of intellec-
tual property rights should contribute to the promotion of technological innovation and
to the transfer and dissemination of technology, to the mutual advantage of producers
and users of technological knowledge in a manner conducive to social and economic
welfare, and to a balance of rights and obligations”. The various areas of IPR protec-
tion covered by TRIPS are likely themselves to have differing impacts on innovation
and technology diffusion, and some of these differences are discussed in box 2.
Following the TRIPS Agreement, a body of research has developed focussing on the
potential impact of TRIPS, and of IPRs more generally, on various aspects of economic
activity. Here we review the existing literature linking IPR protection to both economic
7
There have been international agreements on IPRs since the nineteenth century. Until recently the main instru-
ments of international law regarding the substantive protection of IPRs were the Paris Convention for the Protection
of Industrial Property (1883) and the Berne Convention for the Protection of Literary and Artistic Works (1886). The
TRIPS Agreement has been analyzed extensively by Primo Braga (1996), UNCTAD (1996) and Maskus (1997).
8
It is now widely accepted, for example, that the assimilation of foreign technology was a critical component of
the Asian Miracle (see, for example, Nelson and Pack, 1999).
Box 1. Substantive requirements of TRIPS in the WTO
General obligations Comments
1. National treatment Applied for persons
2. Most favoured nation Reciprocity exemptions for copyright;
prior regionals/bilaterals allowed
3. Transparency
Copyright and related rights
4. Observes Berne Convention Does not require moral rights
5. Minimum 50-year term Clarifies corporate copyrights
6. Programmes protected A significant change in global norms
as literary works
7. Data compilations
protected similarly
8. Neighbouring rights
protection for phonogram
producers, performers
9. Rental rights A significant change in global norms
Trademarks and related marks
10. Confirms and clarifies
Paris Convention
11. Strengthens protection of Deters use of confusing marks and
well known marks speculative registration
12. Clarifies non-use Deters use of collateral restrictions
to invalidate marks
13. Prohibits compulsory licensing
14. Geographical indications Additional protection for wines and spirits
Patents
15. Subject matter coverage Patents provided for products and
processes in all fields of technology
16. Biotechnology Must be covered but exceptions allowed
for plants and animals developed by
traditional methods
17. Plant breeder’s rights Patents or effective sui generis system
required
18. Exclusive rights of importation
19. Severe restrictions on Domestic protection can no longer be
compulsory licensing required; non-exclusive licences with
adequate compensation
20. Minimum 20-year patent
length from filing date
21. Reversal of burden of
proof in process patents
22. Industrial designs Minimum term of protection: 10 years
Integrated circuits designs
23. Protection extended to articles A significant change in global norms
incorporating infringed design
24. Minimum 10 year protection
4 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
INTRODUCTION 5
Undisclosed information
25. Trade secrets protected against New in many developing countries
unfair methods of disclosure
Abuse of IPRs
26. Wide latitude for competition Cannot contradict remainder of WTO
policy to control competitive agreement
abuses
Enforcement measures
27. Requires civil, criminal measures Will be costly for developing countries
and border enforcement
Transitional arrangements
28. Transition periods Five years for developing and transition
economies; 11 years for poorest countries
29. Pipeline protection Not required but a provision for
for pharmaceuticals maintaining novelty and exclusive
marketing rights
Institutional arrangements
30. TRIPS Council Agreement to be monitored and reviewed
31. Dispute settlement Standard approach with five-year
moratorium in some cases
Source: Maskus (2000a)
growth and international technology diffusion.
9
The paper is structured as follows. In
section 2 we discuss the existing literature on IPR protection and growth. Section 3
considers the importance of IPR protection in encouraging domestic innovation, while
section 4 considers its importance for the international diffusion of technology. Here a
number of specific channels for diffusion are emphasized, including trade, FDI, licens-
ing and patenting. Section 5 considers some country studies of the role of IPR protec-
tion in development. The inferences one can draw from this empirical literature are
summarized in section 6. Section 7 then offers some policy conclusions. Section 8 pro-
vides some overall conclusions.
9
The details of this literature are discussed under the appropriate subheadings below, but it is worth noting here
that Maskus (2000a) and Fink and Maskus (2005) provide book-length treatments on the impact of IPR protection on
economic performance, and that the website www.iprsonline.org provides links to a large number of research papers,
including papers covering such important topics as patenting in biotechnology and the access and pricing of drugs in
developing countries. Space restrictions preclude discussions of some of the more controversial aspects of IPR protec-
tion. Finger and Schuler (2005) consider how IPR protection can protect knowledge that exists or might be created in
developing countries.
6 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
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INTRODUCTION 7
Box 2. Aspects of TRIPS and their impact on innovation
and technology diffusion
Included in the TRIPS Agreement are the following aspects of intellectual property
protection:
• Patents—give their owners the right to exclude all others from making, selling,
importing, or using the product or process named in the patent without author-
ization for a fixed period of time. Three forms of patents may be applied for;
(a) invention patents require significant non-obviousness and as such a discrete
advance in technology; (b) utility models tend to be awarded for incremental
improvements of existing products and technologies; (c) industrial designs pro-
tect the aesthetic or ornamental aspects of a commercial article.
• Copyrights—protect the rights of creators of literary and artistic works to com-
municate, display, or perform those works in some medium, plus the rights to
make and sell copies.
• Trademarks and service marks—protect the rights to use a particular distinctive
mark or name to identify a product, service or company.
• Geographical indications—are related to trademarks and certify that a consumer
product was made in a particular place and that it embodies the physical
characteristics of that location.
• Trade secrets—are proprietary information about production processes, includ-
ing items such as customer lists and organizational methods. Standard liability
laws guard against unauthorized disclosure through commercially unfair means.
• Layout designs of integrated circuits—covers the layout design of integrated
circuits, the chips on which they are masked, and products that incorporate the
chip. TRIPS specifically permits reverse engineering of integrated circuits.
The importance of these different aspects of IPR protection for innovation and
technology diffusion are likely to vary. Here we discuss some of these differences.
Patents are expected to increase both innovation and technology diffusion. By pro-
viding an incentive to undertake R&D and the associated costs of inventing a new
technology or product, patents should encourage innovation. The empirical evi-
dence linking patent rights to innovation is mixed however (see section 3). Through
the publication of claims, patents add to the stock of public knowledge and can
encourage technology diffusion. The evidence in favour of such diffusion is stronger
(see section 4).
Literary and artistic ideas protected by copyrights are without industrial applicabil-
ity. While not encouraging industrial innovation, copyright protection is aimed at
encouraging creative works that provide social, cultural and economic benefits to
society. On the other hand, copyright protection limits the dissemination of liter-
ary works and raises the static costs of education, research and education.
Trademarks and geographical indications do not protect the creation of additional
knowledge, nor in theory do they restrict imitation or copying of protected goods
as long as they are sold under a different mark. Like copyrights therefore they are
unlikely to directly raise innovation or encourage technology transfer. Similar argu-
ments can be made for the protection of integrated circuit designs, though TRIPS
specifically allows for the reverse engineering of such designs. Trademarks are how-
ever likely to lower research costs, protect consumers from fraud regarding the
origin of a product and safeguard commercial reputations for quality. Since trade-
marks and geographical indications are used as a signal of quality, they may also
8 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
encourage firms to maintain or improve quality over time, as well as generating
further product differentiation. There is also some anecdotal evidence that under
the right circumstances trademarks can contribute to business development among
low- and middle-income producers in the developing world (see for example Maskus
et al., 2000c; Maskus, 2005).
Trade secrets are rationalized as a mechanism to foster innovations that do not
comply with the strict requirements for the patentability of products and processes.
Firms may choose not to patent an innovation for a number of reasons; (a) the
innovator may judge their creation to be unpatentable in legal terms, but hard to
imitate; (b) a firm may prefer not to disclose its processes, as required by patents,
because disclosure could reduce expected profits; (c) firms may wish to avoid the
costs of patenting. Trade secrets do not incur costs in the form of application and
grant procedures, yet they also do not add to the base of knowledge available to
the public. As such, trade secrets would not be expected to raise the diffusion of
technology significantly, though the potential exists for trade secrets to be reverse-
engineered. Trade secrets may however encourage innovation, especially of the
small, incremental type.
Source: Based on Maskus (2000a, pp. 20-23 and 36-50).
In the modern literature on economic growth, technological progress is viewed as the
prime determinant of long-run growth. This technological progress arises from the activ-
ities of economic agents carried out in order to profit from the introduction of new
products (Romer, 1990; Grossman and Helpman, 1991, Ch. 3) or the improvement of
existing ones (Grossman and Helpman, 1991, Ch. 4; Aghion and Howitt, 1992). Agents
invest in R&D in the expectation of profiting from the resulting inventions. But besides
creating new products, innovative activity adds to society’s stock of knowledge, upon
which subsequent innovations are based. This process is assisted where the informa-
tion that IPRs protect is made available to other potential inventors as in patent claims.
10
The global rate of growth then depends upon the rate of innovation and the stock of
knowledge, and IPR protection can increase growth by encouraging both.
When it comes to exploring these issues in a multi-jurisdiction context, the most rel-
evant analyses are those that examine a world composed of two types of countries: a
developed, innovating “North” and a developing, imitating “South”. The main con-
cerns have been whether increased IPR protection in the South would increase (a) the
rate of (global) growth, (b) the rate of technology transfer from the North to the South,
and, (c) welfare levels in both locations. A straightforward partial equilibrium analy-
sis reveals that while the North always benefits from stronger IPR protection in the
South, the South itself is found to benefit only when R&D is highly productive, such
that the R&D induced by stronger IPR protection in the South results in significant
cost reductions, and when the South comprises a large share of the overall market for
the good (Chin and Grossman, 1990). In these circumstances the additional monop-
oly profits available in the South provide a significant additional incentive for north-
ern investment in R&D, and the welfare of the South increases due to the increased
benefits in consumption resulting from northern R&D. But as Deardoff (1992) shows,
the benefits of increased innovation through stronger IPR protection become weaker
as more and more countries strengthen their IPR regimes, since the extra market
covered and the extra innovation that can be stimulated by such protection dimin-
ishes. Since IPR holders engage in monopoly pricing that distorts consumer choice,
9
Intellectual property rights
and economic growth 2.
10
Mansfield (1985) provides evidence suggesting that the learning process from patent claims is relatively rapid,
taking 10-12 months in the United States. These benefits should not be overstated however since patents do not nec-
essarily disclose sufficient information for the invention to be manufactured and many developing countries lack the
capacity to adopt and adapt new techniques.
strengthening IPR protection can lead to welfare reductions, particularly in a country
that undertakes little or no R&D and would otherwise be able to free ride on foreign
innovations.
11
Countering this is the notion that the North and the South may have
different requirements and priorities when it comes to technology (Diwan and Rodrik,
1991). The South may then have an incentive to provide IPR protection in order to
facilitate the invention of the particular technologies that meet its needs, which might
otherwise be neglected.
More recent work has considered dynamic general equilibrium models of innovation
and growth. Several aspects are then shown as potentially important. One is the com-
petition for scarce resources between R&D (investments in innovation) and the produc-
tion of the new and improved goods that arise from the innovation. The channels
through which technology can be transferred from one country to another then become
significant. In the simplest case, where only goods are traded, successful southern imi-
tation results in the competitive advantage for the production of imitated products shift-
ing to the South. Stronger IPR protection in the South then decreases southern imitation
and increases northern innovation in the short run, as innovation becomes more prof-
itable. But, as Helpman (1993) notes, in the long run innovation in the North may fall,
because if new products are produced for a longer time span in the North, fewer
resources are available for innovation there. Stronger IPR protection in the South may
then reduce global growth. But weak IPR protection in the South may have effects
besides reducing the incentive for innovation in the North. Northern exporters may be
able to mask their production technologies, thereby limiting the extent to which it can
be imitated through traded goods (Taylor, 1993). The potential gains from technology
transfer through weak IPR protection in the South might then be offset by increases
in northern masking.
Where FDI is an option, the resource competition effect noted by Helpman is moder-
ated (Lai, 1998). The innovator can now shift production of new goods to the South,
reducing the competition for resources in the North. Stronger IPR protection in the
South may further increase the speed of foreign investment and the return to innova-
tion. This analysis becomes more complicated, however, if one assumes, as seems rea-
sonable, that southern firms can more easily imitate the products of transnational
corporations (TNCs) when they are produced in the South than products produced in
the North. Stronger IPR protection in the South then makes imitation more costly, and
southern firms find themselves devoting greater resources to imitation, but with a lower
rate of success. The additional resources drawn into imitation in the South leave less
available for production, causing FDI to contract. In response production is shifted back
towards the North leaving fewer resources in the North available for innovation, which
lowers the rate of innovation overall (Glass and Saggi, 2002).
10 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
11
Results such as these have led many commentators to argue that the main impact of TRIPS will be to shift
wealth from developing countries to firms in developed countries. Rodrik (1994) for example states that “irrespective
of assumptions made with respect to market structure and dynamic response, the impact effect of enhanced IPR in
LDCs will be a transfer of wealth from LDC consumers and firms to foreign mostly industrial-country firms” (p. 449).
Extending the options further, the impact of stronger IPR protection in the South on
incentives for firms in the North to innovate and to license advanced technologies to
firms in the South has also been examined (Yang and Maskus, 2001a). Licensing has
the advantage of higher profits due to lower production costs in the South, but involves
other costs in terms of contract negotiations, transferring the necessary technology and
in the rents that the innovator must give to the licensee to discourage imitation. By
reducing the risk of imitation, stronger IPR protection in the South reduces the costs
of licensing (and its policing), thus encouraging licensing to the South and freeing up
resources for innovation in the North.
Perhaps the most important conclusion that follows from this brief review of the rele-
vant theoretical literature is that the implications of stronger IPR protection in the
South on either the incentives for innovation in the North or the rate of technology
transfer from the North to the South are not clear cut. Much depends on the channels
of transmission available and the ability of the South to take advantage of the technol-
ogy to which it is exposed. For individual countries the impact of IPR protection on
growth is likely to depend upon country characteristics, most notably factor endow-
ments. This leads to a further consideration. Many models of endogenous growth have
one dynamic sector that exhibits learning-by-doing externalities or spillover effects and
another traditional sector that does not. Then, depending on whether opening up to
trade shifts resources toward or away from the dynamic sector, a country’s rate of eco-
nomic growth may increase or decrease with globalization. The reallocation of resources
will depend upon a country’s initial factor endowments, amongst other things. While
IPR protection would be expected to enhance growth in countries that move toward
free trade and have a comparative advantage in the dynamic sector, its impact on coun-
tries with a disadvantage in this sector is less clear.
There is a small literature that directly tests whether stronger IPR protection is likely
to result in higher growth. The results from this literature are summarized in table 2.
This literature is not generally concerned with testing for the specific channels through
which technology is being transferred among countries, or for the mechanisms through
which growth might be enhanced, but simply whether, where and when a positive effect
is discernable. The approach adopted is to include a measure of the strength of IPR
protection in a standard cross-country empirical growth framework. Two indices of IPR
protection are commonly used in the literature, and both are based on the perceived
strength of a country’s patent law. The index of Rapp and Rozek (1990) [RRI] is based
on the adherence of each country’s patent laws in 1984 to the minimum standards pro-
posed by the United States Chamber of Commerce (1987). These standards include
guidelines for patent examination procedures, term of protection, compulsory licensing,
coverage of inventions, transferability of patent rights and effective enforcement against
infringement. The index is on a six-point scale with higher numbers indicating stronger
IPR protection. The index of Ginarte and Park (1997)
12
[GPI] is also on a six-point scale
and is constructed using similar criteria to the RRI. Their scoring method differs how-
ever, with five categories of the national patent law considered: the extent of coverage,
INTELLECTUAL PROPERTY RIGHTS AND ECONOMIC GROWTH 11
12
Annex I provides more information on the construction of the Ginarte and Park index.
membership of international patent agreements, provisions for loss of protection, enforce-
ment mechanisms and duration of protection. While the two indices are highly corre-
lated (Rafiquzzaman, 2002), for empirical purposes the GPI has the advantage over the
RRI in that it is constructed quinquennially from 1960 to 1990.
13
12 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Table 2. Summary of research on IPRs and growth
Study Sample and method Dependent variable(s) IPR index Results
Gould and
Gruben (1996)
Thompson and
Rushing (1996)
Thompson and
Rushing (1999)
Park (1999)
95 countries; cross
section with data
averaged over the
period 1960-1988
112 countries; cross
section with data
averaged over the
period 1970-1985
55 countries;
seemingly
unrelated
regression
techniques on a
cross-section of
data over the
period 1971-1990
60 countries;
seemingly
unrelated
regression
techniques on a
cross-section of
data over the
period 1960-1990
Growth of real
GDP per capita
Growth of real
GDP per capita
Growth of real
GDP per capita;
ratio of total
factor productivity
(TFP)
a
in 1971 to
that in 1990; the
Rapp and Rozek
Index of IPRs
Growth of real
GDP, fraction of
GDP invested in
physical capital,
fraction of GDP
invested in human
capital, fraction
of GDP invested
in R&D
Rapp and
Rozek Index
Rapp and
Rozek index
Rapp and
Rozek index
Ginarte and
Park index
IPR protection has a positive
impact on growth, which is
slightly stronger in more
open economies
IPR protection has a positive
impact on growth only in
countries that have reached
a certain initial level of GDP
per capita
IPR protection has a positive
impact on TFP in relatively
rich countries, which in turn
impacts positively upon out-
put growth
IPR protection has no direct
impact on growth. IPR
protection has an indirect
positive impact on growth
through physical capital
investment and R&D in the
most advanced countries
13
Both of these indices are based primarily on the statutes themselves, but not on their enforcement or implemen-
tation. Consequently these indices will overestimate the level of protection in a country where strong anti-infringement
laws exist, but are not enforced as may be the case in many developing countries that inherited IPR laws from their
colonial powers, but do not have the administrative capacity or inclination to enforce them (Gould and Gruben, 1996).
14
The level of IPR protection is highly correlated with a country’s level of economic development. Ginarte and Park
(1997) examine the determinants of their index and find that higher levels of GDP per capita, shares of R&D in GDP,
openness and levels of human capital are positively related to the strength of IPR protection.
