Owing to ever increasing level of competitive intensity, technology has emerged as one of the major driving forces for large corporates and new-age startups, and has been a key enabler for majority of the sectors. Innovations in technology are shaping the global economic landscape and act as a catalyst for knowledge creation, diffusion, and economic development. The rapid advancements in technology has redefined the companies operate and conduct business across sectors. In this digital era, technology has become valuable and is likely to be imitated by the potential infringers, thus reducing the inventor’s incentive to engage in such activities. Besides this, imitators have cost advantage in relation to innovators unless the innovator’s restricts access to their innovation through IPR. IPR helps the inventor’s to protect their invention and have the right to exclude others to make, sell, or manufacture for a period of 20 years. IPRs allow innovators to gain competitive advantage in the marketplace, thus rewarding them for their innovative efforts and compensate them for the investments incurred during the research and development. An adequate and effective IPR protection helps developing countries in growth and technology transfer, thus reaping rewards for innovation and providing returns in research and development. While, weak IPR protection leads to technology spillovers by domestic firms whereas excessive IPR protection leads to inadequate dissemination of knowledge and slows the pace of growth of innovation. Thus, the choice of IPR depends on the country’s innovation development and capacity in the long run. Strong IPR protection prevails in the developed countries having potential innovators to engage in innovate activities, thus boosting the economic growth. Developing countries should embrace weak IPR protection for rapid diffusion of knowledge as an importance source of technology development. Providing stronger IPR protection can lead developing countries to rely on domestic firms that focus on counterfeiting and imitation while rewards creativity in developed countries. Many countries are strengthening their IPR regimes to boost research and development, increase innovation and higher long run growth. On the contrary, IPR holders engage in monopoly activities thus limiting consumer’s choice. The impact of IPR protection varies differently in different countries and depends on the level of development and domestic capacity for innovation.
Transfer of technology takes place through formal and informal channels. Some of the formals channels include trade, licensing, joint ventures, franchising, foreign patenting, and foreign direct investment (FDI) while the informal channel include imitation and technology spillover. The technology transfer relates to voluntary or non-market transactions by which a firm gains access to technology developed in another country. Therefore, policies made to develop a strong IPR regime can help developing countries gain access to foreign technology.
Intellectual Property and International Trade
International trade is a crucial channel for diffusion of technology. The pricing structure of traded products is determined by the effectiveness of patent strength and creates competitive advantage for distribution and sale of goods and services. Firms should encourage export of patented goods in foreign markets having strong IPR protection, thus increasing their revenues and profitability in the marketplace. It also increases the market power resulting in lower sales of competing goods. Imitation in such markets is a costly affair and takes time. Additionally, it depends on the level of development and imitating capabilities of the importing country that encourages international trade. As most of the high-tech products are difficult to imitate so trade flows are less sensitive to IPR protection. As a result, majority of the high-tech firms prefer FDI and licensing in foreign markets and are least affected by IPR protection. A stronger IPR protection may encourage import of high-tech and low-tech products and enable foreign firms to expand their trade volumes.
IPR and FDI
The importance of FDI varies across sectors having little importance in low-tech industry. IPR protection is of secondary importance for firms considering making investments in emerging countries like Brazil and China that receive large investment inflows. Foreign firms prefer setting up R&D centers in nations having stronger IPR protection while setting up sales and distribution centers in countries having weak IPR protection. FDI is undertaken by firms having high-tech or technology-intensive products as the technology advantages can be transferred across borders and can be employed in several geographic locations. However, the FDI decision depends on market size, easy availability of resources, skilled labor, market opportunities, and production costs. IPR protection for industries like chemicals and pharmaceuticals is of primary importance as compared to other industries. FDI is an important source of channel for diffusion of technology when it has to be transferred across borders but may be limited to the host country. On the flip side, it can lead to spillover benefits to domestic firms. Domestic firms may find it easier to imitate the product through reverse engineering. Majority of the firms having complex technology and differentiated products adopt the FDI channel over licensing as the cost involved is high. Stronger IPR protection minimizes the risk of technology leakage and increase technology licensing and joint ventures whereas weak IPR protection may discourage FDI and investment climate in the country. FDI is considered to be effective for the countries having absorptive capacity. Besides this, foreign inflows are greater in the countries having stronger IPR protection as the industries require patenting in several stages of production.
IPR and licensing
Licenses can be in the form of fee, royalty or profit-sharing basis, thus offering the right to produce or manufacture the product for a given period of time within a particular territory. Firms producing low-tech products engage in licensing as compared to other channels such as FDI. Stronger IPR protection can reduce licensing cost and provides greater market power to the licensor. It also discourages innovation in the marketplace. Therefore, IPR protection has a positive impact on licensing.
IPR and foreign patenting
Stronger IPR protection in developing countries encourages foreign patenting and technology diffusion. It has a positive impact in open economies or midsize countries as compared to large countries. The benefits achieved from foreign patenting in developing countries are much more than developed and large markets. However, it is difficult to measure that foreign patenting encourages or inhibits growth in the particular country as it depends on country’s market structure.
IPR protection helps innovators to reap incentive to innovate and encourage long term growth. In the absence of IPR protection, there may be some incentives to innovate depending on the market lead time and difficulty in imitating technology features. On the flip side, excessive IPR protection can lead to inadequate dissemination of knowledge and can further slower the growth of innovation. Research and development is limited to developed countries and developing countries having the innovation capacity and development. While developing countries should have weak IPR for diffusion of technology as stronger IPR can lead to discourage domestic innovation and transfer of profits to foreign entities, thereby reducing output in domestic economy. In the globalised economy, flow of technology and technology-intensive products takes place across borders. Weak IPR can lead to absence of foreign firms marketing their products as they can be easily copied or imitated in the marketplace. This is one the major reason for foreign firms investing heavily in R&D while pressing national government to strengthen the IPR regime so that they can market their goods and services. Intellectual property rights especially patents helps in increasing innovation and technology diffusion. IPR protection help firms to undertake R&D and recoup associated costs related to encourage innovation. IPR also plays a crucial role in international technology transfer and encourage innovation. Stronger IPR depends, inter alia, on country’s level of absorptive capacity of development and innovation. Its impact also depends on country’s openness to international trade having positive effect in more open economies. R&D expenditure and patent applications can be a measure of country’s innovative capacity; however it depends on level of openness of the country and factor endowments. Strengthening the IPR regime can enhance country’s growth and leads to higher growth in open economies. Stronger IPR protection can also help in reducing imitation leading to lower competition and encourage innovation in the domestic market. It restricts diffusion of technology leading to lower output and higher prices. There is a linear relationship between IPR and growth as IPRs are bound to influence trade leading to larger trade flows for industries considered as high-tech or patent sensitive.