Intellectual Property Rights and Biodiversity: The Economic Myths Global Trade and Biodiversity in Conflict Issue no. 3, October 1998 GAIA/GRAIN The World Trade Organisation (WTO) is carving out a role for itself in the global governance of intellectual property regimes. The WTO's Agreement on Trade Related Aspects of Intellectual Property Rights, or TRIPs, establishes standards of rights that all WTO members must provide through seven fields of intellectual property. TRIPs came into effect in 1995 and will soon have to be fully implemented by developing countries, (2000 for developing countries and 2005 for less developed countries). Failure to comply will result in trade sanctions. This briefing examines the economic costs and benefits of TRIPs, with special regard for developing countries and their wealth of biological diversity. In particular, challenges three myths about intellectual property rights (IPR) and economic development: The technology transfer myth, the innovation myth and the investment myth. The costs of TRIPs could well outweigh the benefits for countries of the South. Transnational corporations (TNCs) will gain expanded market control, but the South is not bound to attract investment, technology transfer or experience economic growth because of stronger IPRs. Prices in certain sectors such as seeds and medicines will rise; monopoly conditions will constrain national firms; and the South's subsidy to Northern research and development (R&D) will rise. In the long-term, the socio-economic fabric that supports innovation in the South will erode. Governments and non-government organisations concerned about the impact of IPR, and particularly TRIPs, on developing countries are encouraged to fight for: 1. The withdrawal of all obligations to extend IPR to plant varieties during the TRIPs Review of Article 27.3(b) in 1999; 2. A major reassessment of the costs and benefits of TRIPs during the full Review of the Agreement in 2000, and the scrapping of the treaty if the negative implications are too costly for the South; 3. The strengthening of instruments, policies and practices to thwart the expansion of TNC monopolies on biodiversity, such as the UN Convention on Biological Diversity (CBD); 4. More creative approaches to develop incentives for research and development that are not biased in favour of industrial powers. The primary and immediate beneficiaries of the implementation of the TRIPs Agreement are likely to be technology and information developers in the industrialised countries. UNCTAD,19971 1. Introduction During the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations, developing countries were pressured to accept the inclusion of IPR into the multilateral trade system. The main argument that industrialised countries used to achieve this was that weak IPR protection acts as a barrier to free trade. In 1988, in the early stages of negotiations, the US Trade Representative claimed that nearly 200 transnational corporations housed in the United States were being short-changed of US$24 billion by countries which have weak IPR systems. These were predominantly poor countries in the South.2 Thus began an aggressive campaign to bring all countries' IPR systems up to the same 'minimal' level of protection through GATT. In 1994, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) was concluded as part of The Uruguay Round package deal which transformed GATT into the World Trade Organisation (WTO). The TRIPs negotiations, in which only a small subset of GATT members states participated, revealed a clear North-South dividing line of conflicting interests. The proposal to extend patent protection to plants, micro-organisms, biotechnological techniques, food and essential drugs under the new trade regime raised numerous ethical and legal problems for many developing countries. However, it was largely the economic dimensions of IPR which fuelled the South's opposition to the TRIPs Agreement. Objections were raised about: imposing a one-size-fits-all approach to IPR among highly disparate economies; the danger of permitting monopoly rights in the food, health and energy sectors; the increased drain on foreign reserves; and how stronger IPR would consolidate the technology gap between North and South under deteriorating terms of access to scientific information. Rich countries, for their part, stressed the alleged positive economic returns that would accrue to the South through stronger IPR protection such as: increased technology transfer; greater inflows of foreign investment; economic growth; and higher standards of living. This briefing exposes and critiques the basic liberal economic arguments that continue to be used to rally support for TRIPs, and similar international IPR agreements which are being imposed by industrial powers. The classic discourse about the relation between intellectual property rights and economic development rests on a number of economic myths. We call them myths because they are not truths, but they are nonetheless cleverly perpetuated in the social consciousness. Even so, economists are still hotly divided on the issues and evidence. It is now vital to stand up to these myths and dispel them, because the TRIPs Agreement is coming under review at the WTO. In 1999, the 130 plus governments which are members of WTO, and therefore party to TRIPs, will reassess the treaty's obligations to extend IPRs to life forms, and specifically plant varieties. In 2000, the entire Agreement will be reviewed. These reviews are critical opportunities for developing countries to amend TRIPs in light of its true economic implications. 