15
Their hypothesis is based on firm-level evidence from Brazil by Braga and Willmore (1991) who found a negative
relationship between the degree of trade protection and a firm’s propensity to develop new technology or purchase it abroad.
a
Total Factor Productivity (TFP) is a derived measure of technology change.
While issues remain over the direction of causality
14
the results of the various studies lead
to fairly consistent conclusions. Gould and Gruben (1996) employ the RRI to examine the
importance of stronger IPR protection for growth in a sample of up to 95 countries with
data averaged over the period 1960-1988. They also examine whether the impact of IPR
protection on growth depends upon the degree of openness to trade, the underlying argu-
ment being that in closed economies stronger IPR protection may not have the desired
effect of encouraging innovation and higher growth, as firms may not have the incentive
to innovate if their market is guaranteed.
15
The model of Rivera-Batiz and Romer (1991)
provides a theoretical rationale for this hypothesis, with firms in closed economies finding
it more profitable to copy foreign technology than develop new technology.
Gould and Gruben regress the average growth of real GDP per capita on the RRI and
a number of standard explanatory variables, including initial GDP per capita, the invest-
ment to GDP ratio, the secondary school enrolment ratio and initial levels of literacy.
They find that stronger IPR protection has a positive impact on growth, which is mar-
ginally statistically significant. Gould and Gruben then go on to examine the relation-
ship between IPR protection and growth in open versus closed economies. Openness
is measured using three variables. The first two are the Black Market Premium (BMP)
and distortions in real exchange rates. Countries with high BMPs and high real exchange
rate distortions tend to be highly distorted and inward orientated (De Long and Summers
(1991) and Dollar (1992) respectively). The third measure is a composite index of a
country’s trade regime developed by Gould and Ruffin (1993) comprising a number of
existing trade orientation indices as well as a country’s BMP, real exchange rate dis-
tortions and the ratio of import taxes to imports. Each of these are interacted with the
RRI and included in the growth regression. From their results, Gould and Gruben con-
clude that IPR protection has a slightly larger effect on growth in more open economies.
These last conclusions are tentative, however, since, as Gould and Gruben acknowledge,
openness is multifaceted, which makes using a single measure problematic, particularly
since the measures of openness that have been employed in the empirical literature
tend not to be highly correlated (Pritchett, 1996).
16
Thompson and Rushing (1996) conduct a similar exercise, regressing the average growth
of real GDP per capita between 1970 and 1985 on the ratio of investment to GDP, the
secondary school enrolment ratio, population growth, initial GDP per capita and the
RRI for 112 countries. While they find a positive relationship between the RRI and
growth, it is not statistically significant. They then go on to consider whether IPR pro-
tection may have an impact upon a country’s growth rate, but only once a country has
reached a certain (but unknown) level of development, as measured by initial GDP per
capita. For this they employ threshold regression techniques finding a threshold at an
initial level of GDP of $3,400 (in 1980 dollars). For countries below this value there is
no significant relationship between IPR protection and growth, but above, the relation-
ship is positive and significant.
In a later paper (Thompson and Rushing, 1999), they extend their analysis to a sys-
tem of three equations. The three dependent variables are: the growth rate of real GDP
per capita, the ratio of total factor productivity (TFP) in 1971 to that in 1990 and the
RRI. The system is estimated using Seemingly Unrelated Regression (SUR) techniques
for 55 developed and developing countries. They once again split their sample in two
depending on the initial level of GDP per capita. It is found that increases in TFP have
a positive and significant impact on GDP growth. The IPR index is found to have an
insignificant impact on TFP for the full sample of countries, but a positive and signif-
icant impact for the richest subsample. The results suggest that in the most developed
countries stronger IPR protection impacts upon growth by enhancing TFP.
INTELLECTUAL PROPERTY RIGHTS AND ECONOMIC GROWTH 13
16
Rodriguez and Rodrik (2000) provide a critique of the most popular measures of openness.
Recently, Falvey, Foster and Greenaway (2004a) extend and update the single equation
analysis by employing the recently developed threshold techniques of Hansen (1996,
1999 and 2000). These allow the positioning and significance of a threshold (i.e. a
structural break)
17
to be identified, as well as the possibility of having more than one
threshold. They use the GPI and a panel of up to 80 countries with data averaged over
four five-year periods between 1975 and 1994. They follow the approach of Thompson
and Rushing, arguing that the impact of IPR protection is likely to depend upon the
level of development of a country as well as the structure of its economy. They use ini-
tial GDP per capita and manufacturing value added (since manufacturing tends to be
the most R&D intensive sector) as alternative indicators of imitative/innovative ability.
Columns 2 and 3 of table 3 reproduce a selection of their results.
18
Column 4 extends
these results by considering thresholds on a commonly used measure of openness,
namely the trade to GDP ratio. This allows us to examine the results of Gould and
Gruben in more detail.
The two measures of imitative/innovative ability yield consistent results, indicating a
three-regime, model (i.e. two structural breaks). For countries in either the low or the
high regimes a positive and significant impact of IPR protection is found. But for coun-
tries in the middle regime no significant relationship between IPR protection and growth
appears to exist. These results suggest that it is the least and most developed coun-
tries in the sample that benefit in terms of growth from stronger IPR protection.
19
It
is argued that the most developed countries benefit because stronger IPR protection
encourages innovation and technology transfer. The least developed have little capacity
to innovate or imitate, and benefit because stronger IPRs encourage technology transfer
through other channels.
20
Those countries in the middle of the distribution are likely
to have some capacity to imitate, and there stronger IPR protection can have two off-
setting effects, encouraging domestic innovation and technology transfer through
increased imports and FDI, on the one hand, but reducing technology transfer by lim-
iting the extent of imitation on the other. In no case, however, do the authors find evi-
dence of stronger IPR protection having a negative impact on growth.
The results for thresholds based on the trade to GDP ratio (column 4) are consistent
with those of Gould and Gruben (1996). There is a positive relationship between the
strength of IPR protection and growth in all regimes, but only in the high regime
14 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
17
The current paper makes extensive use of the threshold techniques of Hansen. Threshold regression models are
particularly useful when we expect a relationship between two variables to be contingent upon the value of a third vari-
able. As such they are particularly useful for the study of IPRs where available theory suggests that the relationship
between IPR protection and a number of variables including growth, innovation, imitation, trade and FDI are all likely
to depend upon third variables. Annex II describes the threshold regression model in more detail.
18
Annex III describes the data used for this analysis along with the sample of countries considered and provides
more information on the specification for the growth model estimated. Following Falvey, Foster and Greenaway (2004a)
we include the inflation rate, as an indicator of macroeconomic stability, in the growth regressions reported in table 3
alongside other standard explanatory variables.
19
The authors note that this is reflected in the levels of IPR protection chosen, with lower average values found
for countries in the middle regime than in the low and high regimes. Maskus and Penubarti (1995) similarly show that
patent protection tends to decline as countries move beyond the poorest stage into the middle-income stage in which
they have greater imitative ability.
20
The available evidence is not clear on the exact channels through which the least developed countries benefit
from stronger IPRs, since there exists little evidence of a positive relationship between trade and IPR protection for the
poorest countries, while FDI flows into the least developed countries tend to be relatively small.
(i.e. for the most open countries) is the relationship statistically significant. Bearing in
mind the caveats over measuring openness, this result provides a further indication that
increased exposure to international trade can enhance the benefits of IPR protection.
Finally, there has been at least one attempt to explore the way in which IPR protec-
tion can influence the factors that directly contribute to the growth of GDP per worker.
Park (1999) uses SUR methods to estimate a system of four equations. The four depend-
ent variables are output growth, the fraction of GDP invested in the capital stock, the
fraction of GDP invested in human capital and the fraction of GDP invested in R&D.
The latter three variables are included as explanatory variables in the output growth
equation, while the GPI is included as an explanatory variable in all four equations.
The model was estimated for 60 countries with data averaged over the period 1960-1990.
The results suggest that, while IPR protection has an insignificant direct impact on out-
put growth, it does have a significant indirect effect through its impact on physical cap-
ital and R&D investment. Splitting the sample in two based on the average level of
INTELLECTUAL PROPERTY RIGHTS AND ECONOMIC GROWTH 15
INITGDP
GDI
POPGROW
SYR15
TRADEPGDP
INFLATION
IPR
TH ? ?
1
IPR
?
1
? TH ? ?
2
IPR
TH > ?
2
OBSERVATIONS
TH1
(percentile)
TH2
(percentile)
p-value
F-Stat
ADJUSTED R
2
-0.10
(-6.54)***
0.04
(6.05)***
1.01
(1.42)
0.008
(1.47)
0.06
(3.54)***
-0.001
(-3.74)***
0.02
(2.05)**
0.003
(0.40)
0.01
(1.83)*
293
6.51
(25
th
)
9.29
(77
th
)
0.01**
7.10***
0.66
-0.11
(-6.18)***
0.05
(5.49)***
1.47
(1.89)*
0.003
(0.45)
0.04
(2.39)**
-0.001
(-3.61)***
0.02
(2.10)**
0.01
(1.59)
0.02
(2.21)**
233
9.83
(15
th
)
21.91
(71
st
)
0.07*
6.17***
0.65
-0.10
(-6.10)***
0.03
6.54)***
0.93
(1.43)
0.007
(1.21)
0.05
(3.05)***
-0.001
(-5.11)***
0.005
(0.60)
0.01
(1.38)
0.02
(2.10)**
293
0.34
(18t
h
)
0.77
(84
th
)
0.04**
6.57***
0.63
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated threshold,
regardless of whether it was the first estimated threshold. All equations include a full set of unreported country
and time dummies. t-values are reported in brackets. All models estimated using robust standard errors. *, **,
*** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the significance
of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with 1,000 replications.
Table 3. IPR protection and economic growth
GROWTH INITGDP MANVAL TRADEGDP
GDP per worker, Park finds that IPR protection affects growth indirectly through these
inputs in the richest half of the sample only, with no significant impact found for the
poorest half.
In summary, the results reviewed in this section provide evidence that strengthening
an IPR regime can be growth-enhancing, depending on country characteristics. IPR
protection seems to lead to higher growth in more open economies, other things
equal. It also seems to lead to higher growth in the richest and poorest countries,
but has no significant effect on growth in middle-income countries, all other things
being equal.
16 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
The main benefit claimed for strong IPR protection is that by allowing innovators to
appropriate a share of the benefits of their creative activities, R&D is encouraged which
leads to innovation and higher long-run growth. In this section we examine the cross-
country evidence linking IPRs to domestic innovation. The results are summarized in the
upper part of table 4, which summarizes the literature linking IPR protection to innova-
tion, technology diffusion and growth. At the aggregate level Kanwar and Evenson (2003)
examine directly whether stronger IPR protection (measured by the GPI) results in
increased R&D expenditure.
21
They estimate a panel model for up to 32 countries for the
period 1981-1995, and find that stronger IPR protection has a positive and significant
impact on the share of R&D investment in GDP. Given that it has been shown elsewhere
that R&D spending impacts positively upon TFP and output growth (see, for example, Coe
and Helpman, 1995), these results provide indirect evidence of the importance of IPR
protection in growth and are consistent with the results of Park (1999) considered above.
R&D expenditure is a measure of the input into innovative activity. Patent applications
are a measure of the output, and patents are recognized as the most important form
in which industrial innovation is protected. Such protection is more important for some
industries than others, however. The evidence suggests that firms in most industries in
advanced countries do not find patents to be a particularly effective means of appro-
priating the returns to R&D (see Cohen (1995) for a review). Mansfield (1986) for
example showed that although 65 per cent of pharmaceutical and 30 per cent of chem-
ical inventions would not have taken place without patent protection, in most indus-
tries patent protection was unimportant.
22
One reason put forward for its limited role
is that patent protection often does not affect the rate of entry significantly (Mansfield
et al., 1981). Mazzoleni and Nelson (1998) pick up this latter point and argue that
much of this survey evidence showing IPRs to be relatively unimportant can be faulted
for focusing almost exclusively on large, established firms operating within particular
industries. The studies tend to ignore the role of stronger IPRs on new entrants, small
17
Intellectual property rights
and innovation 3.
21
Note the potential for reverse causality in the relationship between R&D spending and IPR protection. Not only
may IPR protection stimulate R&D and innovative activities, but we may also expect that the demand for IPR protec-
tion is stronger in countries that are more innovative.
22
Mansfield et al. (1981) found that about a half of innovations considered in their study would not have been
introduced without patent protection. Once again the bulk of these were in the drug industry, with less than a quarter
of non-drug innovations being affected by patent protection. Other studies reaching similar conclusions include Scherer
et al. (1959), Taylor and Silberston (1973), Arundel and van de Paal (1995) and Cohen et al. (1997).
firms, organizations outside of any particular industry (e.g. universities) and for the
development of new industries (e.g. biotechnology). Cohen and Levinthal (1989) argue
further that in some cases, overly strong IPR protection has been found to restrict the
innovation process, with researchers finding it difficult to further develop a technology
without infringing the rights of existing patent holders. Little evidence on the impor-
tance of IPR protection for innovation in developing countries is available, though Primo
Braga et al. (2000) note that the criteria of novelty in patent grants is unlikely to be
apt for promoting the small, incremental and adaptive innovations that are typical in
developing countries.
18 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Table 4. Summary of effects of stronger intellectual property rights on
innovation, technology diffusion and growth
Domestic intellectual property rights Technology spillovers
Domestic Innovation
Domestic R&D
Domestic patenting
Channels of inter-
national technology
diffusion
Foreign direct
investment
Technology licensing
Foreign patenting
Trade
Domestic growth
Stronger IPRs increase domestic R&D spending
Evidence mixed in general. But threshold analysis
shows stronger IPRs (a) increase domestic
patenting in countries with innovative/imitative
capacity; (b) reduce domestic patenting in more
open economies
Evidence mixed in general, but strong IPRs
seem to be important for some TNC activities
(production and R&D) and in industries where
products can be imitated (chemicals, pharma-
ceuticals). Some evidence that TNCs more will-
ing to transfer technology to countries with
stronger IPRs
Limited evidence, but what evidence there
is suggests stronger IPRs increase licensing,
particularly in countries with innovative/
imitative capacity
Positive effect stronger in more open
economies and in countries with higher
innovative/imitative capacity
Impact of IPRs on trade flows depends upon
market size and the imitative ability of the
importing country. Positive effect of IPRs on
trade in manufacturing goods (except goods
difficult to imitate) in countries that have
imitative capacity. Possible negative effects in
small markets with weak imitative ability
Evidence that stronger IPRs increase growth in
developed countries and developing countries
with low innovative/imitative capacity. No effect
evident for developing countries with high
innovative/imitative capacity
Evidence that higher R&D spending
facilitates technology transfer and
raises growth
Evidence relating domestic patenting
to growth is mixed. In developing
countries there is little evidence of
a positive impact of domestic
patenting on growth
Evidence generally mixed on
whether inward FDI provides tech-
nology spillovers, although some
evidence of spillovers to host coun-
try firms with absorptive capacity.
Some evidence of spillovers from
outward FDI
Little evidence
Evidence of positive (negative) spill-
overs from foreign patenting for
developing countries with strong
(weak) IPRs, high (low) innovative/
imitative capacity and large, open
(small, closed) markets
Trade has been found to promote
technology spillovers both between
developed countries and from
developed to developing countries
There are a small number of econometric studies using data on domestic patent appli-
cations to examine the role of IPRs in promoting innovation. Many such studies sug-
gest that stronger IPR protection results in little or no measured increase in domestic
innovation, at least as measured by patent applications (Lerner, 2001, 2002; Branstetter
et al., 2004).
23
A recent paper by Chen and Puttitanun (2005) however shows that stronger IPR pro-
tection has a positive impact upon innovation in developing countries. Chen and
Puttitanun develop a model that has both an import and a local sector, with a local
and a foreign firm in the import sector and two local firms in the local sector. In the
import sector the foreign firm has a patented technology, while one of the local firms
has the ability to develop patentable technology in the local sector. Stronger IPR pro-
tection by reducing the ability to imitate can lead to lower competition and higher
prices in the import sector, but may encourage innovation in the local sector. The the-
oretical model suggests that domestic innovation in a country increases in its protec-
tion of IPRs and its level of development, and that a country’s level of IPR protection
may at first increase and then decrease in its level of development. The model is tested
empirically on a sample of 64 developing countries using panel data over the period
1975-2000. The empirical model is a system of two equations, one for IPRs and one
for innovation. IPRs are measured using the GPI index, while innovation is measured
using patent applications filed at the United States patent office by developing coun-
try residents. Empirical results confirm the U-shaped relationship between IPRs and a
country’s level of development and that stronger IPR protection encourages innovation.
Including interaction terms between IPRs and the level of development suggests that
IPR protection has a stronger impact on innovation in countries with higher levels of
development. In a related paper, Schneider (2005) examines the importance of IPR pro-
tection, high-tech imports and FDI on innovation and on per capita GDP growth. Once
again innovation is measured using the number of United States patent applications
made by residents of a given country. The model is estimated on panel data for 47 devel-
oped and developing countries over the period 1970-1990. The results again suggest
that innovation responds positively to IPR protection. Splitting the sample into devel-
oped and developing countries, Schneider finds that while IPRs have a positive impact
on innovation in developed countries, the impact in developing countries is negative,
and often significant.
While both R&D expenditure and patent applications have advantages and disadvan-
tages as measures of innovative activity, patent application data has the advantages of
being relatively reliable, available over a relatively long time period and for a relatively
large number of developing countries. To examine whether the strength of IPR protec-
tion encourages domestic innovation we regress the ratio of the number of domestic
patent applications to the labour force (DOMPAT) on the GPI measure of IPR protec-
tion (IPR) and control variables.
24
The latter include initial GDP per capita (INITGDP)
INTELLECTUAL PROPERTY RIGHTS AND INNOVATION 19
23
Whilst finding that domestic innovation does not respond significantly to IPR protection, both Lerner (2001,
2002) and Branstetter et al. (2004) find that foreign patent applications respond to IPR reforms suggesting that one
benefit of increased IPR protection is through technology transfer. This channel is discussed in section 4 below.
24
Once again information on data sources and construction is provided in annex III.
and the average years of secondary schooling in the population over 15 (SYR15) as
measures of the level of development and to account for the ability of a country to
innovate and to absorb foreign technology, respectively, and the ratio of total trade to
GDP (TRADE) to capture the impact of openness to trade on domestic innovation. The
model is estimated for up to 47 countries with data averaged over four five-year peri-
ods between 1975 and 1994.
