The Harmonisation of the Protectionof Intellectual Property:

Impact on Third World Countries

By Sandro Sideri

UNU/INTECH Working Paper No. 14June 1994

CONTENTS

1. Introduction 1

2. Definitions and justifications 3

3. Intellectual property arguments and LDCs 7

4. North, south, and TNCs: some dynamics of the balance 15

5. Standards 21

6. Harmonization at the global level: the role of GATT and the Uruguay Round

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7. Harmonization at the regional level with particular reference to the EC’s single market

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8. Other IP agreements 37

9. Are there alternatives to higher standards of IP protection? 41

Endnotes 48

Bibliography 57

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1. INTRODUCTION

Technology, or more specifically, the ability to utilise effectively the new technologiesand absorb them into the productive process, is increasingly crucial in determiningcomparative advantages, creating competitiveness, and promoting economic growth anddevelopment. This paper deals with the causes of the ongoing attempt to achieve globalharmonization of protection for intellectual property (IP), particularly for high technol-ogy, and the problems which have been encountered in the harmonization process.

Although most basic research, and much agricultural research, is freely available fordeveloping countries (LDCs), industrial technology must be bought from the firms thatown the patents or other rights covering it. The price depends on the nature of the legalsystem protecting technology and on the bargaining position of the parties concerned[Stewart, 1990: 303]. Harmonization, which means in effect a stronger IP regime, wouldhave considerable effects for the LDCs.

Both the substantive content of intellectual property rights (IPRs) and their enforcementinfluence the conditions of trade, hence most IP issues are bound to be ‘trade related’.The attempt to replace the principle of national treatment with an internationally man-dated protection of IPRs reflects primarily the desire of national industries in thedeveloped countries (DCs) to secure the world-wide exploitation of their innovations.Inadequate IP protection is thought to cause three types of trade-related problems: (a)loss of export sales and royalties, and a reduction in the value of investments of innovatingfirms, in the markets where their IPRs are appropriated without compensation; (b) lossof sales by the same firms in third markets, when unauthorized products are sold there;and (c) lost sales in their home market, when imports involve unauthorized use of goods,works or processes covered by domestic IP laws [Weiss, 1990: 89]. If these problemscould be treated as a trade rather than IP violation, ‘the enforcement mechanisms of theGATT, rather than the apparently ineffectual ones of local courts could be used’ [Pageet al., 1991: 47]. Furthermore, differential national treatments of IPRs, such as copy-rights,1 may effectively constitute non-tariff barriers (NTBs) to knowledge-intensiveproducts [Braga, 1989: 244]. All these considerations have been used to justify the roleof GATT in IP matters, a role which should not necessarily exclude other institutionswhich have already been dealing with some of them.

One of the main instruments used to transfer technology internationally has been foreigndirect investment (FDI). One important reason for many firms to engage in FDI is toprotect their IPRs through the internalization of the market, which in turn has increasedtheir awareness of differences in regulatory regimes across countries and consequentlytheir demand for some harmonization of IP protection. Hence the linkage between theso-called Trade Related Intellectual Property Measures (TRIPs)2 and the Trade RelatedInvestment Measures (TRIMs), both issues on the agenda of GATT’s Uruguay Roundfor the first time.

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It must be remembered that the drive toward harmonization was already implicit in theThird World’s attempt to establish the New International Economic Order during the1970s, and particularly in the proposal for a ‘Code of Conduct on the Transfer ofTechnology’. Although the UNCTAD Code was based on the principle of preferentialtreatment for LDCs, the fact that they pressed earlier for international regulation of thetechnology issue has made it the more difficult for them to resist the introduction of theTRIPs into the Uruguay Round and the harmonization that the DCs demand.

In a world economy, the interdependence of which has increased together with the paceof technological change and product development costs, the need to find the rightinternational framework for IPRs has became very pressing. Yet, the issue of infringe-ment of IP rules concerns not only the straightforward matter of piracy3 and theft, butalso violation of ‘patent protection of [the] technological inputs critical for industrializa-tion, food security (for example fertilisers) or health of poor populations, which have topay more for patent-protected goods’. While LDCs have shown from the beginning awillingness to negotiate a multilateral framework of rules on the counterfeit trade, theyhave objected to embarking in difficult discussions on the nature of intellectual propertyprotection itself or to getting involved in any attempt to improve standards of protection[Kostecki, 1991: 271-2]. The DCs, on the other hand, have from the outset of the TRIPsnegotiations pushed beyond the issue of counterfeiting in the pursuit of a comprehensive,global GATT agreement on all internationally important aspects of IP protection, includ-ing basic principles, substantive standards of protected rights, and rules on nationalenforcement [Reinbothe and Howard, 1991: 158].

The differences between the various national systems for IP protection have caused bitterdisputes [Beath, 1990: 424] because interdependence and international integration re-quire the improvement of technical compatibilities. Hence the call for internationalstandardization, i.e. an essentially voluntary method of achieving compliance with aprescribed set of specifications, which by virtue of the efforts of various interests,including consumer pressure, is assuming the characteristics of an international publicgood [Kindleberger, 1986]. A circular process is emerging in which globalization createsa demand for uniformity which in its turn enhances globalization. Meanwhile, technologyis rapidly eroding the basic notion of national sovereignty in many areas of economicaffairs. ‘In some cases, strictly national rules lose much of their meaning’, while ‘inothers, at least the thrust of the rules requires change’ [Blumenthal, 1988: 540].

Clearly, the introduction of the TRIPs into the GATT system and the harmonization ofIP protection may amount to setting the multilateral framework for the conditions ofinternational competition into the next century [Subramanian, 1990: 509-10]. Theresulting changes are going to affect most business practices, since the main aims of thismultilateral framework are (a) ‘to alter significantly the balance of negotiating power infavour of the transnational enterprises compared to that of the governments of hostcountries, both developed and developing’; and (b) ‘to limit the economic sphere forgovernment’ [Vaitsos, 1990: 82] namely its ability to intervene and regulate the twocrucial, and highly interlinked, sectors of FDI and technology transfer.

Before looking at the issues of harmonization in general it will be necessary to considerthe nature of IPRs and the largely macro-economic arguments which are advanced tojustify them, followed by a particular look at how these general arguments amy apply toan LDC and to the economic balance between LDCs and DCs.

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2. DEFINITIONS AND JUSTIFICATIONS

Intellectual Property Rights (IPRs) include industrial property and copyrights and similarrights.4 Industrial property deals principally with patents for inventions, trademarks andgeographical indications for identifying names or symbols, industrial designs for designsand shapes (such as the layout of semi-conductor chip products),5 plant breeders’ rightsto new plant varieties, and trade secrets6 for proprietary information. Whereas ‘patentscover ideas to the extent that the ideas can be embodied into tangible forms ... primarilyto mass-produced articles of commerce’ [Stern, 1987: 198], copyrights, and most of theother IPRs, are utilised for literary and artistic creations, ‘not ideas as such, but onlyparticular expression of ideas in a particular tangible written form’ [Stern, 1987: 200].More recently, attempts have been made to also bring some commercial items, such ascomputer software, under copyright coverage. Slavish copying of items, and the misap-propriation of knowledge of commercial value, such as trade secrets, is also prohibitedunder legislation on so-called ‘unfair competition’. This can therefore also be includedunder industrial property law. Lately a re-evaluation of basic copyright policies has takenon greater urgency because (a) improved technologies for duplicating copyrighted mediahave lowered the costs of infringement; and (b) the emergence of new products andtechnologies in computer programs, semiconductor devices, and electronic transmissionof data and broadcast signals has blurred the basic distinction between patentability andeligibility for copyright [Maskus, 1993: 175].

This paper will concentrate on industrial property rights, and specifically on patents, sincethese are at the focal point of the current debate on harmonization.

Historically, the very idea of a patent system has been ardently opposed, causing heatedcontroversies in many countries. The conception of patents was linked to the increasingpractice of granting various types of monopoly privileges, a practice born in fourteenthcentury Italy but later spreading to Northern Europe and finally to England. The idea ofpatent protection came under attack during the second and third quarter of the last century.It came to be generally accepted in most Western countries only after the economic crisisof 1873 when protectionists won out over the free traders [Machlup and Penrose, 1950:6] and when the increasing interdependence of nations became ‘for many the chiefargument in favour of the international protection’ [Penrose, 1951: 89].

All Industrial Property Rights relate to knowledge, specifically to knowledge withcommercial usefulness. Patents apply more narrowly to technological knowledge, tech-nology being knowledge employed in the production of goods and services for thesatisfaction of human needs. The nature of these rights, and the economic justificationsfor them, arise from the fact that knowledge can be possessed and used simultaneouslyby different individuals, a characteristic referred to as ‘nonrival possession’ [Romer,1990] or ‘perfect expansibility’ [David 1993a: 219]. Once technology has been created,

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its use by others does not reduce the innovator’s ability to use it, but it definitely reducesthe innovator’s returns.

Since the production and distribution of new scientific and technological informationabsorbs resources, some institutional arrangements for resource allocation are required.One such arrangement is the construction of IP rights (IPRs), mechanisms for theprotection of what amounts to a private monopoly which enables inventors or originators‘to collect (differential) fees for the use of their work by others’ [David, 1993a: 226]. Ithas long been recognized that the patent system represents ‘an unsatisfactory compro-mise’ [Johnson, 1976: 420-1].7 The patent system suffers from a ‘lack of theoreticalprinciple’ [Plant, 1934: 51] and of ‘logic ... so that it survives only because there seemsto be nothing better’ [Jewkes et al., 1958: 252-3]. It rests in fact on ‘a basic economicinconsistency’, which is ‘not only to tolerate but to encourage individual limited islandsof monopoly’ within free-enterprise economies [Machlup, 1958: iii]. A recent survey ofthe topic concludes that ‘the theory of intellectual property protection is fragmented andprovides no robust answer to the question of the appropriate or optimal level of protectionunder various sets of real-world circumstances. In particular, its relevance to developingcountry concerns must be considered marginal’ [Braga, 1990: 32].

The justifications for this system follow the general form of rationalizations for govern-ment intervention in a situation of market failure [Arrow, 1962: 164-5]. The market failurein this case is due to the fact that from the supply side technology presents the hallmarkof a public good, and moreover a durable and strong one due to its economies of scale[Kindleberger, 1983: 377]. The main properties of a public good are nonrival possession,low marginal cost of reproduction, and substantial fixed costs8 of original production.Under these circumstances ‘free’ market conditions fail to allocate the optimum level ofresources to the production of the public good, since they create no financial incentivefor the first investor, although once an innovation is developed it is almost freely availableand of benefit to the whole society. In other words, the public or social return oninnovation is, in the absence of an IP regime, going to be much greater than the privatereturn, and private investment will therefore tend to remain short of the socially optimalamount needed for science and technology generation.9

That not enough human capital can be expected to be devoted to research is due to thefact that research has positive external effects and it ‘produces an input that is purchasedby a sector that engages in monopoly pricing’, hence there is ‘a wedge between themarginal social product of an input used in this sector and its market compensation’[Romer, 1990: S96]. Arrow has analyzed this problematique as an ‘appropriabilityproblem’ arising from the intangible nature of knowledge, a relevant feature of which isthat its benefits are not necessarily and perfectly appropriable, i.e. there is incompleteappropriability, even under a patent system.10

Treating knowledge as a nonrival good (i.e. a purely technological attribute of a good theuse of which by one firm or person in no way limits its use by another), ‘makes it possibleto talk sensibly about knowledge spillovers, that is, incomplete excludability’, which isa function of both the technology and the legal system [Romer, 1990: S96 and S74-5].11

On the other hand, if the returns arising from an innovation were to be successfullyappropriated this would lead to underutilization of the innovation, so that there is atendency to underinvest in R&D under both competition and monopoly [Arrow, 1962:175 and 172;12 Nelson, 1959: 161-2; Dasgupta and Stiglitz, 1980: 267]. In other words,

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the larger the gap between the social and the private rates of return from innovativeactivities, the more likely it is that under-investment will affect these activities.

Thus it can be argued that it is ‘most unlikely that the market mechanism can be reliedupon to produce knowledge in appropriate amounts’ [Dasgupta and Stoneman, 1987: 1].The creation of monopolies to exploit innovations is one of the three alternative ways forcoping with this market failure; the other two being either a subsidy or public involvementin research and development, both to be financed by means of general taxation. Yet noneof these three alternatives -- for short also called ‘property’, ‘patronage’ and ‘procure-ment’13 ---- ‘provides a complete and perfect solution to the problem that they all address’[David, 1993a, 226-27; Dasgupta, 1988: 2-5].

It follows that since the rationale for protecting IP is to be found in the need to providefirms with a sufficient incentive to innovate, either through the rent generated by IPRs orby other means which do not depend on the legal system and which may make protectioneven more lasting. In the longer term, the privatization of knowledge is expected to causefactor productivity to rise and all sort of new products to appear. Yet, since there is noway to know whether the resulting situation will be better or worse than that which wouldhave otherwise have prevailed, this always remains a second-best solution.

By ‘internalizing the external economies of knowledge ... the patent system increasesincentives for invention ... but ... only at the expense of higher prices, lower output, andthe inefficiencies usually associated with monopoly’ [Nordhaus, 1969: 88-9].14 The othermain limitation of the property solution is that it undoubtedly reduces the availability ofknowledge. Benefits would be increased if competitors could imitate and improve on theinnovation to ensure its availability on favourable terms [Levin et al., 1987, 783]. In fact,the better protected the IP is, the more the fee for its use can be raised. Therefore, thisfee, i.e. the price of the industrial technology one wishes to buy, ‘is dependent on thenature of the legal system protecting technology in the originating countries, the monop-oly or oligopoly position of the technology sellers, and the bargaining position of thetechnology buyers’ [Stewart, 1990: 303].

Another limitation of the ‘property’ (i.e., patent) solution is the waste of resources inparallel efforts and ‘research races’ in order to be the first to obtain the patent. Howeverpressure of competition will ensure that only a few firms engage in R&D activity, inextreme cases only one firm [Dasgupta and Stiglitz, 1980: 289].15 R&D may alsoconcentrate on research fields assumed to yield higher profits, while leaving other areaswhich from the societal point of view are more important under-researched. Naturally,whether or not the allocation of resources under the IPR regime is considered efficientdepends on which society’s viewpoint is chosen.

The introduction or strengthening of an IP regime will, it is argued, have two broadlydesirable effects: it will increase the patent owners’ technological accumulation (andprovide extra profits which may serve to finance their investments), and it will provideincentives for increased R&D and innovation. There is no general agreement as towhether in fact stronger IP regimes do increase R&D activity,16 and even if an effect isshown, it is not certain that the resulting innovations will be relevant to LDCs.

Another, often forgotten effect of introducing IP protection is the cost of establishing andstaffing administrative mechanisms to monitor and enforce IP regulations.17

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When one adds all of these effects to what Nordhaus called the inefficiencies usuallyassociated with monopoly [Nordhaus, 1969: 88-9] it will be clear that the theoreticalarguments for harmonised, and thus stronger, IP regimes are far from self-evident. StrongIP protection will tend to cause socially inefficient monopoly pricing and gives theinnovator inadequate incentives to develop second generation products. And if a strongIP protection ‘need not be an enemy of diffusion’, it can also be argued that weakprotection ‘need not be inimical to economic growth’ [Ordover, 1991: 44]. Besides, ‘evenif technology competition were fierce, the resulting industrial structure would be oligopo-listic’ anyway [Dasgupta, 1988: 1].

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3. INTELLECTUAL PROPERTY ARGUMENTS AND LDCS

In support of strong IP regimes, it has been argued that ‘the only way to ensure that firmsundertake every research project that is efficient is to let the firms collect as profit all thesocial value they create’. In this way ‘households still benefit, but in their capacity asshareholders rather than as consumers’ [Scotchmer, 1991: 31]. The analysis of the costsand benefits of such a system has then to move to the international level, becauseshareholders may belong to one country and consumers to another. Since IP protectionleads to the transfer of income from consumers in the markets in which IP is protected tothe inventors or producers, mostly in the DCs, the harmonization of IP regimes wouldtend to cause a redistribution of welfare away from Third World countries and in favourof the most industrialised ones. More than 40 years ago, Penrose warned that ‘no amountof talk about the ‘economic unity of the world’ can hide the fact that some countries withlittle export trade in industrial goods and few, if any, inventions for sale, have nothing togain from granting patents on inventions worked [i.e. exploited] and patented abroad’[Penrose, 1951: 116-17]. We have also seen that the theoretical justification for the patentsystem is based largely on a trade-off between promoting technological innovation(supposedly aided by IP protection) and the negative effect of delaying the diffusion andutilisation of knowledge. Given LDCs’ limited capacity for innovation, one would expectthem to favour a regime of weak or minimal IP protection.

In the early 1970s LDC nationals held no more than about 1 per cent of the world stockof patents [UNCTAD, 1975: 38]. Although this is still valid for many LDCs, many othershave moved away from such a predicament. For them harmonization and stricter IPprotection remains an open question. Nevertheless, the Paris Convention ‘does notaddress the problems that exist for a country that is a large importer or purchaser oftechnology, but is not a large exporter of technology’ [Evenson, 1990: 354] and it hasbeen argued that there appears to be little reason for small countries to adopt a patentsystem [Lyons, 1987: 199].

The alternative is to allow LDCs a free-riding position. This position has recentlyreemerged in the literature based on the consideration that because DCs’ innovations arenot conceived or developed for LDC markets, the world’s supply of such innovationswould not be affected by LDCs’ adopting them without paying for them.

It seems, however, necessary to review more accurately the various arguments on whichthe case for extending stricter IP protection to LDCs has been built. The arguments inbrief are that such protection encourages FDI (argument (i)), that it fosters technologicalprogress, although it may hamper diffusion of innovations (argument (ii)), that southernconsumers may in some circumstances benefit (iii), that it fosters the innovative capacitieswithin LDCs (iv), and that a system of IP protection and licensing creates an environmentfor the transfer of tacit knowledge which is not visible in the product or codified in itspatent (v).

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(i) The first argument is based on the positive link which seems to exist betweenstricter IP protection in a country and the inflow of FDI and technology. FDIis considered to be essential for creating high-technology sectors. This viewis supported by studies made of specific sectors, which have been summa-rised by the UNCTC [1990: 4]. But while some authors feel confident enoughto conclude that this is generally the case [Siebeck, 1990: 92] others considerthe evidence inadequate to permit a definitive analysis [Braga, 1990: 83;Maskus, 1993: 167]. The UNCTC warns that the interrelation between IPprotection and the promotion of investments ‘is much more complex’ and nosimple causal link can be established between the two. Actually, it appearsthat IPRs are usually not considered an important determinant of investmentdecisions by firms’ executives and levels of protection in DCs have variedover time with no discernible relation to FDI flows [UNCTC, 1990: 5].

Turkey abolished patents in the pharmaceutical sector in 1961, yet theabsence of protection has not negatively influenced the inflow of FDI, norhas it stimulated the development of a domestic technological infrastructureand innovation capabilities, or reduced anti-competitive practices, such astransfer-pricing, usually associated with patent protection [Kirim, 1985].18

Brazil abolished patent protection on pharmaceuticals, foodstuffs, agricul-tural chemicals and some metal alloys in 1969. Once again there is littleevidence of any impact on FDI flows or the transfer of technology [Frischtak,1990: 78-80]. Pharmaceuticals were the least protected subsector, yet inter-national firms’ share of total sales in this sector was the second highest of allindustrial sectors, at 71%, in the period 1970-85. FDI flows in pharmaceuti-cals grew from $113 million in 1971 to $971 million by 1984, while themarket share of Brazilian companies decreased from 33% in 1967 to 15% in1988 [Grynszpan, 1990: 107]. It may be that the TNCs increased theirpresence in these sectors to pre-empt the development of pirate industries.

