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

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?

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 An explosion in market mediated ITT. See Figure. FDI: deserves special attention. More later. Many other channels: movement of people, scientific literature, etc.

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.

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?

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.

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

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

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.

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.

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.

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.

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.

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.