Intellectual Property Rights and International Technology Transfer

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The results provide evidence that strengthening IPR protection results in real increases in technology transfer within multinational corporations.

The promotion of stronger intellectual property rights (IPR) protection that has occurred over the past two decades has had its critics. Some economists maintain that this trend is economically harmful to developing countries, which must transfer rents to multinational patent holders in the more advanced countries, especially the United States. Advocates maintain instead that strengthening IPR protection promotes more innovation globally, thereby generating economic growth. Even if the bulk of this innovation occurs in the advanced countries, these proponents maintain, stronger IPR protection will accelerate the transfer of technology among nations, resulting in mutual benefits.

In Do Stronger Intellectual Property Rights Increase International Technology Transfer? Empirical Evidence from U.S. Firm-Level Data (NBER Working Paper No. 11516), co-authors Lee Branstetter, Raymond Fisman, and C. Fritz Foley use affiliate-level data on U.S. multinational firms and aggregate patent data to test whether legal reforms, especially those in line with the minimum global standard for IPR as established in the mid-1990s by the World Trade Organization, increase the transfer of technology to multinational affiliates in reforming countries. One of the presumed benefits of increased protection of intellectual property right (IPR) is that it encourages foreign firms to produce and market technologically advanced products. When a firm transfers advanced technology to an affiliate, it usually has to instruct local engineers and other local skilled workers in key elements of the technology. Some of these elements may have been withheld from the firm' s patents in order to prevent infringement. In a weak IPR environment, multinationals would have little recourse if these local workers took that valuable knowledge to a local rival, combining the patented and unpatented technologies to compete with their former employer. But when working in a strong IPR environment with good patent protection, a firm can deploy strategically sensitive technology outside its home country with a reasonable sense of security because it has the legal means to prosecute patent infringement.

The NBER researchers find that where patent protection has been strengthened, royalty payments increase for the use or sale of intangible assets made by affiliates to parent corporations, which reflect the value of technology transfer. This increase is concentrated among the affiliates of firms that make extensive use of U.S. patents prior to reform. Investment in research and development by affiliates, which is usually viewed as a complement to technology of imports from the parent, also increases after IPR reform as do both the level and growth rate of non-resident patenting. These increases collectively suggest that at least one component of growth in licensing flows is associated with the introduction of new technology following patent reforms. The researchers find no corresponding reaction in resident patent filings. Taken together, the results provide evidence that strengthening IPR protection results in real increases in technology transfer within multinational corporations.

Branstetter, Fisman, and Foley assert that their study draws on richer data than other researchers have used: firm and affiliate-level data for multinationals operating in multiple countries allowed them to deal more effectively with matters of causality and identification. As a result, they were able to offer the strongest evidence to date for the notion that stronger IPR protection encourages at least one kind of international technology transfer.

The researchers' data were drawn from annual and quarterly surveys conducted between 1982 and 1999 by the U.S. Commerce Department's Bureau of Economic Analysis. Branstetter, Fisman and Foley also track and analyze data amassed by the U.S. Patent and Trademark Office, by the World Intellectual Property Rights Organization, and by other sources. Ultimately they studied 16 countries with sufficient data to allow estimates of the impact of strengthened IPR protection. Such reform included the expansion in the range of goods eligible for patent protection, expansion of the effective scope and length of patent protection, and improved administration and enforcement of the patent system.

Branstetter, Fisman, and Foley acknowledge that their analysis "does not consider the impact of reforms on locally owned firms that may be displaced after reforms nor does it examine the effects of reforms on the pace of innovation in non-reforming countries. However," they add, "given the limited evidence that IPR reform spurs domestic innovation, increases in technology transfer are likely to be a necessary condition for IPR reform to increase welfare in reforming countries."

-- Matt Nesvisky