(ii) The second argument for stronger IP protection in LDCs emerges fromquestioning the supposed trade-off between promoting technological pro-gress and technology diffusion, or transfer. If innovation and diffusion areseen as parts of one process, short-term gains from faster diffusion of existingknowledge under a lax system will in the longer term be offset by the slowerrate of innovation in the originating countries. Thus the LDCs themselvesstand to profit from technological accumulation in the DCs. However, theargument that stronger IP protection in LDCs favours innovation in the DCsis challenged by the consideration that ‘unimpeded diffusion of existingtechnology is immediately beneficial not only for consumers but also forthose who would improve that technology. Because technological advanceis often an interactive, cumulative process, strong protection of individualachievements may slow down the general advance’ [Levin et al., 1987: 788].Even if strong IP protection by LDCs enhances a faster rate of innovation inthe North, some of the global gains thus generated may accrue to LDCs onlywhere they are large consumers of the goods produced (see argument (iii)below).19

There is then a counter-argument that impending imitation from the Southraises the North’s incentive to innovate, because firms in the North earngreater profits during their period of monopoly production. Thus continual,

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but not immediate, diffusion of new discoveries spurs the innovators tosearch for the next generation development which will restore their monop-olies. As the South’s imitation causes production to contract in the North, thedisplaced workers are absorbed in R&D activities, leading to acceleratedtechnological innovation [Grossman and Helpman, 1990: 90].

Also related to the development/diffusion dichotomy is the argument thatif strong protection of IPRs serves to promote technological progress ratherthan diffusion, LDCs’ limited capacity to innovate forces them to seek weakor minimal IP protection.

Although the acquisition and diffusion of technological knowledge is alsopromoted by standardisation,20 its introduction, and especially switching toother standards, i.e. other countries’s standards, is a costly process. Whichexplains why each country has a strong interest in having its own standardsaccepted by others in order to retain its positive externalities.

The suggestion of fostering innovation through government financedR&D, thus avoiding IP protection, has been rejected on the assumption thatit may actually delay diffusion [David, 1993a: 237-8]. Yet, this propositioncan be also criticised because often (a) foreign R&D is beyond the scope ofpolicy in the technology-adopting country; (b) domestic R&D may bedirected to developing new products for exports; and (c) the mechanismthrough which certain kinds of innovations are diffused to small and medium-sized enterprises in LDCs may differ from that assumed by David, except inthe case of radical innovations made in DCs [Teubal, 1993: 254].

To conclude, the problem of the trade-off at the international level is insome sense similar to that arising at the domestic level, for which the solutionof stronger IP protection has been advocated. But the trade-off referred tohere cannot continue to be resolved by those who are presently doing it,namely the TNCs and the governments of the DCs, which clearly can in noway be assumed to represent world interests. There are, therefore, two aspectsone can distinguish in this argument. The moral one, namely who decides tointroduce more protection in order to obtain more innovation and in whoseinterest; and the practical aspect that makes it impossible to be sure that anincrease in IP protection will cause more innovation.

(iii) It has also been argued that the South ---- i.e. its consumers ---- may benefitfrom protecting Northern IPRs, hence eliminating the conflict of interestsbetween the two regions. Theoretically, and within a partial equilibriummodel of duopolistic competition between a Northern and a Southern firm,such a possibility, seems, however, valid only in cases where Southernconsumers ‘absorb much of the world’s output of the good subject to costreduction or when the cost savings to be reaped from innovation are quitedramatic’. In other words, the South should agree to protect IPRs only whenthe effectiveness of R&D in reducing production costs ---- i.e. in the marketstructure prevailing with protection ---- is high enough to make the South gainmuch on the consumption side from the research efforts of the Northern firm.In all other cases LDC’s social welfare ‘will be higher when it eschewsprotection of foreign intellectual property than when it succumbs to pressurefrom the North’. Since the North ‘always benefits from having the patents ofits firm respected outside of its borders’, even in the extreme case that ‘the

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Northern firm captures none of the surplus from any licensing agreement thatmaterializes between itself and its Southern rival’, the interests of these tworegions with respect to the system of IPRs do conflict. However, since theprotection of IPRs, which creates the potential to license patents, enhancesglobal efficiency, at least for substantial innovations, ‘the North ought to bewilling and able to compensate the South for any losses that it would incurin the course of providing such protection’. Furthermore, firms do not patentall innovations, and trade secrets are by definition non transferable[Hortsmann et al., 1985]. Thus the conflict becomes one ‘between thebenefits of widespread diffusion of technology and the increased competitionthat such diffusion entails, and the costs of dampened incentives to generatetechnological breakthroughs’ [Chin and Grossman, 1990: 97 and 103-6].

In this connection the argument has even been made for unequal treatmentof foreigners in patent enforcement procedures by countries possessing somedomestic capacity for innovating. Based on a simple application of the newstrategic trade theory, the call for discrimination to promote indigenous R&Deffort ‘hinges on the fact that monopoly profits accruing to foreign nationalsdo not enhance national welfare’. That discrimination can enhance thecountry’s welfare seems possible in at least two cases: (a) when the ‘smallcountry’ assumption holds in respect of foreign technologies but not fordomestically created ones so that there are no dynamic gains from grantingprotection to foreign nationals, because then the dynamic gains of a protec-tion limited to domestic nationals tend to outweigh the static losses if aminimum R&D capability exists in the country; and (b) even when ‘the"small country" assumption is relaxed so that cost reductions in the domesticmarket cannot be secured in the absence of intellectual property protectionto foreign nationals’, ‘for a wide variety of situations discrimination can bewelfare enhancing even though the R and D generated domestically isinferior to that generated abroad’. The higher welfare generated by the poorertechnology is related to ‘the nature of the monopoly profit-consumer surplustrade-off’, which amounts to a kind of infant industry argument for promotingor protecting the creation of R&D in LDCs [Subramanian, 1990a: 549;1991: 946].

Related, but different, is the call for low protection without discrimination,i.e., without unequal treatment of foreigners and nationals, a policy consid-ered more appropriate for small LDCs for which the gains from a high levelof IP protection appear to be negligible. In fact, since information is not afree good, LDCs should not endanger future information imports by refusingto pay for it, but instead push the costs as low as allowed by ‘the importanceof LDC markets in calculations by technology creators of the profit maxi-mizing levels of future technology to be supplied to the world’ [Magee, 1977:335].

(iv) The general theoretical arguments advanced for the patent system itself mayalso be argued to apply to the case of the LDC’s own R&D capacities. Butthe LDCs, at the less privileged end of a dynamic North-South system andfacing the threat of the imposition of an international patent system, are in aquite different situation to that faced by the DCs when they were establishingtheir national patent systems and R&D capabilities. Whether, in present

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circumstances, stricter IP protection would enhance R&D in LDCs remainsa moot point. After all DCs themselves only recently adopted those improve-ments and extensions of their industrial property system which they nowexpect from the LDCs. Indeed, before the revision of national patent lawsfollowing the coming into force of the Munich Patent Convention of 1968,the levels of protection prevailing in Europe were relatively low [Ullrich,1989: 132 fn.10].

There is general agreement that LDCs underinvest in R&D, but the avail-able literature is inconclusive on whether higher returns and investments takeplace in those LDCs which more strictly protect IP [Siebeck, 1990: 2]. Atany rate most authorities, according to Braga [1990: 80], agree that suchprotection is ‘neither necessary nor sufficient for strong technological activ-ity’. Moreover, to adopt stronger IP protection ‘on the OECD model mightbe globally optimal, but it would not be optimal for individual developingcountries’ because it would probably hinder domestic adaptive R&D andeliminate the options to copy and do reverse engineering [Evenson, 1990:353]. This applies at least for the pirating countries. According to Evenson,the strengthening of IPRs seems to be more needed by the less developedcountries because they require ‘stronger incentives for domestic adaptiveinvention to develop the capacity and the industrial relevance of their currentR&D’ and because ‘most of their technology purchase arrangements areinter-linked, complex contracts calling for technical assistance, capital, etc.’,so that any lack of protection of the potential seller’s IPRs is bound to raiserather than to lower the cost of such packages [Evenson, 1990: 354]. Not onlydoes this view conflict with that expressed by many, including Deardorf[1990: 505-6], but (a) it is irrelevant in most LDCs where R&D activitiesrequire much stronger incentives than merely stricter IP protection; and (b)it ignores the fact that by far the majority of patents in developing countriesare held by foreigners, most of them in the hands of corporations, nearly allof them unused. The fact that these patents are not used arises from thestrategic considerations of foreign enterprises and not from any domesticconditions in the LDCs [UNCTAD, 1975: 52].

On the whole, the evidence appears to support the overall conclusionreached some time ago by Vaitsos, that the registration of patents in LDCsbears practically ‘no direct causal relationship whatsoever with inventiveactivity, domestic or foreign’ [Vaitsos, 1972: 90]. Moreover, particularly forlarge countries, a process of industrialization which does not rely too muchon imports of technology may result in a diverse and deep technologicalcapability [Lall, 1985: 70-1].

(v) More recently, the argument for strict IP protection by LDCs has been basedon the not too new recognition that ‘most industrial R&D generates twodistinct types of output. The first type consists of product-specific informa-tion that enables a firm to manufacture a particular new good (or an old goodby a new and cheaper process)’. This ‘codified’ component, in the form ofblueprints, drawings, specifications, and design, amounts to the transforma-tion of experience and information into symbolic form. The second outputcomprises more general technical information, which may facilitate theundertaking of subsequent innovations.

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While the returns to the product-specific information will generally beappropriated by the innovator with the help of patents and secrets, theadditions to general knowledge are more difficult to appropriate [Grossmanand Helpman, 1992: 335]. Although slow and costly to transmit, as it oftenrequires face-to-face communication [Teece, 1981: 83], without this uncodi-fied or tacit knowledge potential users will not necessarily be able to makeuse of the codified information, i.e. ‘production processes will not deliveroutput of the expected quality at the anticipated rate’ [David, 1993a: 240].And since firms tend to codify whatever can be protected as IP, whileeverything else is kept secret, IPRs pertain primarily to the codified aspectsof technology [Arora, 1991: 1-4].

Therefore, it is maintained, the more protected is the codified information,i.e. the stricter the enforcement of IPRs, the easier the transfer of tacitknowledge. Furthermore, tacit and codified components of technology arecomplementary, and form part of a continuum, of which patents and tradesecrets are only some elements. Because IPRs concern only one of theseelements, namely patents, their ‘conceptualization is inadequate’ to eitherexplain or facilitate the process of technology transfer. Given that the scopeof patent protection will affect the incentives to transfer tacit know-how,Arora maintains that arms length contracting, which is strongly affected byIPR regimes, can successfully achieve the transfer of technological know-how, although he recognises that in weak IPR regimes ‘complementaryinvestment plays an important role in the transfer’ [Arora, 1991: 3 and 5].

Since ‘tacit know-how is more valuable when used in conjunction with thecodified components of the technology, inter alia, because both are stronglyinfluenced by the specific conditions under which the licensor operates thetechnology, and learns about it’ [Arora, 1991: 36], when ‘the tacit knowledgecomponents are vital and remain unavailable domestically’ [David, 1993a:243] and when the knowledge has a high tacit component, clearly the transferof technology ‘cannot be separated from the transfer of personnel, which istypically difficult if the contractual relationship is arms-length and non-ex-clusive’ [Jorde and Teece, 1990: 80]. Actually, technology transfers to theSouth differ from North-North transfers because the tacit know-how compo-nent is much more important, so that the potential competition posed by thelicensee is less, and because new and untried technology rarely enters theexchange [Arora, 1991: 7-9].

The conclusion which has been drawn from this argument is that the amountof tacit know-how provided increases in line with the degree of protectionafforded to the codified element of the technology to be transferred, with thedegree of complementarity between these two elements [Arora, 1991: 36-7]and with the ‘technological distance’21 between the firms involved. It istherefore maintained that when IP protection is weak, licensors are verylikely to supply lower levels of technological know-how by restructuring theflow of tacit knowledge. This analysis is advanced as a reason for LDCs toadopt stricter IP protection in order to facilitate the design of ‘contracts forthe successful implementation of technologies by bundling the provision ofassistance (conveying tacit knowledge) together with licensing of the use ofcodified information such as patents and copyrights’ [David, 1993a, 242-3].

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David and Arora have also pointed out that although stricter protection ofIPRs may hamper the process of discovery and invention, it may be instru-mental in bringing about the successful transfer and commercial applicationof new scientific and technological knowledge [David, 1993: 19] becauseeffective licensing under an IPR regime must be complemented by assistancecontracts for conveying tacit knowledge. David then claims that weaker IPprotection ‘involves accepting the tradeoff of slower and less widespreaddiffusion of technological innovation to the developing countries in exchangefor a more rapid pace of knowledge accumulation that may eventuallybecome available to all’ [David, 1993a: 242-243].

The argument based on tacit knowledge, however, does not seem to takefully into account that at any rate not much complementary know-how canbe transferred to countries possessing little technological capability.22

The difficulty extends even to North-South transfers taking place withinTNCs [Teece, 1976]. Where some technological capability does exist theneed for tacit knowledge becomes less pressing, or it can be obtained fromdomestic sources. Furthermore, if the role of tacit knowledge is proportionalto the complexity of the process or the product design, its relevance for thesimpler and less sophisticated technologies most needed by LDCs is boundto be minor. It seems, therefore, that the tacit knowledge argument might berelevant only for the most advanced LDCs, mainly for a few newly-industri-alized countries (NICs). However, since these already posses technologicalcapabilities, they are better equipped either to provide themselves with mostof the tacit knowledge necessary for operating new technologies or to receiveit through FDI or other assistance arrangements with foreign suppliers ofcodified technological information. In other words, their ‘learning to borrow’is already rather well developed.

In fact, the tacit, uncodified character of much innovative activity wouldbe a reason to argue that ‘the problem with the property rights regime maylie less with the lack of patent protection than with the lack of a robustlegislative instrument for trade secrets protection that is effectively enforced’[Frischtak, 1990: 61]. Trade secrets are considered particularly vital duringthe weeks and months from the moment of innovation or discovery until theday a patent application can be prepared and filed. Informal surveys ofexecutives engaged in technology transfer licensing suggest that trade secretsrepresent, very roughly, two-thirds of the technology transferred [Sherwood,1990: 130]. Furthermore, the more complex the process or the product designand the more technologically distant are the firms, or the countries, involved,the more serious are the transfer problems posed by tacit knowledge. Sincethis is often the case when LDCs are concerned, their potential advantage aslatecomers seems largely exaggerated. Yet, together with the need for ‘learn-ing to borrow’ [David, 1993a: 240-41],23 LDCs must be reminded that notonly IPRs are required to make technology work. Furthermore, since themore successfully a firm absorbs technology, the higher the chance ofbecoming an innovator and a dangerous competitor, the foreign firm provid-ing the technology has a strong incentive to keep out of the transaction someuncodified information. Thus, strengthening and harmonizing IPR protection

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becomes less relevant: the only relevant issue is the control of piracy, controlwhich can be performed at DC’s points of entry.

It seems correct, therefore, to conclude with Maskus that it is ‘difficult to envision anyclear interests of the poorest countries’ in the stronger IP protection which the UruguayRound is attempting to set up and that, on the whole, ‘the expected dynamic benefits fromstronger and more harmonised IP regimes would fall largely on the industrial countries’[Maskus, 1990: 407]. Mody strengthens the argument by maintaining [1990: 204] that‘there is neither a theoretical basis nor an institutional capability for forging a worldwideconsensus on appropriate levels and mechanisms of protection ... [they] are alreadybecoming counterproductive in some areas’. The difficulty of demonstrating that LDCsin general have a need for stricter IP protection derives from the notion that only thosecountries with a significant concentration of imperfectly competitive inventive enter-prises have ‘an incentive to maintain a high degree of patent protection as well as to pressfor longer patent protection elsewhere’ [Berkowitz and Kotowitz, 1982: 12]. Since LDCsdo not fall into this category, stricter protection should be recommended only to NICsand also to some more advanced LDCs in order to prevent them becoming competitorstoo soon.

Even though the attempt to improve the protection of the innovator’s rights may aim atstimulating research and rewarding investment, internationally uniform IP laws, particu-larly patent laws, also tend to stifle the creativity of other innovators, to freeze techno-logical advantages, and therefore economic power, in the hands of those who alreadyhave it, and, ultimately, contribute to slowing down economic growth.

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4. NORTH, SOUTH, AND TNCS: SOME DYNAMICS OF THE BALANCE

There is an ongoing conflict between the technological innovators and the imitators, i.e.those that copy or ‘invent around’.24 This conflict has been highlighted by the growingcontrol retained by TNCs on new technologies, the large role they play in internationaltrade and technology and the overall process of globalization of the world economy.Simple production processes and simple products, which are most suitable for LDCs, arealso more copiable, so it is more difficult to appropriate the returns from less sophisticatedinnovations. To minimize copiability TNCs then favour the production of technologiesthat are more complex and sophisticated so as to make their transmission through marketsless efficient, i.e. more difficult, than within firms. The difficulty of appropriating thereturns of simple inventions, together with the efficiency of transferring high technologyworldwide inside firms rather than through the market, explain the tendency of TNCs andprivate markets to seriously undersupply the technologies most needed by LDCs, namelysimple product technologies and production technologies which intensively utilise un-skilled labour [Magee, 1977: 335; 1981: 124].

McCulloch has highlighted a very relevant consideration, that ‘the model of knowledgeas a public good with a transfer cost near zero is largely irrelevant for North-Southtechnology transfer. For these transactions the major costs of making the transfer lie increating required local know-how and infrastructure. The ineffectiveness of compulsorylicensing25 as a remedy for nonworking of Southern patents suggests that even makingpatented technology freely available to Southern users would have little immediateimpact on its local application by Southern firms’ [McCulloch, 1981: 118-9]. Thediscussion of the free-riding option tends to overlook two facts: the different technologi-cal needs and tastes in the South and the South’s potential to undertake innovation forthese needs. It follows that not only may ‘Southern patents ... have a role to play inpromoting the development of technologies appropriate to the South’, but ‘increasedpatent protection in the South need not always be good for the North’. Just as the increasein innovative activity in the North, due to patent protection there, may be at the cost ofsome products particularly suited to Southern requirements, increased patent protectionin the South raises the range of innovations, but also shifts it away from the North’spreferences. Although ‘it is not clear a priori whether the South ought to have a lower orhigher level of protection than the North’, it appears that the South’s greatest incentiveto free ride is for products presenting little taste differences between the two regions(computer software or economics textbooks), while it should grant strong IP protectionto other products, such as some pharmaceutical or agricultural innovations [Diwan andRodrik, 1991: 28-9, 37, 46-7].

Another important consideration in this balance of benefits is that the effects of progresswork asymmetrically. Technical progress in the North, even where it widens the techno-

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logical gap between the two areas, always benefits the South, whereas a narrowing of thegap, i.e. a ‘catch-up’, by an LDC, may not benefit the North and may possibly negativelyaffect it. Since progress in the North tends to be biased towards goods not produced bythe South, while progress in the South competes with the North’s exports, the closing ofthe gap reduces the North’s gains from trade. Hence the real and relative income of thetechnological leader becomes a function of maintaining the lead, an objective which canalso be obtained through technological protectionism [Krugman, 1985: 36, 45-47].

Krugman has also demonstrated that while LDCs always gain from faster processinnovation in the North but may lose from faster product innovation, the North gains inboth cases. With technology transfer, the North always loses if product technologies aremore rapidly transferred, but may not do so if process technologies are transferred. LDCsalways gain. Thus, progress in process technology may lead to less inherent North-Southconflict. TNCs’ apparent bias toward transferring product technologies may be detrimen-tal to the welfare of Northern labour, since it is the North’s special ability to producecertain goods that constitutes the only source of inequality in wages. Consequently, thetransfer of technology to LDCs shifts demand toward the goods they produce, capitalstarts moving there and the relative income of LDC labour rises [Krugman, 1979: 255and 264].