25
To give some indication of the relationship between domestic patent applications and
both a country’s level of development and its protection of intellectual property,
figures 1 and 2 plot the domestic patenting variable against initial GDP per capita and
the GPI respectively. While a strong positive relationship between initial GDP and
patenting is clearly observed, any relationship between IPR protection and patenting is
not easily discernable. Table 5 reports the results from the regression analysis for the
full sample of 47 countries.
26
The second column reports results when the IPR variable
is included linearly. The results suggest that domestic patenting is higher in countries
with higher levels of initial GDP per capita (as is consistent with figure 1), but that
higher levels of secondary education or openness to trade have no significant impact
on the level of domestic patenting. Most importantly, we do find that domestic patent-
ing responds positively to stronger IPR protection.
The importance of domestic innovation is likely to vary with a country’s level of devel-
opment and its factor endowments. We may expect IPRs to impact on innovation dif-
ferently in countries with significant innovative capacity as opposed to those with few
resources available for domestic innovation. Similarly, as discussed above, we may
expect the importance of IPR protection in stimulating innovation to be dependent
upon the level of openness of the country. To explore the possibility of non-linearities
in the relationship between IPR protection and domestic innovation, we employ the
threshold regression techniques discussed in annex II allowing for thresholds on the
level of development (as measured by INITGDP), education (as measured by SYR15)
and openness (as measured by TRADE). These results are reported in the final three
columns of table 5.
In column 3 a single threshold on IPR is found depending on the value of initial GDP
per capita, indicating that there are two regimes with respect to a country’s level of
development. At low levels of development (i.e. below the threshold) increased IPR pro-
tection has no significant impact on the level of domestic patenting. But above the
threshold an increase in IPR protection does have a statistically significant positive
impact on the level of domestic patenting. Column 4 reports the results for thresholds
20 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
25
The estimated regression model also includes a full set of country and time dummies to account for unobserv-
able heterogeneity over time and across countries. Estimating the linear model using either random effects or pooled
data does not affect the coefficient on the IPR variable a great deal.
26
In a number of specifications we also include the square of the IPR variable to account for any non linearities
in the relationship between IPR protection and domestic patenting. Measures of “economic freedom” and the interac-
tion between the IPR index and a dummy for France, Germany, Japan and the United States were also considered, the
latter variable because R&D is highly concentrated within advanced countries. Eaton and Kortum (1999) note that in
the late 1980s, 80 per cent of OECD research scientists and engineers were employed in these four economies and the
United Kingdom (which is not in our sample). These variables tended to be insignificant, however, and are not reported
in the final tables.
based on SYR15, which are consistent with those based on initial GDP per capita. A
single threshold on the IPR variable is found with an insignificant coefficient found in
the low regime and a positive and significant coefficient found in the high regime. The
results for the first two threshold variables support the view that stronger IPR protec-
tion can encourage domestic innovation in countries that have significant domestic
capacity for innovation, as measured either by initial GDP per capita or the stock of
human capital, but that it has little impact on innovation in countries with few such
resources.
Column 5 reveals that there are three regimes for the TRADE variable. While the esti-
mated coefficients are positive in all cases, they decline in magnitude as we move up
the regimes. Only for countries whose openness to trade lies below the higher thresh-
old will stronger IPR protection generate increased domestic patenting. This sense of
a negative relationship between openness and domestic patenting is reinforced when
we observe that the estimated coefficient on the variable TRADE is negative when
significant.
27
INTELLECTUAL PROPERTY RIGHTS AND INNOVATION 21
27
The evidence considered in section 4.4 below indicates that what occurs is a substitution of domestic by foreign
patenting in more open economies.
INITGDP
SYR15
TRADE
IPR
IPR
TH ? ?
1
IPR
TH > ?
1
IPR
?
1
? TH ? ?
2
IPR
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
0.21
(2.43)**
0.02
(0.67)
-0.04
(-0.99)
0.08
(1.77)*
188
199.0***
0.97
0.12
(2.67)***
0.003
(0.07)
-0.05
(-1.75)*
-0.05
(-1.25)
0.10
(2.56)**
8.59
(53
rd
)
0.00***
188
154.3***
0.98
0.15
(2.04)**
-0.01
(-0.32)
-0.04
(-0.91)
0.04
(0.91)
0.10
(2.24)**
2.68
(76
th
)
0.00***
188
149.4***
0.98
0.20
(2.76)***
0.03
(0.85)
0.006
(0.21)
0.14
(2.94)***
0.09
(1.93)*
0.05
(1.12)
0.24
(11
th
)
0.67
(74
th
)
0.00***
188
7037.2***
0.98
Table 5. Domestic patenting decision
DOMPAT LINEAR INITGDP SYR15 TRADE
22 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
-12
-10
-8
-6
-4
-2
0
2
2 4 6 8 10 12
Log initial GDP per capita
L
o
g
d
o
m
e
s
t
i
c
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
Figure 1. Domestic patent applications per 1,000 of workforce
against initial GDP per capita
-12
-10
-8
-6
-4
-2
0
2
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
IPR index
L
o
g
d
o
m
e
s
t
i
c
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
Figure 2. Domestic patent applications per 1,000 of workforce
against the Ginarte and Park IPR index
The importance of technology for raising productivity and living standards has long
been recognized. Innovation and technological progress can raise productivity through
the introduction of new goods (capital and intermediate inputs in particular), the
improvement of existing goods and by reducing the costs of production. More broadly,
technological progress encompasses changes in production processes, organizational
structures, management techniques and the like that raise productivity. Resources for
such innovations tend to be highly concentrated in a small number of advanced OECD
countries,
28
which have the requisite skills and institutions in place to undertake inno-
vation and invest heavily in R&D. As a result firms in these countries register the bulk
of patents. For countries whose firms are not at the technological frontier, the diffu-
sion of technology from the frontier is likely to be an important source of productivity
growth, through both imitation and also through follow-on innovation and adaptation
(Evenson and Westphal, 1995).
As we saw above, the impact of stronger IPR protection on technology diffusion is
ambiguous in theory and will depend on a country’s circumstances. On the one hand,
stronger IPR protection can restrict the diffusion of technology, with patents prevent-
ing others from using proprietary knowledge and the increased market power of IPR
holders potentially reducing the dissemination of knowledge due to lower output and
higher prices. On the other hand, IPRs can play a positive role in knowledge diffusion,
since the information available in patent claims is available to other potential inven-
tors. Moreover, strong IPR protection may encourage technology transfer through
increased trade, FDI, technology licensing and joint ventures. Despite this theoretical
ambiguity, the diffusion of technology from countries at the technological frontier is
considered to be one of the main potential benefits of the TRIPS Agreement, particu-
larly for developing countries that tend not to innovate significantly.
International technology transfer or diffusion refers to the process by which a firm in
one country gains access to and employs technology developed in another country. Some
transfers occur between willing partners in voluntary transactions, but much comes
through non-market transactions or spillovers. Technology flows across borders via a
23
Intellectual property rights and
international technology diffusion 4.
28
The share of R&D financed by enterprises in advanced countries was 98 per cent in the 1980s and 94 per cent
in the 1990s (UNIDO, 2002).
number of formal and informal channels, making measurement difficult. One such chan-
nel is trade in goods and services, with imports of goods having the potential to transfer
knowledge through reverse engineering, but also through the cross-border learning of
production methods, product design, organizational structure and market conditions.
29
Trade in capital and intermediate goods in particular is likely to be an important source
of technology diffusion in this way. A second channel is FDI, inward FDI in particu-
lar, with TNCs expected to deploy advanced technology to their subsidiaries that may
be diffused to host-country firms. Licensing, which involves the purchase of production
and distribution rights for a product and the knowledge required to make effective use
of these rights, is a further channel for technology diffusion. Joint ventures combine
many of the properties of FDI and licensing and hence will also involve technology
transfer. The movement of skilled workers across borders can also act as a channel for
international technology diffusion. These formal channels of technology diffusion are
likely to be interdependent, with firms making their decision on which channel(s) to
serve foreign markets based on the expected return to their technological assets.
Informal channels of technology diffusion include imitation; the movement of person-
nel from one firm to another taking with them specific knowledge of their original firm’s
technologies; data in patent applications and the temporary migration of people, such
as scientists and students to universities and research institutes in advanced countries.
What is specific to the informal channels, and is part of their attraction, is that there
is no formal compensation to the original owner of the technology transferred. But
there will still be costs. Imitation for example requires resources that may be drawn
from local innovation.
30
The formal and informal channels are also related. It is likely
that, in order to be able to reverse engineer and imitate advanced technology, some
level of trade or temporary migration is required for example. The interdependence
among formal channels and between formal and informal channels raises difficult issues
for empirical studies.
The fact that technology or knowledge is typically intangible means that its measure-
ment is not straightforward. Several measures have been employed in the empirical lit-
erature (see Keller, 2004), each with their own strengths and weaknesses. R&D
expenditure data are often used, since R&D expenditures are the main input towards
innovative activity. But such a measure fails to take into account that innovation is
risky, so that a significant portion of R&D projects are unsuccessful, and there is the
possibility of discovering new technology by chance. Patent counts, which are a meas-
ure of the output of innovative activity, have also been used. The weaknesses of patent
count data include the substantial variation in the value of patents, with the majority
worth very little, as well as the fact that many innovations are not patented. On a
broader scale, measures of the changes in a country’s or firm’s TFP can be used as an
24 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
29
Exports are also likely to be an important channel for technology diffusion. Grossman and Helpman (1991), for
example, argue that sellers gain from the knowledge base of their buyers, especially where buyers suggest ways to
improve the product or the process of manufacture. Firm-based evidence relating productivity to exporting supports this
hypothesis (e.g. Bernard and Jensen, 1999). At the aggregate level Funk (2001) and Falvey, Foster and Greenaway
(2004b) provide evidence suggesting that exports may act as a channel for technology spillovers.
30
Mansfield et al. (1981) show that the costs of imitation, while lower than the cost of innovation, are significant.
Patenting innovations was found to raise the costs of imitation further, though even for products that were patented,
60 per cent were imitated within four years.
indicator of technology change. This indicator is constructed by subtracting the contri-
bution of changes in major factor (and material) inputs to changes in output with the
remainder being assigned to changes in technology. Thus TFP is a derived measure of
technology.
31
Since technology itself is difficult to measure, we also tend to find that measures of tech-
nology diffusion are imperfect. Several approaches have been employed.
32
One approach,
following the seminal contribution of Coe and Helpman (1995), has been to examine
whether R&D conducted in a country impacts upon TFP in other countries. The start-
ing point for this kind of analysis is to construct a stock of knowledge for each coun-
try using past R&D expenditures and then to weight these stocks by some variable
indicating the access that other countries have to this knowledge. Weights used in the
literature include imports (Coe and Helpman, 1995; Coe, Helpman and Hoffmaister,
1997), capital goods imports (Xu and Wang, 1999), inward and outward FDI (Xu and
Wang, 2000) and exports (Funk, 2001; Falvey, Foster and Greenaway, 2004b).
A second approach has been to use patent count data. In addition to the decision to
patent results in the publishing of the technical information relevant to the patent, as
discussed above, Eaton and Kortum (1996) also argue that the decision of where to
patent affords further information regarding where innovators see their ideas being used.
Since patent laws are national in scope and since obtaining patent protection is costly,
inventions are typically only patented in a small number of countries. Eaton and Kortum
argue that this choice of where to patent is determined by market size and by where
the invention is likely to be useful. They use a cross-section of 19 OECD countries to
explain the number of patents taken out in one country (destination) by inventors in
another country (source). The results suggest that technology diffusion is larger, the
smaller the distance between two countries, the larger the ability of the destination to
absorb technology (as measured by the level of human capital), and the higher the rel-
ative productivity of the destination. A higher ratio of imports to GDP is not always
found to facilitate the diffusion of knowledge.
A third approach that has proved popular in the growth literature more broadly, has
been to follow Nelson and Phelps (1966) who argue that the rate of technology absorp-
tion depends upon the “technology gap”, usually measured by the ratio of GDP per
capita of a country to that of the technological leader (usually the United States).
Benhabib and Spiegel (1994), for example, regress the growth rate of GDP on standard
variables including the interaction between the technology gap and a measure of human
capital. They find a positive and significant coefficient on this interaction term and con-
clude that human capital speeds the adoption of foreign technology.
But most studies considering the impact of IPR protection on technology diffusion tend
to take one of the channels through which technology might be diffused and to exam-
ine whether IPR protection impacts upon the volume of activity in this channel. If it does,
then it is inferred that IPR protection affects technology flows. This is the literature
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 25
31
See Keller (2004) for a discussion of the issues involved in the construction of TFP
32
See Keller (2004) for a review of the evidence on international technology diffusion.
reviewed below. We examine research linking IPR protection to trade, FDI, licensing
and patenting (section 4). A final subsection discusses other related literature. The gen-
eral conclusions from these studies are summarized in the lower part of table 4, while
table 6 (annex IV) summarizes the findings of several studies relating IPRs to the var-
ious channels of technology diffusion.
Intellectual property rights and international trade
Coe, Helpman and Hoffmaister (1997) identify four channels through which knowledge
produced in one country and transmitted through imports can affect productivity and
growth in others. Firstly, through the importation of intermediate and capital goods,
which may enhance the productivity of domestic resources. Secondly, through the cross-
border learning of production methods, product design, organizational structures and
market conditions that can result in a more efficient allocation of domestic resources.
Thirdly, through the imitation of new products. Finally, through the development of
new technologies or the imitation of foreign technology.
Coe and Helpman (1995) examine the impact of international R&D spillovers and the
importance of imports in facilitating these spillovers for 22 OECD countries. They con-
struct a stock of R&D for each country as described above. A measure of the stock of
foreign knowledge that is available to each destination country is then constructed by
weighting the R&D stocks of its source (exporting) trade partners by the bilateral import
shares.
33
TFP is then regressed on both the foreign and domestic stocks of knowledge.
34
The results suggest that both domestic and foreign knowledge stocks are important
sources of productivity growth, although the former has a much larger impact in the
larger countries. Smaller countries, it is argued, tend to be more open and benefit to
a greater extent from foreign knowledge spillovers.
35
This type of analysis has been
extended to consider North-South foreign knowledge spillovers by Coe, Helpman and
Hoffmaister (1997) who find evidence that spillovers from the advanced North to the
developing South are also an important source of productivity growth, with imports
again being an important channel for such diffusion.
Simply providing access to foreign technology through imports may not be sufficient in
itself for technology diffusion. Other conditions may be necessary before a country is
able to absorb and implement such technology in its domestic production. Using the
Coe and Helpman framework, Crespo-Cuaresma, Foster and Scharler (2004) find that
the benefits of foreign R&D spillovers are stronger in OECD countries that conduct sig-
nificant R&D and that have relatively high levels of absorptive capacity as measured
by education variables.
26 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
33
This literature is not without controversy, particularly over the appropriate weighting of the spillover variable and
whether the volume or indeed the composition of imports is important in facilitating spillovers (Keller, 2004). See
Falvey, Foster and Greenaway (2002) for a discussion of the interpretation and testing of alternative weighting schemes.
34
In their preferred specification the stock of foreign knowledge is interacted with the overall import share to take
account of the level as well as the distribution of imports.
35
This outcome is not replicated when patent count data is employed, however. Eaton and Kortum (1996) find only
limited evidence of a role for imports in facilitating technology diffusion among OECD countries as mentioned above.
While the available evidence suggests that trade is an important channel for techno-
logy diffusion, the question that remains is to what extent are trade flows influenced
by IPRs. Maskus (2000a) discusses the problems faced in trying to identify the effects
of IPR protection on international trade. Firstly, the effects of patent strength are partly
embedded in the prices at which goods are traded, and these effects cannot be sepa-
rated from other components of pricing behaviour. Secondly, as noted above, the deci-
sion to export may be but one of the options available. The effects of stronger IPRs
on exports will also depend on whether FDI and licensing are viable alternatives and
how stronger IPRs affect the choice among them (Ferrantino, 1993). Thirdly, IPR pro-
tection creates market power in the distribution and sale of new goods and technolo-
gies, implying that market structure also matters.
Bearing these problems in mind, there are two direct impacts of IPR protection on
international trade that are likely to be of particular importance. On the one hand,
firms should be encouraged to export their patented goods into foreign markets with
strong IPR protection, since such protection reduces the risk of piracy that can dimin-
ish the profitability of the firm’s activity in that country. In this respect, stronger IPR
protection would be expected to raise imports into a country. On the other hand,
because it reduces the ability of domestic firms to imitate, stronger IPR protection
increases the market power of the importing firm, which may encourage this firm to
act in a monopolistic manner by lowering sales. Maskus and Penubarti (1995) thus
argue that there is a “trade-off between the enhanced market power for the firm cre-
ated by stronger patents and the larger effective market size generated by the reduced
abilities of local firms to imitate the product.” (p. 229). They argue that of the two
countervailing effects, the market expansion effect is likely to dominate in larger coun-
tries with strong imitative abilities, while the market power effect would dominate in
smaller countries with weak imitative abilities. As Maskus (2000a) notes however, the
market power and market size effects may be moderated by other circumstances. Weak
IPR protection need not remove an innovative firm’s market power since imitation in
the local market is likely to be costly and take time. Similarly strong IPR protection
need not create a monopoly because legitimate substitutes are likely to be available in
the domestic economy. Taylor (1993) argues that a third factor may be important for
larger markets with significant imitative abilities at least, with stronger IPR protection
encouraging exports by reducing the need for firms to try and deter local imitation,
thus reducing costs for exporting firms.
The above discussion suggests that the impact of IPR protection on trade is likely to
depend importantly upon the level of development and upon the imitative ability of
the importing country. In countries with little capacity to imitate advanced goods,
stronger IPR protection may lead to market power effects, whereas in countries with
the ability to imitate advanced goods strong IPR protection may be important for
exporters in advanced countries, with such protection reducing the risk of imitation
and encouraging trade.
