IPRs, TRIPS hamper R&D, technology transfer to South

Research and development in and technology flows to the developing world are being undermined by an intellectual property rights system strengthened by the WTO’s TRIPS regime and by potentially trade-distorting government funding of R&D in industrialized countries, a Brazilian expert has told a WTO body looking into the issue of technology transfer.

by Chakravarthi Raghavan

GENEVA: The intellectual property rights (IPRs) system, enhanced by the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), is actually hampering development of research and development (R&D) in developing countries; and industrialized countries, while heavily subsidizing science and technology (S&T) and R&D in their own countries, are placing all sorts of restrictions on attempts of developing countries to cooperate in market-oriented and commercially charged sectors of applied sciences, a Brazilian expert said at the World Trade Organization.

Guilherme de Aguiar Patriota gave this assessment in the week of 10 June in a presentation to the WTO’s Working Group on Trade and Transfer of Technology, which is chaired by the ambassador of Iceland, Stefan Haukur Johannesson.

The presentation also brought out that in Brazil’s experience, the private sector, in particular the transnational companies, contributes very little to R&D. It also challenged the oft-repeated view, which was again voiced at the working group on 11 June by the United States, to the effect that transfer of technology to developing countries is promoted through enhanced IPRs standards and foreign investment and increased imports by the developing countries of technology goods and services, including intermediate goods.

In a separate oral presentation (the text of which was not immediately available), China outlined the government’s efforts to promote science, technology, R&D and Chinese imports of technology through licensing, investment or higher-technology goods. China said it was taking these steps while upholding its commitments under the WTO. However, said China, it was sometimes impeded because some countries block technology transfer for national security reasons.

During discussions and comments in the working group on a secretariat paper, “factual survey of issues and bibliography” on whether IPRs protection impedes or promotes technology transfer, Cuba said that the IPRs system in fact impeded technology transfer by making hi-tech more expensive. The US, however, claimed that the IPRs system, by encouraging foreign investment, encouraged technology transfer.

The working group has before it submissions on a work programme from the like-minded group (LMG, comprising Bangladesh, Cuba, Dominican Republic, Egypt, Honduras, India, Indonesia, Jamaica, Kenya, Mauritius, Pakistan, Sri Lanka, Tanzania, Uganda and Zimbabwe) and from the EU.

The working group chair, Stefan Johannesson, has compiled a draft work programme, which was discussed in informal consultations after the formal meeting of the group.

However, there are differences on whether the work programme should cover work in the next year leading up to the Fifth WTO Ministerial Conference, including making recommendations to that conference. The US is opposed to this. India, Pakistan and others who submitted the LMG paper want the working group discussions to lead to recommendations for the next Ministerial.

Also at issue is whether the work programme should also address the issues of technical assistance. The EU and Norway said that members should be flexible, and if developing countries want to discuss these issues they should be allowed to. The chair is to hold further consultations.

The next meeting of the working group is set for October.

De Aguiar Patriota’s presentation said claims that the IPRs system and foreign direct investment promote technology transfer need to be closely inspected. “Empirical evidence must be produced to back up such affirmations,” he said. “Brazil’s experience  in the telecommunications sector does not confirm such claims.”

It is a known fact, he said, that Brazil had promoted one of the world’s largest transfers of public-owned companies to the private sector during the nineties. Some positive results were obtained, as a result mainly of entry of mobile operators into a market where demand for fixed phone lines had been left unmet for many years. Privatization had helped meet demand, but the rates remained high as the minimum margins were negotiated under the sales agreements.

“But the negative side of the story,” De Aguiar Patriota said, “is the fact that privatization generated an increase in imports of integrated circuits and other mobile phone-related components to such a degree that it generated one of Brazil’s largest trade imbalances in any given sector during last year.

“Some US$8 billion were spent by Brazil in 2001 on electronic components related to the information and communications technology (ICT) and telecom industries. This illustrates how privatization can lead to closing down of R&D departments or facilities in the host developing countries, substituting them with imports that weigh heavily on developing countries’ trade and technology balances.”

Addressing technology issues in the WTO

Many existing WTO agreements contain technology-related clauses that might be relevant to facilitating or creating flows of technology to developing countries. An in-depth examination of these provisions, as proposed by a group of developing countries (the LMG paper), is “obligatory work”, and there is much to be gained by this, he said.

(Discussions thus far at the WTO on a range of issues and in different bodies relating to particular items have brought out that while there are many provisions for transfer of technology, all these have been inoperative, with the major industrial nations treating them as exhortatory and not taking any steps to implement them, often arguing that the technology is owned by their private sectors and that, in a market economy, the government has no role.)