2. Economic Assumptions of TRIPs 2.1 Technology in the global economy Knowledge and the embodiment of knowledge in technology are central factors in the production of goods and services, the competitiveness of nations and firms, and the creation and concentration of wealth.3 Technology also underpins globalisation, as firms are better able to organise and link dispersed productive units in order to penetrate global markets. So it is not surprising that the ability of developing countries to gain access to technology, and utilise it in order to build industrial capabilities, has become a major focus of trade negotiators and international development agencies alike.4 Emphasis on technology as a motor of economic development has grown in recent decades with the emergence of new core technologies. Developments in information technology, new materials and genetic engineering, for example, are changing patterns of production across economic sectors, and altering the nature of international competition between firms and nations.5 In the case of biotechnology, previously discrete sectors of production and distribution e.g. seeds, agrochemicals, pharmaceuticals and food processing have been ingeniously linked. Given the fact that more than 40% of production worldwide is anchored on the exploitation of biodiversity,6 then any technology which alters our productive uses of biodiversity as profoundly as genetic engineering and cloning will have an acute impact on developing countries. Not only are developing countries the source of an estimated 90% of the worlds store of biological resources, but the majority of their citizens are deprived of adequate food, environmental security and health. The technology gap between North and South is growing. Technology flows to developing countries have declined steeply since the early 1980s,7 while the share of developing countries in global research and development (R&D) expenditures has dropped from 6% in 1980 to 4% in the early 1990s.8 Liberalisation of capital markets is not improving this situation at all. The small share (20-30%) of the South in foreign direct investment (FDI) inflows has improved recently, but only affecting a handful of countries (China with Hong Kong, South Korea, Singapore). In the meantime, trade agreements such as those administered by WTO or regional pacts, as well as the controversial Multilateral Agreement on Investments, are heavily biased towards the expansive interests of transnational corporations. Contrary to what we often hear, the strengthening of intellectual property rights in this context can lead to a freezing out of technology importers in the South. 2.2 IPRs and technology The role of intellectual property rights in the generation and diffusion of technology has been under debate for decades. IPRs, such as patents, are supposed to achieve a balance between the need to offer incentives for research and innovation and the need to protect the broader public interest. IPR systems, which provide inventors with exclusive ownership rights over their creations, are supposed to act as catalysts for technology generation. In fact, this cannot be shown to be true. There is simply no clear cut causal link. Patents are not a measurement of anything except the judgement of patent offices with respect to the technical merit of an application in terms of its novelty, industrial applicability and inventive step. The number of patents granted in a country does not reflect either the intensity or quality of R&D in that country. Nor does the patent indicate any concrete economic activity: most patents are only ever a title on paper, with the invention never being used in any productive activity. Nor can the economic benefits of patents be accounted for, statistically or otherwise. All inventions are improvements on previous inventions. The total amount of wealth that these successive innovative steps might have generated at any point in time cannot, therefore, be determined. Most firms don't even integrate the capitalised value of their patent returns into their declared assets.9 For these and other reasons, economists have yet to draw up tools to capture or compare the economic value of patents. Patents are titles to use or produce something deemed 'new' and useful. As such, a patent itself is a form of disembodied knowledge. Patents are valued on the market and traded. But they tell us nothing conclusive about a country's economy or innovative activity. Deciphering international patent activity trying to compare IPR systems and their use across countries is all the more deceptive. So where is the economic link between IPRs and technology? The link is simply in the ownership rights that patents afford over a given technology. The economic value of an ownership right lies in the subsequent control it allows the patent holder over who the technology benefits, who it harms, in what way, for how long, and by how much. A patent has nothing to do with the health of a given economy, but everything to do with the potential for market control confirmed on the patent holder. That is exactly why industrialised countries will continue to use IPRs to artificially freeze their technological leverage in the global economy. 