IPR, Markets For Technology, and Developing Countries Ashish Arora Carnegie Mellon University WIPO-WTO Joint Workshop 17 November 2003

Roadmap Markets for technology Knowledge Economy – Knowledge as a tradable good Impact of MFT for developing countries: Evidence from the chemical industry Upstream, specialist technology suppliers Role of IPR in MFT Direct impact via efficiency of licensing transactions Supply of know-how and tacit knowledge in licensing transactions Indirect impact via entry of specialist suppliers Whose IPR regime? 12/4/2018 Arora, "IPRs, MFT & DC"

Markets for Technology: A Simple Typology Existing Future Technology Technology or component Horizontal (with Union Carbide licensing polyeth. technology to BP Sun licensing Java to actual or IBM; R&D joint ventures between rivals potential rivals) DOJ distinction between markets for technology and markets for innovation, roughly corresponds to columns. Strategic concerns also make it important to understand whether licensing to competitors or complementors Vertical Licensing of IP Affymax licensing combinatorial technology to Pharmaceutical firms (Licensing to cores in non riv als) semiconductors 12/4/2018 Arora, "IPRs, MFT & DC"

Markets for Technology Increasing licensing and tech trades in 1990s Active or emerging tech markets in Chemical processes Biotechnology Semiconductors Estimated size of market for technology $50 billion per year (royalty flows) $20-35 billion per year (licensing plus R&D) 10-15% of civilian R&D ITTIAM in India is developing semiconductor IP; Indian firms licensing drugs to major pharma; Israeli firms in pharma, medical instruments, 12/4/2018 Arora, "IPRs, MFT & DC"

MFT have facilitated the diffusion of chemical technology to developing countries Share in world exports of chemicals, 1899-1993, by country of origin Data from CMA (now Am chem Council) shows much lower shares for “others”, because they define “business of chemistry”, which is different from SIC 28. But even for them, the share of others has increased from 13% to 20% between 1990 and 1999. Clearly, there are many causes. Demand; raw materials, esp. oil. One key is the role of SEFs. Provide plant design and engineering; sometimes affiliated with contractors. Critical role in diffusing technology. Sometimes even radical process innovation. Usually incremental innovation and improvement; also act as agents for technology sellers. Reduce transaction cost. Also bundle required IP. Huge impact – cutting edge technology to developing countries; world capital markets for equipment; if you know what you are doing, -- several sources of ammonia-urea plant. (Haldor Topsoe; Kellog; ICI; Snamprogetti) Source: Table 2 in Eichengreen, in Arora, Landau, and Rosenberg (eds), 1998

Developing Countries and Small Firms Benefit the Most from a MFT Buyers of chemical process technologies, by source of technology, 1980-90 Critical role of independent suppliers – this points to why division of labor is important, and specialist technology suppliers. UOP was supplier of refining technology to independent refiners How SEFs Fuelled Growth of 3rd World Chemical Industry Not have to rely solely on incumbent producers in the West. Technology and engineering services made available, due to competition among SEFs, at MC, not AC. More SEFs imply greater technology variety and quality choices. SEFs are an alternative (not perfect substitute for MNC but ..) Source: Arora and Fosfuri, 1998

Impact of an additional SEF: Estimated additional investment per process, $ mill., 1981-90 Key: For TW as a whole, one additional SEF in the typical market would imply additional investment of $120 m over 10 yrs ~ one chem plant. Not a huge deal but this is marginal impact with about 10 SEFs already. Research Design: Data Dataset: Population of 2081 processes comprising 14893 chemical plants constructed or under construction in world, 1980-90. About 50% are in non-OECD countries. Source of technology and engineering observed for about 50%. Sample: 139 chemical processes in 38 non-OECD countries. (Account for nearly 80% of all investment outside OECD.) Unit of observation: Process-Country pair. Relate variations in number of SEFs operating in 1st World (KFW) to variation in investment in chemical plant in 3rd world (SIZE) across different process Dependent Variable: $ invested in process i in country j. Key Challenges: How to control for a) demand side factors b) for technological maturity c) possible endogeneity of the number of 1st World SEFs For developing countries as a whole, in a typical market, an additional SEF implies ~ 1 additional plant. (Arora, Fosfuri and Gambardella, 2000)

Patents and Markets for Technology Direct: Incentives for codification Easier to search Cheaper to transfer Indirect (but possibly most important): MFT Encourage upstream technology specialists Biotech (Arora and Merges) Semiconductors (Hall and Ziedonis) Chemicals Direct: Can mitigate a key problem – transferring tacit knowledge Arora, 1995 & 1996 Patents can be held as “credible hostages” in technology transactions when non-protected, complementary know-how and services have to be provided. Technical services more likely to be included in licensing contracts when bundled with patents and as part of “turn-key” arrangements. 12/4/2018 Arora, "IPRs, MFT & DC"

Whose IPR Regime Matters for What? Developed country IPR Enhance incentives to codify Facilitate market for technology Encourage technology specialists (SEFs) Encourage licensing by incumbent producers which spills over Enhance innovation by developing countries for developed markets Developing country IPR enhance technology licensing, know-how transfer Increase tech holder bargaining power; may raise cost of technology Modest impact on innovation by developing country  mostly for innovations specific to developing countries Modest impact on market for technology 12/4/2018 Arora, "IPRs, MFT & DC"