Extending Krugman’s early model, Dollar shows that the North’s ability to introduce andtemporarily monopolize new technology enables its workers to earn a premium over thewages paid to their counterparts in the South. This difference in labour costs constitutesthe main incentive for the diffusion of the technology to the South. An increase in thelabour force in the South causes wages in the North to rise by increasing demand forNorthern products, hence improving its terms of trade. In the long run, however, theimprovement in the North’s terms of trade leads to the more rapid diffusion of technologyand a capital flow towards the South, leading in turn to a fall in Northern real wages. Thegrowing downward pressure exercised over time on Northern wages by the increasedsupply of labour in the South is due to the combined effect of both a reduction in Northernlabour’s marginal physical productivity and a decline in the latter’s terms of trade.Consequently the South experiences a real increase in wages. The same effects are causedby a more rapid diffusion of technology to the South. Indeed, the North’s specialisationin exporting capital-intensive and importing labour-intensive goods is due less to initialdifferences in factor endowments than to the North’s ability to keep introducing newproducts.

Finally, since ‘over time the technology and capital that nations have available will be asmuch the result as the cause of trade ... some government control of the process of capitaland technology transfer may be desirable in order to prevent further erosion of the world’srelatively open trade in goods’ [Dollar, 1986: 178, 185, 188-9].

If the innovation process is perceived not as ‘a number of stages which proceedsequentially ... in a linear and predictable fashion’ (the traditional serial model) but ratheras ‘an incremental and cumulative activity’ which is irreversible [David, 1993a: 218],resting on ‘the existence of tight linkages and feedback mechanisms which must operatequickly and efficiently, including links between firms, within firms, and sometimesbetween firms and other organizations like universities’ (the simultaneous model) thenit is the organization of innovation, rather than just the organization of R&D, which mustchange [Jorde and Teece, 1990: 77-8]. Since in the simultaneous model ‘lateral and

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horizontal linkages as well as vertical ones’ become essential to obtain the necessarycapabilities, it has been argued that anti-trust laws may seriously hinder the innovationprocess,26 particularly in mid-sized firms [Jorde and Teece, 1990: 76-79]. Thereforecomplex bilateral and multilateral contracts, internal organization, or various hybridstructures are often required to shore up obvious market failures [Jorde and Teece, 1990:80] and to deal with the imperfections characteristic of the market for know-how. Thisis more so the closer one moves to real, cutting-edge capabilities which are mostly‘generated by precompetitive, collaborative research and development’ as in microelec-tronics, biotechnology, and new materials [Teubal, 1993: 253].

In the simultaneous model of innovation, firms, in seeking ‘to bring technology to themarket and to hold competitors at bay’ rely less on the price mechanism or the adminis-trative processes within the firm and more on interfirm agreements, and particularlystrategic alliances (the commitment of two or more firms to a common goal) whichinclude consortia and joint ventures. When the national anti-trust legislation is hostile tojoint R&D activities, as is the case in the US, it also tends to inhibit technologicalinnovations and international competitiveness [Jorde and Teece, 1990: 84-86].

New technological factors are affecting the balance of interests in IP matters. Some ofthese factors offer advantages for LDCs, such as (a) cheaper access to more traditionaltechnology, due the acceleration of technological developments and the shortening ofproduct life cycles27 (b) the proliferation of public as well as private sources fortechnology transfer, although this advantage is counteracted by the diminished politicalincentive to transfer technology to the Third World since the end of Cold War; and (c) abroader spectrum of chances for co-operation, an advantage that may apply mainly to themore advanced countries in the Third World [Van Wijk and Junne, 1993: 7-11].

There has been an intensification of the demand from DCs for stronger IP protection,particularly in advanced technologies such as IPRs on semi-conductors, copyrights oncomputer programmes, patents, and plant breeders’ rights. This new pressure is connectedto the revolutionary impact of the technological breakthroughs of the 1970s on micro-electronics and biotechnology [Kaplinsky, 1989: 377-81]. It is no coincidence thatcomputer programmes, plant varieties and biological inventions are also the more easilycopiable innovations. It has been argued that the ability to reproduce constitutes a capitalgood in itself which deserves legal protection, in some cases even ‘novel and sui generisforms of intellectual property protection’ [Vaitsos, 1990: 83-84].

New technological factors have altered the North-South balance in specific areas, suchas agriculture, biotechnology and microelectronics. Agricultural technology had been anarea in which most knowledge was a public good, but given the growing role played byTNCs in the production of food, hybrids and fertilizers, in particular, the most advancedtechnologies have become private property. Will the acceptance by LDCs of strongerpatent protection facilitate their diffusion?

Stewart [1990] has summarised the implications of the emerging fields of biotechnologyand microelectronics for LDCs. According to her analysis, the net gains for LDCs frombiotechnology are likely to be small, except for those LDCs that are able to diversify outof primary production, and to establish some local R&D capacity. This is because (a)some of the new products will be substitutes for primary products presently exported byLDCs, (b) new varieties will offer a sharp increase in agricultural productivity and savingson most inputs, including herbicides and fertilizers, which will impel growers to adopt

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the new seeds. For producers of primary products with a demand elasticity of less thanone, this will reduce their net revenues and worsen their terms of trade (c) the changesfavour the trend toward large-scale farming and an increased degree of vertical co-ordi-nation and control [Stewart, 1990: 310-12].

As for the implications of microelectronics, they will not necessarily be negative for thoseLDCs ‘with a good basis of skills and infrastructure and a flexible labour force’. Suchcountries can try to adopt the new technologies, thus increasing their productivity andinternational competitiveness. The less developed Third World countries ‘are likely tosuffer a deterioration in international competitiveness’. The absence of design, manage-ment and maintenance skills and complementary infrastructural facilities prevents thewidespread introduction of these new technologies [Stewart, 1990: 313-15].

Other factors behind the demands for more IP protection are that (a) investments in R&Dare becoming larger, (b) the number of actors carrying out R&D, against whom IP has tobe protected, is also increasing, (c) since innovations may have more unforeseeableapplications, IP protection for the broadest possible field is sought at an early stage of thetechnological cycle, and (d) the fact that research has become a more co-operativeendeavour involving several institutions [Van Wijk and Junne, 1993: 3-7].

In the 1960s and 1970s LDCs took the initiative in IP protection and harmonization, withattempts at revising the International Convention for the Protection of Industrial Propertyof 1983 (the so-called Paris Convention, amended in 1925, 1934, 1958 and 1967)28 andat creating a Code of Conduct on the Transfer of Technology. The effect of these newfactors has been to create a demand from the DCs for world-wide strengthening of theglobal technology system, as a result of which many LDCs have strengthened their IPprotection. The insertion of the TRIPs in the Uruguay Round and the acceptance by theLDCs of the Draft Final Act and the Review concerning this topic are the most recentmanifestations of the campaign waged by the most advanced DCs in favour of theextension, strengthening and harmonization of IP protection. The about-turn in the LDCs’position is explained by their awareness of the widening of the technology gap, due alsoto stagnating transfer from the DCs and to the technological requirements of theirincreasing reliance on export-oriented development strategies [Van Wijk and Junne,1993: ch.3]. This has made them more attentive to the risk of trade retaliation from DCsunhappy with the level of protection they were offering. Yet, if retaliation could beassumed away, the abandonment of the patent system might represent a better alternativefor LDCs, since their losses from reduced domestic innovation under a more open systemwould be outweighed by savings in international royalty payments. It has in fact beendemonstrated that ‘for a relatively long world patent life, even very large countries willfind it profitable not to have a patent system’ and they should ‘not grant local patentprotection for foreign companies’ [Berkowitz and Kotowitz, 1982: 8 and 16].

On a rather different level it has also been argued that making the international technologysystem more open and accessible may generate substantial benefits for both DCs andNICs [Ernst, 1990: 33]. Although no definition of such a system is provided, it seemsreasonable to assume that it includes less, rather than more, IP protection. However theargument rests on the assumption of a fundamental shift in the international demandstructure, particularly for manufactured exports, with increased imports by Japan, theNICs, China, India and Eastern Europe. This would create ‘greater scope for continuousexpansion by NICs of exports of a variety of manufactures’ and thus growing comple-

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mentarity of technologies and production structures between the more advanced NICsand the OECD countries. This would mean that intra-industry trade would increase,capital goods producers in the DCs would experience robust demand in the NICs as thelatter invest in upgrading production, and this would lead to better ‘prospects forcross-investment and technology diffusion’ [Ernst, 1990: 51-2]. Not only is this ‘opti-mistic scenario’ becoming more unlikely, but it leaves out most of the remaining ThirdWorld.

At present LDCs are acutely concerned with DCs’ insistence on protecting productinnovations, rather than just process innovations, particularly in the food, chemical andpharmaceutical sectors. DCs consider that process patenting is insufficient to protect IPand can give rise to counterfeiting, i.e. ‘inventing around’ or producing the same goodby some other means. LDCs give more weight to two disadvantages of product patenting[Bifani, 1990: 170 and 169]. The first is that once product patents are obtained, R&Dinvestment in alternative processes is discouraged since all other possible productionprocesses can be protected only through dependent patents, which require authorizationfrom the main patent holders. This will be particularly limiting for the development inLDCs of processes more appropriate to their domestic factor endowments and socio-eco-nomic and environmental conditions. However ‘if traditional technologies have lesslearning potential than the ‘inappropriate’ technologies, then LDCs may face a trade-off:current output may indeed be lower (unemployment higher) with the inappropriatetechnologies, but future output may be higher’ because of the greater learning potentialinherent in the new technologies and ‘the increased capacity to learn that is engenderedby the process of learning’ [Stiglitz, 1987: 140-1]. A second disadvantage from LDCspoint of view is that product patents stimulate importation of the protected goods, ratherthan their local production, so they offer a weak mechanism for the transfer of technology.

The move toward greater harmonization of IPRs, both globally and regionally, will notnecessarily increase the availability of industrial technologies for LDCs. ‘Nationalinnovation systems29 will remain national’ [Mowery, 1993: 56]. The more global theharmonization and the stronger the protection offered to IP the more likely it is that thegeneral technology gap between DCs and LDCs will increase, with the result that FDIwill continue to stay away from LDCs. Meanwhile, the shift toward non-equity engage-ments will allow foreign companies operating in developing countries to continueexercising robust control from the outside [Van Wijk and Junne, 1993: 8-9].

By classifying LDCs according to their level of technological development and theirmarket orientation it is possible to obtain a first approximation as to the relativeimportance of various channels for technology transfer.30 For Asian countries the mostimportant channel seems to be imports of capital goods, for Latin America it is FDI, andfor African countries technical co-operation grants. Meanwhile, some Asian countriesother than Japan are themselves becoming technology exporters [Van Wijk and Junne,1993: 54-56].

It follows that there is no general yardstick for adequate or fair standards of IP protection.‘Countries must, as they always did, experiment with various standards of industrialproperty protection, utilising the preferential treatment that Article XVIII of GATTprovides for LDCs, in order to find out which one meets their needs best at a given stageof their general economic development. Uniform standards of protection will suit uniformmarkets only’, as has been demonstrated by the IP harmonization within the Common

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Market [Ullrich, 1989: 157]. Hence regional harmonization or harmonization amongsimilarly developed countries appears more effective and fairer than global harmoniza-tion that forces together economies at very different levels of development.

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5. STANDARDS

It will be worth considering technical standards and their international harmonizationhere, because there are some resemblances to the issues raised in relation to IP, and bothstandards and IPRs are of interest under the general heading of the diffusion of technol-ogy. To make efficient use of their resources countries need to build their technologicalinfrastructures, which form closely interconnected sets of institutions and actors, publicas well as private, that diffuse technological information and related services, includingthe provision of research and its financing. As development strategies become moreexport-oriented, norms and standards become more important, if product specificationsin different markets are to be met. Since standards tend to reduce transaction costs andproduct variety (thus reducing the unit cost of physical production) [Kindleberger, 1983:384] they facilitate large scale production and give rise to network externalities.31 Theexistence of these externalities influences the adoption of both technologies and standards[Farrell and Saloner, 1985]. Standards ‘also help technological diffusion because theyimplicitly embody technology’ [Dahlman, 1993: 314] since to meet the better or higherstandards, better technologies are also required.

Standards are structured, technical documents describing the design, material, processing,safety and performance required of a product. They are subdivided32 into technical normsissued by state authorities, which are therefore legally binding, and ‘voluntary standards’which refer to voluntarily agreed codifications regarding products and production meth-ods [European Economy, 1988: 49]. Voluntary standards are intended to facilitatecommunication within an industry. The importance of standards derives from theirrelevance for the development and diffusion of new technologies and products, and thustheir impact on the structure of markets and the performance of industries. The mainproblem in the process of standardisation is ‘that market competition does not lead toenough standardization to optimize the efficiency of existing network technologies’. Thismeans that the state has a role in pushing the system out of ‘wrong’ standards and towardmore appropriate ones.33 However, the direction and extent of government interventionis not easily determined. One option is to support R&D work on ‘gateway technologies’,i.e. adapters, transformers and code translators which ‘permit ex post facto integration ofdistinct system variants into larger networks’, thus increasing compatibility betweensystems. These do produce immediate cost savings but ‘may exact unforeseen economicpenalties by discouraging investment in R&D programmes aimed at establishing thetechnological dominance of one system over its rivals’ [David, 1987: 233-4].

Since technical standards have widely been considered as cost-increasing trade barriers,their international harmonization is viewed mainly as a means to reduce trade barriers.In some cases, such as communication between computers, telecom equipment, andperhaps bio-technology, standards are needed to create a market since only after stand-ardisation has taken place does the market emerge. This process of ex ante standardisation

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‘may imply advanced research and co-ordinated product development or adaptation ofprototypes’ which ‘may also enhance the world-wide competitiveness of all firmsinvolved’ [Pelkmans, 1987: 256-7].

Harmonization is certainly not a costless process, but it seems to generate severaladvantages for the countries involved, advantages that are greater the larger the numberof countries joining the harmonised network [Farrell and Saloner, 1985]. Although, inan imperfectly competitive market, dominant firms may profit more from harmonizationwhich increases production costs [Salop and Scheffman, 1983: 287], it has been demon-strated that ‘both in traditional and in monopolistic international trade models ... thepositive gains of an international harmonization process of technical regulations’ seemassured for the countries involved [Lunati, 1992: 24]. For countries which do notparticipate, it may reduce both their domestic consumers’ welfare and their internationalcompetitiveness.

Although there still are those who view harmonization and standardization ‘as a potentialthreat to their market position or a cause of unwanted adaptation costs’, in reality qualityand standardisation are closely related, since ‘standards can have a market-creating effect’[Pelkmans, 1987: 260] and they can also contribute to an increase in productivity. In otherwords, technical standards, if they cover a wide enough market, are a powerful way ofimproving quality and reducing production costs. But technical standards which serve asbarriers to trade do increase the costs of production and marketing of the productsconcerned. Hence the elimination of national differences with respect to technicalstandards make both static and dynamic economies of scale possible. Costs decline, thusfacilitating exports and the restructuring of the sector in the countries that have harmo-nised their technical standards. The process works with both homogeneous and differen-tiated products, particularly for those which are vertically differentiated.34 Furthermore,the harmonization of technical standards may affect rather differently, according to themodalities of its implementation, countries characterised by asymmetrical economicdevelopment (see contributions by G. Hansson and S. Lutz in [Lunati, 1994: 79]).

If harmonization enhances global efficiency, then DCs should be willing to compensateLDCs for the negative impact such a measure may have on their economies. Furthermore,it should be possible to provide some trade benefits to the technology-buying countriesin order to compensate them for opening up their technology markets formally [Evenson,1990: 354]. Much the same arguments have been applied to the harmonization (i.e.,strengthening) of IP protection [Chin and Grossman, 1990: 106].

As for the role of the state in the process of standard setting and harmonization, it hasbeen demonstrated that while such a role should be minimal in a market characterized bystatic conditions, in a market dominated by dynamic forces it becomes essential in orderto check the natural tendency of market competition to lock the system into ‘wrong’standards [David, 1987: 227-8]. The same is probably also valid for international marketswhich tend to present more dynamic characteristics than domestic markets. However,there is no international state, and international agencies such as GATT are not keen totake on such a task, while national states are not willing to relinquish the little authoritythey still posses.

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6. HARMONIZATION AT THE GLOBAL LEVEL: THE ROLE OFGATT AND THE URUGUAY ROUND

In general the need to harmonise regulations and treatments arises from the need tosimplify comparisons, reduce costs and facilitate transactions. The need is first felt withinnational boundaries, then it tends to interest ever wider regional areas, ultimately reachingthe world level as international trade and other transnational activities increase to thepoint at which we can speak of the globalization of economic life.

The current drive toward harmonization of IP protection derives from both the ongoingprocess of globalization and the direction taken by technological innovation. A globalmarketplace has been created through improved international communications and awider opening of most economies, together with the substantially increased quantity ofgoods embodying IP being traded internationally. As this type of trade has expanded, theabsence of international instruments to effectively deal with abuses, particularly to curtailcounterfeit goods and pirated services, has caused trade disputes to mount rapidly andhas encouraged governments to resort to unilateral measures in order to satisfy domesticpressures against such practices. Policies that had always been considered as purelydomestic are now being questioned by trading partners because they have a trade effect.In some cases they are being redefined as non-border trade barriers. Governmentmeasures regarding services, investment and IP, ‘although generally not imposed at theborder, have clear trade implications’ [Greenaway and Sapir, 1992: 510-1].

IP constitutes a significant part of the trade in this global marketplace. In 1986 over 27%of the United States’ exports were thought to contain an IP component and the trade is‘increasing dramatically’ [Gadbaw and Richards, 1988: 3-4]. The value of world-widetechnology transactions, i.e. royalties, fees and technical services, reached $21.8 billionby the mid-1980s and an estimated $28 billion by 1988. The value rose to $33 billion by1990, 98,7 per cent of it flowing among OECD countries [Hoekman, 1993: 1529].35 Onthe other hand, Third World payments have actually declined, from around $2.0 to $2.5billion annually during 1981-83, to less than $2 billion since 1985 [UN, 1988]. This hasbeen accompanied by falling FDI and the very limited transfer of new technologies,although the flows of both appear to be very unevenly distributed among groups of LDCs,with the NICs receiving the most. Since most of today’s more valuable innovations flowfrom incremental improvements in applied industrial know-how, they become embodiedin products that are widely distributed all over the world [Reichman, 1989: 136]. Thedifficulty of keeping this know-how and the new technologies secret, and the ease withwhich they can be appropriated by those who have not shared in the enormous investmentin R&D, is demonstrated by the estimate that counterfeit products made up more than6% of total world trade in the mid-1980s [Slaughter, 1990: 418].

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Innovation, particularly new technologies, is blurring the distinction between product andprocess technologies36 as well as rendering much more pronounced their ‘copiability’,and it is proceeding at a pace which represents a challenge to the legal structure thatgoverns IPRs.37 The diffusion and assimilation of new technologies are strongly affectingthe patterns of competition, growth and trade shaping the world economy, since (a)knowledge has become much more important as a productive input, (b) imitation hasbecome relatively easier and more widespread as the number and competence of potentialimitators increases, and (c) with product cycles becoming shorter, firms have come toconsider it important to search for new ways of protecting their IP, including resorting toalliances to share technology [Mody, 1990: 212].38

The conflict over IPs concerns mainly these highly copiable technologies, some of whichwere mentioned in section 4 above. For these technologies ‘the co-operation of the creatoris unnecessary in developing the product as indigenous producers can imitate it cheaply’[Subramanian, 1990: 517]. Not only have the technologies for duplicating become moreadvanced, and the reproduction of IP easier and cheaper, but a product of the newtechnologies, such as a computer programme or an integrated circuit design, or even abiogenetically altered organism,39 tends to ‘bear its know-how on its face, a conditionthat renders it as vulnerable to rapid appropriation by second comers as any publishedliterary or artistic work’ [Reichman, 1989: 136-7]. The growth of trade deficits in the USand other DCs has made such a practice less acceptable by the innovating countries[Hartridge and Subramanian, 1989: 895-6].40 The main impetus for the introduction ofIP into the Uruguay Round’s agenda has been provided by US private business interests,and particularly TNC organisations such as the US Intellectual Property Committee (IPC)interested in stopping the alleged erosion of their position at the cutting edge oftechnological progress by unauthorised copying of their IP abroad [Deardorff, 1990: 497;Evenson, 1990: 326; and Bradley, 1987]. The main sectors interested in the extension ofIP protection seem to be the high technology ones, the producers of luxury goods and theentertainment industries. As for the rapid growth of counterfeiting and piracy,41 it ‘seemsto have been greatly facilitated by some of the new technologies themselves, such as theease of copying computer software and audio and video recordings, although they are notlimited to the new technologies’ [UNCTC, 1990: 2]. Besides, since in functional worksa writer can write for human audiences but also for machines, the distinction betweeninventions, covered by patents, and authorship, covered by copyright, has becomeblurred.