3. Unravelling the Economic myths of TRIPs There are many factors entwined in the economic justification of intellectual property rights systems. Three of them are used most heavily today to garner acceptance for stronger IPR in developing countries, and they have important implications for indigenous biodiversity. They constitute the three major myths in the economics of IPR the technology transfer myth, the innovation myth and the investment or FDI myth. 3.1 The technology transfer myth Empirical evidence about the degree of influence that IPRs exert on technology transfer is inconclusive to say the least. There is nothing hard and fast in technology transfer literature to support the liberal economic case for Third World adoption or enhancement of IPR regimes in order to promote North-to-South flows of technology. What is clear is that the international market for technology if such a thing exists is imperfect, and current conditions are heavily skewed against developing countries wishing to gain access to new technologies. For all it is worth, national capacity to generate technology is typically measured by: (1) expenditures on R&D, and (2) by the number of international patents taken out by firms and citizens of various countries. US Patent Office statistics are generally used as a benchmark measurement of the comparative technology generation capabilities of different countries. Knowledge, TRIPs and WTO TRIPs will substantially alter the international political economy of knowledge and technology. TRIPs sets out harmonised rules for property rights over the protection of seven categories of intellectual property worldwide. Any party to the WTO has to implement these rules, which will be enforced through the WTO's Dispute Settlement Mechanism. Many developing and least-developed country members of the WTO will have to provide intellectual property rights in all areas of technology for the first time.10 The patent rules in TRIPs include new restrictions on the use of compulsory licences by governments which seek access to foreign technology.11 The Agreement also obliges states to provide monopoly rights on a range of products and technologies which have been excluded from the IP regimes of many countries. These include pharmaceutical products, agrochemicals, and biotechnological products and processes. In particular, Article 27 of TRIPs imposes IPR on micro-organisms, microbiological processes, and new varieties of plants. Monopoly rights on plant varieties, such as 'basmati' rice, can be exercised either by patents or a sui generis type of right. However, this specific provision will be reviewed and possibly amended in 1999, one year before developing countries are presently scheduled to implement it. IPRs have traditionally been limited and defined by national systems, and as such have been subject to the industrial policy preferences of sovereign states.12 The liberal economic drive behind TRIPs has merely extended the logic of these assumptions to the larger global political economy in general, through which is will impose specifically on the developing world. Table 1: Major technology sources, ranked by R&D expenditure13 Countries Research and Development expenditure, 1993 US patents taken, 1977-96 Technology fees received, 1993 Foreign Direct Investment outflows, 1995 (billion PPP $) % in total (billion PPP $) % in total (billion PPP $) % in total (billion PPP $) % in total USA Japan Germany France UK Italy Canada Netherlands Sweden Switzerland 166.3 74.4 37.1 26.4 21.6 13.2 8.4 5.1 4.8 4.2 39 17 9 6 5 3 2 1 1 1 985.3 307.6 136.2 52.7 52.8 22.1 34.4 16.9 17.3 25.5 57 18 8 3 3 1 2 1 1 1 20.4 3.6 7.3 2.0 2.9 0.9 0.9 6.2 0.4 2.0 40 7 14 4 6 2 2 12 1 4 95.5 21.3 35.3 17.5 37.8 5.1 4.8 12.4 10.4 8.6 30 7 11 6 12 2 2 4 3 3 top 10 countries 361.5 84 1650.8 95 46.6 91 248.7 79 World 428.6 100 1732.0 100 51.0 100 315.0 100 Table 1 reveals that proprietary technology generation is concentrated in just ten countries which account for a massive 84% of global R&D spending per annum and control 95% of the patents taken out in the US over the last two decades. These countries capture 91% of all cross-border technology license and transfer fees in the world.14 The US controls 43% of all technology transfer receipts among OECD countries, followed by Germany (15%), the Netherlands (13%) and Japan (7%).15 The sum of royalties and receipts flowing into these nations grew from US$7.5 billion to an estimated US$28 billion between 1984-1988 alone. By 1996, the US economy was raking in US$30 billion per year from royalties and licences. Developing countries, for their part, supplied over US$18 billion in technology transfer payments in 1995. The level of concentration amongst owners of proprietary technology is staggeringly high. Industrialised countries hold just over 97% of all patents in