However, as the Brazilian presentation has brought out, much of this “commercially-owned” technology has been financed and developed by the state (some $165 billion in 1999, calculated and estimated at US$ 1995 prices and PPP, in the G-7 countries, according to De Aguiar Patriota’s presentation).

De Aguiar Patriota said the relationship between trade and transfer of technology, and recommendations on steps within the WTO to increase the flows of technology to developing countries were a “window of opportunity” to introduce fundamental issues of S&T and R&D within the scope of the multilateral rules-based trading system. Given the growing importance of knowledge and technology as a production factor determining costs, prices, efficiency, marketability and competitiveness in general, it was obvious that these had to be discussed in the light of their impact on international trade and how they affect opportunities for developing countries.

The other factors of production, labour and capital, were in the minds of the founding fathers of GATT (the predecessor of the WTO), and were taken into account in agreements for a succession of multilateral negotiations aimed at reducing the impediments and distortions to trade, accounting for the special situations of developing countries.

However, technology was never a priority negotiating issue (in GATT) despite its importance for trade and development. Fifty years later, perhaps there is a better chance of widening the scope of the WTO by introducing the technology issues through the modest mandate in paragraph 37 of the Doha Ministerial Declaration (which established the Working Group on Trade and Transfer of Technology). Treating S&T as a standalone issue within the WTO would, by itself, represent a successful outcome for the working group.

Outlining some of the measures being taken within his own country, De Aguiar Patriota said Brazil understood that in today’s world, promoting an early start in new areas of technology, as opposed to catching up on old ones, “is the only way forward towards competitiveness.”

Though technology was rapidly evolving, two areas of work of particular relevance to development and economic growth were: the life sciences, including biotechnology, and ICT, including digital revolution and convergence.

Whether for an early start in new fields of R&D or boosting technology in established research areas relevant for trade and development, there was growing awareness of the importance of a better degree of “symmetry” in Brazil’s relationship with cooperating or engaged foreign counterparts.

“The traditional donor-recipient relationships have proved very limited in transfer of technology.” However, symmetry requires a certain measure of self-support on the part of developing countries, and the need for an appropriate mechanism (that Brazil has used) by approving a series of sector-specific funds for financing R&D in priority areas like agriculture, biotechnology, information technology, energy and oil. Public financing should increase twofold in only a few years.

A vexing problem was the reliance of the research community on public initiative and funding, with the government funding about 80% of all research in the country. However, the private sector, in particular the TNCs, contributes very little. Also, the research is being done within the university system and too academic-oriented, with little spillover on industry and trade. Linkages have to be induced through appropriate public policies, regulations and financing mechanisms.

IPRs barrier

The IPRs regime was of great concern in this context. Studies based on patent applications and use of patent information for reverse engineering or working around protected technology or merely for purpose of promoting advancement of research, indicate that Brazil “is particularly unsuited to take advantage of the IPRs system,” he said, adding that “enhancement of the IPRs system through TRIPS seems only to have made matters worse.”

There is enough evidence to suggest that the system actually hampers development of R&D in developing countries. Among medium-income developing countries, “Brazil has achieved one of the smallest increases in patent applications over time,” he added.

As pointed out in a presentation by Lynn Mytelka, “the patent system will work as a stimulus to invention only where a ‘solid knowledge’ base, developed R&D and enterprise structure and financing to sustain a process of innovation are well established.” In most developing countries, firms have neither the capacity nor the resources to scan broadly and detect useful ideas. Even if they were able to do so, they would not have resources to innovate “around the patent”, especially where both the process and product are patented.

R&D is capital-intensive, requires abundant skilled labour and has a long maturity curve.  This means that in practice “the IPRs system may actually function as an impediment to technology flows to developing countries under the conditions prevailing in these countries, characterized by inadequate or expensive financing, inappropriate or unenforceable regulatory environment for innovation, insufficient skilled labour and modest installed research base.”

Referring to Brazil’s rich cultural and ethnic heritage and biodiversity, Patriota said that the “traditional knowledge of Brazilian Indians regarding medicinal uses of Amazonian plants, for example, is being tapped by foreign companies as a shortcut towards research of new plant-based drugs.” The possibility of using these assets for the benefit of the people that have generated them was related to the IPRs, the extensive use of ICT, financing of cultural enterprises, among many other considerations.