Given the theoretical ambiguity of the IPR-Trade relationship, a number of studies have
examined the question empirically. Maskus and Penubarti (1995) use an augmented
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 27
version of the Helpman-Krugman model of monopolistic competition to estimate the
effects of patent protection on 1984 bilateral trade for 28 manufacturing sectors. They
examined trade from 22 OECD countries to a sample of 71 countries at all stages of
development. Their explanatory variables include the importing country’s per capita
gross national product (GNP) and trade restrictions (BMP and tariff revenue as a per-
centage of dutiable imports) alongside the RRI of IPR protection. They also include the
interaction between the IPR index and dummies indicating whether the importing devel-
oping country has a small or a large market to account for market size effects and tech-
nological capacity. Their results indicate that higher levels of IPR protection have a
positive impact on bilateral manufacturing imports into both small and large develop-
ing economies, though the impacts were statistically weaker in the smaller economies.
Whilst suggestive of the importance of technological capacity or imitative ability for the
relationship between IPR protection and trade, their results find little support for a
positive impact of IPR protection in the most patent sensitive industries.
Adding a measure of IPR protection to a standard equation explaining trade flows is a
clear first step to determine if this channel is important for technology diffusion. Fink
and Primo Braga (2005) add the GPI measure of IPR protection to a standard gravity
equation
36
explaining either total non-fuel or high-tech trade flows for a large cross-
section of countries for the year 1989. The rationale for using high-tech trade in addi-
tion to total non-fuel trade is based on the a priori expectation that the effects of IPR
protection are stronger for knowledge-intensive trade. To deal with the econometric
problem of zero trade flows, their model consists of one equation explaining the prob-
ability of zero observations and a second equation explaining the magnitude of posi-
tive trade flows. They find that stronger IPR protection has a small but significantly
positive impact on the probability that countries trade with each other and a signifi-
cantly positive impact on bilateral trade flows for both total non-fuel imports and
exports. For high-tech trade however, stronger IPR protection is found to have a sig-
nificantly negative impact on the probability that two countries trade with one another
and a negative and insignificant impact on bilateral trade flows. This latter result is
contrary to what one might have expected, and Fink and Primo Braga suggest several
possible explanations, based on the considerations noted above. Firstly, strong market
power effects, in the case of high-tech goods, may offset positive market expansion
effects caused by stronger IPR protection. Secondly, stronger IPR regimes may cause
high-tech firms to serve foreign markets by FDI, partly substituting for trade. Thirdly,
the high-tech aggregate may include many goods that are not sensitive to the desti-
nation country’s patent regime, as other means of appropriating the benefits of the
investment in R&D may be more important. Fourthly, they were unable to include
tariff and non-tariff barriers, which may be important determinants of trade flows for
some industries.
In a similar gravity equation exercise, Smith (1999) examines the impact of IPR protec-
tion on exports from the 50 United States plus the District of Columbia to 96 countries.
28 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
36
Including the GDP and populations of both trade partners, distance between trade partners and dummies for
common border, common language and various Preferential Trading Arrangements (PTAs) as standard explanatory
variables.
Smith splits her sample of importing countries into four groups depending on their imi-
tative ability defined according to their strength of patent rights
37
and R&D spending
as a percentage of GNP.
38
Dummies for these four groups were then interacted with
the IPR measure. She finds a negative relationship between IPR protection and exports
from the United States to those countries with the weakest threat of imitation. For
those countries with the strongest threat of imitation however a positive relationship
between IPR protection and trade exists. Overall, she concludes that United States
exports depend upon IPR protection in importing countries, but that the direction of
the relationship depends on the threat of imitation. Weak IPRs are a barrier to United
States exports, but only for countries that pose a strong threat of imitation.
The results of these studies suggest that stronger IPR protection can lead to signifi-
cantly higher trade flows, though not necessarily in goods and industries considered
high-tech or patent sensitive. Fink and Maskus (2005) draw the following conclusions
from this empirical literature. Firstly, they argue that transnational trading firms do
not base their export decisions on IPRs in the poorest countries, where the local threats
of imitation and reverse engineering are weakest. Secondly, patent rights matter impor-
tantly in middle-income, large developing countries, where such imitation is more likely.
Stronger IPR protection in these countries encourages foreign firms to expand their
trade volumes by reducing the threat of imitation. Thirdly, the products of many high-
tech industries are difficult to imitate, so trade flows in these industries are in fact less
sensitive to IPR protection than in other medium-technology industries.
39
Fourthly, high-
tech firms may decide to serve foreign markets through FDI and licensing, so that
exports in such industries may be little affected by variations in the degree of IPR pro-
tection. Moreover, while stronger IPR protection may increase imports of high-tech
goods, it also increases imports of low-tech consumer goods and may lead to the decline
of indigenous industries relying on imitation.
Intellectual property rights and FDI
Foreign direct investment occurs when a TNC has a sufficient cost or technological
advantage over firms in the host country to offset the higher costs of operating inter-
nationally.
40
FDI can be vertical, in which case the subsidiary produces inputs or under-
takes assembly from components that are likely to be exported within the TNC, or
horizontal, in which case the subsidiary produces products and services similar to those
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 29
37
Both the Rapp and Rozek and the Ginarte and Park indices are used with similar outcomes.
38
The four groups are defined (in increasing order of imitative ability) as: (a) Countries with weak imitative abilities
and strong IPR protection: (b) Poor countries that have low technological capabilities and thus a low threat of imitation,
but that also have low levels of IPR protection: (c) Industrial countries that tend to have strong technological capabili-
ties leading to a strong imitation threat, but that at the same time tend to have high IPR protection, which dampens
this threat, and: (d) Industrializing countries that have an effective threat of imitation and that also have low levels of
IPR protection. Maskus (2000a) suggests caution is warranted in interpreting Smith’s results since, “in the developing
economies R&D data are highly suspect and not comparable to those in developed countries” (p. 118). In addition, the
division of countries into four groups is somewhat subjective, with a number of anomalous designations.
39
Cohen (1995) argues that in many high-tech industries, such as aerospace and robotics, the complexity of the
technology makes imitation via reverse engineering extremely difficult, rendering IPR protection unnecessary.
40
See Maskus (2000a) for a detailed discussion of the determinants of FDI, and the role of IPR protection in the
decision to invest abroad.
produced by the parent firm. Increasingly, FDI is undertaken in industries in which
knowledge and technology are important. This is because technology advantages can
be transferred relatively easily across borders, and because technology acts as a public
good within the firm, where it can be employed in several locations without reducing
its availability for others. The decision on where to invest will depend on locational
considerations that include local market size, resource availability, distance from mar-
kets and production costs. Where technology is relevant to the FDI decision an ade-
quate supply of labour with the appropriate skills will also be important.
While FDI can be an important channel for technology diffusion when firm-specific
technology is transferred across borders, one important advantage of FDI relative to
licensing or joint ventures from the TNC’s perspective is that FDI keeps the technol-
ogy internal to the firm. This may limit the diffusion of technology within the host
country. Even so a number of considerations suggest that the presence of TNCs in a
country will provide spillover benefits to domestic firms.
41
Fosfuri, Motta and Ronde
(2001) for example argue that such benefits may appear through labour training and
turnover, while Rodríguez-Clare (1996) suggests that the provision of high quality
intermediate inputs may provide an important externality when they also become
available to domestic firms. Imitation through reverse engineering may also be facil-
itated when the product is produced locally (Das, 1987). Domestic firms may find it
easier to export once foreign TNCs establish distribution networks, a transport infra-
structure and satisfy the relevant regulatory arrangements (Aitken, Hanson and
Harrison, 1997).
Empirical evidence linking FDI to technology diffusion is mixed. In general, there is
little evidence of substantial FDI spillovers for developed or developing countries.
42
Xu
and Wang (2000) extend the approach of Coe and Helpman (1995) for a sample of up
to 21 OECD countries over the period 1971-1990, by adding both inward and outward
FDI flows as weights on foreign knowledge stocks. They find little evidence of spillovers
through inward FDI, but some evidence of spillovers through outward FDI. Globermann,
Kokko and Sjöholm (2000) using data on patent applications by Swedish TNCs and
non-TNCs also find evidence that outward FDI is the more important source of tech-
nology transfer. An alternative approach has been to consider patent citations as an
indicator of the extent of spillovers. Using data on Japanese FDI into the United States,
Branstetter (2001) finds evidence that FDI encourages technology spillovers through
subsidiaries bringing technology from their countries of origin and through TNCs facil-
itating learning of foreign technologies.
Görg and Greenaway (2004) summarize the results from several studies of FDI
spillovers at the firm or industry level. Here firm or industry productivity is regressed
on control variables plus a variable which proxies the presence of foreign firms in the
sector, usually the share of employment in TNCs or the share of total sales by TNCs.
The results are mixed with positive, negative and insignificant impacts of foreign
30 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
41
See Blomstrom and Kokko (1998) and Saggi (2002) for a detailed discussion of the potential benefits of FDI
42
See the review by Görg and Greenaway (2004).
investment all being found. One explanation put forward for the negative impact is
that increased competition in product and factor markets can have a negative impact
on a domestic firm’s productivity (Aitken and Harrison, 1999). Görg and Greenaway
do note that there is some evidence of spillovers for firms that have a certain level
of absorptive capacity. Dougherty (1997), for example, using data on Chinese enter-
prises, finds that technology diffusion is positively related to the presence of domestic
enterprise-level R&D programmes.
Like the other channels, economic theory is unable to draw unambiguous conclusions
on the impact of IPR protection on FDI. TNCs are more likely to undertake FDI rather
than licensing or joint ventures when they have a complex technology and highly dif-
ferentiated products and when the costs of transferring technology through licensing
are high (Davidson and McFetridge, 1984; Teece, 1986; Horstmann and Markusen,
1987). In such circumstances stronger IPRs, by reducing the risks of technology leak-
age through arm’s length trade, may increase the extent of licensing and joint ventures,
thus reducing the need for FDI (Yang and Maskus, 2001a). On the other hand, it has
been argued that weak IPR protection tends to affect the general investment climate
adversely, hence discouraging FDI (Smith, 2001). The importance of IPR protection is
also likely to vary across sectors, being of secondary importance for FDI in low-tech
industries, or where the product or technology is difficult to imitate. For TNCs with
technology that is easy to copy however we would expect more attention to be paid to
the strength of IPR protection. Regardless of these arguments, it is clear that strong
IPR protection is not a necessary condition for firms to invest in particular countries.
If it were, then large countries with high growth rates but weak IPR regimes, such as
Brazil and China, would not have received the large foreign investment inflows that they
have. While flows of FDI into these countries have been large, some evidence indicates
that TNCs are unwilling to locate R&D facilities in such countries and that they may
transfer older technology (see for example Maskus et al., 2005).
The empirical evidence linking IPR protection to inward FDI is mixed. Mansfield (1994)
used survey evidence for 100 major United States firms in six industries, and asked
whether IPR protection was a concern in the location of various facilities. He found
that while IPR protection was of little concern in the location of sales and distribution
outlets, it became more important at higher stages of production. Many firms were con-
cerned about IPR protection when deciding on the location of components manufac-
tures, while the majority were concerned about IPR protection in the location of
complete product manufactures. The greatest concern about IPR protection was in decid-
ing the location of R&D facilities, which were less likely to be located in countries with
weak IPR protection.
43
Across industries IPR protection was found to be very impor-
tant for chemicals and pharmaceuticals, but was of secondary importance in other indus-
tries. This it has been argued is because FDI in many low-tech goods is likely to depend
more on input costs and market opportunities, rather than IPR protection (Maskus,
2000d). IPRs are also likely to be of secondary importance for FDI in products that are
difficult to imitate.
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 31
43
Mansfield (1995) conducted a similar exercise for German and Japanese firms, reaching similar conclusions.
The early empirical research found little evidence of links between IPR protection and
the volume of FDI. Ferrantino (1993) found no statistically significant relationship
between a country’s membership of international patent or copyright conventions (or
the length of its patent grant) and the extent of United States affiliate sales in that
country; Mansfield (1993) found that there was no significant correlation between the
extent of FDI by United States firms in a country and the perceived strength of its
intellectual property protection; and Maskus and Eby-Konan (1994) found an insignif-
icant impact of the RRI on FDI by United States TNCs. More recently, Primo Braga
and Fink (1998) found no evidence of a relationship between either FDI flows or stocks
and the GPI in a gravity model of FDI.
44
But Maskus (2000b) cautions that these stud-
ies should be discounted somewhat, since they were “limited in specification and
plagued by poor measurement” (p. 10).
There is stronger evidence that the strength of IPRs affects the type of activities TNCs
are willing to conduct in host countries. Lee and Mansfield (1996) consider the rela-
tionship between a country’s protection of IPR and the volume and composition of
United States FDI in that country. Using the same survey of 100 United States firms
as Mansfield (1994), they explain the volume of United States FDI into each of 14 coun-
tries using control variables and a variable which measures the average percentage of
firms who considered patent protection in this country to be too weak to either trans-
fer their newest technology to a wholly owned subsidiary there or to invest in a joint
venture with a local partner. The results suggest that FDI is lower in countries with
weaker perceived IPR protection, and that the percentage of FDI that was devoted to
final production and to R&D facilities was significantly lower in countries with per-
ceived weak IPR protection, suggesting that not only the volume but also the quality
of investment is affected by the strength of IPR protection. Kumar (2002) argues that
these results should be treated with caution due to the small sample size, the subjec-
tive measure of IPR protection and the low t-values on coefficients. He goes on how-
ever to discuss evidence by Seyoum (1996) who found that IPR protection is significant
in explaining inward FDI, particularly in emerging markets and Maskus (1998b) who
found that the strength of IPR protection was positively related to affiliate sales and
assets in developing countries.
The question of whether the strength of local IPRs is important for the location of over-
seas R&D activity of TNCs is taken up by Kumar (2001). Economies of scale in inno-
vation, agglomeration economies and the need to protect firm-specific technology all
discourage undertaking R&D abroad. But this may be partly countered by the need to
adapt goods to local market conditions, to take advantage of cheap inputs, and to ben-
efit from trained R&D personnel and localized knowledge. While investment in R&D
overseas is the least globalized of TNCs activities, Kumar shows that it has grown over
time, especially since the 1980s. He then relates the ratio of R&D expenditure to affil-
iate sales by United States and Japanese TNCs to control variables and the GPI in a
sample of up to 77 countries, but finds that R&D spending overseas is not affected by
the strength of IPR protection in the destination country.
32 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
44
The results discussed and reported here are based on those of Fink (2005).
Smarzynska (2004) examines whether stronger IPR protection affects the composition
of FDI flows for 24 transition economies. She estimates a Probit model of the decision
to invest in a country and in the decision to invest in production facilities abroad. She
finds that weak IPR regimes deter FDI in high-tech sectors (i.e. drugs, cosmetics and
health-care products, chemicals, machinery and equipment and electrical equipment)
with some evidence suggesting that FDI is deterred in other industries too. She also
finds evidence to suggest that stronger IPR protection encourages firms to set up local
production facilities rather than focusing solely on distribution networks, with this lat-
ter effect not restricted to high-tech sectors.
Branstetter et al. (2004) use affiliate level data on United States TNCs and aggregate
patent data to test whether legal reforms that strengthen IPRs increase the transfer of
technology by TNCs to reforming countries. The results suggest that technology trans-
fer is higher following IPR reforms, with an increase in technology transfer, as meas-
ured by intra-firm royalty payments from parent firms to affiliates located in IPR
reforming countries. They also distinguish affiliates between those whose parent com-
panies patent in the United States above and below the median. They find that tech-
nology transfer is concentrated among affiliates of parents that use patents extensively
(i.e. those that patent above the median).
In conclusion, while there are many reasons to expect inward FDI to be an important
channel for technology diffusion, the evidence of this to date at both the aggregate and
firm level is mixed. If anything at all, the evidence indicates that FDI is an important
source of diffusion in countries that have reached a certain level of absorptive capac-
ity. To the extent that FDI is an important source of diffusion, IPR protection can affect
the extent of technology diffusion through its impact on FDI flows. Again however, the
evidence linking IPRs to FDI is mixed. Stronger IPR protection has been found to
encourage FDI in certain industries, most notably chemicals and pharmaceuticals. As
with trade, IPRs may play less of a role in high-tech industries due to the difficulty in
imitating these industries’ products, while in low-tech industries other factors may be
more important in determining FDI flows. Stronger IPR protection has also been found
to affect FDI flows at certain production stages. In particular, IPRs can affect FDI flows
in component manufactures, final production and R&D facilities, reflecting the fact that
patenting is more important at some stages of production than at others.
Intellectual property rights and licensing
The relationship between licensing, technology diffusion and the strength of IPRs is
likely to be even more complex than the other channels. Maskus (2004) argues that
the reasons for this relate to the large variety of licensing agreements that may exist.
Licences may exist within a firm, a joint venture or between unaffiliated firms. They
may cover technical assistance, codified knowledge, know-how and IPRs. They may be
offered for a fixed fee, a franchise fee, a royalty schedule or a share of profits, and they
may offer the rights either to produce or distribute the product of the licensee for a
given period of time within a geographical territory.
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 33
Economic theory suggests that firms that own a complex technology, produce highly
differentiated products and face high licensing costs are more likely to undertake FDI
than licensing (Horstmann and Markusen, 1987). FDI is more efficient in these circum-
stances as it allows the costs of technology transfer to be internalized. The reasons that
technology and product licensing should be particularly sensitive to IPR protection are
evident, however. Stronger IPR protection should reduce the costs of licensing by reduc-
ing the licensor’s expense of deterring defection from contracts. They should expand
security over the protection of proprietary information in licensing deals. Stronger IPR
protection gives the licensor greater ability to set and monitor terms under which
licensees operate. A stronger IPR regime is also likely to increase the rents accruing to
the licensor, since it does not need to offer the licensee a higher share of the rents to
deter imitation. At the same time stronger IPR protection provides the licensor with
greater monopoly power, which as discussed above can reduce innovation, which in
turn may lead to reduced licensing.
