The advancements in the technology space have helped numerous businesses to grow and thrive in the marketplace. Intellectual property rights play a crucial role in protecting new technologies and monetizing through licensing revenue streams.
Intellectual property can be in the form of patents, trademarks, industrial designs, copyrights and geographical indications. Intellectual property, especially patents help in protecting an invention or new technology, thus excluding other to make, manufacture, and sell without the consent of the inventor for a period of 20 years. There is a need for stronger intellectual property rights, especially in developing countries to encourage further innovation and providing return on investment in research and development.
Developed countries have focused on stronger IPR regime to create opportunities for potential inventors to gain a competitive edge in the marketplace; on the other hand, weak IP enforcement in developing countries has led to rapid diffusion of knowledge by imitating competitor’s product and making them dependent on imitators as a source of technology development.
Most of the developing countries need to understand the importance of patents as an effective source of development and obtaining returns on R&D. However, the impact of stronger IPR regime depends on resources available for domestic innovation and capacity. On the contrary, a strong IPR enforcement can lead to monopoly pricing and restricts consumer choices, particularly in developing countries that invest little in R&D and depend on foreign innovations.
The term technology transfer is defined as a process in which a firm obtains access to a particular technology developed in another country. An adequate IPR protection can result in significant impact on technology diffusion and depends on country’s resources for domestic innovation and development.
However, it can also restrict technology diffusion with patents preventing others to make or sell the proprietary knowledge and allowing the inventor to sell at higher prices. On the other hand, IPR can encourage technology transfer through a number of formal channels such as international trade, FDI, joint ventures, and licensing.
A stronger IPR regime can make a significant impact in open economies, thus relying more on foreign patents and reduce domestic patenting. It leads to increase in trade flows and act as a substitute to the products domestically available, thus leading to less domestic filing and more foreign patenting. However, diffusion of technology is not successful for countries having imitating capabilities and innovative capacity.
A stronger patent regime encourages foreign patenting in large markets and is beneficial to foreign firms to grab more market share in open economies. Developing countries should not enforce stronger IPR as it will result in inhibiting growth and increase cost of imported goods, whereas developed economies can apply stronger IPR to encourage firms to produce innovative products domestically instead of relying on imitative products.
As most of the developed countries have adequate resources to spur innovation and growth, FDI and technology licensing are considered as the most important factors for technology diffusion. A stronger patent regime not only encourages licensing opportunities to firms in developing countries but also lead to technology spillovers to local technology companies, thus leading to erosion of profits.
The risk is higher when the developing countries have the requisite innovative capacity to develop imitative products and tailor the technology to suit local needs, requirements, and standards. Thus, majority of technology firms embrace license contracts instead of establishing a local presence. A stronger patent protection helps the company to license their technology and increase patenting activity in the developing countries. It may also lead to increase exports and enhance welfare in the developing countries.
Foreign Direct Investment
Majority of the MNCs evaluate the strength of IPR before making investments in the particular country. Prior to making an investment in the host country, MNCs take into account and evaluate the adequate legal infrastructure, laws pertaining to the particular technology and how government agencies treat foreign entities. The level of IPR protection and patent filing activity is often perceived as a measure of FDI received by the host country in the high-technology sectors.
Thus, there is a positive relation between FDI and IP enforcement. In developing countries, FDI focuses on distribution activities due to weak IP laws. In addition to this, most of the MNCs conduct their R&D in weak IP enforcement countries due to low cost researchers in these countries and then the innovation is integrated with the company’s knowledge and resource abroad to realize the return on investment. Therefore, low-cost advantage and country’s risk are also the important factors to be considered in making FDI. Firms should make informed decisions while making investments such as market size, existing resources and production costs.
To sum up, the strength of IP protection in the country helps in facilitating technology transfer to firms in developing countries. Weak IP enforcement can lead foreign firms to engage in distribution activities as compared to developing manufacturing subsidiaries. A stronger patent regime is not only necessary to encourage technology transfer and foreign investment but it also depends on the country’s expected growth, resources and innovative capacity and development.
However, developing countries having a certain level of innovation capacity can benefit from technology diffusion and enhance growth. Majority of the research and development efforts are concentrated towards developed countries while the developing countries have adopted a different approach, having a weak IP regime necessary for technology and knowledge diffusion, thus relying on imitating products. On the contrary, a strong IP enforcement helps in rewarding innovators and creativity.
Also, one of the major reasons for firms investing on R&D efforts, especially for technology products, is to put pressure on government agencies to strengthen the IPR regime. A stronger IPR enforcement can attract FDI and increase return on investment. Technology licensing can help the firm to reduce the cost of production and discourage imitation. Therefore, stronger IPR regime can enhance the growth of the country depending upon its characteristics. Besides this, it leads to higher growth in open economies and rapid diffusion of technology and knowledge through formals channels.
By Manoj Poonia, assistant vice president, Effectual Knowledge Services and Karan Bhutani, assistant manager, Effectual Knowledge Services.