Brazil has been a firm believer in international cooperation for S&T. However, the idea of accelerating transfer of technology through government-to-government collaborative actions or actions involving international organizations “is being met with increasing scepticism among stakeholders.” While at the level of basic research (where most of Brazil’s capabilities lie), there is a tendency for governments to treat knowledge and research as a public good, “this is not the case in the area of applied sciences.” Foreign countries are happy to cooperate under general and non-intrusive agreements, gaining access to Brazilian universities and institutional research (most of them the result of public funding), but for cooperation in more market-oriented and commercially charged sectors of applied sciences, “the developed countries apply all sorts of restrictions.”

Hence, if one is not careful, it could lead to a reverse transfer of basic sciences, from the developing to the developed countries, while “very little of applied technology transfer takes place to developing countries as these latter remain under strict protection and centralized IPRs regimes, trade secrets and other restrictive practices.”

Trade-distorting funding

There is an obvious asymmetry embedded in the system, he said. The working group should look into how much government money actually goes into funding for basic science and for R&D in general, how much of this is “trade-distorting”, how much a direct or indirect subsidy or subsidy equivalent for R&D to be appropriated by private companies from the subsidizing country itself at later stages of the production chain.

They are subsequently exported to the rest of the world under conditions of “non-level playing field, or asymmetrical funding and financing conditions,” the Brazilian expert charged.

[As former Indian ambassador to GATT BL Das has pointed out, the Uruguay Round Subsidies Agreement is so drafted that the kinds of subsidies commonly used in developed countries have been made non-actionable, while those needed by developing countries have been left out of the special dispensation. These non-actionable subsidies (of the developed countries) include assistance for research conducted by higher institutions on a contract basis, if the assistance is no more than 75% of the costs of industrial research or 50% of the costs of pre-competitive development activity; assistance to disadvantaged regions in a country; and assistance for adapting existing facilities to new environmental requirements.

[And as Carlos Correa and other IPRs experts have brought out, the problem is further compounded in the US, where publicly-funded research and patents obtained as a result are licensed to the private firms for a nominal amount, “provided it is worked in the USA”.]

The magnitude of public money going to S&T and R&D last year, as set out in an OECD publication, De Aguiar Patriota said, was (in 1995 prices and PPP dollars): US $70.3 billion, Japan $17.7 billion, Germany $14.7 billion, France $10.6 billion, Italy $6.5 billion, UK$6.4 billion and Canada $4.6 billion. For the G-7 countries, the total comes to $165.0 billion.

“In fact the amount of public money in the technology leading countries that goes into maintaining the technology leadership of their industries would be greater than money spent on agricultural subsidies. From the point of view of a developing country ... this issue has to be dealt with under trade-related considerations. The possibility that these public funding schemes might in fact be extremely trade-distorting to the disadvantage of money-deprived governments of the South, can be proven to be the single most important impediment to technology flows to developing countries.”

These figures of assistance, De Aguiar Patriota pointed out, do not include the effect of tax breaks or incentives for R&D, nor the effect of other instruments for inducement and concentration of R&D within the subsidizing developed home country. Among these other instruments are: the use of government purchasing power to ensure returns on investment that would otherwise remain uncertain, too long-term or simply unviable economically; and the ability of technology holders to raise margins of profits on their technology-intensive goods and services through negotiated elevation of standards of protection and enforcement of IPRs worldwide.

The strengthening of IPRs, as a result of the Uruguay Round, has provided technology owners, mostly concentrated in the developed world, huge additional gains, which are rule-based, not market-oriented.

Further, coverage of IPRs was extended to non-inventive activities such as different types of software and integrated circuits, which got protection not through patents but sui generis type agreements, more in line with copyright applied to works of authors. “This was a means of locking up technology and/or knowledge that could be more easily transferred to developing countries, by imitation, reverse engineering or copying.”

Again, the spread of certain types of technologies, in particular ICT, actually promotes “spontaneous, non-negotiated trade liberalization, and not necessarily to the advantage of developing countries.

“As ICT and ICT infrastructure spread to developing countries, by means of greater connectivity and access to digital networking, and promote access to the Internet, people in faraway developing countries are put in close touch with patterns of consumption more typical of developed countries.”

“There is no value judgement in this,” said De Aguiar Patriota. “But the fact is that the Internet brings with it greater amounts of information produced in the developed world, much of it trade-related and trade-promoting.” Thus, the impact of digital technology on trade could not be looked at through the prism of goods alone in digitalized form; the Internet’s trade-facilitating and promotion effect, working as an incredibly efficient mechanism for reducing costs, has also to be considered. The Internet places citizens in markets of developing countries in direct contact with information on goods and services mostly produced in developed countries and oftentimes for consumers of those countries. And technical assistance through Internet-based systems could increase exports to the detriment of FDI associated with a physical presence in the importing market. (SUNS5139)                                    

From Third World Economics No. 282 (1-15 June 2002)