Little empirical literature on licensing and on the importance of IPRs exists, though
Mansfield (1994) in his study of IPR protection and FDI found that United States TNCs
were less likely to transfer advanced technologies to unaffiliated firms in countries with
weak patent rights. More recently, Yang and Maskus (2001b) estimate the impact of
international variations in IPR protection on the volume of unaffiliated royalties and
licensing fees (a measure of arm’s length technology transfer) paid to United States firms
in a panel of 23 largely developed countries in 1985, 1990 and 1995. Included along-
side the GPI (and its square) are measures of human capital (representing imitative
ability), real GDP, the labour force and a measure of openness. The results often indi-
cate a non-linear relationship between licensing and IPR protection, with stronger IPR
protection reducing licensing at low levels and increasing licensing at higher levels. This
it is argued is because countries with the lowest levels of IPR protection also have the
weakest imitative ability. As such, an increase in IPR strength in these countries, while
reducing the risk of imitation slightly, would also increase the monopoly power of the
licensor. This latter effect is likely to dominate and lead to lower licensing. Most obser-
vations in the sample however are above the turning point, suggesting that IPR protec-
tion has a positive impact upon licensing.
Intellectual property rights and patenting
Given the costs involved in registering patents, if inventors in one country register a
patent in another, it indicates that the technology could usefully be deployed in that
second country. Eaton and Kortum (1996) include the RRI measure of IPR protection
in their regression explaining the decision to patent abroad in OECD countries. They
find that countries providing stronger IPR protection are more attractive destinations
for foreign patents. They further show that productivity growth was significantly related
to foreign patents, and that except for the major innovators (France, Germany, Japan,
United Kingdom and the United States), countries in the sample obtained over 90 per cent
of their productivity growth from foreign patenting.
34 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Recent studies also consider developing countries. Park (1999) conducts a similar exer-
cise to that above relating the decision to patent inventions abroad for 16 source coun-
tries and 40 destination countries for four periods between 1975 and 1990. He regresses
the fraction of inventions in each source country that are patented in each destination
on the market size of the destination (i.e. GDP per capita), the number of scientists
and engineers per 10,000 of the workforce, the cost of filing patents and the GPI. The
results indicate a strong positive impact of IPR protection on the decision to patent,
suggesting that a 1 per cent increase in IPR protection leads to a greater than 1 per cent
increase in the rate of foreign patenting.
Xu and Chiang (2005) consider three channels of technology diffusion. These are: inter-
national trade, following the approach of Coe and Helpman (1995); foreign patenting,
following Eaton and Kortum (1996); and disembodied spillovers, following the approach
of Benhabib and Spiegel (1994). Using data over the period 1980-2000, they split their
sample of 48 countries into developed and developing countries and also into three
groups based on real GDP per capita (low, middle and high-income countries). They
show that, with few exceptions, TFP growth is positively and significantly related to
all three channels of technology diffusion. They go on to examine the determinants of
the patenting decision, finding that the level of IPR protection is positively and signif-
icantly related to foreign patenting across country groupings, suggesting that strength-
ening IPR protection may have a positive indirect upon TFP growth by increasing
foreign patent applications.
We extend this work by first considering the determinants of foreign patenting. The
approach is analogous to that used in section 3 to explain the determinants of domes-
tic patenting. Here the variable we seek to explain is FORPAT, which is the number
of foreign patent applications (also scaled by the domestic labour force) in a country.
The explanatory variables are as before. Figures 3 and 4 plot the relationship between
foreign patent applications and initial GDP per capita and the GPI index of IPRs respec-
tively to give a visual indication of the relationship between patenting by non-residents
and the level of development and of IPR protection in the recipient economy. As with
domestic patenting, a strong positive relationship between foreign patent applications
and initial GDP per capita is observed. The relationship between foreign patenting and
the IPR index also appears positive, though not as strong. The regression results are
presented in table 7. The results from the linear model suggest that the level of for-
eign patenting is higher the more developed the country is (as measured by INITGDP)
and the stronger its IPR regime. The large and highly significant coefficient on the IPR
index is consistent with the results of Park (1999) and is suggestive of the importance
of IPR protection in facilitating technology diffusion through foreign patenting. The
coefficients on the level of schooling and openness to trade are not significant.
As we did with the domestic patenting results we now allow for thresholds on INIT-
GDP, SYR15 and TRADE, and find both interesting similarities and differences with
the domestic patenting results. Considering thresholds on INITGDP and SYR15 we find
evidence of a single and a double threshold respectively. Stronger IPR protection is
found to have a consistently positive and significant impact upon foreign patenting,
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 35
except in the low regime for thresholds based on education, where the coefficient is
positive, but insignificant. The size of the coefficients indicates that the impact of
stronger IPR protection on foreign patenting is greater in countries at higher levels of
development and with higher levels of education. This is consistent with the view that
stronger IPR protection enhances technology diffusion through foreign patenting in
countries with significant levels of imitative ability. Considering the threshold results
on TRADE we find evidence of a single threshold, with the impact of IPR protection
on foreign patenting being positive and significant in both regimes. The coefficient is
36 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Figure 3. Non-resident patent applications per 1,000 of workforce against
initial GDP per capita
-8
-6
-4
-2
0
2
4
2 4 6 8 10 12
Log initial GDP per capita
L
o
g
f
o
r
e
i
g
n
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
Figure 4. Non-resident patent applications per 1,000 of workforce against
the Ginarte and Park IPR index
-8
-6
-4
-2
0
2
4
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
IPR index
L
o
g
f
o
r
e
i
g
n
p
a
t
e
n
t
a
p
p
l
i
c
a
t
i
o
n
s
significantly larger for more open countries however. This result is the opposite of that
for domestic patenting, where increased openness lowered the impact of stronger IPRs
on patenting. In combination these results suggest that in relatively open economies
stronger IPRs may encourage foreign patenting at the expense of domestic patenting.
This result is consistent with the theoretical model of Rivera-Batiz and Romer (1991)
discussed in section 2 above.
Having found that IPR protection can influence both domestic and foreign patenting,
we examine whether these measures of innovation and technology diffusion influence
economic growth, by adding them to a standard growth equation similar to that con-
sidered in section 2 for the sample of 47 countries for which we have data on domes-
tic and foreign patenting.
45
Our primary concern is to examine the extent to which any
growth promoting spillovers associated with foreign patenting are dependent on the
characteristics of the recipient economy. Once again we employ threshold analysis for
this purpose. The results are presented in table 8, where the second column presents
the results for the linear model, including in the regression the GPI index of IPRs,
DOMPAT and FORPAT as well as standard control variables. The coefficients on the
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 37
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated thresh-
old, regardless of whether it was the first estimated threshold. All equations include a full set of unreported
country and time dummies. t-values are reported in brackets. All models estimated using robust standard errors.
*, **, *** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the
significance of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with
1,000 replications.
INITGDP
SYR15
TRADE
IPR
IPR
TH ? ?
1
IPR
TH > ?
1
IPR
?
1
? TH ? ?
2
IPR
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
2.04
(1.79)*
-0.04
(-0.06)
0.13
(0.13)
2.46
(2.67)**
188
10.20***
0.74
1.37
(1.49)
-0.12
(-0.16)
-0.40
(-0.99)
1.96
(2.09)**
3.28
(3.66)***
9.26
(59
th
)
0.00***
188
8.66***
0.77
1.33
(1.16)
-1.47
(-2.17)**
0.37
(0.83)
0.56
(0.67)
1.21
(1.68)*
2.44
(2.73)***
2.13
(65
th
)
3.35
(86
th
)
0.01**
188
14.8***
0.78
1.97
(1.91)*
-0.17
(-0.24)
-0.52
(-1.27)
2.09
(2.47)**
2.58
(2.79)***
0.66
(73
rd
)
0.02**
188
10.88***
0.75
Table 7. Foreign patenting decision
FORPAT LINEAR INITGDP SYR15 TRADE
45
Details concerning the construction and the definitions of the variables, country coverage and the model speci-
fication are provided in annex III.
control variables are of the expected sign and are significant for initial GDP per capita
and investment only. The coefficients on the other control variables are not out of line
with the previous literature, however. The coefficient on the IPR index is positive and
significant, as was the case for the broader sample of countries considered by Falvey,
Foster and Greenaway (2004a). The coefficients on the two patenting variables, while
of the expected sign, are statistically insignificant, which may be attributable to their
collinearity with the other variables. Alternatively, it may be that patenting is an impor-
tant source of growth for subsamples of countries only. The threshold analysis exam-
ines this hypothesis for our measure of technology diffusion (FORPAT), which is the
main variable of interest.
The threshold analysis reveals several interesting results. Thresholds based on the level
of IPRs indicate that while foreign patenting has a significant positive impact on growth
at lower levels of IPR protection, there is no significant impact of foreign patenting on
38 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
INITGDP
GDI
POPGROW
SYR15
TRADE
IPR
DOMPAT
FORPAT
FORPAT
TH ? ?
1
FORPAT
TH > ?
1
FORPAT
?
1
? TH ? ?
2
FORPAT
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
-0.10
(-5.01)***
0.05
(5.42)***
0.05
(0.10)
-0.001
(-0.19)
0.01
(1.28)
0.015
(2.33)**
0.008
(0.85)
0.0003
(0.37)
187
29.19***
0.81
-0.12
(-6.10)***
0.06
(6.09)***
0.26
(0.58)
0.004
(1.0)
0.01
(1.45)
0.02
(3.26)***
0.009
(0.89)
0.003
(2.59)**
-0.001
(-1.02)
3.35
(69
th
)
0.01**
187
35.69***
0.83
-0.11
(-6.05)***
0.05
(5.89)***
0.34
(0.71)
0.006
(1.34)
0.01
(1.45)
0.02
(3.24)***
0.007
(0.69)
-0.0003
(-0.23)
0.003
(4.88)***
-0.0006
(-0.92)
9.29
(61
st
)
9.96
(81
st
)
0.07*
187
30.97***
0.83
-0.11
(-5.67)***
0.05
(5.74)***
0.21
(0.47)
0.006
(1.37)
0.01
(1.18)
0.01
(2.41)**
0.004
(0.50)
-0.001
(-1.08)
0.002
(1.67)*
0.79
(89
th
)
0.02**
187
30.11***
0.82
-0.11
(-6.37)***
0.05
(6.04)***
0.29
(0.64)
0.006
(1.20)
0.01
(1.41)
0.02
(3.35)***
0.006
(0.74)
-0.005
(-1.76)*
0.004
(5.54)***
-0.001
(-1.26)
24.51
(33
rd
)
25.41
(56
th
)
0.02**
187
41.85***
0.84
Table 8. Foreign patenting and growth: full sample
FORPAT LINEAR IPR INITGDP TRADE GDP
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated thresh-
old, regardless of whether it was the first estimated threshold. All equations include a full set of unreported
country and time dummies. t-values are reported in brackets. All models estimated using robust standard errors.
*, **, *** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the
significance of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with
1,000 replications.
growth in countries with high levels of IPRs. This result suggests that overly strong IPR
protection can limit the spread of knowledge through foreign patenting. The results for
thresholds based on initial GDP per capita indicate that only countries in the middle
regime benefit from diffusion through foreign patenting. Countries with little imitative
ability and countries with significant innovative capacity do not appear to benefit from
diffusion through patenting. Countries that are more open to international trade are
found to benefit to a greater extent in terms of growth from foreign patenting than may
be expected. Finally, we also allow for thresholds based on a measure of country mar-
ket size (i.e. the level of GDP). The results suggest that for small countries increased
foreign patenting has a negative effect on growth, a result suggestive of the importance
of market power effects in small markets. In the middle regime increased foreign patent-
ing has a positive and significant effect on growth, suggesting that market power effects
are diminished in larger countries, while for the largest countries there is no statisti-
cally significant effect of foreign patenting on growth.
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 39
INITGDP
GDI
POPGROW
SYR15
TRADE
IPR
DOMPAT
FORPAT
FORPAT
TH ? ?
1
FORPAT
TH > ?
1
FORPAT
?
1
? TH ? ?
2
FORPAT
TH > ?
2
?
1
(percentile)
?
2
(percentile)
p-value
Observations
F-Statistic
R
2
-0.12
(-6.13)***
0.06
(5.37)***
1.15
(1.62)
-0.007
(-0.80)
0.008
(1.19)
0.03
(2.06)**
0.01
(0.54)
-0.0002
(-0.05)
107
23.96***
0.83
-0.12
(-7.36)***
0.05
(5.31)***
2.40
(3.99)***
-0.001
(-0.06)
-0.008
(-1.63)
0.015
(1.27)
-0.11
(-3.37)***
-0.08
(-2.53)**
-0.001
(-0.15)
0.10
(4.17)***
2.49
(63
rd
)
3.33
(83
rd
)
0.03**
107
33.8***
0.86
-0.12
(-7.01)***
0.05
(5.39)***
1.49
(2.09)**
0.003
(0.27)
0.005
(0.73)
0.03
(2.27)**
-0.007
(-0.26)
-0.02
(-2.82)***
0.01
(1.64)*
6.29
(26
th
)
0.02**
107
19.86***
0.84
-0.12
(-6.92)***
0.05
(4.98)***
1.37
(1.83)*
-0.0004
(-0.04)
0.001
(0.13)
0.03
(2.47)**
0.05
(1.64)*
-0.09
(-4.49)***
-0.02
(-2.90)***
0.01
(1.70)*
0.51
(54
th
)
0.67
(80
th
)
0.02**
107
9.29***
0.84
-0.13
(-7.20)***
0.06
(5.46)***
1.29
(1.79)*
-0.002
(-0.17)
0.006
(0.92)
0.03
(2.44)**
-0.008
(-0.31)
-0.02
(-2.77)***
0.004
(1.05)
0.014
(3.62)***
22.93
(21
st
)
24.56
(56
th
)
0.06*
107
29.20***
0.85
Table 9. Foreign patenting and growth: developing countries
FORPAT LINEAR IPR INITGDP TRADE GDP
Notes: For ease of presentation the thresholds are listed by value, with ?
1
being the smallest estimated thresh-
old, regardless of whether it was the first estimated threshold. All equations include a full set of unreported
country and time dummies. t-values are reported in brackets. All models estimated using robust standard errors.
*, **, *** indicate significance at the 10, 5 and 1 per cent level respectively. The p-value indicating the
significance of the estimated threshold is computed using the bootstrap procedure of Hansen (2000) with
1,000 replications.
The analysis above includes both developed and developing countries in a single regres-
sion equation. One important debate concerning the impact of TRIPS is whether
stronger IPR protection is likely to affect developing countries differently, depending
upon their level of development, market size and imitative/innovative ability. To con-
sider these issues, we repeat the above analysis for the 27 developing countries in our
sample. The results are reported in table 9. Once again the only control variables that
are consistently of the expected sign and significant are initial GDP per capita and
investment. In the linear model we again find insignificant coefficients on both the
domestic and foreign patenting variables.
Considering the threshold results, we find that for thresholds based on the level of
IPR protection there is a positive relationship between foreign patenting and growth
for developing countries with the highest levels of IPR protection. This suggests that
stronger IPR protection in developing countries can encourage international technol-
ogy transfer. For countries with the lowest levels of IPR protection a negative rela-
tionship between foreign patenting and growth is found. For the remaining three
threshold variables we find a negative and significant relationship between foreign
patenting and growth in the low regime. These results suggest that foreign patenting
can have a deleterious impact on growth for developing countries with low levels of
imitative ability, low levels of openness and small markets. This is consistent with
many of the arguments developed in the literature arguing that market power effects
can be significant for countries that have small markets and who have few domestic
competitors or are sheltered from foreign competition. In countries that are more
open to trade, are larger in size and are more developed in terms of GDP per capita
however, the results suggest that technology diffusion through foreign patenting can
be a significant source of growth.
Related literature
While valuable and informative, the accumulation of studies of individual channels of
technology diffusion is unlikely to provide full information on the effects of increased
IPR protection on international technology transfer for several reasons. Firstly, the deci-
sions to export, undertake FDI or license are made jointly, implying that studies con-
sidering a single channel may produce biased results. Secondly, there are some channels
that are very difficult to measure—imitation and reverse engineering for example—and,
consequently, analysis of the impact of these channels does not exist. Thirdly, as noted
above, there are likely to be interactions between direct channels and indirect chan-
nels, such as imitation. In view of these considerations, some authors have looked either
at multiple channels simultaneously or attempted to model the overall costs and ben-
efits of stronger IPR protection.
There are a small number of studies that consider several channels of diffusion simul-
taneously. Maskus (1998b) considered the joint decision of TNCs, examining the impact
of patent rights on patent applications, affiliate sales, exports and affiliate assets using
a four-equation simultaneous equation model. The model was estimated with data on
40 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
the foreign operations of United States majority-owned manufacturing affiliates in
46 destination countries over the period 1989-1992. As independent variables Maskus
included the RRI, distance from the United States, investment incentives, market size,
tariff protection and the level of local R&D. Also included was the interaction between
the IPR index and a dummy for developing countries. The results suggest that patent
applications are strongly affected by IPR protection, though less so in developing coun-
tries. Stronger IPR protection also impacts positively upon exports, affiliate assets and
affiliate sales in developing countries.
In a similar vein, Smith (2001) considers the simultaneous impact of IPR protection
on United States exports, affiliate sales and licences to unaffiliated foreign firms in a
sample of 50 developed and developing countries using a variant of the gravity equa-
tion. As in her previous study, the IPR variable is interacted with dummies for weak
and strong imitative ability. The results suggest that stronger IPR protection increases
bilateral exchange across all countries. At the same time, stronger IPR protection
increases the benefits of locating abroad and leads to increases in affiliate sales and
licensing relative to exports, particularly in countries with strong imitative abilities.
Strong IPR protection also reduces the need to internalize knowledge assets within the
firm thus increasing United States licences relative to both affiliate sales and exports.
The evidence in favour of stronger IPR protection increasing United States exports is
weak once multiple channels of exchange are allowed.
McCalman (2005) seeks to quantify the impact of TRIPS, by estimating an endogenous
growth model for 27, mostly developed, countries.
46
He finds that in the short run
(i.e. when the level of technology is held constant) the majority of countries lose due
to a redistribution of wealth to foreign owners of technology. But in the long run, when
research efforts can respond to the enhanced incentives provided by TRIPS, all coun-
tries benefit. McCalman shows that the increase in income levels due to enhanced inno-
vation are sufficient to offset the redistributive impact of TRIPS, though under certain
plausible parameter values India was found to lose. Given this last result, one might
conjecture that countries with lower technological capability than India, but which were
not covered in this study, may also suffer under TRIPS.
