NO EVIDENCE IPRS PROMOTE OR HINDER FDI

6:44 AM Jun 22, 1993

NO EVIDENCE IPRS PROMOTE OR HINDER FDI
Geneva 21 June (Chakravarthi Raghavan) -- Available empirical evidence do not show that the availability and extent of intellectual property protection in a country has any correlation with Foreign Direct Investment in a country, a study by the UN Centre for Transnational Corporations (UNCTC) shows.

"There are neither theoretical nor empirical grounds to maintain that a higher level of property protection will in general attract more FDI or affect its composition," the study adds in assessing the overall effect of various reforms under way (as a result of US S.301 pressures, Uruguay Round negotiations etc).

The study, "Intellectual Property rights and Foreign Direct Investment" (UN Sales No E.93.II.A10), by Carlos M. Correa brings together available evidence on relationship between IPRs and FDI, surveys legislative reforms and provides what the UNCTC Director in an introduction has called "analytical guidelines that may of potential value to interested policy makers, TNCs and researchers in the field".

The study brings out that even on pharmaceutical patents, an area of most intense controversy, available evidence is insufficient to prove that existence of product patents is a condition for FDI.

Rather the evidence shows that even in the absence of protection, FDI in this sector may be high, while grant of protection is not sufficient for FDI to take place.

Given the current 'sensitivity' of international secretariats to such issues being pushed aggressively by the US and other major industrialized countries, the carefully worded language of the conclusions, really seem to challenge the view, propagated by the major industrialized countries and the transnationals, that lack of technology transfers to the South via foreign direct investment is due to the inadequacy of intellectual property protection and that such protection would promote FDI.

The empirical evidence and language would also lead to the conclusion, even though not so explicitly spelt out, that in fact the proposals under the Uruguay Round Draft Final Act, both in terms of liberalisation of the tariff and non-tariff barriers to imports and the Trade-Related Intellectual Property Rights (TRIPs) agreement, both establishing global uniform standards and whittling away the last remnants of the WIPO-administered Paris Union Convention on requiring working of the patent in the territory of the country, would in fact enable Third World markets being supplied and dominated by imports from abroad to the detriment of domestic production or even research and development capabilities.

Recent changes in national legislations, the study says in its conclusion, clearly point to a strengthening and expansion of IPR protection, consistent with new standards being sought in the framework of the W.I.P.O.(though a patent harmonization treaty) and the negotiations within the Uruguay Round.

But the implications of these changes too are unclear except for the fact that the IPR title holders "will be freer under the new rules to opt for FDI or other channels of internationalization to reach most markets in the world, and the weakening of working obligations in the patent system, in particular, will facilitate use of trade as the main means of exploiting innovation in countries where other reasons do not make FDI an attractive option."

The UNCTC report notes that intellectual property protection, viewed till recently as subject for a few specialists, has gained a prominent place on the international economic agenda. The change among others to the substantial increase in R & D costs, problems of appropriating results of innovation (particularly in area of new technologies) and globalization of economies has led to the new and vigorous attitude of innovating firms and the industrialized countries towards availability and enforcement of IPRs worldwide.

This in turn has triggered unilateral actions, such as those under the US trade law, as well as multilateral negotiations within WIPO and the Uruguay Round.

The relationship between FDI and IPRs, the study notes, is widely disputed.

While for some a strong IPRs system is an essential component of a climate conductive to FDI, technology transfer and R & D by TNCs, for others including many governments and experts in developing countries, a high degree of protection does not necessarily mean a higher or a better composition of FDI flows.

Any analysis of impact of IPRs on FDI has to confront difficult methodological problems, foremost being how to isolate effects of IPR protection and distinguishing it from influence of other factors, as also the time-lag between up-front costs of stronger IPRs and resulting benefits of FDI.

As a result, many of the studies have either provided inconclusive evidence or reinforced preconceived notions.

There was a consensus that the main factors explaining FDI flows is economic environment prevailing in a particular country -- cost conditions, market size, level of human capital and infrastructural development and the broad macro-economic conditions.

But regulations in areas such as remittances, price controls and foreign investment do not seem as influential on investment decisions as economic factors.

"This conclusion has been extended to include IPRs, which has not been considered a major influence on most investment decisions in the literature on investment decisions, and conclusions on the degree to which the level of IPR protection affects the volume and composition of FDI has been elusive." Moreover, the difficulty of measuring impact of IPRs, often felt at micro level should warn against simple judgements of this issue".

However a "generous accounting" of the impact of IPRs on FDI suggests that in 1990 upwards of $180 billion of outward stock of the largest home countries was involved and perhaps $30 billion of inward investments to leading host developing countries.

But the data from various developing countries with limited or weak IPR protection also indicate the "uncertain relationship between protection and the volume of composition of FDI. Thus, Brazil, Mexico, South Korea, Singapore, Taiwan and Thailand -- all major targets of industrialized countries against piracy and other 'inadequacies' of IPR protection have also been among the most attractive places for FDI during the 1980s.