The positive side of high copiability is that the failure of the international patent systemto provide effective protection for inventions and innovations in electronics, as well asin other areas most affected by the new technologies, has also caused their more rapidimitation and diffusion both nationally and internationally [Soete, 1985: 417].

The Uruguay Round negotiations have focused on the need to establish multilateralstandards for the protection and enforcement of IPRs, since investments in R&D producelarge spillover effects that can no longer be confined within the boundaries of the countryundertaking them. This means that standards for the legal protection of IPRs are seen asan integral part of trade liberalisation, in addition to their obvious relation to FDI and thetransfer of technology.

Many DCs have suffered a loss of competitiveness as comparative advantage in a widerange of manufactures, including low-tech products but extending to high-tech sectors

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such as consumer electronics and semi-conductors, has shifted South. This has convincedthem that inadequate or inefficient protection of IP is depriving them of a competitiveadvantage in the high technology sectors [Kostecki, 1991: 271]. Besides, the stifferinternational competition tends to reduce profit margins, making ‘illegal copying oftechnologies a more serious problem than it was before when there was little interest inThird World markets and when copying companies were less export oriented’ [Van Wijkand Junne, 1993: 69]. Furthermore, because the number of ‘routes’ available for obtain-ing the same product has increased and because firms do not really know what is easilycopiable and what is not, different productive sectors find themselves allied in requestingmore IP protection.

As DCs are losing their comparative advantage in some traditional sectors, they areshifting resources into activities with a high intensity of creativity, research, or knowl-edge, all of them IP-intensive, since these are the fields in which the DCs retain theircomparative advantage. This has not only led to demands for stricter IP protection, it alsoincreases the temptation to use trade policy as a tool to deal with IP protection issues,which were beyond the traditional scope of trade negotiations. This is in contrast with anearlier tendency toward a steadily declining role of patents [McCulloch, 1981: 117] (and,for a different view [Mansfield, 1986: 178-9]). Their freedom to make effective use oftrade leverage, for example by conditioning trade concessions on the provision of IPprotection, is ‘in fact quite limited if its use cannot somehow be justified under GATTrules’. Without such justification they risk being accused of unilateralism and becomingexposed to retaliation. Yet GATT contains only limited references to IPRs [Gadbaw,1989: 230] and it addresses only states, with the result that private citizens are not entitledto directly invoke rights or obligations by referring to GATT rules. This is in contrast tothe main IP conventions which are largely self-executing, i.e. they contain rules formu-lated in such a way as to be appropriate to form generally applicable national laws, withor without adoption, yet in both cases applicable to the nationals of the member states,thus allowing individual claimants to invoke the conventions’ rules [Fikentscher, 1989:109-10]. A GATT IP system therefore places private IPRs in the hand of nationaleconomic policy makers with the likely result that the exploitation of IP ‘will have tofollow the imperatives of the policy they make’. Moreover, by subjecting standards ofnational IP protection to a negotiating process, it makes them dependent on ‘a quid proquo mechanism whereby private intellectual property rights are traded against commer-cial advantages’ [Ullrich, 1989: 136-7 and 139]. Since a case can be made that weakprotection of IP does not violate GATT rules,42 LDCs could require concessions in otherareas.

Although the actual negotiation of the terms under which IP has been included in GATThas no doubt been based largely on national interests and inequalities of power, it will beworthwhile to give some consideration to the theoretical framework of the harmonizationof IP protection. The motive for harmonization derives from the simple consideration that‘the potential domain of economically useful innovation transcends the horizon of thenational state, for reasons inherent in the economic nature of knowledge itself’. And sinceinternational economic relations tend to be essentially competitive, how and to whatextent competition leads to the generation, accumulation and dissemination of usefulknowledge remains an important question [Johnson, 1976: 417-8]. In fact, once a patenthas been granted according to the law of either a national state or a regionally integratedsystem, the disclosure of the invention which is required for obtaining the patent also

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makes it internationally available, and thus facilitates its imitation and copying. Hencethe patent holders’ interest in geographically extending their monopoly rights and theirstrong support for a system that would secure patent protection in foreign markets, asystem which is opposed both by the domestic advocates of industrialisation in general[Machlup, 1958: 17] and even more by those involved in the hi-tech field in the NICs.The latter view IP protection as a barrier to the entry of their new hi-tech products andprocesses, a tool to protect DC’s ‘infant hi-tech industry’ [Beath, 1990: 414].43

The infant-industry argument reemerges whenever LDCs possess some R&D capability,even if it is inferior to prevailing standards abroad. The new strategic trade theory hasbeen used to justify the protection of this indigenous R&D [Subramanian, 1991: 946].The argument is based on external economies: ‘the inability of innovative firms toappropriate fully the knowledge they create’ being ‘empirically the most plausible sourceof positive externalities’. Based on perfect competition, traditional international trademodels cannot accommodate ‘externalities resulting from incomplete appropriability’.Furthermore, the applicability of the perfect competition model is undermined by the factthat ‘investment in knowledge has a fixed-cost aspect that causes dynamic economies ofscale’, leading to competition ‘over who gets to realize these externalities’ [Krugman,1987a: 137-38]. Strict IP protection can assist DCs in winning these externalities, but itcould also be favourable to LDCs whose R&D capability is not too weak.

Since most DCs, and especially the US, have realised that their competitive advantagerests on the technology and innovatory prowess of their TNCs, harmonization has cometo mean growing stress on IP protection, the so-called global ‘minimum standards’, asagainst the ‘national treatment’ principle. In fact, the TNCs need IP protection in morecountries than they did previously because they either plan to become active there, orwant to prevent competitors from being active there, or even because they need theprotection as a bargaining asset to negotiate a favourable agreement with a local company[Van Wijk and Junne, 1993: 4-5].

For the DCs, their innovation policy and ‘fair’ trade goals, based on the strategic tradetheory, seem to have become more important than the strengthening of GATT’s multi-lateral trading order. This must raise the issue of whether they are considering IPRs asan instrument for facilitating the transfer of technology to LDCs, or as a means to slowdown or avoid this transfer, which may erode the North’s technological edge andconsequently its monopoly rents. In fact a global TRIPs agreement cannot but raise thecosts of infringement, since refusing to protect foreign rights, de facto implies encourag-ing local infringement [Maskus, 1990: 388]. Because marginal returns from licensingwere not considered important, the US tended in the past to license its technologies onrather generous terms. Only when it become apparent how quickly some countries,notably Japan, were able to assimilate those technologies did US firms start not only totighten licensing terms in order to better protect their rents, but also to pressure thegovernment to push for a global harmonization of norms and standards. ‘This pressurehas led to the essentially political ... process of setting domestic and internationaltechnology standards’, a process to which private firms and government agenciescontribute intensively [David, 1987: 211].

No general consensus has emerged on whether the harmonization of IP protection shouldaim at the comprehensive and fundamental restructuring of the IP system, or on whetherit should include trade secrets as in the US proposal [Braga, 1990: 86]. Although GATT

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expressly exempts patents,44 copyrights and other IPRs from its discipline, the US hasbeen pressing for the development of a set of standards for IPRs protection and theadoption of a system of full harmonization extending to cover patents, trade marks,copyrights, trade secrets and semi-conductor chips. An Anti-Counterfeiting Code jointlysponsored by the US and EC was presented as early as 1978 at the Tokyo Round, yet nosingle international agreement has explicitly dealt with counterfeiting before the matteris taken up in the Uruguay Round.45 Other DCs have proposed the convergence method,and the EC has concentrated on the streamlining approach, simplify the national rulesthat favour domestic activities by discriminating against imports. In the GATT negotia-tions the EC is not much interested in seeking the harmonization of national laws, butwould like to see an agreement on a set of principles for substantive standards to berespected by all [Raghavan, 1990: 121].

Estimates of the losses caused by piracy and lack of protection of US IPRs incurred byUS firms in 1986 amounted to almost 24 billion dollars, or 2.7% of sales affected by IP.Other estimates of US losses, although considered much too high by some, range from43 to 103 billion dollars, and similar figures are expected for Western Europe and alsoJapan. As for LDCs as a whole, the patent protection adopted by GATT may entailadditional royalty charges of between 43 and 102 billion dollars per year to be paid toDCs [Almeida, 1990: 83].46 The ‘aggressive unilateralism’ applied by the US,47 with theapproval of several other DCs, has transformed GATT’s reciprocity principle into whathas been called ‘status quo reciprocity’ [Subramanian, 1990: 510] according to which,despite the principle of national treatment incorporated in both the Paris and BerneConventions and in the Universal Copyright Convention, other countries must improvetheir IP standards in order to maintain their current access to DCs’ markets. This amountsto the rejection of the mutual multilateral process with its traditional negotiations forincreased market access. The apparent effectiveness of the approach should not hide therisk that it can undermine the credibility of the multilateral rules-based trading systempainfully built up after the Second World War.

In the preparation for and during the Uruguay Round, DCs have maintained that GATTis the only forum entitled to deal with a topic like IP, while the LDCs insisted that GATTwas meant to deal only with goods, and so has no jurisdiction on IP matters, which arebetter left to existing international bodies such as the World Intellectual PropertyOrganization (WIPO)48 and UNESCO (which sponsored the Geneva ‘Universal Copy-right Convention’ (UCC) of 1952). Not only are these bodies directly related to IP, theyare already policing and administering international agreements in this field.49 Thus ‘thechallenging task of the TRIPs negotiations is to achieve a modicum of constructiveinteraction between two separate sets of rules which have evolved independently: therules governing trade embodied in GATT and several GATT Codes and the rulesgoverning IPRs which are embodied in a number of international agreements adminis-tered by or in co-operation with WIPO’ [Weiss, 1990: 102].

This has been characterised as an attempt to pursue international trade liberalisation‘through the growing global monopolization of one of the most important factors ofproduction, that is knowledge, a process facilitated by the absence of international agreedantitrust rules’ [Bifani, 1990: 177]. It would mean for GATT ‘a rather dramatic shift inorientation’ [Benko, 1988: 223]. Although the proponents of this shift try to distinguishIP protection from trade protection, arguing that the former is necessary to allow IPowners to export the products embodying it, so that this protection in fact fosters

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international trade, there is no doubt that GATT is now ‘being called upon to extendprotection, not restrict it’ [Deardorff, 1990: 498]. In fact, the attempt to ensure adequateprotection of IPRs without increasing barriers to trade ‘has proven to be an excessivelyhard if not impossible task’ [Kostecki, 1991: 271] and the establishment of a uniformapproach to IP protection has generated a ‘curious paradox’. On the one hand, DCs ‘thatnominally subscribe to a regime of free trade competition want the rest of the world tostrengthen their domestic intellectual property laws and to accept international minimumstandards that could significantly restrict opportunities to copy cultural and technologicalproducts originating in the industrialized countries’. On the other hand, LDCs, ‘whosedomestic economic policies restrict free-market principles, appear to support free com-petition for products of human ingenuity in the international market place’ [Reichman,1989a: 795]. Or, in the words of an Indian economist, ‘on the same platform, [the DCs]plead for freedom for their traders and protection for their manufacturers’ [Patel, 1989:985].

Apparently, ‘to rely on the pure forces of the market has become increasingly difficultand perhaps irrelevant, even for those who profess most respect for them. As the‘Hobbesian’ market makes its way in the international economy, some participants of theUruguay Round start to adopt a hard stance regarding the liberal belief’ in a free market[Almeida, 1990: 78].

Since in the most literal sense, intellectual property laws are NTBs, and GATT expresslyrecognizes them as exempt from GATT’s proscription of NTBs, it is evident that nationalIP laws, or the failure to have them, ‘are NTBs cognizable under GATT’ and thereforefall under its jurisdiction. The question becomes then ‘whether a particular national lawis an intellectual property law, in the meaning of the GATT exemption’. If national IPlaws ‘act like NTBs only when there is disharmony in the law of nations’, not all IPregulations have to fall automatically under GATT jurisdiction [Stern, 1987: 202-5], buthigher standards of harmonization become even more important. DCs’ insistence on aGATT-based international regime for IP rests on the contention that inadequate, excessiveand discriminatory protection of IPRs impedes and distorts trade.50 There is, however,the risk that ‘combined with existing distortions in the foreign trade regime, strengthenedintellectual property protection could also lead to potentially inefficient R&D invest-ments’ [Nogues, 1990a].

Most LDCs have slowly come to accept that GATT deals with IP, in part because, underpresent circumstances, with an unstable world situation, GATT may help to protect themfrom the most aggressive DCs. Furthermore, GATT’s principle of ‘positive reciprocity’makes it possible to reach trade-offs in negotiated packages that involve different sectors.Most LDCs have nothing to gain from upgrading their IP protection systems, which, asthey stand, do not constitute a violation of their trade obligations. For them, entering newagreements for the harmonization of IP treatment represents a policy concession whichDCs should reciprocate by providing better market access for LDCs’ textile exports andmore open markets for their agricultural products [Maskus, 1990: 408].51 If one believesthat protection of IP does indeed enhance global efficiency, there should be room foradditional reciprocity and even for some compensation to LDCs.

Another way of modelling this reciprocity is Stern’s suggestion that inadequate IPprotection should be seen as a tax on the returns from IP. This tax, however, does notproduce revenues for the state, but instead represents a subsidy to the nonpaying users of

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the technology. If all relevant IP was owned by foreign companies, the tax would amountto a tariff. It is thus analogous to the tariffs on labour-intensive imports imposed by DCs,so the reduction of both tariffs could be jointly agreed in bilateral or multilateralnegotiations [Stern, 1987: 206].

While the DCs’ agenda is based on the assumption that adequate levels of IP protectionare essential for trade liberalisation and the encouragement of FDI and technology flows,the LDCs’ main interest is to obtain more access to, and improved terms for, technologytransfer, including the most recent technologies. They perceive IPRs as raising barriersto technology acquisition and as increasing the cost, at a time when it is being increasinglyrecognised that the acquisition of foreign technology is the first ingredient for successfultechnological accumulation [Bell and Pavitt, 1993]. An IP regime intended to protectDCs’ strategic industries from copying and reverse engineering52 may in fact depriveLDCs of the most advanced technologies and so exclude them from the learning processwhich is essential for reducing the technological gap. In fact, for Third World countriesthe Uruguay Round means both accepting IP protection and harmonizing their standardsupwards to the level of protection prevailing in the DCs, which is not only above thestandards applicable under the IP laws of most LDCs but also higher than the minimumrights guaranteed under the Paris Convention.

This again raises the doubts mentioned earlier concerning the motivation of the DCs: isthe harmonization, or rather universalisation, of patent laws intended ‘to reward exportmonopolies in the industrial centres which would slow down industrialisation and spreadof technology in the Third World’ [Raghavan, 1990: 116], or are they, as they themselvesmaintain, trying only to reward innovation and inventiveness, without which there wouldbe no progress and no technology transfer? If the latter is true, are there grounds to givea positive answer to the basic theoretical question of whether or not the patent system perse significantly promotes innovation?53

If the justification for granting patents rests on their providing incentives for thedevelopment of industries in the patent-giving country, what is the value to that countryof a patent which is not locally exploited? It was only with the growth in internationaltrade that ‘it was realized that enterprises could benefit from a patent grant without havingto exploit the patented invention in the country granting it, but by importing from abroad’.During the 19th century and the first part of the 20th century it was common for patentlaws to require patent holders to exploit their patents and to prohibit patents being usedto secure exclusive rights over export markets [Bercovitz-Rodriguez, 1990: 3-4 and 9].

The requirement that patents be locally exploited rests on an artificial distinction betweenthe processes of innovation and diffusion. LDCs need to concentrate on diffusion, butthis ‘involves more than the acquisition of machinery or product designs and relatedknow-how’. It involves ‘a continuous accumulation of knowledge and skills in thetechnology-adopting firms and countries’ which makes possible the introduction of moresubstantial technical changes and even proper innovations [Bell and Pavitt, 1993:259-60]. This dynamic interactive process generates technological capability, defined as‘the ability to scan, assess, select, use, assimilate, adapt, improve, and develop technologythat is appropriate to changing circumstances’, accumulated in people and institutions[Dahlman and Nelson, 1993: 6; Rosenberg and Steinmueller, 1988]. This modelling ofthe process allows considerable scope for variations in the gains to be obtained fromadopting internationally transferred technology as a means to also foster domestic

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technological learning [Bell and Pavitt, 1993: 260-61]. Since ‘the skills needed forimitation are essentially a sub-set of those needed for innovation’, so ‘the capabilitieswhich are built through successful imitation become the basis from which innovativecapabilities finally emerge’ [Cooper, 1991: 12]. Thus, no country should adopt an IPregime that does not facilitate the creation of technological capability and technologicallearning.

This conclusion is strengthened by considering that ‘contrary to a widely-held assump-tion, technology does not spread among the industrial countries mainly through ... [FDIand licensing] but rather through reverse engineering and imitative research and devel-opment’ [Bell and Pavitt, 1993: 269]. Therefore, the acquisition of technology, whetheror not FDI is involved, relies on a learning process for the development of an appropriatedomestic technological capability, and possibly on the existence of a suitable technologypolicy. Also evidence from the international semi-conductor industry suggests that theadvantages of FDI over licensing are less to do with informational secrecy than the earlyestablishment of long-term contacts with overseas consumers, both for ‘learning byusing’ feedback and to deter entry by local producers [Flaherty, 1984: 69-70]. Therefore,a technology policy dimension is particularly important since failures of the learningprocess tend to be more common in LDCs than in industrial countries [Cooper, 1991:15] and the absorption of new technologies, particularly informatics, may be a slow andgradual process for most LDCs [Marton and Singh, 1991: 206; Lall, 1990].

It must be stressed that (a) ‘the ongoing debates about proposals for global harmonizationof intellectual property protection are, in large measure, about the desirability of achievingsuch uniformity at a strong, rather than a weak standard of property rights enforcement’[David, 1993: 3], and (b) that the establishment of minimum standards for IP protectionis a rather complex task. GATT has not been ‘a standard-setting institution’ having reliedinstead on national treatment and the most-favoured-nation principle,54 although it is clearthat ‘national treatment achieves nothing in the absence of standards’ [Benko, 1988: 223]i.e. without the specification of minimum conditions against which a firm’s or country’sbehaviour can be measured, and (c) to achieve such an harmonization at world-wide levelimplies resolving any conflicts with regional schemes of IP protection as well asco-operating with already existing international institutions responsible in this area.

The issues involved in the harmonization of IP protection can be tackled by answeringthe following questions: (a) do the benefits exceed the costs of extending IP protection,i.e. is it efficient?; and (b) is the geographical distribution of these costs and benefits fair,i.e. is it equitable? Those that answer both questions negatively, or are unable to answerthem positively, must then be prepared to accept ‘an optimal geographical extent of patentprotection that need not be the whole world’ [Deardorff, 1990: 500-5]. If one then alsostrongly doubts whether higher IP protection would contribute to global welfare, then the‘presumption of global welfare deterioration’ becomes rather strong. Even assumingglobal welfare gains, there remains the high probability that bilateralism and its ‘statusquo’ reciprocity will prevail over the multilaterality required if national welfare lossesare to be compensated for [Subramanian, 1990: 518 and 521].