In an interesting case study, McCalman (2002) examines the behaviour of Hollywood
film studios with respect to IPR protection in different countries. Given the large fixed
costs and relatively low duplication costs of new films, IPR protection is likely to be of
great importance to film studios. McCalman studies the speed of diffusion of 60
Hollywood films to 37 countries. The results suggest that increasing IPR protection
from a relatively low level to a moderate level increases the speed of diffusion, but fur-
ther increases to a high level reduce the speed of diffusion. The release of a film is
likely to be delayed in countries with weak IPR protection, because of the risk of piracy
that will reduce returns on that film. In countries with relatively high IPR protection
INTELLECTUAL PROPERTY RIGHTS AND INTERNATIONAL TECHNOLOGY DIFFUSION 41
46
See also McCalman (2001) who estimates the value of income transfers between countries in response to TRIPS.
studios may be less worried about piracy, but more worried about competition with
their existing products, and so may also delay the release of a film. Overall, the results
suggest that while some IPR protection can speed the diffusion of new products (films
in this case), very strong IPR protection may in fact reduce the speed of diffusion.
42 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Cross-country studies of the type reviewed so far have the advantage that they can cover
a wide range of experience and circumstances. Yet they are subject to several common
econometric problems, including endogeneity and measurement issues, as well as the
question of the applicability of results outside the sample. The alternative approach is
to undertake case studies examining the importance of the IPR regime in an individ-
ual country’s economic development. Case studies allow greater depth of analysis and
an accumulation of case studies can provide a similar range of experience to a cross-
country study. The obvious candidates for study are those countries that have made a
successful transition from technology importers to innovators.
Maskus and McDaniel (1999) considered how the Japanese patent system affected tech-
nological progress in Japan in the post-war period. They found that the patent system in
place in Japan encouraged incremental and adaptive innovation and the diffusion of knowl-
edge into the economy. This resulted from a number of measures, but most notably the
use of utility models, which are patents of a shorter duration awarded to incremental inven-
tions that build upon more fundamental discoveries. Such utility models were found to
have a large positive impact on Japanese TFP growth.
47
While the direct impact of patent
applications on TFP growth was smaller it was still positive, and patent applications were
found to have an indirect impact on TFP growth through stimulating later utility models.
Kumar (2002) extends the discussion of the role of IPR protection in development from
Japan to Taiwan Province and the Republic of Korea. He argues that the Republic of
Korea also encouraged learning and diffusion through the utility model system, and claims
that there was a deliberate policy of softening IPR protection to facilitate imitation by
domestic enterprises. Kim (2002) argues further that in the early stages of development
the Republic of Korea acquired and assimilated mature technologies in order to under-
take duplicative imitation of existing foreign products with cheap skilled labour. Relatively
few foreign firms patented technologies in the Republic of Korea because of its small mar-
ket size and limited imitative threat. In addition to maintaining weak IPR standards, he
argues that the role of government was to promote exports and to encourage the devel-
opment of technical and engineering skills. In Taiwan Province, Kumar (2002) argues that
43
Country specific evidence
5.
47
Further case study evidence of the benefits of utility models includes Dahab (1986) who finds that utility mod-
els were important in allowing domestic producers to capture a significant share of the farm machinery industry by
adapting foreign technology to local market conditions in Brazil, and Mikkelsen (1984) who describes how such utility
models allowed the successful adaptive innovation of rice threshers in the Philippines.
44 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
IPR protection was also weak to encourage the diffusion of knowledge, with the govern-
ment openly encouraging counterfeiting as a means of developing local industries.
While there was considerable diffusion of knowledge at early stages of development
along with much incremental innovation in these two cases, eventually pressure from
abroad forced them to strengthen their IPR regimes. Based on the experience of the
Republic of Korea, Kim (2002) argues that strong IPR protection will hinder rather
than facilitate technology transfer and indigenous learning activities in the early stages
of industrialization when learning takes place through reverse engineering and duplica-
tive imitation of mature foreign products. It is only after countries have accumulated
sufficient indigenous capabilities and an extensive science and technology infrastruc-
ture capable of undertaking creative imitation that IPR protection becomes an impor-
tant element in technology transfer and industrial activities.
Kumar (2002) goes on to document the experience of India. While inheriting a relatively
strong IPR regime from colonial times that provided protection for most industries, con-
siderable pressure built up from Indian firms in the 1960s that were unable to develop
their own technology due to foreign patent holders who were restricting entry. This was
particularly the case in the chemicals and pharmaceuticals industries and led to a new
patent act that reduced the scope of patentability in food, chemicals and pharmaceuti-
cals to processes and not products. It is widely accepted that these changes helped facil-
itate the development of local technological capability in chemicals and pharmaceuticals.
48
Kumar argues that the experience of India indicates the importance of weak IPR protec-
tion in building up local capabilities, even in countries at very low levels of development.
Maskus (2000c) examines the likely effects of introducing stronger IPR protection in the
Lebanon, using survey data on 117 manufacturing and services firms. IPRs are seen as
unimportant in many industries, and where patents are applied for they tend to be for
minor improvements and disclosure does not provide for effective technology transfer.
Whilst acknowledging their shortcomings, Maskus uses partial equilibrium models to cal-
culate the impact of stronger IPR protection in different industries. For most industries
he finds that the static effects of stronger IPR protection on prices, employment and out-
put are likely to be negative. He goes on to suggest that dynamic gains from stronger
IPR protection are possible, however, through increased FDI, increased product develop-
ment by local firms (particularly in cosmetics, food products, software applications, pub-
lishing and film production), and the increased ability to enter into joint ventures or
product licensing. Further, to the extent that these lead to additional technology trans-
fer and local product development, the average quality of local products should rise.
Survey evidence from China reveals that managers of foreign enterprises are reluctant
to locate R&D facilities in China for fear of misappropriation and patent infringement
(Maskus et al., 2005). Enforcement problems and weak penalties were also a concern.
These factors led firms that transferred technology to China not to use the latest tech-
nology, but technologies that were at least five years behind the frontier. Chinese firms
were also found to suffer from trademark infringement, which in the long run is likely
to be particularly damaging to enterprise development.
48
Fink (2001) simulates the effects of the introduction of IPR protection on two therapeutic drugs in India. The
results suggest that the impact of offering IPR protection can be higher prices and significant welfare losses, but that
non-patented therapeutic substitutes to a patented drug can limit the extent of price increases and reduce welfare losses.
45
Summary of empirical results 6.
The literature reviewed above has tended to use cross-country or panel data techniques
to detect the role that stronger IPR protection might play in encouraging economic
growth and international technology transfer. As noted in the Introduction, there are a
range of channels through which growth-enhancing technology transfer might occur.
Formal channels include foreign patenting, FDI and technology licensing. All of these
channels may also generate informal technology transfer (technology spillovers), as can
other forms of international contact, including trade in goods and services and the move-
ment of workers. Whether growth-enhancing effects occur at all, and their magnitude if
they do, also depends on the characteristics of the recipient country—such as its levels
of development and human capital, openness to trade and FDI and its market size.
Because this is a relatively recent research topic the literature is still relatively small.
There are also weaknesses in both the data and the econometric methodology employed.
The results are far from definitive as a consequence. But while it would be premature
to make strong claims on the basis of the limited evidence to date, the overall pattern
of results justifies certain inferences.
It seems clear that the implications of stronger IPRs depend, inter alia, on a country’s
level of development (measured by GDP per capita or human capital). Three distinct
groups emerged from our threshold analysis—advanced countries with innovative capa-
bility; middle-income countries with imitative capability and innovative potential; and
poor countries with neither. The membership of these groups can be expected to change
over time and also depends on the activity under consideration.
For the advanced countries, the evidence from section 2 suggests that strengthening
IPRs raises growth, and later sections indicate that this at least partly comes about
through increased innovation, as shown by increases in domestic patenting, and tech-
nology diffusion, as shown by increases in foreign patenting. These are the countries
whose IPR regimes already meet or exceed the TRIPS standards, leaving them free to
strengthen them further if they wish.
For middle-income countries, the evidence suggests that strengthening IPRs has no over-
all effect on growth. Despite this the evidence suggests that a stronger IPR regime encour-
ages both domestic innovation and technology diffusion through foreign patenting and
46 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
international trade in these countries, with evidence also indicating that both domes-
tic innovation and technology diffusion can impact positively upon growth. For such
countries therefore the potential for gains from stronger IPRs exists. The available evi-
dence indicates however that the beneficial impact of stronger IPR protection on domes-
tic innovation and technology diffusion in these countries is to a certain extent offsetting
the growth-enhancing benefits otherwise obtained from the imitation now precluded by
the stronger IPR regime. These are countries whose IPR regimes will need to be strength-
ened in order to meet the TRIPS standards. Their policy focus should be to encourage
domestic firms to shift from imitation to innovation and to facilitate other activities
with growth-enhancing technology spillovers.
For poor countries, the evidence from section 2 suggests that strengthening IPRs encour-
ages growth. Unfortunately research so far is less than enlightening on the exact chan-
nels through which this occurs. Stronger IPRs appear to have no effect on innovation
in these countries and the evidence reviewed suggests that the impact on international
trade of stronger IPR protection in these countries is negative. Moreover, while stronger
IPR protection is found to encourage foreign patenting, this has no significant effect
on growth in the lowest-income countries. These are countries whose IPR regimes will
also need to be strengthened to meet the TRIPS standards. It may be that most will
not have significant imitative or innovative capability in the near future. Those which
do must be concerned that TRIPS will inhibit their firms from passing through the imi-
tative stage that seems to be the precursor to gaining innovative capability in relatively
high-tech industries. The TRIPS obligations may make WTO membership less attrac-
tive for those countries with imitative aspirations.
A country’s openness to international trade also seems important in determining the
impact of IPR protection on growth, innovation and technology diffusion. The evidence
from section 2 suggests that, other things equal, stronger IPRs have a significant and
positive effect on growth in more open economies. The exact mechanism through which
this occurs is yet to be revealed, but it appears to involve the substitution of domes-
tic innovation for technology produced abroad, since stronger IPRs seem to lead to less
domestic patenting and more foreign patenting in more open economies. And it is not
just that more open economies receive more foreign patents. The evidence suggests that
the growth-enhancing effects of foreign patenting also appear to be stronger in more
open economies
In addition to the role of trade in the relationship between IPRs and growth, IPRs are
also found to influence trade, with evidence suggesting that stronger IPR protection
leads to larger trade flows, albeit mainly for countries with imitative capability and not
necessarily in goods and industries considered high-tech or patent sensitive.
Since most innovation occurs in a few advanced countries, FDI and technology licens-
ing are often perceived as the major formal channels for international technology trans-
fer. But while there is some evidence that stronger IPRs encourage licensing, the
evidence on whether stronger IPRs encourage FDI is largely inconclusive. IPRs do appear
to be important for some TNC activities (R&D and local production) and in some sec-
SUMMARY OF EMPIRICAL RESULTS 47
tors (chemicals and pharmaceuticals), however. Most host countries anticipate that FDI
or licensing will yield further benefits from technology spillovers to domestic firms. By
their nature such spillovers are difficult to measure, so perhaps it is not surprising that
there is little conclusive evidence of growth-enhancing spillovers through inward FDI,
either at the economy-wide, industry or firm level.
The above suggests that for some countries foreign patenting may be an important
source of technology transfer. In addition to the effects discussed so far, the evidence
indicates that a country’s market size may be important in determining whether
increased foreign patenting encourages or inhibits growth. When the full sample of
countries was considered the evidence suggests that increased foreign patenting has a
negative effect on growth in small countries, a positive effect in middle sized countries
and no effect in larger countries. Results for developing countries reported in the paper
suggest that foreign patenting has a positive impact on growth in countries with rela-
tively high levels of IPR protection, for relatively open economies and for countries with
relatively large markets. Combined with the result that stronger IPR protection encour-
ages foreign patenting in developing countries, these results are consistent with the
broad conclusions of the literature that stronger IPR protection should encourage tech-
nology diffusion and that the benefits of technology diffusion should be greater in more
open economies, countries that are more developed and in larger markets where for-
eign firms have less market.
Few developing countries agreed to TRIPS in the hope or expectation that it would
encourage domestic innovation and international technology diffusion. Indeed, since
the adoption of the Agreement, the North-South technological gap has continued to
grow (Correa, 2001). In response an international commission on IPRs established
by the British Government has questioned whether the TRIPS Agreement is likely
to provide any benefits to the world’s poorest countries.
49
The Commission argues
that stronger IPR protection is unlikely to make the poorest countries attractive loca-
tions for innovation and recommends that for such countries the deadline for adopt-
ing TRIPS standards should be extended until at least 2016.
50
This recommendation
has to an extent been taken up by the WTO’s TRIPS council which recently decided
to extend the transition period for the least-developed countries by seven and half
years from the 1 January, 2006 until the 1 July, 2013. Despite this concession the
trend for developed countries is not towards a relaxation of the TRIPS Agreement,
but towards a strengthening of IPR protection (Correa, 2001). Moreover as acknowl-
edged in the Commission’s report, for many developing countries at a certain level
of development and with a certain innovative capacity, stronger IPR protection may
be beneficial, supporting innovation and technology diffusion and in turn enhanc-
ing growth. These conclusions are consistent with those drawn from the literature
reviewed above.
In the past, countries have been able to adapt their IPR regimes to facilitate techno-
logical transfer and to promote their own industrial policy objectives. Both anecdotal
evidence and the case study evidence reviewed above, indicates that many current inno-
vators operated lax IPR systems in the past, designed to encourage technology diffu-
sion through imitation, as well as incremental innovation through utility models. While
TRIPS removes a large part of this flexibility, it does allow countries to undertake dif-
ferent policies with respect to IPR protection. In this section we discuss policies con-
sistent with TRIPS that can help countries maximize the benefits (or minimize any
losses) from TRIPS. The potential policy responses to TRIPS have been considered quite
49
Policy responses to TRIPS 7.
49
The Commission on Intellectual Property Rights (2002).
50
Article 66 allows those least developed countries that are experiencing difficulties in implementing TRIPS to seek
time extensions.
extensively elsewhere,
51
and we draw upon this work to examine policies that can affect
the relationship between IPRs and both innovation and technology diffusion.
52
From our summary of the empirical evidence it is clear that policy recommendations
should vary according to a country’s level of development and its level of imitative or
innovative capacity. The policy priority in poor countries, with weak institutions and
limited R&D capacity for example, should be to improve the investment environment,
with liberal trade policies to encourage imports of technology embodied in goods. Such
countries should not be required to apply and enforce strong IPR obligations and they
should have access to mechanisms that reduce the cost of importing IPR protected
goods. Hoekman et al (2004) argue that this could be achieved through a direct sub-
sidy or more likely a differential pricing scheme that lowers the consumption cost of
technology intensive imports. For other developing countries, with relatively high lev-
els of innovative potential, the stronger IPR protection required by TRIPS can encour-
age domestic firms to switch from imitation to innovative activities. Stronger IPR
protection in these countries by encouraging technology diffusion through international
trade and foreign patenting will also help offset any adverse growth effects from lost
imitative opportunities. We begin by looking at policy responses at the national level,
and then turn to the role of multilateral organizations.
Intellectual property rights related policies
In order for countries to benefit in terms of growth, TRIPS should encourage domes-
tic innovation and international technology diffusion, while limiting the market power
of foreign patent holders. While TRIPS sets minimum standards for IPR protection, it
does leave some room for discretion and this can be used to achieve these goals. Maskus
(2004) sets out policies with respect to patent fees, the scope of patentability and stan-
dards for the inventive step, or novelty requirement of patents, that may contribute to
the development of a domestic innovative sector and to the international diffusion
of technology.
The fees for patent applications and for the renewal of patents and trademarks can be set
to promote both innovation and diffusion. It is possible, for example, to set lower patent
application fees for small and medium-sized enterprises than for large firms, thus encour-
aging innovation by local firms. Patent renewal fees may also rise over time to encourage
firms to let patents on mature technologies lapse early, thus allowing domestic firms to
imitate older technology, which as discussed above was one factor in the development of
countries such as the Republic of Korea and Taiwan Province for example.
Developing countries can also limit the scope of the subject matter that can be patented.
TRIPS does not define “invention” nor specify the three criteria for patentability
50 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
51
See Maskus (2000a, 2004), Kumar (2002) and Hoekman et al. (2004) in particular.
52
In this paper we concentrate specifically on those policies that may affect innovation and international tech-
nology diffusion, and in turn long-run growth. Maskus (2000a, 2004) and Primo Braga et al. (2000) discuss the more
general policy responses required following TRIPS, including those related to creating the enforcement processes and
procedures and building up the capacity to process patent applications in developing countries.
(i.e. that it is “new”, involves a “non-obvious inventive step” and is “capable of indus-
trial application”). Allowable claims could therefore be made narrow and limited to sin-
gle technologies or applications, which will not block others from inventing around the
patent. Broad patents on the other hand could allow rights that go considerably beyond
the claimed invention itself and could thereby discourage subsequent innovation.
Countries could also set high standards for the inventive step in order to prevent rou-
tine discoveries from being patented. This could be combined with a system of utility
models to encourage local firms to invent around patents and to improve their manu-
facturing methods. As discussed above, utility models, which award patents to incre-
mental innovations, have been shown to encourage local domestic innovation and these
should be considered as a means of developing a domestic innovative sector. Introducing
a second tier patent regime will be of little use, however, if there are too few national
resources to create the user base.
Developing countries should also encourage the rapid publication of patent applications,
with full disclosure of the technical processes involved in producing the inventions and
how to put them to commercial use. This will maximize the spillovers to local firms,
allowing them to build upon the disclosed knowledge and possibly to invent around
the patent. This tactic will be constrained by the need to attract foreign patenting in
the first place, however.
But whatever their post-TRIPS policy choices, developing countries have to be aware of
the likely response from the developed countries that demanded the stronger IPR pro-
tection in the first place. Some will argue that any imitation unauthorized by the IPR
holder is piracy and theft. The United States Congress for example has not renounced
unilateral trade action and reserves the right of the United States Trade Representative
to initiate bilateral negotiations with countries whose IPR standards may be TRIPS com-
patible but nevertheless lower than those of the United States. Indeed, several devel-
oping countries have already complained about the continuous use of unilateral pressure
to raise IPR protection beyond the minimum levels of TRIPS (see Correa, 2001).
