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Stronger Patent Protection Leads to Innovation and Tech Transfer

10/20/2003 --

ANN ARBOR, Mich.---International agreements requiring developing countries to provide greater protection for patent and other intellectual property rights (IPR) have stirred controversy in recent years.

Opponents say a large number of studies indicate IPR reform results in little or no increase in domestic innovation. They also contend that mandated policy change works against the national economic interests of developing nations. Advocates, on the other hand, believe strong IPR are required to create the incentives to spur more innovation, both in the developing and developed world, and to accelerate the transfer of technology from advanced to less-advanced countries.

To shed light on this debate, C. Fritz Foley of the University of Michigan Business School and colleagues Lee Branstetter and Raymond Fisman of Columbia Business School examined the response of individual U.S. multinational firms to a series of reforms in IPR regimes undertaken by 12 countries from 1982 to 1999.

Their findings indicate that an increase in IPR leads to an increase in technology transfer by multinationals. This increase is reflected in trends in intrafirm technology licensing, affiliate R&D spending and patenting in the reforming countries.

¿After IPR regimes are strengthened, there is an increase in royalty payments from local affiliates to parent firms for the use or sale of intangible assets,¿ says Foley, assistant professor of corporate strategy and international business at the Michigan Business School.

This payment increase is greater (22.8 percent) than average (8.5 percent) for local affiliates whose parent companies have larger pre-reform patent portfolios, the researchers say. At the time of IPR reform, affiliates also increase their R&D expenditures, presumably to modify and build upon the parent firm¿s technology for the local market.

The study shows no increase in royalties paid by unrelated foreign parties in the developing countries, however, indicating multinationals tend to leverage their technology inside the parent firm and its affiliates.

Further analysis reveals that after IPR reforms have been made, there is an increase in the number of patents filed and the rate of filing by foreign persons, but not by local residents. Foley, Branstetter and Fisman conclude that higher levels of protection encourage multinationals to boost both the volume and sophistication of the technology being transferred.

¿In the absence of strong IPR protection, multinationals limit the deployment of certain critical technologies---often, more advanced ones---for fear those technologies will be imitated by local rivals,¿ Foley says. ¿The existence of stronger IPR appears to induce multinationals to deploy those technologies because they have a legal remedy against imitation.¿

For more information, contact:
Bernie DeGroat
Phone: 734.936.1015 or 734.647.1847