existence.16 The top 50 corporations in the world own over a quarter of all patents in the United States. In the US and Germany, in 1983, 12% of R%D spending came from just five companies. In Europe, 81% of all Swiss R&D expenditure and 69% of Dutch R&D was accounted for by four firms. This means that TNCs are in an oligopolistic position vis-à-vis the ownership and exploitation of the worlds technological capabilities. The rise of firm-to-firm strategic technology alliances and TNC licensing agreements with university and government research institutions, with concomitant rights of prior access to research results, point to a tightening of knowledge control globally. As Kumar puts it, 'The larger corporations in major industrialised countries may be commanding a stronger control over technology than indicated by their share of patents.'17 Indeed, 92% of all strategic technology alliances contracted between 1980 and 1989 were between the triad countries of the North (US-Japan-EU).18 The bulk of technology transfer going on today is in the form of cross-border mergers and acquisitions. According to UNCTAD, some 70% of the global payments of royalties and fees constitute transactions between parent companies and their foreign affiliates.19 The level of TNC investments in foreign affiliates in 1996 reached US$1.4 trillion, of which only one quarter was financed by FDI flows.20 Therefore, 'technology transfer' is very much a matter of major companies moving technology and capital across country borders, but within their own corporate boundaries. Two of the biggest determinants of TNCs' willingness to transfer technology are the size of the recipient market and the technological capabilities of the recipient country. Evidence suggests that developing countries are not attractive recipients for technology transfers because of the relatively low degree of indigenous technological capabilities. Technology capability is defined as the ability both to create new technology and to adapt and modify technology that exists elsewhere. Most TNC R&D is conducted in the home country, principally because of economies of scale, the existing technological capabilities of developed countries and proximity to the point of consumption. The R&D conducted abroad is usually of a low-level technology nature or is adaptive research for local markets.21 The average age of technologies transferred to TNC subsidiaries in developing countries is also often much older than that transferred to developed countries.22 This makes the possibility of building technological capabilities in the South all the more difficult, especially since technological frontiers are moving forward quite rapidly, as new core technologies become more fully integrated into the global economy. Developing countries are now in a terrible dilemma. They are more dependent than ever on TNCs for technology transfer and foreign investment. However, they are being frozen out of those flows, and the compulsory intellectual property regime of TRIPs could seriously exacerbate this position of exclusion. The type of patent protection fostered by TRIPs will definitely limit the amount of R&D spillovers or technological trickle-down that occurs when technology is adapted for developing country markets. 3.2 The innovation myth Several authoritative studies have pointed to the irrelevance of the patent system for innovation. Kamien and Schwartz, and Firestone, found that competition for market share was the biggest influence on R&D investments by firms.23 A 1985 study conducted by UNCTAD which covered one hundred corporations found the role of patents vis-a-vis innovation was not only sector-specific, but differed on a country-to-country basis.24 There is no uniform cross-sectoral link between IPRs and innovation. Cohen and Levin have found that patents are only significant to innovation in certain industries, being most successful in pharmaceuticals and chemicals, where only an estimated 60% and 30% (respectively) of innovation occurs because of the presence of IPRs.25 And even in the sectors where IPRs do play a role, IPRs produce some particularly unhealthy side-effects. A recent study by Michael Kremer reaffirms the heavily distorted relationship between the drug industry and the patent system, where the IPR incentive works to increase prices and lower consumption.26 R&D expenditures by governments and protection of nascent industries have contributed to the innovatory output of developed and emerging markets. The Japanese and South Korean experience both point to the central role of strong state intervention in this respect. Figures on the R&D programmes and investments of developed country governments also point to the fact that companies often only commercialise what is essentially the product of public research. This is undeniable in the development of biotechnology in Europe, Japan and the US. The liberal economic argument for adopting IPRs because they supply the prime incentive to invent is premised on the assumption that private companies are responsible for all technology generation. This is simply not true, as state intervention plays an enormous role in developing technological capability. Table 2: Government role in R&D 199227 