Yet the conclusion of the Uruguay Round on December 1993 marks the acceptance byLDCs of a new IP standard markedly different from LDCs’ original position. Theagreement presents the following main characteristics:

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(i) patents are protected for 20 years from time of filing. Inventions which maybe excluded from patenting are those affecting public order or morality,therapeutical methods, and plans and animals which are not micro-organ-isms.55 Also biotechnological inventions are to be protected under patent law,while plant varieties can be protected either by patents or by sui generissystems, to be revised after 4 years, such as the breeders’ rights of the UPOVConvention. With the exception of pharmaceutical products, compulsorylicensing of patents (allowed by Article 5A of the Paris Convention) isforbidden. The protection of a patented process extends to the productsdirectly obtained by that process. The burden of proof in case of allegedinfringement of process patents is also reversed;

(ii) copyrights and related rights such as computer programmes, original compi-lations of data and cinematographic works, are protected for the life of theauthor plus 50 years. Protection for 20 years is accorded to broadcastingorganisations. Computer programmes are protected as literary works underthe Berne Convention (of 1886, as revised in 1928, 1948 and 197156), thereare important additions to existing provisions on rental rights, and performersand producers of sound recordings are also protected;

(iii) industrial designs, including the lay-out of integrated circuits, are protectedfor at least 10 years on the basis of the WIPO ‘Treaty for the Protection ofIntellectual Property in Respect of Integrated Circuits’ (IPIC) of 1989. Theprotection extends to equipment containing a protected chip and infringe-ment involves compensation;

(iv) trademarks are protected for 7 years. The protection can be renewed indefi-nitely and compulsory licensing is forbidden;

(v) protection is extended to geographical indications, particularly for wines andspirits;

(vi) trade secrets and know-how which have commercial value are also protected.Rules and procedures are established for dealing with counterfeited andpirated goods. In cases of ‘wilful trademark counterfeiting or copy rightpiracy on a commercial scale’ the punishment includes ‘imprisonment and/ormonetary fines sufficient to provide a deterrent’;

(vii) the effective IPR enforcement mechanism is available to both foreign right-holders and nationals. Dispute settlements take place under GATT/WTO,57

while the operation of the TRIP agreement and governments’ compliancewith it is to be monitored by a Council for Trade Related Aspects ofIntellectual Property Rights, which is to be created;

(viii) the agreement is to be implemented, and national legislation brought intoline, after a one year transitional period for DCs, 5 years for LDCs and EasternEuropean countries, and 11 years for the least developed countries. LDCswhich currently do not provide product protection have up to 10 years tointroduce such protection.

Clearly, most of these elements go far beyond minimum standards. In fact, as a result ofthis first-time introduction of the most-favoured-nation clause in an international IPagreement, foreign nationals, to whom any advantageous treatment must be extended

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immediately and unconditionally, may enjoy a more favourable treatment than nationals;the 20 year term for patents constitutes a world-wide maximum as does the requirementof protection for chemical processes and substances and the inventive step requirement[Ullrich, 1989: 157 fn. 85]; compulsory licensing is even more restricted than the ‘ModelLaw for Developing Countries on Invention’ proposed by BIRPI (the secretariat for theInternational Bureaux of Intellectual Property, replaced in 1970 by WIPO) in 1965[Penrose, 1973: 779-83]; and, finally, rental rights and protection against unauthorisedrecording of life performances go beyond the Berne Convention. Furthermore, article27.3 requires every country to introduce some form of IPR system for seeds and plants,although it can choose the kind of monopoly to apply, which basically means eitherpatents or breeders’ rights. Yet, not only are there countries like India which forbid IPRsfor ‘a method of agriculture or horticulture’ (art. 3(i) of the 1970 ‘Indian Patent Act’),but by requiring an ‘effective’ IP protection (as in the American Section 301) theagreement implies that such a system will not be determined by individual countries butby the GATT [Shiva, 1993: 556].

Finally, since bilateralism tends to set standards and modes of IP protection that ‘havenot been established as either the most effective or the most desirable methods ofprotection’, their incorporation into a multilateral accord will only perpetuate the ineffi-ciency of these standards. Therefore, the US view that some form of protection is moredesirable than none seems very short-sighted: ‘it is not necessarily good for everyone andis perhaps counterproductive for the US in the long-run’ [Mody, 1990: 225-6].

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7. HARMONIZATION AT THE REGIONAL LEVEL WITHPARTICULAR REFERENCE TO THE EC’S SINGLE MARKET

The previous section contained a suggestion that the optimal geographical extent of patentprotection need not be the whole world. The EC offers an instructive example of thedifficulties of the international harmonization of both standards and IP protection, andhow these difficulties may be tackled. It can also serve as a model for a specificallyregional harmonization process. Naturally the EC is also interested in stronger IPprotection outside the Community, particularly in LDCs.

The Treaty of Rome, which established the EC, decrees that no member state can refuseto import goods produced by other member countries, but exempts restrictions protectingthe quality of life (art. 36) i.e., standards of safety, health, etc. The Treaty also states thatnational norms directed at protecting quality of life should be made similar in order topermit the free movement of goods within the Community (art. 100). The same appliesto IPRs, since a ‘Europe without frontiers’ cannot materialise if these vary widely frommember state to member state.

The Treaty allows two routes for the harmonization of IP protection within the commu-nity. The first is the principle of mutual or reciprocal recognition, which can be construedfrom Articles 30 and 36, and the second is harmonization, or the bringing closer togetherof national norms. The second approach derives from Article 100 and was followed untilthe beginning of the 1980s. The problem has been its political impracticability: stateswith higher standards resisted accepting the lower standards that emerged from thebargaining process which was inevitable under the rule of unanimity established byArticle 100. Furthermore, the process interferes with each country’s autonomous right tofind an equilibrium between state intervention and the market’s self-regulating power[Good, 1991: 399].

Therefore, by the middle of the 1980s the EC’s approach shifted towards mutualrecognition. Under this so-called ‘new approach’, the EC has confined itself to a totalharmonization of objectives in the fields of health, safety, etc., while the standardisationof the means for their implementation was left to national public authorities and theprivate sector. Furthermore, a qualified majority is now sufficient to determine theobjectives for technical harmonization (art. 100A of the Single European Act (SEA)).When technical harmonization concerns protecting the quality of life, however, it isstipulated that the process should ‘take as a base a high level of protection’ (art. 100A ofthe SEA). The conditions which producers must meet to be able to sell their productsrepresent a minimum for them, but a maximum for the controlling authorities. This ‘newapproach’ represents an attempt not only ‘to accelerate both harmonization processes atthe Council level and European standardisation processes at industry level’, but also to

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provide ‘more flexibility for innovation and easier market access’ for producers frommember countries [Pelkmans, 1987: 249-53 and 260].

In 1990 a ‘Green Paper on the Development of European Standardization’ proposed theestablishment of the ‘European Standardisation System’ and a redefinition of the tasksof the European and national standardisation bodies. The previous year the Council ofMinisters had approved the guiding principles underlying a Commission Memorandumon ‘A Global Approach to Certification and Testing’, since the assessment of a product’sconformity to essential requirements constitutes a rather central element to the elimina-tion of technical barriers to trade [Walle et al., 1990: 1566].

With respect to the quality of the product, the ‘new approach’ enacted by the resolutionof 7/5/1985 [Previdi, 1990; Walle et al., 1990] aims at guaranteeing a minimum levelwhich competition can only improve.58 This minimum level is obtained by establishing(a) simple general clauses for the protection of collective interests such as safety, health,and environment, rather than precise technical specifications, (b) a consultative processamong the various parties involved in what is officially referred to as ‘normalization’ or‘the organization of consensus’, (c) a system for confirming the observance of technicalspecifications, and (d) a system of inspection and testing of marketed goods. To preventthe different national practices and capabilities, with respect particularly to (c) and (d),hampering the circulation of goods among member countries, there is the principle ofreciprocal recognition, already adopted in 1969. To this principle has been added, first in1984 and then again in the ‘new approach’ of 1985, the objective of harmonising the ruleson control or certification activities. The result has been the provision of a single EC mark(see [Gielen, 1992]). However, if quality marks and national marks certifying conformityto national standards are allowed to co-exist with the EC mark, they may once againbecome de facto, technical barriers [Walle et al., 1990: 1562]. It seems, therefore, thatthe EC Commission has not abandoned its intention to replace national standards withEuropean standards.

The creation of an EC-wide organisation for industrial quality (including the EuropeanOrganisation for Testing and Certification, and the EC mark) is certainly crucial to theSingle Market, but it may also constitute a serious obstacle for extra-EC goods. In otherwords, there is a danger that European technical specifications will be developed so asto frustrate extra-EC imports. The danger is even more real for LDCs, whose exportscannot always achieve these standards, given their limited technical capabilities and thehigh costs involved in the required quality control.59

None of the EC Treaties contain measures specifically focused on IPRs, except for amention in Article 36 of the EC Treaty, so that IPRs are created and protected only bynational law. Nevertheless their regulation has proceeded on the basis of the fourfreedoms and the anti-competition principles. Following the 1985 White Paper and theSEA, the EC’s drive toward IP harmonization has been based on the Article 100A of theSEA. It has been recognized that reliance on national laws and national courts is notentirely satisfactory. ‘Harmonization of the laws of the member states would eliminatemany problems’ [Jones, 1992: 686-7] particularly the inconsistencies between EC lawsand the IP laws of individual member states. Since the unification or reconciliation ofdifferent IP laws is crucial for the creation of a smoothly-operating internal market, aseries of measures have been adopted or are being discussed.

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(i) The Commission issued the ‘Green Paper on Copyright’ in 1988 (with afollow-up in 1991) followed by draft directives on terms, rental rights,broadcasting, personal data privacy and data bases. A directive (CouncilDirective 91/250) on computer software was adopted in 1991. This directive‘presents an innovative synthesis of various approaches to the principalproblems in software protection’. The harmonization of the copyright lawsof member states requires substantial changes in these laws and implies amoderation of the essentially territorial principle of copyright protection,60 aprinciple which also clashes with EC freedoms aiming at the elimination ofall barriers among member states. The directive also ‘seemingly accepts thepractice of reverse engineering’ and ‘effectively ends the discussion over suigeneris protection for programs’ [Raskind, 1992: 729-32]. All these meas-ures, after a long period of inactivity in the field of copyrights, demonstratethe Commission’s choice of a global approach to achieve a comprehensiveminimum protection in all member states as a basis for the further and morespecific harmonization of protection of authors’ rights and similar rights. TheGreen Paper also makes a brief reference to the conflict between IPRs andstandards, since whereas standards give manufacturers open access to tech-nical specifications, IPRs create a monopoly. This conflict is part of a widerissue: the conflict between IPRs and the free movement of goods and freedomof competition pursued under the Treaty of Rome. The Green Paper recog-nises that IPRs have become a serious issue for standardisation and suggeststhat ‘if specifications covered by an intellectual property right are proposedfor a standard, serious consideration should be given as to whether suchspecifications should be adopted. This should be envisaged only if licenceswill be granted on fair and reasonable conditions’. However, when the GreenPaper stresses that the process must ‘reconcile the need to adopt effectivestandards, the legitimate interest of IPR as patent owners, and the need tomaintain the transparency of procedures and compliance with competitionpolicy’, this seems to verge on accepting compulsory licensing when apatentee is not prepared to licence specifications which are indispensable forthe setting of a standard [Good, 1991: 401-2].

(ii) Harmonization directives have been issued governing patent-related areas,such as biotechnical inventions, breeders’ rights, semi-conductor chips, andcomputer programmes. Yet the EC has been unable to develop a single setof patent rules that are applicable Community-wide, even though the variousnational laws are more uniform than those covering other IPRs because allEC countries are members of the Paris Convention and many are signatoriesto the 1973 European Patent Convention (EPC) which has created the bestknown and, in economic terms, largest regional patent system. The EPC cameinto force in 1978 when the European Patent Organisation was establishedwith its executive arm: the European Patent Office (EPO). Both functionunder international law. EPO is an intergovernmental body which presentlygroups 17 countries (12 from the EC, 4 from EFTA and Monaco).

The ‘European patent’ which it issues provides protection in all statemembers simultaneously since its duration, scope, and legal status aregoverned by uniform and binding rules. Hence the patentees’ rights areequally guaranteed, i.e. enforced, throughout the territories covered by the

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EPC. The EPC also contains the conditions which must be met before a patentcan be granted. Although the European Patent Organisation is legally sepa-rate from the EC, it will be empowered to grant the ‘Community patent’ assoon as the EC decides to put into effect the system agreed upon under theLuxembourg Convention of 1975 and the Community Patent Convention(CPC) of December 1989. The European patent will have equal validity inthe countries which have ratified the Community Patent Convention. Sincethe two patents co-exist, the applicants can ‘take out exactly the level ofprotection they think appropriate’ [Braendli, 1993: 4] and although infringe-ment actions will remain in national courts, they will have Community-wideeffects.

As a result, national patent legislation has necessarily been largely harmo-nised, since each country acceding to the EPC must ensure that its IPprotection and its patent law conform to the binding provisions of theConvention. National patents are still available, although ultimately theyshould be replaced by the European one. Yet, such regional harmonizationgenerates its own problems, as demonstrated by the different treatment ofparallel imports (see note 41) according to whether they originate from anEC country licensee or from a third-country licensee. In the first case, ‘theeffective ‘protection’ of traders engaged in such traffic’ provided by EC rules‘can assist sheer piracy’ [Dyekjaer-Hansen, 1992: 35].

The need to expand IP protection not only outside national boundaries, butalso beyond the region has made it necessary for the EPO to interact with theJapanese and American Patent Offices.61 Since 1983 these three offices haveorganised several joint technical co-operation projects aimed at facilitatingaccess to patent protection [Braendli, 1993: 6].

Policies on licensing are more restrictive in the EC than in the US becausethe EC finds it difficult to see vertical restrictions as a response to a marketfailure, as does the US anti-trust legislation. In the EC’s perception, theserestrictions are more likely to reduce than enhance competitive efficiency.Furthermore, ‘the EC policy on licensing reflects the overarching politicalgoal of promoting intra-community trade and removing barriers to such atrade’ [Ordover, 1991: 51-52].

(iii) In order to eliminate the need to apply for trademarks in each member state,the EC has sought to both harmonise the very different existing nationaltrademark laws62 and to develop a Community Trade Mark with a singleregistration valid throughout the Community. The first objective has beenpursued through Council Directive 89/104, which is not however a full-scaleeffort at harmonising trademark legislation. It only relates to registeredtrademarks, sticking to establishing uniform conditions for obtaining andmaintaining trademarks, providing a definition of signs that can be used astrademarks, setting rules for the refusal or invalidity, and defining the rightsof trademark owners.

The creation of a Community Trade Mark registration system,63 hasgenerated several proposals, starting with COM(80)635 of November 1980,none of which have yet become an agreed directive.

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8. OTHER IP AGREEMENTS

In addition to steps taken within the EC, the DCs have initiated a number of arrangementsfor the protection of specific new technologies [Van Wijk and Junne, 1993: ch.2] whichoperate nationally, regionally, or internationally.

For semi-conductor chips the 1984 Protection Act (SCPA) passed by the US is stricterthan the copyright legislation from which its requirements are derived, but less stringentthan patent law.64 This has forced other DCs, including the EC, to emulate it and evenestablish the IPIC. Although the 1986 ‘chip pact’ between the US and Japan, and theIPIC, are both expressly directed at preventing the copying of original chip designs, fewcases have come to the courts in the US. This does not indicate that piracy has beeneliminated, but that the specific objective of these two instruments, namely preventingpiracy, was wrong. US leadership in this sector has continued to decline. It now appearsthat piracy does not really exist in this field, because the chip cannot be copied withoutduplicating the processes involved in making it, which implies long-term research andreverse engineering. Hence, the SCPA is ‘a solution in search of a problem’ [Correa,1990: 96-97].

Section 6 of the TRIPs ‘Review of Draft Final’ of April 1992 may expect the same fate,since even when dealing with straightforward piracy there is more fuss than substance inmuch of the quarrel regarding IP protection. Hence even if an ‘Anti-Counterfeiting Code’is adopted, as many recommend, ‘IPRs will, no doubt, be one of the main issues ineconomic international relations in the twenty-first century’. Contrary to Braga’s view[Braga, 1989: 313, 309 and 264] IPRs will remain largely, though not exclusively, aNorth-South issue [Greenaway and Sapir, 1992: 515; Mody, 1990: 234]. It does notappear that the main objective of DCs is to protect their markets from imports ofcounterfeit goods or from acts of technological piracy. In any case, such protection islikely to be more effective if enforced at the source of these activities, or by importcontrols at the borders, without needing to activate the complex GATT machinery. GATTis invoked because the alleged acts of piracy ‘relate to rather important markets of thirdcountries (rather than to the domestic market of a given industrialized country) or to thedomestic market of the country accused of providing only inadequate protection if thatmarket is large and attractive enough’, such as those of the NICs [Ullrich, 1989: 149-50].

At any rate the protection offered by IPIC and the TRIPs draft agreement, the latterexpressively referring to IPIC, allow independent development and reverse engineeringthat are excluded under the patent system. But it may increase the barriers to new potentialentrants, hence reinforcing ‘the tendency of innovative firms not to part with theirtechnology’. And it may also negatively affect the diffusion of microelectronic innova-tions through trade, since governments have to stop the importation of infringing chipsor of the goods incorporating them at their borders. The establishment of this new formof IP protection for the layout design of integrated circuits ‘will, in sum, facilitate the

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international trade of chips under exclusive rights but will, most likely, promote neitherthe innovation nor the diffusion and transfer of the relevant technology to developingcountries’ [Correa, 1990: 98-99].

Computer programmes, for which the major problem has from the beginning been illegalcopying of software for retail sale or internal use, are generally protected under copyrightlaws. The EC has taken the same path with its 1991 Directive, which establishes commonstandards for the whole Community.

The most important DCs have significantly extended their definition of IP protection forbiotechnological inventions, i.e. the exploitation of biological process to produce newproducts, devices and organisms. The objective is to provide patent protection. But whilethis has been relative easy with plants, the controversies surrounding the patentability ofhigher organisms, such as animals and human material, have kept the issue unresolvedin most countries. While in the US the actual granting of patents on life forms other thanmicro-organisms has not settled the controversy, in Europe the industrial sectors inter-ested are pressing for ways to be found to overcome the exclusion of these life formsfrom patentability established by Article 53(b) of the EPC. The broadening of patentcoverage to plants continues to be strongly opposed in Europe. The so co-called breeders’exemption of the Plant Breeders’ Rights system is an attempt to avoid ‘the privatizationof life’.65 Breeders’ rights, a system of protection distinct from patents, are offered by the1961 International Convention for the Protection of New Varieties of Plants (UPOVConvention).66 This was revised in March 1991 under pressure from large R&D-basedcompanies working in advanced biotechnology. The revision has (a) increased themonopoly role of breeders’ rights, and (b) removed the ‘farmers’ exemption’ which gavefarmers the right to save their own seeds, so that they now have to pay royalties for doingso. Twenty states are party to UPOV, which has become the most widely-recognisedsystem for industrial property protection for plant breeders. The rights have a durationvarying from 18 years to 25 years. Although no LDC is so far party to the UPOVConvention,67 changes in IPRs in this field are necessary in some LDCs ‘not only torespond to external demands but also to protect local developments’ [Correa, 1992: 157].

There is also disagreement between the US and Europe on animal patents, allowed in theUS although Europe seems more hesitant about accepting the idea. Actually, althoughArticle 53(b) of the EPC establishes the non-patentability of essentially biologicalprocesses for the production of plants or animals, its interpretation has been narrowlyconstrued by the Technical Board of Appeal with the result that ‘it is possible to obtainpatents in the EPO for a wide range of genetically modified organisms’ [Nott, 1992: 83].Furthermore the recently signed UPOV Convention lacks any ban on protecting plantsby both variety rights and patents rights,68 thus implying the possibility of dual protection.Meanwhile, the EC Commission is preparing a directive on harmonising the legislationof member countries, legislation which should also be amended to accommodate theUPOV Convention. The opposition focuses on ethical questions as to whether or notanimals and plants should be subjected to patent or variety protection, and regarding therisks of releasing dangerous organisms into the environment.69

As for the LDCs, although they possess most of the genetic resources available in theworld, they ‘lack the financial and technological resources to take full advantage of theirwealth’. The largely informal and collective innovation which they have so far contrib-uted ‘does not fit into the concepts and requirements of intellectual property rights, which

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are based on criteria of novelty and inventiveness’. Since no alternative to IP protectionhas yet materialised [Correa, 1992: 154],70 rights to, and control over, biologicalresources will be determined by IPRs, thus causing ‘the uncompensated free flow ofresources and knowledge from the south to the north’. The ‘Biodiversity Convention’signed at Rio, in 1992, although not by the US,71 reflects ‘the tensions and contradictionsbetween farmers’ rights (see note 70) to ensure biodiversity conservation and IPRs forthe seed industry to ensure market expansion for biotechnological commodities’ [Shiva,1993: 555 and 558].

