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Innovation and IPR: made for each other!

Amit Aggarwal, Co-Founder, of  leading Intellectual Property (IP) management advisory firm , Effectual Knowledge Services,  suggests how Intellectual Property Rights help in protecting innovation and incentivize innovators...

In today’s knowledge-driven economy, technology plays a vital role in transforming business. Over the years, companies depend on technology to solve complex problems. The emergence of new technologies has led to innovation in businesses across sectors. Innovation is the wave for future and is the backbone to survive in the modern business world. Technology development and innovation can raise productivity levels in developing countries, however, majority of the resources that are necessary for innovation have been concentrated in developed countries and invest heavily in research & development (R&D). Leveraging information technology has helped businesses to reduce operations cost, achieve cost efficiencies, drive revenue growth, and gain competitive advantage in the marketplace. IT plays an integral role in every industry and mitigates the risks involved with business decisions. Therefore, strategic use of technology has helped businesses to reap rewards and increase productivity. The technology innovations are valuable and can be easily imitated by competitors, thus leading to decline in revenue and profits of the inventor. Therefore, these innovations have to be protected through stronger IPR regime.

Intellectual Property Rights (IPRs) help in protecting innovations and provide incentive to innovators to engage in innovative activities. IPR also provides return on investment for the expenditure incurred in research and development (R&D).  Innovation is useful if it can be accessed at a marginal cost. It may yield benefits in the short run but may not provide any incentive to the innovator for further innovation. The choice of IPR varies from one country to another. While developed countries focus on excessive IPR protection may lead to inadequate dissemination of knowledge and decline further innovation whereas developing countries have adopted weak IPR protection that has stimulated research and development activity. Stronger IPR protection can help the inventor to gain monopoly in the market and restricts consumer choice, thus encouraging long-term growth and improve product quality. Developed countries have adopted stronger IPR regime with an aim to encourage inventive and innovative activities that leads to long-term economic growth. While developing countries embrace weak IPR protection for rapid diffusion of knowledge through imitation and as a source of technological development. Also, economies providing stronger IPR protection have lead to shifting profits to foreign entities rather than encouraging domestic firms to undertake innovative activities that depend only on imitation and counterfeiting. The main aim of IPR protection is to encourage innovators for their research and development (R&D) efforts, thus leading to long run economic growth. Besides this, expenditure incurred on IP is a measure of innovative capacity and patents are recognized as the most importance aspect to safeguard innovations.

International technology diffusion is defined as a process by which a country gains access and employs technology of another country. Technology transfer takes place through voluntary and involuntary transactions. Most of the transactions take place through involuntary transactions such as technology spillovers and non-market transactions as compared to voluntary transactions that include international trade, FDI, licensing, joint ventures and foreign patenting. Some of the Informal channels of technology include imitation, data from patent applications, and migration of people such as scientists. A stronger IPR can encourage technology transfer resulting in increased trade in goods and services, however, it depends on country’s absorptive capacity, imitation ability, and level of development. The impact of technology diffusion depends on company circumstances as stronger Intellectual property protection an especially patent that restricts technology diffusion as they prevent others from using, making, or selling proprietary knowledge leading to higher prices of products or services. IPR also plays a crucial role in diffusion of knowledge as other inventors are aware about the patent claims and develop similar products on the expiry of the patent.

International Trade
Trading of goods and services has the ability to transfer knowledge through reverse engineering and cross-border learning of production, processes, and market structure. This is an important source of diffusion of technology through formals channels. The effects of patent strength are included in the price of goods that are traded and the decision to export depends on other alternatives that are available such as FDI and licensing. Many firms encourage their exports in countries having stronger IPR protection for minimizing the risk of privacy that can lead to decline in revenue and profits. Stronger IPR protection have a positive impact on in open economies as they receive more foreign patents as compared to domestic patents and growth-enhancing effects are also on the higher side. Additionally, IPR can influence trade to a large extent as it leads to larger trade flows, however, it depends on the country’s imitative capability and development.  As a result, stronger IPR can lead to higher imports into the country. It can also lead to decline in domestic innovation and may increase the prices of goods and create monopoly position in the market. Whereas, weak IP protection will not affect an innovative firm as it takes time for imitation of goods and is likely to be costly.

Foreign Direct Investment (FDI)
FDI is undertaken by companies having knowledge and technology-intensive as these are easily transferred across geographical boundaries. FDI helps the company to keep the technology advantage internally as compared to other sources for technology diffusion. Firms undertake FDI if they involve complex technology and highly differentiated products as the risks of technology spillovers are minimized. Inward FDI can lead to deployment of advanced technology diffusion in the host country. As most of the innovation takes place in foreign countries, FDI is considered to be viable option for technology transfer. Most countries prefer licensing and FDI over other formal channels as technology spillovers can provide benefits to domestic firms. Also, these spillovers are difficult to measure. A stronger IPR protection leads to more inward cashflow and boost the economy. Weak IPR protection affects the investment climate and discourages FDI in the country. However, importance of FDI varies across sectors as it is less important in low-tech industries and where there is difficulty in imitation of products or technology. FDI in low-tech industries depends on the market size and structure instead of level of IPR protection. Stronger FDI is encouraged in industries like pharmaceutical and chemicals.
Foreign Patenting
Foreign patenting depends on the country’s market structure and size and determines whether increase foreign patenting increases or inhibits growth. A stronger IPR protection has a positive impact on foreign patenting especially open economies having large markets. Developing countries have huge advantage in foreign patenting as it encourages diffusion of technology. Additionally, technology diffusion has more benefits in the open economies as compared to closed economies and in relatively large markets.

Future Roadmap
Stronger IPR protection can restricts diffusion of technology with intellectual property protection especially patents prevent others to develop or enter markets. It also leads to reduction in dissemination of knowledge thus lowering the output and increase in prices of goods and services. However, technology diffusion depends on country’s circumstances and its ability to absorb and implement technology in its domestic production. Countries having stronger imitative abilities should have stronger IPR protection to encourage trade flows whereas countries having limited capacity to imitate capacity should have weak IP protection for diffusion of technology. The difficulty in assessing the IPR protection depends on the location of R&D centers as they are favored in the countries having weak IPR protection. Stronger IPR protection can affect technology diffusion through formals channels such as FDI as patenting is required at various levels of production. In developing countries, the impact of intellectual property protection is dependent on numerous factors and stronger IPR protection will not be effective in terms of innovation and diffusion of technology. It will also inhibit growth in these markets and hamper the business environment/investment climate. On the other hand, developed countries should embrace stronger IPR protection in order to encourage innovation and technology transfer. 

Amit Aggarwal  holds a law degree, a master’s degree in management and bachelor’s degree in electrical engineering. He has also undergone extensive training in patent law from US and European patent attorneys and has received certifications from organizations like WIPO, GIIP, IP Central, Lee & Hayes, and Microsoft.
Jan 16 2016