In analysing the effect of the changes, proposed and realized, the study says it would be difficult to foresee its implications for FDI flows under the new system once it becomes enforceable. This is because of the comprehensiveness of the reform in terms of titles involved and industries affected and on the other to its universal application, independently of different levels of economic and technological development.

Nevertheless, the study says, several considerations are pertinent:

* To the extent that most countries would observe similar standards of protection and such standards would become "normal" in all or most countries, the role of IPRs as a factor to induce or deter FDI in a country will lost significance, though differences might still remain over enforcement and this in turn could affect FDI.

* The patent system will be the area most affected, with the non-discrimination clause in the TRIPs agreement becoming a provision with highest potential impact on FDI strategies. According to one interpretation, this clause will prevent national legislation from establishing compulsory licensing or other remedies in cases of failure or insufficient local working of the invention.

If this interpretation is correct, such a rule will be the culmination of a long process towards weakening of the working obligations that has been manifest in successive revisions of the Paris Convention and in legislation of the industrialized countries.

Such an elimination of working obligations, actively pursued by the US in the Uruguay Round, "will facilitate activities of the TNCs worldwide and further the globalization of economic activity."

And to the extent that foreign patentees may retain all their rights by simply importing the protected product and other barriers (tariff and nontariff) are not an obstacle to enter a given market, title holders will be able to supply the market through imports rather than by FDI or licensing.

* The effects of changes in IPRs other than patents will vary substantially according to the interplay of various factors and also depend on previous level of rights available.

* A significant impact of the patent changes will be felt, specially in the areas of the pharmaceutical industry and biotechnology, in countries where new fields of patentability are or will be introduced

In analysing experience and effects in countries over patents and FDI, the study notes that Brazil abolished pharmaceutical product patents in 1949 and process patents in 1969. Despite opposition of the TNCs to these decisions and enthusiastic approval of them by local firms, the TNC dominance of the Brazilian market increased. After the total abolition of pharmaceutical patents, FDI in this sector grew at one of the highest rates in Brazilian industry, with annual FDI flows increasing almost six times between 1971 and 1979. The TNCs control around three quarters or more of the Brazilian market.

In Turkey, after the abolition of process and product patents in pharmaceuticals in 1961, ostensibly to cut foreign exchange losses and control high prices, FDI rose considerably in this sector among all other manufacturing industries with foreign participation.

Nigeria is an example of a country with the opposite experience. Though it offers "adequate" patent protection, while lacking an industrial and technological base, such protection neither stimulated working of the patented drugs through FDI nor development of inventiveness among domestic producers. Most of the pharmaceutical firms, the largest holders of patents in manufacturing industry, were engaged "solely in marketing of imported drugs, with patents mainly serving as import permits or non-tariff barriers limiting competition. Rather than work patented inventions in Nigeria, patentees import the patented product for distribution, thus preventing competitors from entering the market."

In Argentina, process protection was given in 1864, but there are no product patents. But unlike Brazil, national firms account for about 55 percent of total sales in the domestic market, and some have vertically integrated to produce raw materials for their own and third party consumption.

But the lack of patent protection did not deter FDI. Most pharmaceutical TNCs have established foreign affiliations in the country or licensed their products to local firms. While many TNCs (Ely Lilly, Merck) decided to close their affiliates in 1980, this was not due to lack of patent protection (since this policy already applied to them when they first invested) but due to the distortion, instability and decline in the economy.

Italy, abolished patent protection for pharmaceuticals in 1939 and re-established it only in 1978.

During this period, the national pharmaceutical industry developed rapidly and became an important producer and exporter, with the national industry accounting for 48 percent of the market in 1979.

After the introduction of patents, this share of the market decline, dropping to 41 percent in 1988 -- due to the sale of national companies to foreigners and the closure of small laboratories.

In contrast, the foreign laboratories not only their market share but achieved a 200 percent increase in total sales in just seven years.

"The most striking change took place however in the Italian trade balance in medicines and pharmaceuticals. A surplus of $40.6 million in 1978 turned into a deficit of $826.8 million in 1989."

On the issue of the impact in biotechnology, a matter of concern among many countries, the study says the implications should not in principle be very different from those for chemically synthesized medicine.

"Nevertheless, if the conferred protection is too broad and extends to products replicating those existing in nature (such as growth hormones, interferon, tissue plasminogen activator and other proteins) the patentee may enjoy, because of the uniqueness of the products, a market power higher than for drugs that can be more easily 'invented around'. Moreover, some of the biotechnology-based drugs are high value-added compounds that only need to be produced in small quantities to meet world demand. Under these conditions, FDI seems an unattractive option for technology owners who can more securely commercialize the final product under patent rights without transferring any productive capacity abroad."