The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology Transfer

Author:Keith E. Maskus

    An edited version of this chapter was published in the fall of 1998 in the Duke Journal of Comparative & International Law 9(1):109-62.

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I Introduction

The global system of intellectual property rights (IPRs) is undergoing profound changes. Numerous developing countries recently have undertaken significant strengthening of their IPR regimes. Regional trading arrangements, such as the North American Free Trade Agreement (NAFTA) and a series of partnership agreements under negotiation between the European Union (EU) and various Eastern European and Middle Eastern nations, now pay significant attention to issues of regulatory convergence, with particular emphasis on IPRs. Most important is the introduction of the multilateral Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) within the World Trade Organization Page 42 (WTO). Under the terms of TRIPS, which I discuss further later in the chapter, current and future WTO members must adopt and enforce strong and nondiscriminatory minimum standards of protection for intellectual property. Finally, although considerable controversy persists over international means of protecting key information technologies, including databases and electronic information transfers, there is an evident commitment to achieving strong protection in those areas.

That the international system is moving toward markedly stronger IPRs is not a surprise when viewed in the context of economic globalization, which is the transcendent commercial and political force of this era. Globalization is the process in which national and regional markets are more tightly integrated through the reduction of government and natural barriers to trade, investment, and technology flows. In this global economy, the creation of knowledge and its incorporation in product designs and production techniques are increasingly essential for commercial competitiveness and economic growth. The situation acquires growing political saliency in light of the fact that the international mobility of capital and technology has increased markedly relative to that of most types of labor. Accordingly, globalization tends to vest its largest rewards in creative and technically skilled workers and to place its largest pressures on lower-skilled workers.

Emerging countries have strong and growing interests in attracting trade, foreign direct investment (FDI), and technological expertise, although such encouragements must be tempered with accompanying programs to build local skills and to ensure that the benefits of competition actually arise. In this context, IPRs are an important element in a broader policy package that governments in developing economies should design with a view toward maximizing the benefits of expanded market access and promoting dynamic competition in which local firms take part meaningfully. That broad package would include promoting political stability and economic growth; encouraging flexible labor markets and building labor skills; continuing to liberalize markets; and developing forward-looking regulatory regimes in services, investment, intellectual property, and competition policy.

It is beyond the scope of this chapter to consider in detail all of these issues and their complex interrelationships. Rather, I focus here on relationships between IPRs and technology transfer. In the next section, I give an overview of recent trends in international investment and licensing, using U.S. data as a particular illustration. In the third section, I discuss the role of IPRs in attracting technology flows through FDI and licensing. In the fourth section, I discuss the limited number of econometric studies of these effects. In the fifth section, I present the broad outlines of a pro-competitive strategy for attracting investment and technology. In a final section, I offer concluding remarks.

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II Trends in FDI and Technology Transfer

Multinational enterprises make multifaceted decisions regarding the means by which they can serve foreign markets. Firms may choose simply to export at arm's length to a particular country or region. Alternatively, they may decide to undertake FDI, which requires selecting where to invest, what kind of facilities to invest in, whether to purchase existing operations or construct new plants (so-called greenfield investments), which production techniques to pursue, and how large an equity position to take with potential local partners. Firms may prefer a joint venture with some defined share of input costs, technology provision, and profits or losses. Finally, multinational enterprises may opt to license a technology, product, or service, thus leading to complicated issues of bargaining over license fees and royalty payments. Those decisions are jointly determined and, for any firm, the outcome depends on a host of complex factors regarding local markets and regulations. IPRs clearly play an important role in those processes, though their importance varies by industry and market structure.

I begin with a glance at recent international data on FDI and licensing. Many countries do not compile reliable and comprehensive data on such flows, so the overview is constrained by limited data availability.

Table 3.1 lists aggregate figures on FDI inflows and outflows, in millions of U.S. dollars, for representative countries from the International Monetary Fund's (IMF) Balance of Payments Statistics. One immediate observation is that reported FDI data are quite volatile. For example, while inward FDI into the United States remained fairly steady at between US$48 billion and US$60 billion between 1987 and 1995, outward FDI more than tripled from 1990 to 1995. Japan's outward FDI rose sharply in the late 1980s but fell by more than half between 1990 and 1995. The volatility suggests that one should be cautious about making inferences on the basis of a single year of data.

Despite this problem, it is clear that the period saw sharply rising FDI flows in both the industrial countries and most of the key developing countries.1 Spain experienced a dramatic increase in inward FDI during the late 1980s after its accession to the EU, but that inflow later moderated. The United Kingdom continued to be a net supplier of FDI, but annual investment in that country doubled over the period. Japan remained, in relation to its gross national product (GNP), a very small recipient of inward FDI but a large supplier of outward FDI. Poland's rapid liberalization and deregulation program, along with its increasing commercial ties with Western Europe, led to a 40-fold increase in inward FDI in the early 1990s.

As is well known, FDI in China mushroomed during these years, rising by a factor of 10 between 1990 and 1995. Its receipt of nearly US$36 billion in FDI in

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TABLE 3.1 Total FDI Flows, Selected Countries (US$ million)

Country 1987 1990 1995
Inward Outward Inward Outward Inward Outward
Industrial  . .
Canada 8,040 8,540 7,855 4,725 10,786 5,761
Germany 1,820 9,760 2,530 24,210 8,940 34,890
Japan 1,170 19,520 1,760 48,050 60 22,660
Spain 4,571 745 13,987 3,522 6,250 3,574
United Kingdom 15,696 31,335 32,430 19,320 32,210 40,330
United States 58,220 28,360 47,920 29,950 60,230 95,530
Developing  .
Argentina –19 1,836 1,319 155
Brazil 1,169 138 989 665 4,859 1,384
Chile 891 6 590 8 1,695 687
China 2,314 645 3,487 830 35,849 2,000
Egypt, Arab 948 19 734 12 598 93
Rep. of  .
Indonesia 385 1,093 4,348 603
Kenya 39 31 57 33
Korea, Rep. of 616 540 788 1,056 1,776 3,529
Malaysia 423 2,332 4,348
Mexico 2,621 2,634 6,963
Poland 12 8 89 3,659 42
Singapore 2,836 206 5,575 2,034 6,912 3,906

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