Competition policies
One potential outcome of TRIPS that is of particular concern to developing countries
is that stronger IPR protection strengthens the market power of foreign TNCs, which
may lead to reduced sales and higher prices,
53
and which can limit the extent of tech-
nology diffusion. In addition enhanced market power may restrict entry and can lower
the rate of innovation. As our summary of the empirical literature in section 6 indi-
cates, this may be of particular concern in countries that are relatively closed to trade
and those with small markets. Moreover, as Correa (1999) notes, in most developing
countries mechanisms aimed at controlling restrictive business practices, or the misuse
of IPRs, are either weak or non-existent.
POLICY RESPONSES TO TRIPS 51
53
Lanjouw (1997) and Maskus (1998c) for example find that stronger patent protection increases the price of pro-
tected drugs considerably when compared with copied or generic drug prices.
Enhanced market power through stronger IPR protection may facilitate other forms
of anti-competitive behaviour, including selling practices and licensing restrictions
(Primo Braga et al., 2000).
54
These include: (a) the cartelization of potential competi-
tors through cross licensing agreements that fix prices, limit output or divide markets;
(b) the use of IPR-based licensing agreements to exclude competitors in particular mar-
kets by raising entry barriers through tie-in sales or restrictions on the use of related
technology; (c) the use of IPR protection to predate competitors by threatening or ini-
tiating bad faith litigation and opposition proceedings, which may raise market entry
barriers particularly for new and small enterprises. It has been argued elsewhere, how-
ever (Maskus, 2000a), that IPR protection alone rarely creates such power unless accom-
panied by restrictions on competitive entry by other firms.
TRIPS article 40 sets out a general right for countries to establish and enforce anti-
monopoly policies for the purposes of combating abusive technology licensing practices.
There exist a range of domestic policies that are consistent with TRIPS and which can
offset such market power effects. Examples include price controls, compulsory licences,
and parallel imports. To the extent that anti-competitive practices are reliant on restric-
tions on competitive entry, however, there is a rationale for using policy to minimize
entry barriers, through limiting business regulation and through the further opening of
the economy to international trade and investment, which allows greater competition
from foreign sources.
One possibility for governments that wish to reduce the impact of IPR induced market
power on prices would be to consider price controls through reference prices or admin-
istrative ceilings. A balance between the host country’s and foreign firm’s interests needs
to be struck, allowing firms to generate “normal” profits on their underlying R&D invest-
ments (Primo Braga et al., 2000). Such practices are not uncommon in pharmaceuti-
cals, particularly where health is publicly funded. But price controls are relatively
inflexible and distort market signals. Their widespread use is to be avoided.
Compulsory licences are an alternative possibility for limiting market power. A compul-
sory licence is an involuntary contract between a patent holder and a third party author-
ized by the national authorities that entitles the licensee to exploit the patent for a
fixed period of time during the patent life, upon the payment of reasonable remuner-
ation to the right holder. Firms taking out a patent in a country which grants compul-
sory licences will know that any attempt to restrict supply to exploit its monopoly
power could be undermined in this way. Governments may resort to compulsory licens-
ing to promote public health, welfare, security, competition and other objectives. These
would need to be transparent and well defined in order not to discourage the entry of
foreign firms and the development of new technologies by domestic firms (Maskus,
2004). Moreover, the threat of compulsory licensing is only credible if a potential
licensee capable of supplying the patented product economically at a lower price exists.
While potentially useful as a means of limiting anti-competitive behaviour, there is little
52 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
54
Article 40 of TRIPS lists specific anti-competitive practices that may be encouraged by strong IPR protection
including exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing
evidence that countries have successfully used this tool to gain access to international
technologies (Maskus, 2004). Indeed, some argue that the restrictions imposed on com-
pulsory licences are so rigorous as to eliminate nearly all prospects for effective tech-
nology transfer (Correa, 2003). In particular, requirements for compensation, the need
for non-exclusive licensing, and the inability to compel transfer of know-how signifi-
cantly restrict the ability of local firms to benefit from this policy.
If patenting in different countries allows the patentee to price discriminate internationally,
then the profits of the innovating firm will be maximized by setting higher prices in mar-
kets with lower price elasticities of demand. Such market segmentation may also promote
collusive behaviour. If price differences exceed the costs of shipment between markets,
however, then profitable arbitrage opportunities arise for third parties if they ship legally
sold products in low priced markets for resale in high priced markets. This is known as
parallel importing.
55
Whether parallel importing is legal or not depends upon the princi-
pal of exhaustion adopted by the importing country.
56
Under a system of national exhaus-
tion, a title holder can prevent parallel importation of their product from a foreign country.
If rights are exhausted internationally, the title holder loses their exclusive privilege after
the first distribution of the product, thus allowing parallel imports from abroad.
57
The claim that price discrimination across segmented markets is harmful and pro-
motes collusion must be considered from the relevant perspective, however.
58
Firstly,
the market power associated with IPR protection may be slight if there is extensive
inter-brand competition in each location. Secondly, allowing unrestrained parallel
trade would establish uniform pricing by the IPR holder, subject to differences in
transport and marketing costs. Economies with large markets and inelastic demand
would face lower prices under uniform pricing, benefiting consumers. In contrast,
countries with small markets and elastic demand would face higher prices than under
price discrimination. The standard view is that this latter situation is that which per-
tains in most developing countries, suggesting that a global regime that allowed par-
allel imports may not be beneficial to them. Thirdly, foreign right holders may choose
not to sell in some countries, in the presence of parallel trade, because local demand
would be insufficient under uniform pricing, which in turn may lower the extent of
technology diffusion.
59
Fourthly, it may be that products that would command low
prices in developing countries under a regime of national exhaustion would be
exported to otherwise higher priced regions under a regime of parallel imports. Here
the trade-off would be increased export revenue at the expense of higher prices to
POLICY RESPONSES TO TRIPS 53
55
It should be stressed that parallel imports are trade in legitimate goods outside official channels of distribution,
and not trade in counterfeit goods. Maskus (2000a, chapter 7) provides a more detailed analysis of the treatment of
parallel imports.
56
This is discussed in greater detail in Falvey, Martinez and Reed (2004). TRIPS allows members to decide for
themselves the extent of exhaustion. Article 6 states that “[F]or the purposes of dispute settlement under this Agreement,
subject to the provisions of Articles 3 and 4, nothing in this Agreement shall be used to address the issue of the exhaus-
tion of intellectual property rights”.
57
A hybrid to these two extremes is a system of regional exhaustion whereby parallel trading is allowed within a
particular group of countries, but parallel imports from countries outside the region are banned.
58
Maskus (2000c) argues that if Lebanon were to adopt a policy banning parallel imports of IPR protected goods,
the resulting segmentation of its market from world markets could support higher prices.
59
Further arguments in favour of banning parallel imports relate to the possibility of parallel traders free riding on
the investment, marketing and service costs of authorized distributors, and that exclusive rights make it easier to mon-
itor marketing efforts and enforce product quality (see Maskus, 2000a, pp.208 215).
domestic consumers.
60
Finally, under certain conditions price discrimination can pro-
vide positive economic benefits at the global level.
Malueg and Schwartz (1994) show that a global ban on parallel importing could result
in perfect price discrimination, in that each market has its own price, which would
maximize firm profits and encourage further innovation.
61
Recent research however suggests that the impact of banning parallel imports on inno-
vation is theoretically ambiguous. Li and Maskus (in press) develop a model in which
a manufacturer with the ability to engage in cost-reducing innovation competes for sales
in its own market with parallel imports from a distributor in another market. They
show that distortions associated with parallel imports reduce the incentive for the man-
ufacturer to invest in innovation. The amount by which R&D is reduced is found to
depend upon both transport costs and the legal treatment of parallel imports. Valletti
(in press) develops a model in which a monopolist after conducting R&D to determine
the quality of its product serves a number of different markets. In the model, price dif-
ferences across markets can arise due to both differences in marginal costs and in con-
sumer demand in different markets. Valletti shows that the impact on the level of
investment in R&D of allowing parallel imports depends upon the reason for differen-
tial pricing. When differential pricing is due purely to consumer demand parallel imports
reduce investment in R&D, but when differential pricing is due to cost differences par-
allel imports increase in R&D investment.
The role of parallel imports is therefore quite controversial. Some argue for banning
parallel imports (Barfield and Groombridge, 1998), while others argue that such a ban
amounts to a non-tariff barrier to trade (Abbott, 1998). A more moderate view is that
they play a useful role in discouraging abusive price discrimination and collusive behav-
iour. The ambiguous impact of parallel imports on prices and technology diffusion leads
Maskus (2000a) to conclude that the best advice seems to stick with the status quo,
with each country selecting its own policy.
62
In many developing countries this would
imply a presumption that a policy of international exhaustion allowing parallel imports
should be followed.
Complementary policies
Much of the literature reviewed above indicates that the responsiveness of innovation
and the channels for international technology diffusion to stronger IPR protection are
likely to depend upon other characteristics that reflect a country’s ability to innovate
54 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
60
For developed countries therefore, there is an argument for banning parallel imports, particularly of patented
drugs. This would allow patent holders to prevent pharmaceutical products priced and sold for poor people in develop-
ing countries from being arbitraged and resold in developed countries.
61
Obviously the claim that global welfare could be higher does not mean that all countries benefit equally or even
at all. Price discrimination redistributes consumer benefits from high-price countries to low-price countries.
62
While the results discussed here hold for all forms of IPR protection, Primo Braga et al. (2000) note that in the
area of trademark protection, parallel imports may undermine the efforts of the property right owners to guarantee con-
sistent quality and to maintain pre-sales and after-sales services.
and take advantage of foreign knowledge. Here we consider complementary policies that
may encourage domestic innovation and technology diffusion.
Encouraging local technology development can have both a direct effect on produc-
tivity and growth, especially as many of the benefits of R&D are likely to be local
in nature, and an indirect effect by encouraging greater technology diffusion. But
while encouraging local technology development should be a priority for the rela-
tively more advanced developing countries, the benefits of such policies for the least
developed countries are likely to be limited, particularly if they draw scarce resources
away from other more pressing activities, such as education and health care. Evidence
suggests that the ability of domestic firms to absorb foreign technology does depend
upon the existence of an in-house R&D capacity.
63
Technology policies, capital mar-
ket regulations and tax policies could therefore be adjusted to encourage more inno-
vation and in turn technology diffusion. Developing domestic innovative capacity may
also lead to increased inflows of FDI, which could further increase technology dif-
fusion. Examples of policies to encourage domestic innovative activities include pub-
lic assistance for basic R&D and public-private research partnerships.
64
Direct
subsidies can be quite costly, however, by distorting resource allocation decisions,
encouraging firms to behave strategically in order to win subsidies, and creating
opportunities for corruption and rent seeking behaviour. Hoekman et al., (2004)
argue that the biggest problem of implementing subsidy policies is that they are dif-
ficult to control and that governments need to be able to determine which efforts
are successful and establish an effective and credible exit strategy from those that
are unsuccessful.
Investment in education may also encourage domestic innovation and the international
diffusion of technology. Although there is limited evidence on the subject, it is to be
expected that stronger IPR protection would become more important in encouraging
innovation in countries with high levels of education and training, particularly in sci-
ence and technology. In addition to encouraging innovation, countries that invest in
education are likely to encourage greater inflows of FDI in response to a strengthen-
ing of IPR protection. Moreover, by enhancing a country’s absorptive capacity, educa-
tion is likely to encourage the adaptation of foreign technology.
65
But in order to
encourage domestic innovation and technology diffusion, skills other than basic liter-
acy and mathematical skills are required. As such there is an argument for encourag-
ing higher education in science and engineering, which will improve specialist skills.
This could involve encouraging students to undertake training at foreign universities,
which in itself could act as a form of technology diffusion. At the same time, such a
policy is subject to the risk of a “brain drain”, with trained graduates not returning
to work in their country of origin.
POLICY RESPONSES TO TRIPS 55
63
Aggregate evidence from developed countries also suggests that the presence of a domestic R&D sector can allow
countries to benefit from foreign technology (see for example Crespo-Cuaresma et al., 2004; Griffith, Redding and van
Reenen, 2004)
64
Utility models as discussed earlier may also promote domestic adaptive innovation.
65
Crespo-Cuaresma et al. (2004) also present evidence for OECD countries suggesting that the benefits from for-
eign technology spillovers are stronger in countries with higher levels of human capital.
Technology diffusion
To the extent that trade flows, FDI, technology licensing and foreign patenting lead to
externalities in the form of technology spillovers, they should be encouraged. While the
evidence in favour of these channels encouraging technology diffusion is mixed, in coun-
tries with significant imitative abilities the evidence reviewed above suggests that stronger
IPR protection could increase such flows. Other factors are also likely to be important
in increasing both the flows and the knowledge spillovers through these channels. These
include sufficient levels of human capital (which can raise a country’s imitative and inno-
vative ability as discussed above), the local investment climate, market competition, gov-
ernance policies and the degree of openness to trade and foreign investment.
Available evidence suggests that FDI and licensing are attracted to locations with an effec-
tive infrastructure, stable government, and open trade and investment regimes (Wheeler
and Mody, 1992; Brainard, 1997; Carr et al., 2001). While government incentives to under-
take FDI in a country may be important in some cases, in general they are ineffective in
the absence of an adequate skilled labour force, market opportunities, infrastructure,
macroeconomic stability and political and legal predictability (Wallace, 1992).
The empirical evidence reviewed above suggests that the impact of IPR protection on
growth is stronger in more open economies. Moreover, stronger IPR protection creates
market power that is more easily abused in closed economies. In addition to a liberal
stance on inward trade and FDI improving a country’s access to foreign technologies,
intermediate inputs and producer services therefore, openness may reduce monopoly
power and encourage innovation and growth. The problem that IPR protection in small
and relatively closed economies can lead to market power effects that limit the diffu-
sion of knowledge may be partly relaxed by membership of a Regional Trade Agreement
if this increases the effective size of the market served by IPR holders.
The role of multilateral organizations
For most developing countries, achieving the benefits of access to developed country
markets that membership of the WTO can provide comes at the perceived cost of
strengthening their IPR regime in order to conform to the TRIPS Agreement. Ensuring
that developing countries obtain the maximum net benefit from TRIPS is a task fac-
ing their governments, and one in which multilateral organizations can provide assis-
tance. In this as in many other areas, the degree and type of assistance required will
depend on the circumstances of the country concerned. The empirical literature reviewed
above has highlighted the relevant country characteristics: levels of development, skill
levels, market size and openness to trade and FDI. One major potential benefit to devel-
oping countries from strengthening their IPR regimes to comply with TRIPS is through
the increased international transfer of technology this induces in some circumstances.
Multilateral organizations can also have a role to play in facilitating this transfer.
One point that should be clear from the literature reviewed above is that there is still
much to learn about the economic effects of IPR protection. Multilateral organizations
56 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
can play a significant role in facilitating research in this area and in encouraging the
dissemination of its findings to all interested parties. Primo Braga et al (2000) argue
that such research should focus on specific types of intellectual property and should
analyse the implications of IPRs under different country-specific and sector-specific cir-
cumstances. A combination of the broad multi-country studies of the type reviewed
here, and specific country and sector case studies seems appropriate.
Each developing country will need to design an IPR regime that best fits its own cir-
cumstances, subject to being TRIPS compliant. Appropriate policies were discussed
above. But this regime will also need to be modified as circumstances change and as
the country develops. Individual countries stand to benefit from the knowledge and
experience of those who have gone before them and multilateral organizations can
encourage the accumulation of this knowledge and facilitate access to it.
Along the same lines, multilateral organizations may play a role in capacity building in
this area more generally. Maskus (2004) argues that capacity building in IPRs should
focus less on the specification of protective laws and regulations and more on the tech-
nical, judicial and legal expertise underlying effective technology transfer. One possibil-
ity is the development of a repository and the publication of best practices in foreign
licensing contracts with subsidiaries, joint ventures and arm’s length partners. Multilateral
organizations have a role to play in reducing overall information problems by encourag-
ing collaboration and information sharing among governments, possibly by serving as an
intermediary for knowledge about successful technology acquisition programmes that have
been undertaken in the past (Saggi, 2003). Technical standards play an important role
in diffusing production and certification technologies, and learning technical standards
is often tantamount to learning technology. Here multilateral organizations could create
a pool of experts to aid standard setting bodies in developing countries (Maskus, 2004).
Given the importance of the presence of innovative capacity for successful international
technology diffusion, multilateral organizations could play a role in encouraging the
development of a research culture in developing countries. This could include the
development of training programmes in how technology is transferred, as well as the
financing of education programmes more generally, particularly those that can aid the
diffusion of technology (Maskus, 2004). In this area the training of scientists and engi-
neers would seem to be a priority, possibly in advanced country institutions.
66
A com-
plementary approach would also exploit the use of the Internet for online training
services (Maskus, 2004). The development of a domestic R&D sector could be encour-
aged through public-private R&D partnerships and supporting research institutions in
developing countries. Donor countries and multilateral organizations could consider
establishing specific trust funds to finance the training of scientific and technical
personnel to facilitate the transfer of technologies that are particularly important in the
provision of public services, and for encouraging research in developing countries (Roffe,
2002). Multilateral organizations may also have a role to play in supporting research
POLICY RESPONSES TO TRIPS 57
66
Indeed, negotiations over the temporary cross-border movement of people have already been launched in the
WTO with respect to the GATS agreement on trade in services. This could be extended to include people who move
temporarily to increase their education levels. (Hoekman et al., 2004).
into technologies that would be productive in developing countries for social needs,
such as water treatment, energy and the environment (Maskus, 2004).
Article 66.2 of the TRIPS Agreement provides an obligation on behalf of developed coun-
try governments to provide incentives to their enterprises and institutions to promote
technology transfer to the least-developed countries.
67
Hoekman et al (2004) suggest that
this benefit should be extended to other low-income developing countries that have lit-
tle or no innovative capacity. There is, of course, no assurance that this encouragement
will be successful. While there are clear constraints on imposing obligations on govern-
ments with respect to the disposal of private property, Maskus (2004) argues that mul-
tilateral organizations, and the WTO in particular, could increase the scope for monitoring
developed country efforts in the transfer of technology and could add an evaluative mech-
anism for the effectiveness and extent of technology transferred. Over time this approach
should build up useful information about problems and effective practices in transfer-
ring technologies. An agreement at the WTO to increase the size of the pool of tech-
nologies available in the public domain or widely accessible at affordable costs could
also be considered. This should certainly be feasible for research that is largely publicly
funded (Barton, 2003; Maskus, 2004). Developed country governments could also extend
the fiscal benefits to firms transferring technologies to disadvantaged home regions to
transfers to developing countries. Similarly they could offer the same tax advantages for
R&D performed abroad as for R&D done at home (Maskus, 2004).