There are several regional schemes outside the EC, the North American Free Trade Area(NAFTA) being the latest addition. One of the very important problems it may pose isthe strengthening of the dependence of the Americas on US technology and manufactur-ing methods. Since these are not necessarily the best for every type of production, theirgeneralised adoption could seriously affect Latin American countries’ competitivenessoutside of the region. NAFTA will also mean another push for the harmonisation of thewhole region’s IP standards at the level and style of the US. To prepare itself for enteringNAFTA, Mexico has started to strengthen its IP regime in order to reduce disincentivesto investment and technology flows. One revealing example of the effects of NAFTA isthe severe restriction it imposes on Canada’s relatively liberal compulsory licensingregime for patented pharmaceutical, and the rise in prescription drug prices which isexpected to result.

The Caribbean Basin Initiative launched by the US in 1983 to support that region’sdevelopment is also meant to discourage the governments of recipient Caribbean nations‘from ‘poaching’ and rebroadcasting copyrighted satellite television transmissions byconditioning receipt of benefits on an executive branch finding of an absence of suchactivity’ [Davis, 1991: 513].

In the Third World, there are two official organisations in Africa, the African RegionalIndustrial Property Organization (ARIPO) for the English-speaking countries and theOrganisation Africaine de la Propriété Intellectuelle (OAPI) for the French-speaking partof the continent. Both organisation also grant utility model protection,72 although in bothareas ‘the level of patent activity appears to be low’ [Lesser, 1990: 13].

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9. ARE THERE ALTERNATIVES TO HIGHER STANDARDS OFIP PROTECTION?

Among the theories dealing with conflicts of interest in international relations, the ‘newliberal institutionalism’ maintains that co-operation can develop and be maintained bysovereign, self-interested states acting with a mix of conflicting and complementaryinterests even under anarchical conditions, i.e. where there is no world government andcheating and deception are endemic. Under these conditions, concern about complianceis a significant barrier to co-operation, but the theory posits the possibility of incrementalreforms in institutions precisely targeted at further reducing transaction costs. Given thechoice they face, between co-operation and cheating, states’ behaviour can be describedin terms of a prisoner’s dilemma. Applied to GATT negotiations the theory expectsco-operative impulses to prevail. For the closely related TRIPs agreement it appears that‘the trading environment will not promote efficiency unless it is accompanied bydomestic reform’ to generate the necessary convergence or harmonization. In order toreach this result the theory assumes that each actor obtains positive payoffs and ‘the morefuture payoffs are valued relative to current payoffs, the less incentive to defect today ----since the other side is likely to retaliate tomorrow’ [Wolfhard, 1991: 122-3]. Thisassumption is unfortunately not at all confirmed by the literature reviewed so far, whichinstead shows that, whereas DCs are sure to gain now and later, LDCs’ present gains aresmaller or even negative and future gains are rather uncertain. It has also been shown thatthe level of IP protection is not very relevant for the rate of acquisition of foreigntechnology. The strengthening of IP protection legislation in many LDCs might not resultin an increase in technology transfer, better access to advanced technology or moredomestic innovation: harmonization at higher standards could ‘freeze the existing inter-national division of labour by way of the control of technology transfer to the ThirdWorld’ that it would give to foreign innovators, particularly TNCs [Braga, 1989: 252].As for the impact of different levels of IPRs on international trade, no systematic evidenceexists but preliminary results seem to indicate that bilateral trade may be negativelyaffected by weak patent regimes [Maskus, 1993: 163].

It is also quite evident that most of the pressure for the harmonization of IP protection athigher levels comes from the R&D-intensive sectors of DCs and from their complexstrategy to meet market competition. This is particularly evident in the pharmaceuticalindustry’s need to meet competition from the generic drug industry. On the issue ofpatenting pharmaceuticals, DCs and LDCs could not be more divided. Patents are‘fundamental instruments ... to sustain very high drugs prices’ and profits which in turn‘finance R&D whose output provides tomorrow’s competitive edge’. The industry ishighly regulated and ‘over time, this dynamic interaction between industry and govern-ment knits the web and nature of regulations’, including the pressure for stricter patentprotection. This applies equally in the LDCs, and since the potential markets for patented

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drugs in LDCs are substantial, LDCs have become ‘worth more to brand-name companiesthan the extension of patent protection in industrial countries’ [Nogues, 1990: 101-2].

The only case in which stricter IP protection is a condition for the transfer of technologyis where the fear exists that competitors might take advantage of the situation andappropriate the technology for themselves. Except in very specific cases, there is,however, ‘strong evidence that patents do not effectively deter imitation by rivals for verylong’. Whether or not this evidence, gathered in DCs, is also validated in LDCs remainsto be seen [Westphal and Evenson, 1993: 50-1].

This leaves open the possibility that private and public enterprises in DCs may, undergiven circumstances and for specific technologies, find it convenient to transfer technolo-gies irrespective of the level of IP protection in the receiving countries. The probabilityof this is increased by subsidies from DC governments with an interest in the transfer asa means to achieve some other, more general, objective. There are now larger numbersof actors involved in research activities and research results are now often of significanceoutside the sector in which they have been developed. These factors may contribute tothe acquisition of technology by LDCs regardless of the level of their IP protection.

One possible benefit expected from harmonization is that it would reduce the risk ofcompetitive regulatory environments. But for this purpose harmonization does not needto take place at a higher level of protection, so long as the treatment of IP is rather uniform.Harmonization at a higher level, while being beneficial to the more advanced LDCs readyto move into higher-technology sectors, will only force the weakest countries to compete,i.e. to pay more, even for more traditional technologies.

A relatively unexplored aspect of harmonisation is the impact it may have on the creationand diffusion of so-called ‘global public goods’, such as reductions in emissions ofindustrial pollutants that contribute to the destruction of the ozone layer or to globalclimatic change. This objective is dependent on ‘widespread adoption of advancedmanufacturing technologies and substitution of fuels and materials, which also will relyon inward transfer of technology by developing economies’. This includes many of thoseprocess technologies that involve a lot of tacit know-how. ‘The extensive internationali-zation of this industry is contributing to the more rapid international transfer of technolo-gies essential to this particular global public good’ [Mowery, 1993: 57-8]. This transferclearly takes place regardless of the level of IP protection. In fact, once the enterprisesgenerating the technologies are sufficiently internationalized, the process either compen-sates for the difficulty of transferring the tacit components or it makes the companies ableand willing to create the necessary capabilities in the receiving countries. In both cases,however, they make the transfer without jeopardizing their profits, which may be kept atacceptable levels by any subsidies that DC governments are willing to offer in pursuingtheir national goals or even some global public good.

Incidentally, it seems interesting to note that the sectors in DCs that receive most of thesubsidies, which are permitted by GATT but clearly violate anti-trust principles, are alsothe proponents or enthusiastic supporters of the TRIP initiative. Besides, the anti-trustnorms that have accompanied the national and international development of intellectualproperty rights are ‘custom-tailored to the existing national and international IP protectionsystem’.73 Since GATT can address only the signatories and not their nationals, GATTIP protection ‘would not be counter-balanced by a corresponding set of anti-trust rules’.74

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GATT would therefore have to embark on the difficult task of formulating ‘an additionalantitrust system that addresses the Contracting Parties’ [Fikentscher, 1989: 122-3].

The whole discussion on IP protection, however, becomes less relevant if one considersthat ‘much of the knowledge about how to perform elementary processes and about howto combine them in efficient systems is tacit, not feasibly embodied and neither codifiablenor really transferable’ [Westphal and Evenson, 1993: 3]. Thus LDCs’ paramountobjective is to strengthen their limited technological capability, together with the im-provement of ‘incentives’ and ‘institutions’, as in Lall’s three-pronged approach (see note22). The three basic blocks of this approach make up a comprehensive framework in afield of policy-making that ‘is under-researched, at least as far as developing countriesare concerned’ [Lall, 1990: 65]. All three blocks imply a direct role for the public sectorin education and training (capabilities); in establishing sensible and stable macro-eco-nomic policies (incentives); and in effectively regulating domestic competition andpromoting inter-firms linkages and co-operative technology efforts with national institu-tions such as universities and research centres (the so-called ‘infratechnology’) [Lall,1990: 64-7]. At any rate, the high correlation between growth and education variables,such as primary and secondary school enrolment rates is well established.

Assuming that the strengthening of domestic technological capability is the main objec-tive, it follows that no single approach to IP protection exists for each and every LDC.Individual countries should be left free to choose the most appropriate system accordingto the specific stage of development, the nature of the industry,75 and the developmentstrategy pursued by each of them.76 The approach chosen should be adapted over timein line with the progress they make. After all, ‘while the developed countries are seekingto universalize rules specific to their own patent laws at the current stage of development,developing countries are trying to maintain the same rules that were in force in thedeveloped countries at earlier stages’ [Bercovitz-Rodriguez, 1990: 11] when DCs did nothesitate to use low levels of protection in order to promote their infant industries [UNCTC,1990: 5]. The US and other DCs appear even to be ‘pushing for provisions substantiallydifferent from those prevailing in the industrialized West’ [Damschroder, 1988: 395].

Therefore, each LDC faces the following tasks:

(a) to identify their particular conditions and needs;

(b) to create or strengthen their technological capability, including both national andfirm-level capacities to absorb technology. The latter are essential for the exploi-tation of the more advanced technologies transferred from abroad, particularlytheir tacit components; and

(c) to design the most appropriate policy for enhancing the transfer of the requiredtechnology.

The discussion about TRIPs relates mainly to the design of policy. All these tasks can bebetter performed with continuous technical assistance by specialised international agen-cies and by the more willing DCs. The emphasis put on (a) challenges the justificationfor harmonization, while (c) implies a stricter IP protection in many cases, but not always.Furthermore, (c) represents only the first element of a technology policy [Dahlman andNelson, 1993: 7], while the development of an adequate technical human capital base, aspart of (b), must be linked to trade and economic policies that enhance domesticcompetition and economic openness.

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If the concept of technology is extended to include the organisation and management ofproduction systems, from research to design, production, distribution, and marketing,then what is the importance of norms and standards, and even IP protection as currentlyunderstood, and their harmonization for the acquisition of technology by LDCs? Thecrucial element for an effective acquisition of technology becomes firstly, to build up anadequate human capital base, and secondly, to explore more accurately the conditions forthe utilisation of other means of obtaining foreign technology than those generallyemployed, namely purchase of new equipment, FDI, and technology licensing. Otherrecognised means to obtaining foreign technology are the use of non-proprietary tech-nology, acquisition of knowledge from returning skilled nationals, R&D, reverse engi-neering, copying, foreign publications, trade fairs, data bases, foreign experts, informallinkages with nationals abroad, local education, and training [Dahlman, 1993: 313].

In fact, ‘effective science and technology policies are not separable from economicpolicies that have the effect of raising the payoff to investments in the improvement ofscientific and technological capabilities’77 [Rosenberg, 1990: 149]. As such they oughtto be integrated into overall development strategies resting on the essential promotion ofan adequate technological infrastructure, which is also needed for the effective absorptionand adaptation of imported technologies. Although this technological infrastructurerequires the establishment and expansion of local productive facilities, the developmentof human resources is more crucial. Training facilities of various types and levels aretherefore necessary, together with increased institutional capacities to provide techno-logical support services. These support services include applied research capability andclose links between R&D and production sectors; information systems, including alter-native technology sources and the prescription and maintenance of standards; metrology,and the development of subcontracting and support facilities for small and mediumenterprises [Marton and Singh, 1991: 209]. The economic variables involved have beenconveniently grouped under three headings: incentives, capabilities and institutions. Acountry’s industrial development is largely the result of the complex interactions takingplace among these three sets [Lall, 1990: 11].

Naturally, the development of the technological infrastructure is essential for the transferof tacit knowledge from abroad. Such a development must be accompanied by measuresaiming at identifying and exploiting the tacit knowledge available inside LDCs, whichin turn requires that close links be established between learning institutions and produc-tion sectors and activities. Since technology ‘is specific to applications and accumulatesin firms along paths that reflect a technological logic’, firms and countries run along thosepaths at a pace determined by factor intensities and by the levels and patterns of publicand private investment, particularly investment devoted to R&D and training [Pavitt,1985: 19]. None of the various capabilities imparted by technology transfers, whetheroperational, duplicative, or innovative capabilities,78 ‘will accrue as a matter of course topassive recipients of technology: each requires an increasing level of technological effort’[Baranson and Roark, 1985: 27]. This points to the need for proper and diversifiedtraining of the domestic labour force. It is the availability of an indigenous technologicalcapability that enables a country to respond to opportunities, but also to create themaccording to its own development strategy. Unfortunately, even though the building ofindigenous technological capabilities has been advocated by many, ‘there is as yet noclear statement of what this really means at different stages of development and differentsectors of the economy’ [James and Watanabe, 1985: 11].79

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The technological gap between DCs and LDCs is mostly a difference in availableknow-how, i.e. a difference in the practical and conceptual skills embodied in their labourforces. In a time of growing questioning and re-evaluation of development assistance,this need for training suggests that the so-called international community might eschewpharaonic projects, and many other types of intervention which have rarely enhanceddevelopmental goals, in favour of concrete and long-term support for technologicalcapability building.

The transfer of know-how technology is largely a question of training and teaching, andit can be accomplished through formal educational programmes and international ex-changes, but even more through informal learning-by-doing and on-the-job-training.Hence the creation of a scientific and production labour force is a function of strength-ening education at all levels, including vocational training, in-service training, appren-ticeship and training abroad80 and by exposing the largest possible number of people totechnical and technological environments.

Since ‘tacitness implies the need for a stream of investments over time to acquire mastery... and tacit knowledge can only be acquired through investments in learning’ [Westphaland Evenson, 1993: 4], part of the investments needed to give LDCs’ educational systemssuch a boost must come through international co-operation. This type of involvementshould also ease DCs’ worries for the respect for human rights and democratic rule in thecountries with which they co-operate.81

The recent experience of Japan and the Asian NICs amply demonstrates that thecontribution of training is of most importance during the early stages of economicdevelopment [Kim and Dahlman, 1992: 451; OECD, 1988: 71 and 81] and that invest-ments are better concentrated at the secondary and post-secondary levels to create a large,skilled workforce in science and engineering [Mowery and Rosenberg, 1989: 109-13 and295]. However, rather than favouring public-sector research facilities, the aim should beto maximise the investment in training mid-level technical workers, such as skilledtechnicians, BS-level engineers and scientists [Mowery, 1993: 46-7].

Although it has been shown that ‘there are advantages to backwardness that almostcertainly include the opportunity to borrow technologies developed elsewhere’ it is alsotrue that ‘the exploitation of [these] potential advantages in practice requires supportinginstitutions, notably a strong education system and an open regime for foreign trade andinvestment’ [Dollar, 1993: 434]. And in fact the creation of an appropriate institutionalframework has been shown to be crucial to any process of technological accumulation[Soete, 1990]. This is all the more relevant when considering East Asia’s industrialisation,the latest interpretation of which is that, since ‘late-industrializers are entirely dependenton ‘learning’ in order to compete,’ ‘the strategic focus of the firm tends to be on theshopfloor, because that is where borrowed technology is made to work’ [Amsden, 1991:283 and 285]. Fortunately, technical capability can be influenced, though not in the shortrun, by appropriate government policies. Since licensing has also been shown to be afunction of the availability of technical capabilities [Contractor, 1985], its use may risewith the diffusion of training in the receiving LDCs.

In fact even copying and piracy require a substantial reverse engineering capacity whichis not only highly productive but also generates adaptive and derivative inventions, theso-called downstream patenting [Evenson, 1990: 352]. Such a capacity can and must becreated. Yet market failure characterises the creation and diffusion of technology,

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particularly if the market for the education and training of the workforce appearsinefficient. This further underlines the constructive and critical role that the state mustplay in LDCs. In order ‘to overcome the problems of inefficient markets, predatorysuppliers and corrupt officials’ such a state must also be ‘a strong state’ [Vernon, 1990:267 and 270]. To obtain it, foreign assistance is of little use, but the level of IP protectionis in most cases even less relevant.

During the process of technological accumulation the amount of IP protection that acountry can support will change, tending to rise with the country’s overall developmentaccording to the ‘threshold argument’. The IP legislation and the instruments it employs(e.g. utility model vs. patent systems) will have to be adjusted accordingly. The approachdepends, however, on DCs’ willingness to allow LDCs to retain national treatment andmove toward the threshold at their own pace, instead of being herded together byinternational mandate. This implies that DCs should abandon the search for general highstandards of protection for different categories of IP, which would enable the owners toeffectively enforce their IPRs and would provide the contracting parties with operativedispute settlement procedures. It also implies that LDCs should concentrate on definingspecific substantive IPRs which could be incorporated in their national legislation. If thisis not as ‘neat’ a solution as the universal harmonization wanted by some DCs, it is amore realistic and practical one. This has been demonstrated by the wide acceptance ofthe UCC, the minimum rights of which are considerably lower than the standards of theBerne Convention.

The feasibility of this approach depends also on the dispute settlement provisions. Theutilisation of GATT procedures ‘in a substantively uncertain setting of this kind wouldrun into considerable difficulty ... and the result would be a dispute settlement procedurethat is not taken seriously, and that is used simply as a formality, or legitimation device,before recourse is had to the real remedy, namely, retaliation’ [Naresh, 1989: 361]. Sinceit is difficult, however, to retaliate against pirates, these measures are bound to affectmainly the offending country’s export-oriented sectors, exactly those sectors that bestunderstand the importance of IP protection. The actual imposition of sanctions wouldundermine their support for reform of the country’s IP legislation or for higher standardsof protection [Braga, 1989: 319]. Moreover, whilst individual acts of infringement canbe stopped by specific import bans, it is difficult if not impossible to determine theappropriate commercial sanctions in response to trade distortions allegedly due to lowstandards of IP protection. In these circumstances, general sanctions will only encourageprotectionism [Ullrich, 1989: 144-5].

At any rate, an agreement signed only by DCs cannot be expected to make muchdifference to the current level of international protection, since the gaps which the newstandards are supposed to fill are generally not found in the legislation of developedcountries. The LDCs do not really matter, as firms from DCs do not even bother to seekpatent protection there [Ullrich, 1989: 149-51]. It is therefore plausible to suggest thatthe proposals for the GATT IPP code are aimed at the newly industrializing countries, toforce them to adhere to standards of IP protection which fit DCs’ needs. In fact, ‘requiringhigh levels of industrial property protection from these countries amounts to no less thanthe attempt to bring back and to reserve to industrialized countries what they consider tobe ‘their’ technologies.’ A GATT IP protection system also threatens the role of WIPOand may even undermine the traditional system of international IP protection. The maindifficulty of including IP, and the other new issues, in GATT derives from the fact that

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‘they fundamentally involve domestic regulation which, ultimately, relates to nationalsovereignty’ [Greenaway and Sapir, 1992: 515]. Given that it is not possible to demon-strate that a higher degree of IP protection maximizes the national well-being of thecountries that have no capability to conduct R&D and only consume the goods andservices produced by it [Chin and Grossman, 1990: 91], conflicts of interest betweengovernments are to be expected.

Given therefore the consensus already existing for the draft ‘Anti-Counterfeiting Code’that was all but signed at the Tokyo Round, and the common interest to avoid the spreadof counterfeits, it should be possible to agree to tighten this code’s enforcement provisionsand introduce more effective dispute settlement procedures. IP protection could then begradually extended to other areas, starting with certain types of high technology goods[Naresh, 1989: 361]. If the result amounts to a ‘GATT à deux vitesses’, this might bepreferable to accepting a single IP protection system that penalises both the NICs and theremaining LDCs. The co-existence of different regulatory regimes could be accommo-dated, following the example of the EC in the fields of financial services and cross-borderinvestment, by adopting the principle of mutual recognition which ‘does not guaranteeeventual harmonization but is a pre-requisite to possible convergence across countries’[Greenaway and Sapir, 1992: 514].

