Copyright 1997

National Law Center for Inter-American Free Trade

InterAm Database

April 19, 1989

Intellectual Property Committee (USA)

Keidanren (Japan)

UNICE (Europe)

Strong Intellectual Property Protection

Benefits the Developing Countries

Intellectual property protection provides incentives for the adaptation of imported products and technology to local conditions and the development of domestic innovation, technology and culture. It furthers economic growth and leads to greater technological self-reliance, thereby making a country less dependent on the technology and creativity of other countries. The historical record in the industrialized countries, which began as developing countries, demonstrates that intellectual property protection has been one of the most powerful instruments for economic development, export growth and the diffusion of new technologies, art and culture.

Developing countries (LDCs) must compete today not only in their own markets but also in regional, if not global, markets. The development of competitive "world class" products and services will require higher levels of technology. Most industrial technology is produced and owned by the private sector, not governments. Private sector companies decide on the timing and the conditions for the transfer of the products and technology and they must find it in their interest to do so. Domestic companies are often in the best position to be aware of problems needing solutions and where and how valuable improvements can be made. They will not have any incentive to develop technology if they are not assured of an adequate return on their investment.

A nation's economic development policy, should, therefore, encourage the importation and local development of products and technology by providing them with adequate protection. Similarly, a nation's cultural development policy should, through adequate protection, encourage local artists, writers, composers, musicians and filmmakers, by ensuring that they can be properly rewarded and that their works do not have to compete against lower cost and often inferior pirated works. Rather than reducing the scope of intellectual property protection, developing countries should recognize the contributions that adequate intellectual property protection can make to their development and provide such protection to all creators and innovators - domestic as well as foreign.

1. Economic benefits of strong intellectual property protection.

Strong intellectual property protection produces long-run economic benefits by:

(a) Stimulating innovation by providing an environment in which innovation is rewarded;

(b) Providing lower cost methods of production and distribution of existing products;

(c) Inviting new, safe and effective products and technology;

(d) Creating and providing new, safer and more effective products, processes and services in, and specifically for, in-country markets through the adaptation and improvement of existing products and technology;

(e) Creating jobs in both the primary industries and in supporting industries throughout the economy;

(f) Creating a higher quality and technically-prepared labor force through the on-the-job training associated with authorized transfers of technology;

(g) Increasing the amount of new capital that can be generated for investment in economic development;

(h) Creating advances which will contribute to the level of technology throughout the world and, in the process, gain revenues from others who would benefit from their use; and

(i) Providing, in the cultural industries, an infrastructure designed to reward creative talent -authors, performers, et. al. - through a system of royalties and local and foreign distribution outlets for their works.

2. Technology and product transfers require a conducive environment.

Developing countries should recognize that mandating the terms on which products and technology will flow into an economy will not guarantee the acquisition of the best products or technology. Valuable products and commercial technology are predominantly in the hands of private sector innovators or creators, who have the ability to determine where and how that technology will be exploited. Strong intellectual property protection, by balancing the benefits that the product and technology will provide society as a whole with the need to provide incentives for continued innovation, serves to induce these innovators to bring their technology to the market place. On the other hand, when faced with a country that provides inadequate intellectual property protection or a government that requires that the products or technology be made available at low cost and with restrictions on their use, the creators and innovators will either take their products and technology elsewhere or only make available products that contain older technology that they can afford to ''lose.''

3. Free riding and imitation condemn a country to perpetual second-class status.

Economic development is a long and dynamic process which cannot spread and sustain itself without the wide participation of the private sector. It cannot be shortcut by governmental policies that interpose the government in the business decision process; attempt to control the inflow of products and technology; establish formal government R&D systems and programs; and seek free access to products and technologies developed elsewhere.

Rather than looking at the cost of importing products and technology, developing countries should look at their economic benefits. While the "free-rider" approach may provide "short-term" benefits to a few local imitators and to the LDC by lowering its balance of payments costs, it will increase long run costs through continued dependence on external sources of old or outdated technology. Without the environment conducive to private sector commercialization provided by adequate intellectual property protection, formal governmental direction of research can only provide marginal assistance to the development process. On the other hand, strong intellectual property protection, which associates inventive efforts with economic returns, works as an effective tool in stimulating the private sector's interest in inventive activity, thereby leading to the introduction and diffusion of new technologies.

An economic climate characterized by extensive infringement because of inadequate intellectual property protection puts a premium on imitation, which contributes little to technological and cultural advancement or to industrial development. Inadequate protection reduces the willingness and the ability of industry to commit to long-term planning and to develop the next generation of products, processes and services not only for its own country markets but also for the regional and global markets in which the local industry must increasingly compete. The absence of a mechanism to ensure industry a return from any investment of resources on innovation also has a chilling effect on the growth of a technically-trained labor force with the needed skills to adapt and improve existing technology and develop local technology. Without adequate and effective intellectual property protection, the technically-prepared work force either leaves the country ("brain drain") or concentrates its efforts on copying, rather than on innovation. In the cultural industries, the ability of local creative talent to create new works in inhibited by the forced competition with cheap and inferior works produced by pirates, who quickly take over the market and who do not pay royalties to the local creators.

4. Economic development is based on the assimilation and adaptation of technology and ultimately local innovation.

Economic development depends on the assimilation of appropriate technology with the formation of a local technological capacity. While in the short term, a LDC that follows such a strategy may be technologically dependent on more advanced countries, in the long term it will be able to use the imported technology to provide a necessary base for greater technological self-reliance.

Japan's modernization and economic restructuring after World War Two was based on this model and not on the "free-ride" approach. Japan passed its first patent law in 1885 and its patent law of 1921 has remained the basis for its patent system up to the present time. As a result, long before World War Two, Japan had recognized rights in technology and rewarded those who made it available to them. It assimilated, modified and adapted imported technology and then moved on to local innovation. According to the Bank of Japan, Japan's income in 1955 from the export of its technology abroad amounted to 1% of what it spent on importing foreign technology, but by 1987 that ratio had increased to 33%. While on the national level Japan is still a net importer of technology, its economic and technological development has not been adversely affected. Furthermore, some segments of industry have become exporters of technology.

A good example is the development of Japan's pharmaceutical industry, which today is highly competitive on a global scale. Its development, however, was retarded by the delay in introducing product protection for pharmaceuticals until 1976. While Japan had, since 1888, protection for processes and methods of use, which in some cases provided protection almost equivalent to a product patent, it was not sufficient to discourage local industry from concentrating and investing its resources on "detour" and imitative processes that were, in many cases, economically inferior to existing processes. The technology trade balance of Japan's pharmaceutical industry, which had been in deficit, rapidly improved with the introduction of product patent protection for chemicals in 1976, and, according to Japan's Management and Coordination Agency, has been in surplus since 1986.

5. Conclusion.

LDCs are increasingly recognizing that foreign investment and the transfer of advanced technology, often associated with imported products, are critical elements of a successful economic development strategy. An important element of a country's business climate is the protection of intellectual property - those ideas or works which the investment seeks to exploit. Where intellectual property protection is adequate, the advanced technology that is transferred serves as the basis for further local innovation, greater technological self-reliance and dynamic economic growth. Where the protection is inadequate, advanced technology is not transferred and, even when it is introduced into the economy, it is not on terms that are conducive to long-run economic development.

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