Many suggestions for developed country action involve a cost, which weakens the incen-
tive to implement them. There is an argument therefore for coordinating commitments
through the relevant multilateral organization. Hoekman et al (2004) argue that the most
powerful indirect incentive for technology transfer is for developed countries to grant
significant market access for products in which poor countries have a comparative advan-
tage. They argue that a link between technology transfer and market access exists due
to the role that market size and growth play in attracting trade and FDI, and the asso-
ciated incentives to invest in new technologies if export markets were more assured.
Multilateral organizations, particularly the WTO, have an obvious role to play here.
Developed countries could also expand their programmes for the training and develop-
ment of workers in developing countries, particularly in science and technology. Maskus
(2004) argues that fiscal incentives could be introduced to encourage enterprises to
employ on a temporary basis recent science, engineering and management graduates
from developing countries. Similarly, he argues that universities could be encouraged to
recruit and train students from developing countries in science, technology and manage-
ment. Incentives for setting up degree programmes through distance learning or even
foreign establishments of university campuses may be considered. One problem with the
temporary movement of highly skilled individuals across borders is that it may become
permanent, as they perceive the personal rewards of operating in developed markets.
This can lead to a brain drain and have a detrimental impact on developing countries.
Thus complementary programmes to establish a domestic entrepreneurial environment
that attracts back skilled workers who reside in developed countries may be important.
58 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
67
Article 66.2 states that “Developed country Members shall provide incentives to enterprises and institutions in
their territories for the purpose of promoting and encouraging technology transfer to least-developed country Members
in order to enable them to create a sound and viable technological base”.
59
Concluding remarks
8.
While few would consider IPR protection to be a panacea for developing countries,
views on the importance of IPR protection tend to be polarized. On one side, it is believed
that stronger IPR protection can encourage innovation, technology diffusion and
enhance growth. On the other it is thought that stronger IPR protection leads to monop-
oly power for patent holders, reduces the incentive to innovate and limits the diffusion
of knowledge. The evidence reviewed and presented here supports neither claim.
The impact of IPR protection on growth, innovation and technology diffusion in devel-
oping countries is likely to depend upon a number of factors. While stronger IPR pro-
tection in the poorest countries is not likely to lead to substantial benefits in terms of
innovation or technology diffusion, the administrative cost of developing a patent system
and the enforcement of TRIPS, along with the potential abuses of market power in
small closed markets suggests that such countries could lose out from TRIPS. Stronger
IPR protection in the poorest countries may also inhibit or lengthen the imitative stage
of development that seems to be necessary in order to develop innovative capacity in
many industries. Policies aimed at improving the business environment and encourag-
ing imports of technology embodied in goods could potentially reduce such costs, though
their impact on other development-related goals needs to be carefully weighed.
In other developing countries the potential for benefits from TRIPS is stronger. Here
existing firms engaging in imitation could be encouraged through stronger IPR protec-
tion to shift resources towards adaptive innovation, while stronger IPR protection is
likely to increase trade and FDI flows into countries with existing imitative ability, thus
enhancing technology transfer. Policies to enhance the benefits of TRIPS would help
develop the domestic innovative sector through encouraging R&D and investment in
education, along with policies aimed at opening markets to foreign imports and encour-
aging inward FDI.
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68 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
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70 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
The following is an outline of how the strength of IPR protection was constructed and
is taken from the appendix of Ginarte and Park (1997).
(1) Coverage YES NO
Patentability of pharmaceuticals 1 0
Patentability of chemicals 1 0
Patentability of food 1 0
Patentability of plant and animal varieties 1 0
Patentability of surgical products 1 0
Patentability of microorganisms 1 0
Patentability of utility models 1 0
(2) Membership in international treaties YES NO
Paris convention and revisions 1 0
Patent cooperation treaty 1 0
Protection of new varieties (UPOV) 1 0
(3) Loss of protection measures against losses YES NO
Working requirements 1 0
Compulsory licensing 1 0
Revocation of patents 1 0
(4) Enforcement YES NO
Preliminary injunctions 1 0
Contributory infringement 1 0
Burden-of-proof reversal 1 0
(5) Duration Value
Application-based standard
x ? 20 years 1
0 ? x < 20 x/20
Grant-based standard
x’ ? 17 years 1
0 ? x’ < 17 x’/17
Notes: Where x = duration of protection in years under an application-based standard and x’ = duration of
protection under a grant-based standard.
The value of each category, other than duration, is j/k where j is the number of “1”s received (or number
of conditions satisfied) and k the number of conditions to be satisfied.
Source: Ginarte and Park (1997).
71
Annex I.
Construction of the Ginarte
and Park IPR index
Annex I.
Threshold regression analysis is particularly useful when we expect the relationship
between two variables to be contingent upon the value of a third variable. In the case
of IPR protection such models can be particularly useful therefore, since IPR protec-
tion is expected to impact differently upon countries at different stages of development.
In a series of papers, Hansen (1996, 1999 and 2000) develops a technique that allows
the sample data to jointly determine both the regression coefficients and the threshold
value. In addition the technique allows one to test the significance of the threshold
value. In this Appendix we briefly describe this approach.
Estimation
We can write the threshold regression model for a single threshold as:
?
i
= ?
1
x
i
+ ?
i
q
i
? ?
1
(1)
?
i
= ?
2
x
i
+ ?
i
q
i
> ?
1
(2)
where q
i
is the threshold variable. Here the observations are divided into two regimes
depending on whether the threshold variable is smaller or larger than ?
1
. The two regimes
are distinguished by different regression slopes, ?
1
and ?
2
. Chan (1993) and Hansen
(1999) recommend estimation of ?
1
by least squares. This involves finding the value
of ?
1
that minimizes the concentrated sum of squared errors. In practice this involves
searching over distinct values of q
i
for the value of ?
1
at which the sum of squared
errors is smallest. This value of ?
1
is our estimate of the threshold, ?
1
. Once we have
a value for it, it is straightforward to estimate the coefficients of the regression model.
This approach can be extended to any number of thresholds. In the two-threshold model
we would then have the following:
?
i
= ?
1
x
i
+ ?
i
q
i
? ?
1
(1)
?
i
= ?
2
x
i
+ ?
i
?
1
? q
i
? ?
2
(2’)
?
i
= ?
3
x
i
+ ?
i
q
i
> ?
2
(3)
where ?
2
is the second threshold and the thresholds are ordered so that ?
1
< ?
2
. It is
a straightforward extension to search for the values of ?
1
and ?
2
that minimize the sum
of squared errors. At the same time however this can be computationally demanding.
Chong (1994), Bai (1997) and Bai and Perron (1998) have shown that sequential esti-
mation is consistent, thus avoiding this computation problem. This involves fixing the
72
Annex II.
Threshold regression analysis
Annex II.
ANNEX II. 73
first threshold at ?
1
and searching for a second threshold assuming that the first is
fixed. It can be shown that the estimate of ?
2
is asymptotically efficient, but that ?
1
is not. This is because the estimate ?
1
was estimated from a sum of squared errors, a
function that was contaminated by the presence of a neglected regime. Bai (1997) sug-
gests a refinement estimator for ?
1
, which involves fixing the second threshold at ?
2
and searching for the first threshold, ?
1
, now including the second threshold. We denote
this refined estimate by ?
1
.
Testing for the significance of a threshold
Having found a threshold it is important to determine whether it is statistically signif-
icant or not, that is, to test the null hypothesis H
0
: ?
1
= ?
2
. Given that the threshold
?
1
is not identified under the null, this test has a non-standard distribution and criti-
cal values cannot be read off standard distribution tables. Hansen (1996) suggests boot-
strapping to simulate the asymptotic distribution of the likelihood ratio test allowing
us to obtain a p value for this test. Firstly, one estimates the model under the null
(linearity) and alternative (threshold occurring at ?
1
). This gives the actual value of the
likelihood ratio test, (F1),
Here S
0
and S
1
are the residual sum of squares from the linear and threshold models
respectively. Then a bootstrap is created by drawing from the normal distribution of
the residuals of the estimated threshold model. Hansen (2000) recommends fixing the
regressors in repeated bootstrap samples. Using this generated sample, the model is
estimated under the null and alternative and the likelihood ratio F
1
is obtained. This
process is repeated a large number of times (in our case 1,000). The bootstrap estimate
of the p-value for F
1
under the null is given by the percentage of draws for which the
simulated statistic F
1
exceeds the actual one.
In the case of the two-threshold model we would like a test to discriminate between
one and two thresholds. An approximate likelihood ratio test of one versus two thresh-
olds is given by the following statistic,
To obtain the p-value a bootstrap procedure is once again followed with the depend-
ent variable being generated under the null hypothesis of a single threshold.
The threshold analysis in this paper begins by estimating a single threshold on each of
the threshold variables considered. If the first threshold is found to be significant using
the bootstrap procedure described above we search for a second threshold using the sequen-
tial estimation method described above. We continue this process until an insignificant
threshold is found. To maintain a reasonable sample size in each regime we adopt the
restriction that at least 10 per cent of observations must be in each regime.
F
1
=
S
0
— S
1
(?
1
)
where ?
2
=
1
S
1
(?
1
)
?
2
n(t — 1)
F
1
=
S
0
— S
1
(?
1
)
where ?
2
=
1
S
1
(?
1
)
?
2
n(t — 1)
Empirical methods
In the empirical analysis we relate both the level of IPR protection (section 2) and the
level of international technology diffusion, as measured by patent applications from non-
residents to economic growth in a relatively large sample of developed and developing
countries. The starting point for this analysis is, by now, a standard empirical growth
regression in a panel setting. Following the contributions of Levine and Renelt (1992)
and Sala-i-Martin (1997) there has been some standardization of the variables included
in empirical growth models. The core regression that we estimate is the following:
GROWTH
it
= ?
1
INITGDP
it
+ ?
2
GDI
it
+ ?
3
POPGROW
it
+ ?
4
SYR15
it
+ ?
5
TRADE
it
+ µ + ? + ?
where GROWTH is the average growth of GDP per capita over each five-year period,
INITGDP is the log of initial GDP per capita in each five-year period, GDI is the log of
the average level of investment in each five-year period, POPGROW is the average growth
rate of population in each five-year period, SYR15 is the average years of secondary
schooling in the population over 15 at the beginning of each five-year period and TRADE
is the average ratio of total trade to GDP in each five-year period. We expect positive
coefficients on GDI, SYR15 and TRADE and a negative coefficient on INITGDP and
POPGROW.
68
We also estimate a fixed effects specification, including a full set of time
and country dummies in all specifications.
In section 2 we add to these variables the measure of IPR protection developed by
Ginarte and Park (1997). We extend the linear model considering the relationship
between IPR protection and growth by conducting a threshold regression analysis, to
address whether the impact of IPR protection on growth depends upon the value of
variables measuring imitative ability (namely INITGDP and manufacturing value-added
74
Annex III.
Empirical method, data sources
and construction
Annex III.
68
The coefficient on population growth is expected to be negative and significant. In the existing (mainly cross-
section) literature however both positive and negative coefficients have been obtained, with Levine and Renelt (1992)
finding the coefficient on this variable to be “fragile”. We find that excluding the country-fixed effects and estimating
a pooled or a random effects model give us the more usual negative coefficient on population growth, though the coef-
ficient tends to be insignificant. One possibility therefore is that population growth is capturing some form of market
size effect.
ANNEX III. 75
as a share of GDP, MANVAL) and upon openness, as measured by the ratio of trade
to GDP. This follows from the arguments of Thompson and Rushing (1996) and Gould
and Gruben (1996).
The second part of our empirical analysis considers the impact of patenting by domes-
tic and foreign residents on growth and of the importance of IPR protection in influ-
encing the extent of foreign technology diffusion through patents. On the one hand,
this simply extends the above growth model to include the ratio of patent applications
by domestic residents per 1,000 of the labour force (DOMPAT) and the ratio of patent
applications by non-residents per 1,000 of the labour force (FORPAT). The variable on
domestic patents is included to account for domestic innovation, while the variable on
patenting by non-residents is included to account for international technology diffusion,
as discussed in the main text. Once again we extend the linear model to consider
threshold effects, allowing the coefficient on foreign patenting to depend upon third
variables. We consider threshold effects based on the level of IPR protection to exam-
ine whether the strength of IPR protection affects the extent of technology diffusion
through foreign patenting. We also consider thresholds on the level of initial GDP per
capita, which allow us to examine whether the extent of technology diffusion through
foreign patenting is affected by variables used to account for a country’s ability to imi-
tate existing products and to innovate. Finally, we consider thresholds based on the
ratio of trade to GDP in order to examine whether the degree of openness affects the
extent of diffusion, and the level of GDP to examine whether market size affects the
extent of technology diffusion.
In addition to examining the importance of foreign patenting for growth, we also exam-
ine whether the level of IPR protection impacts upon domestic innovative activity, as
measured by DOMPAT, and upon international technology diffusion, as measured by
FORPAT. The basic specification for our empirical model is the following;
X
it
= ?
1
INITGDP
it
+ ?
2
SYR15
it
+ ?
3
TRADE
it
+ ?
4
IPR
it
+ µ
i
+ ?
t
+ ?
it
where the dependent variable, X, is either the average ratio of patent applications by
domestic residents per 1,000 of labour force or the average ratio of patent applications
by non-residents per 1,000 of labour force and the independent variables INITGDP,
SYR15, TRADE and IPR are as defined above. In various specifications we also include
a measure of higher schooling, variables representing political and civil liberties (taken
from Freedom House) and in the case of the foreign patenting equation we include
DOMPAT. The inclusion of these variables does not alter either the sign or significance
of the main variable of interest, namely the index of IPR protection. Moreover, the coef-
ficients on the variables themselves tend not to be significant. Since we have no solid
theory on which to draw for our empirical analysis we report the results from the above
parsimonious specification. The equation as written above is once again a fixed effects
model allowing for unobserved country and time heterogeneity. We also experimented
with both a pooled and a random effects model. The sign and significance of the coef-
ficient on the IPR variable tends not to differ greatly across specifications.
Country coverage, data sources and construction
Most of the data used in our analysis was taken from Falvey, Foster and Greenaway
(2004a). This dataset considers up to 80 developed and developing countries over the
period 1975-1994 using data on four five-year averages. The sample of countries con-
sidered in our analysis is listed below. Data on patent applications is only available for
47 of these 80 countries. The 47 countries used in our analysis of domestic and for-
eign patenting are indicated by an asterisk in the list below.
76 THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN TECHNOLOGY TRANSFER
Developed Countries
Australia*
Austria*
Belgium*
Canada*
Denmark*
Finland*
France*
Germany*
Greece*
Ireland*
Italy*
Japan*
New Zealand*
Netherlands*
Norway*
Portugal*
Spain*
Sweden*
Switzerland*
United States of America
Developing Countries
Algeria*
Argentina
Bangladesh*
Benin
Bolivia
Botswana
Brazil*
Cameroon
Central African Republic
Chile*
Colombia*
Democratic Republic of the Congo
Republic of the Congo
Costa Rica
Dominican Republic
Ecuador*
Egypt*
El Salvador*
Fiji
Ghana
Guatemala*
Haiti
Honduras
India*
Indonesia*
Iran (Islamic Republic of)*
Israel*
Jamaica
Jordan
Kenya*
Republic of Korea*
Malawi*
Malaysia
Mauritius
Mexico*
Mozambique
Nepal
Nicaragua
Niger
Papua New Guinea
Pakistan*
Panama
Paraguay
Peru*
Philippines*
Rwanda
South Africa*
Senegal
Singapore*
Sri Lanka*
Swaziland
Syrian Arab Republic
Thailand
Togo
Trinidad and Tobago
Uganda
Uruguay*
Venezuela*
Zambia*
Zimbabwe*
ANNEX III. 77
Variable Definition Source
GROWTH
INITGDP
GDI
POPGROW
SYR15
INFLATION
TRADE
IPR
MANVAL
DOMPAT
FORPAT
GDP
Average growth rate of GDP per capita in each five-year
period
(log) of initial GDP per capita in each five-year period
Average of the (log) of gross domestic investment in each
five-year period
Average growth rate of population in each five-year
period
Average years of secondary schooling in the population
over 15 at the beginning of each five-year period
Average annual rate of increase of the CPI index in each
five-year period
Average of the ratio of total trade to GDP in each five-
year period
Index of IPR protection
Average of manufacturing value-added as a share of GDP
in each five-year period
Average number of patent applications by domestic resi-
dents per 1,000 of labour force in each five-year period
Average number of patent applications by non-residents
per 1,000 of labour force in each five-year period
Average of the (log) of the level of GDP
World Development Indicators
(2001)
World Development Indicators
(2001)
World Development Indicators
(2001)
World Development Indicators
(2001)
Barro and Lee (2000)
World Development Indicators
(2001)
World Development Indicators
(2001)
Ginarte and Park (1997)
World Development Indicators
(2001)
WIPO (various years) and World
Development Indicators (2001)
WIPO (various years) and World
Development Indicators (2001)
World Development Indicators
(2001)
Data for both the empirical growth model and the determinants of domestic and for-
eign patenting are taken from a number of available sources. Variable names, defini-
tions and sources are listed below.
S
e
l
e
c
t
i
v
e
s
u
m
m
a
r
y
o
f
t
h
e
e
v
i
d
e
n
c
e
o
n
I
P
R
p
r
o
t
e
c
t
i
o
n
a
n
d
t
h
e
c
h
a
n
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s
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f
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f
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n
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t
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a
m
p
l
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a
n
d
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d
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f
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s
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o
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a
n
n
e
l
I
P
R
i
n
d
e
x
R
e
s
u
l
t
s
78
Annex IV.
Evidence on IPR protection
H
e
l
p
m
a
n
-
K
r
u
g
m
a
n
m
o
d
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p
o
r
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f
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a
n
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f
a
c
t
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s
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o
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f
r
o
m
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2
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o
u
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t
r
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e
s
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o
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d
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r
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UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
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