The agreement reached on TRIPs represents the upgrading of the minimum level of IPprotection to provide a new international IP protection standard. The change reflects boththe growing globalization of economic activities and the adoption by LDCs of export-oriented strategies as well as developments in technological innovation, yet it seemsdebatable to claim that this ‘transition from classical free trade standards of GATT to newfair trade standards does not conflict with the aims of international development’ whichare so loudly proclaimed by governments as well as private organisations [Ullrich, 1989:130]. Moreover, it is likely that harmonization may result in less rather than more openmarkets [Hoekman, 1993: 1537].

The world economy is fast changing, and if the features that presently characterise thesituation of DCs, such as very low growth rates, large and growing unemployment, andthe emergence of rival and protectionist blocs, continue to prevail [Sideri, 1993] then thedifferentiation of LDCs would become even more noticeable. Except for a few NICs,each absorbed within one or other of the emerging blocs, the rest of the Third Worldmight have to return to some sort of import substitution strategy, not only because sucha policy makes the need for technological dynamism generally much less pressing[Cooper, 1992: 8], but also because it ‘will raise long-run rates of growth whenundertaken in a country with comparative disadvantage in R&D’ [Grossman and Help-man, 1990: 90]. Regardless of the present liberalization drive, the interventionist postur-ing that these trade and industry policies require, would also heighten the tensions andconflicts which fill the international economic system. Yet, while ‘the structure of tradepolicy is in fact in flux’, ‘the GATT system is clearly crumbling’, apparently unable ‘toregain its one-time vitality’ [Krugman, 1992: 439-40]. Hence, the drive toward globalharmonization might be halted by the appearance of different harmonization schemesenacted under the aegis of each bloc’s hegemonic country.

Meanwhile, growing international interaction and technological innovation are makingthe technological factor of ever-greater importance as a source of competitive advantage.IP protection is becoming integral to the design of economic policy in general and trade

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policy in particular. The struggle for the most ‘appropriate’ international IP systemreaches well beyond GATT and the agreement reached in the tormented course of theUruguay Round.

ENDNOTES

1. A survey of executives in the American motion picture and television, publishing and advertisingindustries conducted in 1984 found copyright infringement to be the most frequently mentioned barrierto trade [Benko, 1988: 221].

2. Officially this Negotiating Group deals with ‘Trade Related Aspects of Intellectual Property Rights,including Trade in Counterfeit Goods’.

3. It has been suggested that the word piracy should be replaced with the more appropriate ‘word "corsairs"because most pirates in Third World countries have all the legal mandates and abide by local laws to dowhat they do’ [Braga, 1989: 313]. Besides, the countries presently insisting on higher IP standards ‘werethe pirates of not even a century ago, and began to find a value in enhanced intellectual property protectiononly as their technological capabilities developed and their economic structures changed’ [Naresh, 1989:358].

4. Strictly speaking, IP covers copyright for literary and artistic works and related rights, while Dcs use theterm IP in an all-embracing manner to include all types of industrial property rights. Furthermore,trademarks ‘fall more appropriately under the economics of product differentiation and, despite theircategorization as intellectual property, they have an economic rationale which differs significantly fromthat of patents and copyrights’ [Benko, 1988: 218].

5. ‘Because industrial design partakes of both art and industry, it sits astride the Berne and ParisConventions’ [Reichman, 1989: 8]. For this reason integrated circuits were the object of a particular‘Treaty for the Protection of Intellectual Property in Respect of Integrated Circuits’ (IPIC), adopted inWashington on May 1989.

6. Trade secrets, also referred to as know-how, manufacturing data or technical assistance, are probablyone of the most important and least understood forms of IPRs. Trade secret protection supplements thepatent system, but while trade secrets may include business information not related to technology, patentsare limited to technological improvements of products or processes. While patent protection is absolute,the protection of trade secrets ‘only protects against disclosure by parties who derive the informationfrom the original developer’ [Keating, 1991: 61]. Furthermore, although the patent system is intendedto discourage duplication of efforts, trade secret protection may very well encourage such duplication.For trade law, this area is a much ‘neglected orphan in economic analysis’. See also Friedman et al.[1991: 61-65] .

7. It is also argued that ‘science, as a social organization, views knowledge as a public consumption good,while technology regards it as a private capital good’. The patent system is then presented as ‘bothinteresting and problematic because it represents a conjunction of the distinctive and antithetical moresof science and technology in regard to the treatment of new information. Looking backward it seeks toreward additions to knowledge that are disclosed, and does so on the basis of priority. But to finance theaward it looks ahead to a contrived limitation of access to the new knowledge’ [Dasgupta, 1987: 10 and12].

8. Fixed costs are by definition a source of scale economies in production, while the presence of learningpossibilities connected to the process of using a piece of knowledge (learning-by-doing, learning-by-us-ing, learning-to-learn) implies ‘not only an intertemporal externality, it implies ---- if powerful enough---- dynamic scale economies in production activities’ [Dasgupta and Stoneman, 1987: 3-4]. Since fixedcosts act as a barrier to entry and limit competition in R&D, this also tends to reduce wasteful duplicationof R&D spending. In respect of the increase in the number of firms, there is a trade-off between twotypes of efficiency: namely static efficiency, which pushes the price closer to marginal cost, and dynamicefficiency, which limits the actual cost reduction, while raising the total level of R&D spending in theindustry, at the same time as each firm spends less [Dasgupta and Stiglitz, 1980: 279-81].

9. For an interesting analysis of the distinction between science and technology, see Dasgupta and David[1987].

10. Empirical studies such as Taylor and Silberston [1973] have amply shown that patents rarely conferperfect appropriability.

11. Romer explains that each research investment generates not only a patentable blueprint, but also anon-appropriable contribution to the stock of general-knowledge capital [Romer, 1990].

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12. Hence, one can ‘expect a free-enterprise economy to underinvest in invention and research (as comparedwith an ideal) because it is risky, because the product can be appropriated only to a limited extent, andbecause of increasing returns in use’. Furthermore, ‘the incentive to invent is less under monopolisticthan under competitive conditions but even in the latter case it will be less than is socially desirable’[Arrow, 1962: 175-6].

13. Dasgupta had earlier called these the ‘Lindahl market mechanism’, ‘Samuelsonian contrivance’, and‘Pigovian public finance’, respectively [Dasgupta, 1988: 3].

14. ‘...a patent system is instituted when mechanisms for producing information efficiently are not availableunder the price system’ [Nordhaus, 1969: 70].

15. That ‘the market can sustain excessive duplication....is a special kind of market failure’, although ‘theprescription of an externality tax is incompatible with incentives’. Furthermore, ‘even if technologicalcompetition were very fierce, the resulting industrial structure would be oligopolistic’ [Dasgupta, 1988:10 and 1]. Moreover, with free entry into the patent race, it is likely that there will be only one actualentrant who spends so much on R&D that most potential profits are exhausted [Dasgupta and Stiglitz,1980: 285].

16. ‘Theoretical economics is genuinely divided on this point’ and ‘the ex ante inducement to R&D that expost protection is meant to provide is largely an article of faith’ [Subramanian, 1990: 514]. Marketconditions and competitive rivalry often constitute the main determinant of innovation, renderingmonopoly protection unnecessary [Maskus, 1993: 170]. In fact, accumulated evidence shows that whilepatents are certainly important for some inventions and industries, such as pharmaceuticals, finechemicals, petroleum and machinery, they are much less relevant, or irrelevant, to the remaining sectors[Mansfield, 1986: 174-5] Empirical evidence collected by Mansfield indicates that information aboutnew products and processes becomes available to a firm’s competitors fairly rapidly, on average withinabout 12 to 18 months [Mansfield, 1985: 219]. Even if it seems that ‘this evidence is outdated... [and] itis likely that patents have taken on increasing importance as R&D-stimulative devices [such] astechnological competition has become stronger and more globalized... in truth... the important empiricalquestion of whether greater protection of IPRs would call forth substantially more inventive activity...[re-mains] unresolved’ [Maskus, 1993: 171-2].

17. The more regulations are involved, the longer the time taken to obtain a patent and consequently theshorter the length of effective protection. This is very evident in the case of drugs, particularly in the US.The average time from the moment when research on a new chemical compound starts until the momentthe new drug is allowed onto the market ranged from 13.6 years to 9.5 years between 1966 and 1979,according to a study by M. Eisman and W. Wardell quoted by Nogues [1990: 100].

18. It is interesting to remember that in Germany the prohibition on patenting inventions of new chemicaland pharmaceutical substances was abolished as late as 1967. The 1877 law had allowed only thepatenting of inventions of chemical and pharmaceutical production processes [Bercovitz-Rodriguez,1990: 5].

19. This argument is also raised by David, who attributes it to Chin and Grossman without, however, spellingout any of the qualifications made by these two scholars. Hence, the statement that ‘both regions standto gain from an international regime providing strong protection of intellectual property’ cannot be saidto represent their conclusion, a conclusion that David also questions, on the basis of his tacit know-howproposition [David: 1993a: 243].

20. Standardization of physical units ‘has a dual influence on the progress of scientific knowledge’ with aresulting fall in the unit costs of performing research tasks. In fact, standardization ‘almost invariablyraises the task productivity of scientific researchers’, while ‘the tendency toward increasing capitalintensity in scientific research activities gives rise to equipment that embodies instrumentation techniquesthat are increasingly standardized’. Hence David’s ‘view that standardization more strongly supports thecollective pursuit of public knowledge’ [David, 1993a: 223-5].

21. For the definition and measurement of technological distance see Westphal and Evenson [1993: 35-9].22. Technological capabilities are classified into three broad categories:

(a) production capabilities pertaining to the operation of productive facilities; these encompass variousactivities involved in product design, production management and engineering, repair and mainte-nance, input sourcing and output marketing;

(b) investment capabilities relating to the expansion of existing capacity and to the establishment of newproduction facilities; these involve project selection, design and engineering, execution as well asextension services, and manpower training; and

(c) inventive capabilities concerning indigenous efforts to adapt, improve, and develop technology[Westphal and Evenson, 1993: 24-25].

The distinction between firm-level technological capabilities (FTC) and national ones (NTC) elaboratedby Lall [1990: ch.1] is also relevant. The range of capabilities needed by a mature industrial firm is

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extremely wide. At the most general level three sorts are distinguished: entrepreneurial, managerial andtechnological proper. The latter group, i.e. the sum of the FTCs, can then be classified according to theirdegree of complexity (basic, intermediary or advanced) and according to their function (investment,production, and linkages with the economy), all of which can be expressed in a matrix [Lall, 1990: Table1, 21]. ‘The development of FTC lies at the heart of industrial success...and is the result of effort andinvestment by the firm itself, but is highly sensitive to external influences. Such influences arise fromfactor and product markets, and from direct government interventions’. It is largely from product marketsthat incentives originate which ‘are then more or less reflected in markets for factor supplies, therebydetermining the efficiency with which capabilities are used. Both incentives and capabilities operatewithin an institutional framework; institutions set the rules of the game’. National technological capabilityis defined by the interplay of capabilities, incentives and institutions, where capabilities include bothphysical and human capital and direct technological effort; incentives ‘emanate from the macro-economicenvironment, the competition facing industrial firms, factor markets and direct promotional measuresaimed at industry’; and institutions ‘can include industry associations, training centers, standard institutes,other technology-support bodies, technology import/diffusion institutions, technical consultants orextension services, financial intermediaries, legal bodies, and so on’ [Lall, 1990: 30]. Technologicaleffort includes R&D spending and technology imports, the latter taking place either (a) formally orinformally. Formal technological imports are subject to contract and usually paid for, which can beembodied in capital goods, either individually or in turnkey packages, or disembodied, which in turn caneither be (1) codified in blueprints, patents, models, instructions, etc. or (2) tacit, needing interpersonalinstruction by consultants, technical assistance, training programmes, etc., Informal technologicalimports takes place via publications and communications, the migration of skilled people, and observa-tion and imitation [Lall, 1990: 53-54].

23. For some this is also a reason for accepting free-riding by LDCs, as explained later.24. Since ‘patents rarely confer perfect appropriability... many patents can be ‘invented around’. Besides,

‘the effectiveness of patents is highly non-uniform... most effective, absolutely and relatively, inindustries with chemical-based technologies’. Whereas, product patents are seen ‘as moderately effectivein a few industries producing relatively uncomplicated mechanical equipment and devices’ and muchless so in most other industries, patents on new products appear more effective than process patents inmost industries, particularly in the drug industry [Levin, 1986: 199-200]. Furthermore, patents ‘are notthe only nor necessarily the primary barriers that prevent general access to what would otherwise be purepublic goods. Lead time accrues naturally to the innovator, even in the absence of any deliberate effortto enhance its protective effect. Secrecy, learning advantages, and sales and service efforts can provideadditional protection, though they require the innovator’s deliberate effort [Levin et al., 1987: 816].

25. Compulsory licensing takes place when government authorities or courts can force a patentee to grant apatent to a third party, mostly in connection with the patent not having been ‘worked’, i.e. not used.Compulsory licence provisions appear in both the ‘Patents Acts’ and the ‘Plant Varieties and Seeds Acts’of the US.

26. For a rather different view see Broadly [1990] and Shapiro and Willig [1990].27. On the other hand, while product life-cycles are becoming shorter, patents are not. Where in the last

century a 10-year patent would often amount to little more than giving the innovator a decent start on hisrivals, the same patent duration in the electronics age can amount to a monopoly power over virtuallythe whole of the exploitable life of an innovation.

28. Two other treaties more directly concern agricultural inventions: the International Convention for theProtection of New Varieties of Plants (1961, coming into force in 1968, amended 1978 and 1984) andthe Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the purposeof Patent Procedure (1977). No LDC have signed the first, and only Argentina has passed a law to protectnew varieties; while Senegal, South Korea and the Philippines have ratified the Budapest Treaty. Formore on the international treaties concerning IP, see Blakeney [1989: 14-21].

29. i.e. ‘networks of public and private institutions within an economy that fund and perform R&D, translatethe results of R&D into commercial innovations, and affect the diffusion of new technologies’ [Mowery,1993: 5].

30. For an extensive analysis of the primary channels for international technology transfer after WWII,namely FDI, including joint ventures and strategic alliances, licensing, and trade in goods, mainly capitalgoods, see Mowery [1993: 19-42].

31. Network externalities group several positive effects which make the existence of a large set of compatibleusers desirable. One of these effects is consumption externalities, which is typical of communicationtechnologies [Farrell and Saloner, 1985]. As for the reduction of variety caused by harmonisation, anote of caution must be introduced in order to avoid confusion with the emerging notion that the ‘newtechnologies’, particularly microelectronics and information technologies, have ‘fundamentally changed

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the economics of manufacturing from scale to scope’, so that product variety, i.e. flexibility, andinnovation ‘will no longer have to be traded off against productivity, and will become instead the onlyway to compete in the evolving global marketplace for both consumer and industrial products’ [Goldharand Schlie, 1991: 19-20]. Clearly the discussion in the text does not refer mainly to these latesttechnological changes, yet it is interesting to note that these ‘economies of scope’, as compared to thetraditional economies of scale, are reputed to increase the efficiency of small-scale production in LDCsand, ‘in so far as scale is a barrier to entry, lead to more entry and competition’. Moreover, the adoptionof the new technologies may require more learning-by-doing and learning-by-using than the traditionaltechnologies [Alcorta, 1993: 1 and 36].

32. Standards have been classified according either to the manner in which they have come to be set up orto the nature of the information conveyed.

33. In static terms ‘the existence of significant increasing returns in system scale can give the result that onevariant will drive out all the others and so emerge as the de facto standard for the industry’, regardlessof whether it is also the most efficient. Also in a more dynamic process of ‘systems rivalry’ with ‘activitiesconducted under conditions of incomplete information and dominated by unappropriable increasingreturns due to the learning phenomena, habituation, and network externalities, public agencies may haveto intervene to mitigate the tendency of market competition relentlessly to lock the system into ‘wrong’standards [David, 1987: 220 and 227-8]. This is illustrated by the case of the keyboard layout knowtoday as ‘QWERTY’, where ‘competition in the absence of perfect futures markets drove the industryprematurely into standardization on the wrong system’ [David, 1985: 336]. As for network technologiesthey refer to ‘distributed, multicomponent systems within which there are strong technical complemen-tarities’ [David, 1993a: 236]. For the ‘path dependence’ created by increasing returns and cumulativeprocesses, see the case of the rise and persistence of the US manufacturing belt as presented by Krugman[1991].

34. In the case of differentiation where quality improvements affect only fixed costs, and variable costs reactslowly to quality change, ‘natural oligopolies’ are generated which are little affected by marketenlargement [Shaked and Sutton, 1984].

35. The share of services in total world trade is substantial. During the 1980s it varied between 20% and 27%[Secchi, 1990: 89]. For more data on IP-intensive goods traded internationally, see Maskus [1993: Table77, 160-1].

36. Increasingly, and particularly in the food, chemical and pharmaceutical sectors, manufacturers in DCsseek the protection of products, rather than processes. Since the production of these goods can generallytake place in various manners, it would be difficult to patent all the alternatives. LDCs on the other handmaintain that product patents confer a more extensive monopoly privilege because, in this case, all otherpossible processes for its production could be protected only through dependent patents, which requirethe authorization of the holder of the principal patent. This situation discourages investment in R&D onthe processes for producing existing products, making it difficult, if not impossible, to develop processesmore appropriate to the licensees’ resource endowment and in particular their socio-economic conditions[Bifani, 1990: 168-9].

37. In fact, because ‘a few of the most important new technologies do not fit clearly into any of the existingcategories of intellectual property... their eligibility for legal protection is consequently uncertain ...[and]it is questionable whether any of the traditional intellectual property laws would in fact be adequate orappropriate’ [Benko, 1988: 228, see also Gadbaw 1989: 227 fn.10]. The ‘extraordinary rapid technologi-cal change in the 1970s and 1980s...has thrust upon us new and as yet unresolved problems of governancein the national and international spheres’. While the technology ‘evolves much more rapidly than thebody politic can absorb’, this ‘revolutionary change is occurring in a much more interdependent world’[Blumenthal, 1988: 531-2].

38. Based on a problem of market failure, i.e. the absence of complete appropriability of returns, co-operativeagreements in R&D represent ‘an alternative to either pure market transactions or integration’ into asingle firm, but they also tend to cause ‘a harmful reduction of competition’. Until now, however, theyhave not been very frequent [Jacquemin, 1988: 552-3]. However, the ‘increasing complexity andmulti-disciplinarity of resources required for innovation and of the stock of knowledge itself tend to maketechnological innovations the outcome of interactions and cooperation among fundamentally autono-mous organizations commanding complementarity resources. As a result... the locus of innovation couldwell be a ‘network’ of various types of organizations’. This seems to be happening particularly inbiotechnology where ‘the large firms are no longer the sole locus of innovative activity’, which instead‘should be thought of as a ‘network’ of inter-organizational relations’ [Arora and Gambardella, 1990:362 and 374].

39. Biotechnological inventions can easily be duplicated as these inventions are embodied in self-replicatingliving material [DGIS, 1991: 14].

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40. Particularly in the US, the pressure for tighter IP protection has emerged from the ‘twin perception thatthe erosion of the competitive position of the U.S. technology leadership in certain sectors, in particularin pharmaceuticals, chemicals, computer software and semiconductors, is due to copying in foreigncountries and to unfair practices of certain countries, including inadequate protection of intellectualproperty’ [Weiss, 1990: 89].

