Development of Intellectual Property Laws and Foreign Direct Investment in Jordan

• Author: Abdullah Nawafleh
• Position: University of Derby a.nawafleh@my.westminster.ac.uk
• Pages: 142-153

Page 142

1 Introduction

Direct investment is a key instrument in the transfer of technology from one country to another. To attract foreign investment in support of these transfers, however, strong IPRs are considered vital. Several studies establish that intellectual property protection in developing countries, especially countries with low per capita incomes, directly encourages technology transfers from highly advanced technological countries through foreign direct investment (FDI). ¹ It has also been observed that firms are more likely to invest in countries with strong legal protections. It has been found that the smaller risk of imitation leads to a relatively larger net demand for protected products. ²

The Hashemite Kingdom of Jordan (hereafter "Jordan") has taken important steps to reform its legal system and encourage foreign investors. One of the most significant developments in these reforms is the creation of a new legal system for protection of intellectual property rights. The establishment of this framework complies with King Abdullah II aspiration to transform Jordan into an Information Technology (IT) centre in the Middle East, an intention that he announced during a meeting with Microsoft President Bill Gates in January 2000. ³

Jordan is a developing country with modest natural resources, although this ultimately has little bearing upon its rate of development. From 1960 to 2000, for instance, economic output and per capita incomes grew more than three times as fast in South Korea - a country with relatively few natural resources - compared to those in Brazil, a country with abundant natural resources. ⁴ The reasoning for this can be traced to Korea's relative openness to technological and other innovations. It has, for instance, strong intellectual property laws that facilitate the importing of new technologies and the generation of business through FDI. ⁵ Page 143

2. Factors Influencing FDI and Intellectual Property Rights

FDI refers to investments made by investors to overseas enterprises in which the foreign investor has a long-term interest as well as substantial control in the resultant venture. ⁶ FDIs can be developed in one of three ways. The foreign investor may chose to acquire interest in an already existing firm, either fully or in part. Generally speaking, this method involves forming a joint-venture. In other instances, foreign investors can establish new companies in the host country. This is known as greenfield investing.

To determine what impact weak or strong protection of IPRs has on foreign investors' decisions to invest abroad, it is important to look to the Dunning's OLI paradigm which explains activities of multinational corporations in terms of ownership (O), localization (L) and internalization advantages (I) ⁷. Dunning's OLI paradigm maintains that foreign firms typically do not possess good information about the local business environment of countries in which they are planning to invest.

Another point is that FDIs take place when three sets of advantages are perceived by firms to exist simultaneously. ⁸ The first set focuses upon the specific ownership advantages. The firm must generally have a unique ownership advantage, which could be based on ownership of a product or a production process offering competitive advantage. Examples include patents, trademarks, exclusive access to markets and resources, trade secrets, production technology, and management and general organisational abilities ⁹. Typically, however, the foreign investor's ownership-specific advantages are sensitive to property rights protection in the host country; the success of a foreign investment is tied to the security of its intellectual and physical property in the host country.

The second set of advantages refers to the location-specific advantages as perceived by firms. These are the characteristics of host countries in terms of their economic environment or government policies. This set of advantages explains why a firm wishes to produce its goods in the host country. There must be some location advantages to justify a firm's decision to locate in one place rather than another. This choice of location arises from natural differences between countries, including differences in endowment with natural resources, differences in input, production, transport costs, and cultural manifestations requiring adaptation of the product for specific markets. Oil companies, for example, must operate in particular locations where oil is available. Location specific advantages also arise from artificial differences, particularly those related to government policies on, for example, tariffs, domestic corporate taxation, investment or tax regulation of foreign firms, profit repatriation or transfer pricing, royalties on extracted natural resources, anti-trust regulation, technology transfer requirements, intellectual property protection, and labour market regulation. ¹⁰

The third set of advantages relates to internalisation incentive advantages, all of which aim to reduce uncertainty and avoid transaction costs with potential licensees, controlling inputs, and protecting quality. Generally, it must be more advantageous for the investing firm to use its ownership-specific advantages in a foreign country, rather than selling such advantages to local companies ¹¹.

If only the first set (ownership-specific advantages) is met, firms will rely on exports, licensing, or the sale of patents, to service a foreign market. Given the existence of internalisation incentives, FDIs become the preferred mode of servicing foreign markets. It only applies, however, if location-specific advantages are present. There are three conditions necessary for FDIs to take place. Of these, however, locational advantages are the only ones that host governments can influence directly. ¹² One important reason for many firms to engage in FDIs relates to protecting their IPRs in the host country. Most firms will prefer foreign investment over licensing in the case of weak protection. Internalised foreign production helps firms to maintain direct control over their proprietary assets ¹³.

The following sections will explore the legal development of IPRs that are important to foreign investment practices in Jordan. Page 144

3. Jordan and the Reform of its IPRs Regime

Since the mid-1990s, intellectual property law has been the fastest growing and most dynamic field of law in Jordan. Before reforming their IPRs laws, however, Jordan was regarded as a weak enforcer of such rights, hindering the country's participation in international trade. A clear example of the weakness of IPRs in Jordan before the 1990s law reform, led the United States Trade Representative Office to put Jordan on a Special 301 Watch List. The Watch List established the general opinion that Jordan had what was considered inadequate intellectual property protection. ¹⁴ Since that time, however, Jordan's success in promoting IPRs has helped legitimate businesses capitalise on their intellectual property assets and operate without fear of illegal competition. ¹⁵

3. 1 The Concept of Intellectual Property under Jordanian law

According to the World Intellectual Property Organisation (WIPO), IPRs in general are identified as the legal rights which result from intellectual activity in the industrial, scientific, literary and artistic fields, or the rights granted to a person or a company by a state for products of intellectual effort and ingenuity16.

The meaning of 'intellectual property' is not defined with precision in the 1952 Jordanian constitution. Articles 11, 12, 44 and 75 (i) & (f) mention 'property' in general, but do not specify what constitutes 'property'. Jordanian Investment Law No. 68 of 2003 does not define the concept of intellectual property, but Article (12/B) of the same law refers to intellectual property right. It defines 'foreign capital' as: 'Intangible rights such as licenses, patents, trademarks and trade-names registered in [Jordan].' The definition of intellectual property can be found in Article 2 (viii) of the Convention Establishing the World Intellectual Property Organization (1967), amended in 1979, to which Jordan become a party on 12 July 1972. In this article intellectual property includes the rights relating to:

* literary, artistic and scientific works,

* performances of performing artists, phonograms, and broadcasts,

* inventions in all fields of human endeavour,

* scientific discoveries,

* industrial designs,

* trademarks, service marks, and commercial names and designations,

* protection against unfair competition, and all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.

From this definition there are various forms of Intellectual Property Rights that can be divided into two categories. Firstly, there is industrial property, which includes patents, trademarks, industrial designs and trade secrets. Secondly, there are copyright issues, which include literary, musical, artistic, and audiovisual works.

3. 2 IPRs and National Treatment under Jordanian Law

National legislation of any country primarily protects its own citizens and those who are on an equal footing with them. Where no treaty obligation exists, the question of whether...