Encouraging International Technology Transfer
International technology transfer (ITT) is a comprehensive term covering mechanisms for shifting information across borders and its effective diffusion into recipient economies. Thus, it refers to numerous complex processes, ranging from innovation and international marketing of technology to its absorption and imitation. Included in these processes are technology, trade, and investment policies that can affect the terms of access to knowledge. Policy making in this area is especially complex and needs careful consideration, both by individual countries and at the multilateral level.
Markets for exchanging technologies are inherently subject to failure due to appropriability problems, spillovers, asymmetric information, and market power. Thus, there is strong justification for public intervention. However, interests in shaping such intervention are not uniform. Technology developers are interested in reducing the costs and uncertainty of making transfers, along with protecting their rights to profit from such transfers. They argue that effective protection and policy supports for markets are necessary to increase the willingness of innovative firms to provide knowledge of their production processes to firms in developing countries. Technology importers are interested in acquiring knowledge at minimal cost. Some observers argue that this objective is best met by refusing to protect the rights of foreign firms to profit from such transfers, or at least to restrict sharply their exclusive rights to exploit technology.
There is scope for mutually advantageous changes in policy regimes within these extremes. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) within the WTO reflects an important multilateral effort to address these fundamental tradeoffs. However, the Agreement is widely criticized as being overly protective of the needs of technology developers and insensitive to the needs of developing countries. In fact, TRIPS does not address itself in practical ways to issues of ITT, confining its language to general statements.
There are numerous channels through which technology may be transferred across international boundaries. One major channel is trade in goods, especially capital goods and technological inputs. A second is foreign direct investment (FDI), which may be expected generally to transfer technological information that is newer or more productive than that of local firms. A third is technology licensing, which may be done either within firms or between unrelated firms at arm’s-length. Licenses typically involve the purchase of production or distribution rights (protected by some intellectual property right) and the technical information and know-how required to make effective the exercise of those rights. In this regard patents, trade secrets, copyrights, and trademarks serve as direct means of information transfer.
There are also important non-market channels of ITT. Perhaps most significant is the process of imitation through product inspection, reverse engineering, decompilation of software, and even simple trial and error. Imitation can be a costly process. A related form of learning is for technical and managerial personnel to leave the firm and start a rival firm. Yet another means is to study available information about those technologies. Patent applications are available for this purpose. Thus, patents provide both a direct source of technology transfer, through FDI and licensing, and an indirect form through inspection. However, there is much debate over whether such patent disclosures provide sufficient information for rival engineers to understand the technologies.
Finally, much technology appears to be transferred through the temporary migration of students, scientists, and managerial and technical personnel to universities, laboratories, and conferences located mainly in the developed economies. Note that in-depth training in science and engineering may be gained this way, suggesting that it is a particularly longlasting form of ITT. Further, information may be available within the public domain, making it free for taking, although not necessarily absorbed at low cost.
A major reason for protecting IPRs is that they can serve as an important support for markets in technology, including ITT. Without protection from leakage of new technical information, firms would be less willing to provide it on open technology markets. Further, patents and trade secrets provide the legal basis for revealing the proprietary characteristics of technologies to subsidiaries and licensees, supporting the formation of contracts. However, the idea that weak IPRs reduce inward ITT is not certain and is not accepted by all observers. Limited patent protection and weak trade secrets offer local firms some scope for imitating foreign technologies and reverse engineering products. With intellectual property protection foreign firms may choose not to have any physical presence in a country, preferring to satisfy a market through exports. Similarly, strengthened IPRs provide foreign inventors greater market power in setting licensing terms.
Thus, the question is really empirical. A crude summary of the available evidence is as follows:
• There is strong evidence that patent applications serve as a conduit for learning among OECD economies. Thus, “trade in ideas” is a major factor in world economic growth.
• Patent citations reflect “knowledge flows” across borders in the sense that local inventors learn from them. There is a strongly positive impact of knowledge flows on international innovation, at least among developed regions.
• Stronger patent rights may be expected to raise considerably the rents earned by international firms as patents become more valuable, obliging developing countries to pay more for the average inward protected technology.
• International trade flows, especially in patent-sensitive industries, respond positively to increases in patent rights among middle-income and large developing countries. However, trade flows to poor countries are not responsive to patent rights.
• The evidence on patents and inward FDI is mixed but recent studies find positive impacts among middle-income and large developing countries. Again, poor countries with stronger patents do not attract FDI on this basis.
• There is an identifiable “internalisation effect” whereby strengthening of patent rights shifts ITT from exports and FDI toward licensing. Further, the sophistication of technologies transferred rises with the strength of intellectual property protection.
• Whatever the role of IPRs, they are only one of a list of factors that influence ITT. Important factors include the investment climate, efficient governance, market size and growth, proximity to suppliers and demanders, and infrastructure.
In addition to econometric studies one can look at the histories of such recent developers as Japan and the Republic of Korea. Both pursued IPR policies that favoured local use of international technologies, licensing, and incremental innovation as they moved from being crude imitators to creative imitators and then knowledge-intensive innovators. Developing countries today have much to learn from these histories. However, TRIPS has narrowed the avenues such countries may take toward technological learning and adaptation from foreign technologies.
TRIPS recognizes in Article 7 that the transfer and dissemination of technology is a fundamental objective of the global IPR system. However, most provisions of TRIPS offer little direct assurance that there will be a rise in ITT to poor countries. Thus the negotiators included Article 66.2, which obligates developed countries to offer positive incentives to its firms and institutions to transfer technologies to the least developed countries. Article 67 obligates the developed countries to providing technical and financial assistance to help induce more ITT.
Article 66.2 is not likely on its own merits to achieve significant increases in ITT. There are two essential difficulties. For one, ITT largely relies on private market incentives and this article does little to redress the basic problems mentioned above. Second, even if governments in developed countries were willing to offer substantial incentives they would face domestic political opposition in doing so.
In this regard, the following set of policy recommendations should provide a framework for improving the environment for ITT. I organize them in terms of host-country policies, sourcecountry policies and issues for the global system.