24 Oct 2005  Research & Ideas

IPR: Protecting Your Technology Transfers

Countries are adopting stronger intellectual property rights to entice international corporate investment. But who really benefits from IPR? Should multinationals feel secure that their secrets will be protected? A Q&A with professor C. Fritz Foley.

 

The competitiveness of many multinational companies depends on their ability to transfer intellectual property and other intangible assets to their worldwide production processes. These sources of competitive advantage can be anything from a proprietary manufacturing plan for semiconductors to a cleaning solvent formula. However, before deciding to deploy these critical assets in a particular country, multinational executives have a key issue to explore: Does the country where I'm transferring technology have intellectual property rights in place that can protect my business against infringers?

In a recent paper, researchers looked at the issue of IPR from a wider perspective: Does the presence of stronger intellectual property rights increase international technology transfer in general? It's an important question because of the potential benefits to both the companies involved and the local economies where they do business.

We asked Harvard Business School professor C. Fritz Foley to discuss the research, which he conducted with Lee Branstetter and Raymond Fisman, both of the Columbia Business School.

Cynthia Churchwell: What attracted you to researching intellectual property rights (IPR) and technology transfer?

Fritz Foley: Before going to graduate school, I spent a year living in Sri Lanka. I was affiliated with the Institute of Policy Studies, an economic think tank, where I conducted research on industrialization, particularly in the apparel export sector. As I visited factories producing clothing and fabric and compared the techniques used by competitors in different parts of the world, I began thinking about the factors firms consider when deciding what kinds of technology should be deployed in what kinds of locations.

At this same time, a debate about the impact of stronger intellectual property rights was reaching a boiling point as the World Trade Organization included the Agreement on Trade-Related Aspects of Intellectual Property Rights in its charter. Opponents of stronger IPR were arguing that stronger IPR would work against national interests, transferring rents to multinational corporate patent holders headquartered in the world's most advanced countries, especially the United States. IPR advocates countered that improved IPR would spur innovation, and that even if this innovation was focused in advanced countries, stronger IPR would accelerate the transfer of technology between countries. Given my long-standing interest in the activities of multinational firms, I wanted to see if there was any empirical evidence for this latter claim.

Q: Define technology transfer a little bit more for us. What is it? Who practices it? How does IPR affect it?

A: The kind of technology transfer my coauthors Lee Branstetter, Raymond Fisman, and I study in our paper occurs when a parent of a multinational company provides information about industrial products or processes to an affiliate operating abroad. These transfers are common and of increasing importance; measures of transfers have grown twice as fast as measures of the scale of affiliate operating activity over the last two decades. Transferred information can take the form, for example, of a specific formula used to produce a particular chemical or a detailed set of instructions for building an electrical component. This information instructs local engineers and other local skilled workers concerning key elements of the firm's technology.

The reforms we studied appear to be effective because they were sustained, broad-based efforts to improve IPR.

Some technical information is detailed in a firm's patents. However, since this information is generally available to the public, firms often deliberately withhold information from the firm's patents, in the United States and in the foreign country, in order to prevent other parties from being able to copy its technology simply by reading its patents. When the firm transfers this knowledge to local employees, there is a risk that these employees will defect to a local manufacturer, taking sensitive technology with them. These employees are able to combine the patented and unpatented elements of the firms' technology, effectively competing with it in the local market. In a weak IPR environment, the multinational firm has little recourse. In the context of a stronger IPR environment with good patent protection, the firm can prevent the infringing firm from using the patented components of its technology.

Q: In general, what did your research conclude about how intellectual property rights influence international technology transfer? Are there certain facets of IPR that, when present, lead to increased technology transfer?

A: We found that in a sample of sixteen countries in the 1982-1999 time period, technology transfers by U.S. multinationals increased following reforms. Affiliates also increased their levels of R&D expenditures. These increases were concentrated among firms that one would expect to value IPR reform the most, namely those firms that made extensive use of the U.S. patent system in the years before reforms. For these firms, measures of technology transfer increased by more than 30 percent. In addition, we found that non-resident patent applications increased and grew at a faster rate following reforms, indicating that multinationals do not just patent technologies that had been used prior to reforms but also transfer new technology to reforming countries.