41. Estimates of trade losses due to counterfeiting and piracy range up to $60 billion annually [FinancialTimes, 17 October 1989: 7]. In 1986, the value of lost sales resulting from unauthorized copying of USpatented, copyrighted, or trademarked materials has been estimated by the US International TradeCommission (USITC) at between $43 to $61 billion. Also according to USITC, the world-wide loss toUS industry of domestic and export sales attributable to foreign product counterfeiting, passing off, andcopyright and patent infringement of similar products is estimated to amount to between $6 and $8 billionin 1982 [Davis, 1991: 508, fn.8] [Weiss, 1990: 89, fn.5]. Estimated losses to American book publishersdue to piracy reach $700 million a year [Benko, 1988: 222]. According to a pressure group based in theUS, International Intellectual Property Alliance, in 1992 American business lost around $2 billion inpotential trade in the ten worst-offending Asian countries [The Economist, 1st May, 1993: 67]. The USPharmaceutical Manufacturers Association estimates that the sale of copied drugs amounts to $1.4 billionper year [Nogues, 1990: 86]. For a more detailed analysis of seven main LDCs engaged in piracy andthe affected sectors, see MacLaughlin, Richards and Kenny [1988].

Strangely enough, however, the practice of counterfeiting has attracted little attention from economists.One of the few economic analyses of this wide-spread phenomenon demonstrates that if supplies ofcounterfeits are assumed to be perfectly elastic, stricter enforcement is not at all welfare-improving[Grossman and Shapiro, 1988: 79-80].

The so-called parallel imports, i.e. imports into a country of products protected by patent or trade markand already offered by the local subsidiary or the appointed distributor, present a related problem. Theseimports may be counterfeits, in which case they can be dealt with accordingly, or genuine products madesomewhere else. In this second case, if the importing country is a member of the EC the matter becomesvery complex indeed.

The problem of parallel imports is connected to the ‘principle of exhaustion’, according to which legallyacquired IP-protected goods can be disposed of irrespective of the seller’s wishes. The principlerepresents an attempt to reconcile the free movements of goods with the exclusive rights arising from IPprotection, its objective being to open up sources of cheap supply to the domestic consumer. In fact theEC has opted for the principle of community-wide exhaustion. Yet, ‘territorial exhaustion is inherentlydiscriminatory because, in respect of international trade, it allows the title-holder who benefits fromparallel protection in another country to oppose the importation of a product he first marketed in thatcountry, while such a title-holder is not entitled to control the subsequent distribution of a product afterits first sale in the domestic market. Thus, in the case of imported products, the title-holder would beallowed to exercise the rights twice, i.e. in the country where the product was first marketed as well asin the country of importation, whereas in the domestic market the title-holder is allowed to exercise hisrights only once’ [Yusuf and Moncayo, 1992: 128]. Therefore, the establishment of world-wide uniformstandards of IP protection is bound to raise questions on the continued admissibility of a territorialexhaustion regime in view of the restrictions to international trade which it may cause. In fact, ‘territorialexhaustion may undermine export-based economic development strategies of developing countries andcountries undergoing transition to market economy. Since under territorial exhaustion, title-holderswould be entitled to invoke their exclusive rights to protect their home markets from parallel imports,this would mean that whenever a developing country or a country in transition relies on foreigntechnology for its domestic development, it would be restricted in its choice of export markets sincequantitative restrictions ---- proscribed by the general Agreement ---- may be replaced by protectiveintellectual property measures having an equivalent effect’. The shift to a world-wide exhaustion of IPRscould prevent IPR-holders ‘from control[ling] the entire distribution process of goods and services afterthey have received reasonable returns for the products marketed by themselves’ [Yusuf and Moncayo,1992: 130]. The adoption of a principle of world-wide exhaustion of IPRs ‘would be perfectly in thelogic of internationally harmonized standards of intellectual property and free trade’, whereas anexception in favour of LDCs, or some subgroup of LDCs, may offer them some compensation foraccepting the TRIPs agreement [Ullrich, 1989: 155].

42. ‘There is nothing in the GATT per se, however, which requires any country to have any laws that protectintellectual property in any particular specific manner at any particular level’ [Richardson, 1989: 368].And ‘neither the GATT nor WIPO conventions contain express provisions against too little or noenforcement of IPR’ [Meng, 1990: 72].

43. The infant industry argument is also supported by learning-by-doing economies, as in the case of a matureindustry that in DCs no longer shows learning economies, although these are substantial in a particular

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LDC. If in the latter the demand is also relevant, then some protection may make it profitable for theLDC’s firms to enter production. Since the price of the protected good should not rise, the terms of tradeof DCs are not affected. The infant industry argument is further supported by the ‘strategic trade policy’literature which also shows the eventual positive impact of protection on domestic expected demand andR&D. This approach underlines the tendency for DCs’ technological progress to concentrate in exportindustries, while that of LDCs centres on import competing industries. Hence technological progress inDCs widens the productivity differential and so the basis for trade, but that in LDCs narrows it.

44. IPRs are dealt with under articles IX(6) and XX(d) of GATT. The first simply stresses cooperation amongthe parties in order to avoid misrepresenting marks of origin in international trade. The second ‘allowsContracting Parties to take measures for the enforcement of intellectual property rights that normallywould be inconsistent with the General Agreement’ [Hartridge and Subramanian, 1989: 900]. ArticlesI and III are also indirectly related to IPRs. These refer to the most favoured nation and national treatmentprinciples, respectively [Meng, 1990: 70-2].

45. The 1978 American proposal was further elaborated, with the participation of the EC, Japan, Canada andsome other DCs, into the draft ‘Agreement to Discourage the Importation of Counterfeit Goods’ and thenabandoned, since for the countries concerned ‘the code was clearly inadequate. It dealt only withcounterfeiting of trademarked goods and then only as a border measure’ [Benko, 1988: 222-4].

46. But see note 42 above.47. To protect its IP, the US has lately introduced several major, and often fundamentally new, national legal

and institutional measures such as (a) the 1980 amendment to the 1975 ‘Copyright Act’, explicitlygranting protection to software; (b) the 1984 ‘Semiconductor Chip Protection Act’ which, in contrastwith the national treatment clause, contains a reciprocity clause; (c) the 1985 ‘International SoftwareProtection Act’, which also includes a reciprocity clause [Vaitsos, 1990: 85]; (d) the 1988 ‘OmnibusTrade and Competitiveness Act’, particularly its Section 301 which authorises threatening countries withcommercial retaliation if they do not conform to US requirements on IPRs; and (e) the 1988 amendmentof the ‘Tariff Act’ of 1930, particularly its Section 337. These measures are largely based on the ‘Tradeand Tariff Act’ and the ‘National Productivity and Innovation Act’, both of 1984. It is, however,particularly in relation to the Third World that ‘the technology issue is dominated by the role of the UnitedStates’, so much so that it ‘might almost be termed an area of U.S.-South conflict’ [McCulloch, 1981:111-2]. The US is leading a war on piracy and by combining Section 301 with Special 301 Action, caneffectively use trade measures for ‘securing concessions from foreign states with insufficient protectionof IPRs’ [Davis, 1991: 532]. Interesting enough it has been remarked that the list of pirating nationsprepared by the US Department of Commerce ‘is almost exactly the list of countries that most economistswould regard as having made significant progress in economic development over the past thirty or fortyyears’ [Evenson, 1990: 325]. Finally, trade secrets in the US are protected by state, rather than federallaw. Although all are based on section 757, comment b, of the ‘Restatement of Torts’ of 1939, state tradesecret laws differ widely. Thus the growing interest in establishing federal trade secret legislation.

48. WIPO, a specialized agency of the UN, is mandated to ensure multinational administrative co-operationin ‘the protection of intellectual property throughout the world’. It is responsible for promoting creativeintellectual activity and for facilitating the transfer of technology to LDCs in order to accelerate theireconomic, social and cultural development. WIPO provides only for national treatment, i.e. countrymembers can set their own patent conditions and duration, but cannot discriminate between local andforeign inventions (article 2 of the Paris Convention), and it has no enforcement power or dispute-set-tlement mechanisms. Since 1984 WIPO has been working on a ‘Treaty on the Harmonization of CertainProvisions in Laws for the Protection of Inventions’.

49. LDCs ‘feared that under GATT their powers would be diminished relative to the industrialised countries,which of course was exactly the reason the United States and other industrialised countries wanted tomove the issue into GATT’ [Deardorff, 1990: 498]. According to the critics, WIPO has not been able tomeet all expectations and needs because, in line with the UN system, negotiations proceed on the basisof group co-ordination and voting, which has resulted in a rather sterile North-South confrontation.Another reasons is the lack of a workable mechanism to ensure compliance with obligations [Reinbotheand Howard, 1991: 157].

50. Lengthy negotiations at Punta del Este resulted in the following compromise mandate for the UruguayRound: ‘in order to reduce the distortions and impediments to international trade and taking into accountthe need to promote effective and adequate protection of intellectual property rights, and to ensure thatmeasures and procedures to enforce intellectual property rights do not themselves become barriers tolegitimate trade, the negotiations shall aim to clarify GATT provisions and elaborate as appropriate newrules and disciplines’. The draft proposed by LDCs emphasised instead that (a) ‘lack of adequate andeffective protection’ of IPRs is the cause of trade distortions and an impediment to international trade;(b) the Round’s aim was to promote a more effective and generalised application of existing international

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standards and ensure that the enforcement of IPRs does not itself create barriers to legitimate trade; andtherefore the Round had only (c) ‘to clarify and elaborate rules and disciplines with respect to thesematters’.

51. Others see the acceptance of the main objectives of the TRIPs as ‘the price developing countries mustpay for a settlement in agriculture and clothing’ [Page et al., 1991: 47].

52. For the problems posed by reverse engineering see also Friedman et al. [1991: 70-71]. It has been shownthat reverse engineering capacities are much stronger in the NICs than in the other LDCs [Evenson, 1990:352].

53. The answer given, among others, by Taylor and Silberston [1973] for the UK is negative. See also Kitch[1986].

54. The national treatment principle requires that the nationals of foreign countries should be treated in thesame way as the country’s own nationals [Blakeney, 1989: 121]. See also UNCTAD [1975: 47-48].Given the absence of a common set of rules and the wide variety of measures and terms of protectionamong countries, national treatment provides insufficient guarantees of international protection. Becauseof its inability ‘to equalize an unequal level of protection in different countries’, it is often called ‘aphantom’. Besides, foreign nationals are granted protection, at least for copyright, subject to the conditionof reciprocity [Katzenberger, 1989: 45]. However is has been maintained that, since countries which aremembers of GATT must ensure their national laws conform to the minimum standard of protection, andmust respect the limitations placed upon national legislation by the GATT Treaty, ‘where nationaltreatment results in less than is required by the minimum standard, the Treaty, rather than the nationallaw, must be applied to the foreigner’ [Weiss, 1990: 103-4]. Unlike national treatment, the most-favoured-nation principle is alien to existing IP treaties, hence thelist of exemptions accorded by article 4 in the ‘Draft Final Act’. It is in principle applicable to IPRs, butits application becomes difficult when the countries concerned have different socio-economic structures,different levels of development, or when the ‘most favoured’ nations are members or third partiesvis-à-vis a customs union [Weiss, 1990: 105-6].

55. The problems of patentability concern mainly food, pharmaceutical and chemical products, since LDCsand many scholars feel that these products satisfy basic needs, so they should be either non-patentableor be made widely available at prices that render them accessible to all.

56. With the last revision, the Convention incorporated preferential provisions, on a non-reciprocal basis, infavour of LDCs [UNCTAD, 1975: 48] and offers protection similar to, but less comprehensive than, theUniversal Copyright Convention (UCC) of 1971.

57. Although it is accepted that WIPO’s enforcement is more limited than GATT’s, it cannot be denied thatin the latter’s dispute settlement system, as usual in international economic organisations, ‘emphasis isplaced... on the accommodation of interests rather than on vindication of rights on a "victory versusdefeat" pattern’ [Weiss, 1990: 107-8].

58. ‘An examination of Community competition policy with respect to intellectual property law reveals thatthere are no inconsistencies between the two bodies of law and that the intellectual property law must beconsidered an integrated part of competition law’ [Vandebeek, 1990: 1609].

59. In fact the EC has a special programme (PRISMA) for assisting (a) the lesser developed regions of themember countries to reinforce their national technical infrastructures; and (b) particularly small andmedium-sized enterprises to get access to quality tools.

60. In fact, ‘contrary to conventional wisdom, there is no international patent, international trademark orinternational copyright’, but ‘each country retains control over the issuance and enforcement of intellec-tual property rights that it grants’ [Keating, 1991: 54].

61. David rightly underlines the need ‘to reflect upon the power of recent accelerating advances in the wholecomplex of telecommunications and information technology to further diminish the economic meaningof historically defined national boundaries, but for the arbitrary constraints which the exercise of politicalsovereignty continues to impose’ [David, 1987: 237].

62. ‘Trademark laws have been the most territorial of all intellectual property rights’ and those ‘of the ECcountries have differed significantly from country to country’ [Celedonia, 1992: 751]

63. The international register system of ‘The Madrid Agreement’ of 1891, now administered by WIPO,already exists but, aside from the fact that four EC countries plus the US and Japan are not members ofit, there are many problems with this system which have never been adequately solved by the more recent,so-called ‘Madrid Protocol’ which, in any case, has not yet come into effect. The system remains basedon individual, national registrations, so that it is basically a filing cabinet [Celedonia, 1992: 756-7].

64. Yet, protection for mask works originating abroad is granted only to nationals of a state which has filedthe appropriate request at the US Patents and Trademarks Office [Dreier, 1989: 71].

54

65. The patentability of a process for the production of plants has been admitted not only when such a processhas been altered in its constituent parts, but also when the alternative lies in the special sequence of theprocess steps [Correa, 1992: 155].

66. Although plant breeders’ rights could be a viable alternative to patent protection for plant varieties, theyare not included in the TRIPs’ negotiations. However, if patent protection is extended to plant material,breeders and farmers in LDCs using patented plant material in their export crops will have to buy licencesand pay licence fees [DGIS, 1991: 31 and 34].

67. In 1991 five Latin American countries ---- Argentina, Brazil, Chile, Paraguay and Uruguay ---- decidedto establish a harmonised system of breeder’s rights in their countries.

68. For an extensive discussion of this distinction see Nott [1992: 84-5].69. Incidentally, it has been noted that ‘the idea of using patent law to achieve particular social goals, such

as environmental protection, has received little attention in the literature’, probably because such aproposal stands in direct opposition to the main objective of patent law, namely ‘the universal pursuit ofprogress and the development of technology’ [Atkinson and Sherman, 1991: 169].

70. An alternative to IPRs could, however, be the farmers’ rights introduced by FAO in 1987. These are‘rights arising from the past, present and future contributions of farmers in conserving, improving andmaking available plants’ genetic resources, particularly those in the centers of origin/diversity’, andobserved through the creation of an international gene fund to reward farmers with programmes beneficialto all. However, these rights do not accrue to the individual farmer, but are vested in the internationalcommunity, entitling governments to receive assistance in the maintenance of genetic resources,assuming always that there are funds available since the contributions to the fund are voluntary, unlikeroyalty payments under IPRs [Shiva, 1993: 559].

71. But the US drug, seed and biotechnology companies that opposed the Rio Convention have recentlystarted urging the Senate to quickly ratify the same agreement.

72. Invented in Germany and introduced there for the first time in 1891, the utility model is an industrialproperty right for ‘minor inventions’ until now adopted only by a small number of countries. Comparedto the patent, the utility model requires less inventiveness and can be obtained by a simpler and cheaperprocedure. International conventions do not generally consider the utility model, so their stricter criteriaand more complex regulations do not apply to it. Its several advantages have made it rather popular tousers of industrial property systems: since its introduction almost 4 million applications have been filedand about 2.2 million utility models have been registered in Germany, against 1.7 million patents grantedsince 1877. Even more interestingly, while domestic applicants account for more than 80% of theapplications for the utility model, they account for only about 50% of those for patents. The number ofdomestic applicants for patents started to predominate only from the mid-1950s. A similar trend hascharacterised the Japanese experience and it is being noted in the case of China. Although IP protectionhas entered into force only since 1985, utility certificates have met with an enormous success [Häusser,1987; Ullrich, 1989a: 111, fn. 64]. South Korea has a utility model system, and since 1970 Brazil alsohas operated one which ‘appears to be working effectively as an inducement to innovation and does notseem to be hampered by major legal or administrative barriers’ [Frischtak, 1990: 69-70].Utilised mainly by small and medium-sized enterprises and independent inventors, it apparently ‘assumesparticular importance for the domestic economy at the beginning of a country’s industrialization’[Häusser, 1987: 319]. Besides the countries mentioned above, the utility model has been adopted alsoby the members of the African Intellectual Property Organization (OAPI in French) and the WIPO ModelLaw for English Speaking African Countries on patents also provides for the introduction of utilitycertificates [Ullrich, 1989a: 111, fn.63].

73. In contrast to the US tradition, article 85 of the Treaty of Rome contains a broad prohibition of explicitand tacit collusion where it is likely to affect trade between member states. Its para. 3 exempts ‘somecollusive behaviour restricting competition’ when sufficient beneficial effects are assumed. Thus thereis a ‘delicate appreciation of complex trade-offs’. One way of implementing such a system has been bygranting group (or block) exemptions’, an example of which is the Regulation on R&D agreements,which came into force in March 1985, and which accepts that ‘cooperation in R&D, in many cases,cannot be limited to the sole level of pure R&D, and that it will generally lead to joint exploitation of theresults in order to stabilize the agreements and to solve the appropriability problem’ [Jacquemin, 1988:557-9].

74. The establishment of world-wide competition rules has been proposed by some, see Jacquemin and Sapir[1991], particularly ‘to offset unwarranted abuses of stronger intellectual property rights’. Although, ‘thelink between competition policy and IPRs is complicated..., as technological rivalry intensifies and firmsturn more frequently toward joint ventures, patent-pooling arrangements and cross-licensing agreements,the potential for abuse of IPRs may be growing’ [Maskus, 1993: 157 and 178-9].

55

75. A very useful classification of industrial technologies by categories, based on Pavitt, has been elaboratedby Vernon [1990: 263-67].

76. As for the automatic approval system adopted by South Korea at the end of the 1970s, the fact thattechnology agreements were to be evaluated, approved and registered by the ministry dealing with theusage of the proposed technology, made approval and registration of most technologies a ‘one stop’process. Although this so-called ‘utility model protection’ has been praised by many [Westphal andEvenson, 1993: 65] it has also meant repetitive acquisition of foreign technologies; acquisition ofoutdated technologies; higher royalty rates for fairly standardised technologies and also lump-sumpayments; and more unfavourable terms and conditions for Korean licensees than in the prior period[Marton, 1986: 421-2].

77. India represents the case of ‘low payoff from a relatively well developed and extensive scientific andtechnological infrastructure’ and its ‘distinctly disappointing’ industrial research [Rosenberg, 1990: 149]is due to this rather than to the weak protection provided to IP.

78. ‘Implantation of operational (turnkey) technology theoretically permits the recipient to make a productequivalent to that produced by the technology supplier, though in practice the production efficienciesand quality levels achieved vary widely. Duplication technology transfer implies design and engineeringknow-how sufficient to reproduce an entire plant or discrete components. Technology transfers thatengender innovative capability allow the recipient to go beyond duplication to alter transferred products,processes and equipment designs in response to changing resources, requirements, and market demands’[Baranson and Roark, 1985: 27].

79. H. Bruton’s article in the same volume is a substantial contribution to the definition of a policy for buildingsuch an indigenous technological capacity.

80. According to a recently published study by the Washington-based National Science Foundation, Asianenrolments at all levels of US higher education rose from 20,000 in 1985 to 200,000 in 1985, scienceand engineering attracting most of these students. Presently more than half the Ph.D.s awarded in the USin engineering and mathematics are to foreign students, with Asians predominating. Furthermore, R&Dspending is fast increasing in Asia. The combined spending of six Asian countries ---- China, India, Japan,Singapore, South Korea and Taiwan ---- in 1987 was only about 25% less than the spending of the USfor the same year. Yet, while the latter’s spending is showing signs of decline, that of Asia is clearlyrising, further strengthening their self-sufficiency [Greenberg, 1993: 6].

81. Avoiding brain drain and reversing it when it has taken place are also measures that can greatly contributeto capability building.

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