Technology Transfer and the Role of Intellectual Property Rights

1. Technology Transfer and the Role of Intellectual Property Rights KAMAL SAGGI Presentation at the WTO October 11th, 2005

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

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

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

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

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

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

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

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

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

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

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

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

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