We did not identify any specific facets of IPR that are magic bullets when it comes to promoting technology transfers. In fact, the reforms we studied appear to be effective because they were sustained, broad-based efforts to improve IPR in many ways. We classify the reforms we study according to whether or not they expand or strengthen patent law along five dimensions:

  1. Expansion in the range of goods eligible for patent protections.
  2. Expansion in the effective scope of patent protection.
  3. Increase in the length of patent protection.
  4. Improvement in the enforcement of patent rights.
  5. Improvement in the administration of the patent system.

On paper, fifteen of the sixteen countries we studied improved IPR along at least four of the five dimensions.

In two of the countries in our sample, China and Argentina, reforms were less thorough, and the managers and lawyers we interviewed while conducting our research raised concerns about the extent to which reforms were effectively implemented. Our results do not indicate that the more limited reforms in these countries increased technology transfers.

Q: There seems to be a general trend among countries and the international community at large to strengthen IPR. If this trend keeps advancing, what will be the result on technology transfer? Who will be the big winners? And what becomes of countries where IPR continues to be ignored?

A: This is a very important question. There has indeed been a general trend towards stronger IPR over the last twenty years, but the overall consequences of reform remain hotly debated. While our initial research in this area indicates that reforms stimulate technology transfers, other work has found little evidence that reforms increase local innovation. Less is known about additional effects reforms might have. For example, some have argued that reforms displace imitators who, following reforms, often can no longer use intellectual property developed by others without incurring costs.

My coauthors and I have started studying the broader consequences of reform. We have some preliminary evidence that reforms provide multinationals with assurances that encourage the use of more efficient global production arrangements. In developing countries that reform, policy changes actually appear to spur multinational economic activity and to encourage the local production of goods that had not previously been produced domestically. These changes seem to be large enough to offset any reduction in economic activity among imitators. These results therefore suggest that both reforming countries and owners of protected intellectual property have something to gain. However, the estimates of distinct effects that I have seen suggest that the benefits are disproportionately large for patent holders.

Q: What are the implications of your research for policy makers? For corporations?

A: I think this research has important implications for both of these audiences. Governments, especially governments in emerging markets, have exerted considerable effort devising programs to facilitate the transfer of technology. Often these policies do not place much emphasis on creating an environment in which IPR is protected, but our research points out that this is a mistake. For example, both India and China often defended policies of requiring multinationals to have local partners by arguing that this policy encouraged technology transfer. However, this policy may have in fact had the opposite effect as multinational managers are very reluctant to share ownership of advanced technologies with local partners in countries with imperfect IPR.

Governments of more advanced countries also should be interested in our findings since they often push countries with weak IPR to reform. Our results point out some of the benefits that flow to reforming countries as a consequence of reforms and may give policy makers working at agencies like the U.S. Trade Representative's Office some helpful facts to bring to the negotiating table.

Multinational managers are very reluctant to share ownership of advanced technologies with local partners in countries with imperfect IPR.

There are also implications for the global production decisions that multinational firms make. Improved IPR allows firms to shift technologically advanced activities abroad and fuels the incentives for innovative activity. As a consequence, reforms have the potential to allow multinationals to dedicate more resources to innovation and management activities in advanced countries and to expand operations in emerging markets, thereby fueling productivity growth and industrialization.

Q: Are there other aspects of IPR or international technology transfer you think warrant further exploration?

A: One issue that I would really like to understand better is the reaction of individual domestic firms that had been imitators prior to reforms. Do they disappear? Some anecdotes I have heard suggest that these firms often become attractive acquisition targets or licensing partners for patent holders that are empowered by reform. After all, they already do have some expertise manufacturing and marketing the patent holder's products.

Q: What are you working on now?

A: Most of my work focuses on the activities of U.S. multinationals, using these firms to extract insights about corporate finance and globalization. Recently I have been analyzing the effects of changes in the foreign operations of these firms on their domestic operations. There is a popular notion that increased activity abroad is associated with decreased activity at home. My findings indicate that this is not the case. In fact, a recent working paper I have written with (Harvard Business School professors) Mihir Desai and James R. Hines Jr. concludes that expansions abroad are associated with expansions at home. I guess I just cannot stay out of a good globalization debate.

About the author

Cynthia D. Churchwell is a business information librarian at Baker Library, Harvard Business School, with a specialty in the international economy.