24 Oct 2016

Protecting innovation in technology diffusion

The use of innovation can be maximized through adequate IPR protection that can also yield benefit in the long run.

In today’s knowledge-driven economy, innovation invaluable and can be easily copied or imitated by infringers, thus reducing the inventor’s profit and reducing incentives to engage in innovative activities.

Large enterprises invest huge sums of money in research and development (R&D) to gain a monopoly position in the market and earn successful returns of investment which can compensate for a higher share of R&D investment that is unsuccessful.

The use of innovation can be maximized through adequate IPR protection that can also yield benefit in the long run. It may also provide better returns and incentive for further innovation; however, excessive IPR protection can lead to inadequate dissemination of knowledge. Intellectual Property Rights (IPRs) provide adequate protection to innovators while preventing others from making, sell, manufacture the invention/technology or negotiate on terms which it can be used.

The main advantage of IPR protection is to restore the confidence and an incentive to innovate that not only ensures long-term growth but also improves product quality. In a weak IPR environment, the country must have existing laws to protect innovators interest so that they can exploit subsequent innovations.

ngth of IPR protection varies from one country to another depending upon the interests of the country and trade-off between innovation and profits. Therefore, IPR should balance both of the elements in order to encourage further innovations which in turn can lead to long-term economic growth.

IPR Protection – Developed Vs. Developing Countries
Generally, developed countries embrace stronger IPR protection to encourage innovation and reward innovators for their work. A stronger IPR regime is critical for long-run economic growth and can lead to a surge in innovative activities.

Developed countries spend higher on R&D as compared to developing countries. While, on the other hand, developing countries adopt weak IPR protection for rapid diffusion of knowledge through intimation as a source of development. These countries consider providing more benefits to domestic firms through counterfeiting and imitation and do not promote domestic activity.

Intellectual Property and Technology Transfer
International technology transfer is a process by which one country transfers technology to another through voluntary transactions, technology spillovers, and imitation. As stronger IPR protection is beneficial in developed countries where innovation is existent, R&D is productive, and measures to protect new inventions are enforceable. Since strong IPR protection leads to monopoly pricing and restricts the welfare reductions, countries with little or no R&D depend on foreign innovations. Technology is transferred through formal channels like trade channels, FDI, licensing, foreign patenting and informal channels such as imitation and counterfeiting.

When technology is transferred through international trade, IPR plays a pivotal role in impacting growth in open economies. A stronger IPR protection can reduce the substitution of innovation for technology produced and developed in foreign countries. On the other hand, weak IPR protection leads to less domestic patenting and more dependency on foreign entities. IPRs are likely to influence trade flows.

In open economies, stronger IPR protection leads to larger trade flows, however, not necessarily for technologies that are patent-sensitive or involves high technology. It also depends on the imitative capabilities and innovative capacity of the country. Since most of the innovation takes place in the developed markets, FDI and technology licensing are considered as the effective channels for technology transfer. However, technology transfer through licensing is the more effective formal channel as compared to FDI in the case of stronger IPR regime.

Many host countries believe that technology transfer through FDI or licensing can result in technology spillovers to domestic firms and will yield benefits in future. FDI is embraced by industries in which knowledge and technology are important as they can be easily transferred across borders. It also depends on the market size, resource availability, production costs, labor supply, and skills.

The main advantage of technology diffusion through FDI is that the technology remains internal to the firm and technology spillovers are reduced both at the firm and industrial level. Large corporates having a complex technology and highly differentiated products prefer FDI over licensing or joint ventures as the cost incurred on technology licensing is very high. Generally, it is believed that countries embracing weak IPR protection receive less FDI, however, it varies from one sector to another, being of secondary important for the low-tech sector or where the products are difficult to imitate.

Enterprises pay more attention to IPR protection when the products are easy to imitate and unwilling to establish R&D centers in these countries. IPR protection is critical for pharma and chemicals industry as compared to low-tech industries wherein it depends on macro factors such as market opportunities, difficulty in imitation, etc. IPR protection affects FDI at various stages of product development, reflecting that patenting is more important at some stages of production. Some countries also prefer diffusion of technology through foreign patenting, however, determinants such as market size and structure are crucial to determining factors for growth.

Countries having higher levels of IPR protection have registered a positive impact of foreign patenting in comparison to open economies having large markets. As a result, benefits of technology diffusion are greater in developed countries with larger markets and less market power authorized to foreign entities. Stronger IPR protection has significant and positive impact on the foreign patenting. It can also limit the spread of knowledge through foreign patenting.

Whereas countries having a limited imitative ability and less innovative capacity do not benefit from foreign patenting. Technology diffusion through foreign patenting can have a positive impact on the countries having an openness to trade, large markets, more developed in terms of GDP per capita income. Foreign patenting does not have any impact on the growth of developing countries due to small markets, low levels of imitative abilities and innovative capacity.

IPR and Technology diffusion
To some extent, foreign patenting, licensing, joint ventures should be encouraged for trade flows but can also lead to technology spillovers. Other factors may include human capital, investment climate, competition, government policies, and country’s openness to trade and foreign investment. Countries with imitative abilities should embrace stronger IPR protection to increase trade flows. FDI and licensing are more attractive in countries having open trade and stable government, and investment policies and regimes.

The impact of IPR protection is stronger in open economies having more market power. Stronger IPR protection in developing countries restricts technology and knowledge diffusion and restricts innovations and growth.

To conclude, IPR protection varies from one sector to another with having stronger IPR protection for high-tech goods as compared low-tech products. While some countries embrace stronger IPR protection as a belief to encourage innovation and growth, on the other hand, it leads to the monopoly position in the market that limits the diffusion of knowledge.

The impact of IPR in developing countries depends on numerous factors as stronger IPR protection will not provide any benefit in terms of technology diffusion or innovation in developing countries. It may also increase the imitative stage of development that is necessary to develop the innovative capacity for many sectors.

However, policies should be aimed at improving the business environment for foreign entities to set up R&D facilities and attract more inward FDI that also further increase trade flows and enhance technology transfer. The policies should also be aimed to enhance the TRIPS agreement that can benefit the domestic sector to encourage R&D and open markets for foreign firms.

The article is authored by
Amit Aggarwal is Co-founder and Director at Effectual Services, a leading Intellectual Property (IP) management advisory firm offering IP support solutions to Fortune 500 companies, law firms, research institutes and universities, and venture capital firms/PE firms.
&
Karan Bhutani is an Assistant Manager at Effectual Services.

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