Governments % share of total R&D expenditure Direct governments % share of R&D performed by business enterprises France Germany United Kingdom United States 48.8 37.0 34.2 47.0 19.8 10.7 14.6 28.3 Public research and R&D spillovers are perhaps the most important sources of innovation in the North. Semiconductors emerged from military research in the US, as did many new materials IPRs should logically have significant effects on the public research and R&D spillovers from public to private sector. If liberal arguments about the relationship between IPRs and innovation are wrong, then the restructuring of IPR or investment regimes, not to mention government technology policies, could spur a net decline in global technology generation. There are two major faults in the IPR-innovation link. It is plainly evident that much innovation and technology development occurs in the total absence, or profound uncertainty about the availability, of IPRs. This is especially true of innovation in developing countries, which has developed the biodiversity that the world depends on for food, medicine, shelter and clothing without any IPR regimes. Farmers have never treated their germplasm as private property, but have exchanged it freely so that further innovation would benefit both themselves and others. Since the late 1970s, TNCs have been investing heavily in biotechnology without any assurance of being able to monopolise their inventions. The patent regime has been biotechnology friendly only in the US and Japan. The EU has not implemented its biotechnology patenting regime yet, while major markets of the South such as China, Brazil and India, are only starting to put their biotechnology patenting systems on paper, much less in place. Despite that, hundreds of billions of dollars have been poured by the private sector into biotechnology R&D. Another major flaw in the IPR-innovation link is the ideological emphasis placed upon IPR as the preferred incentive system for innovation. There are in fact already many incentives for innovation including a battalion of fiscal tools such as subsidies and tax credits, all aimed at manipulating the private sector's aversion to R&D risk.28 This is more euphemistically known as governments 'correcting market failures'. Absence of patent protection for biotechnological innovations in many countries underscores the deficiency of this argument. Most firms prefer to use lead-time and secrecy as opposed to the public disclosure of the invention, as patent rights require, to protect what they consider their intellectual property. This practice is on the rise.29 As one study of the situation in the Asia-Pacific Economic Community (APEC) countries put it, 'Intellectual property policies are not the only, nor necessarily the most important, government policy affecting innovation The ratio of patents to real research and development expenditures in the United States and elsewhere has been declining.'30 TRIPs also gives the flawed IPR-incentive thesis universal applicability. However, many foresee that the imposition of IPRs on the South will have disastrous implications for indigenous innovation and their economies. The presence of foreign-generated products on the domestic market will undermine demand for locally produced counterparts, thus subverting local innovation.31 Furthermore, TRIPs requires countries to legally treat the importation of IPR-protected goods and services as actual working of the invention in the importing country. This will further stifle innovation in the South as it robs local entrepreneurs of access to the technology other than in its finished form. Local innovators will increasingly need to reverse-engineer technologies, in order to bypass IPR restrictions and tackle the diminishing terms of access to scientific information. Under TRIPs this practice is considered unlawful. When combined with shrinking budgets for public education under IMF prescriptions, these policies will unravel the innovative fabric in many developing countries. They will also completely ignore the creative technological processes that are not recognised by Western IPR regimes such as TRIPs. 3.3 The foreign direct investment myth TRIPs and other trade-related IPR agreements embody an erroneous understanding of the link between investment and IPR. Propaganda emanating from liberal economists holds that strong IPR protection is necessary to attract investment, particularly FDI.32 FDI is the preferred form of external investment today as it provides the long-term promise of stable capital for recipient countries, as opposed to speculative investment or equity portfolios. It has also grown tremendously in recent years, spurred by the liberalisation of financial markets and investment laws. The global FDI stock quadrupled between 1982 and 1994. In 1996, it stood at US$3.2 trillion or 9% of the world's GDP. Total outflow tipped the US$300 billion mark for the first time in 1995.33 Industrialised countries account for 80% of FDI outflows and 60% of FDI inflows. Most FDI going to the South ends up in China (including Hong Kong SAR), South Korea and Singapore. Most FDI flows occur through mergers and acquisitions. Critical analysis of FDI teaches us a number of important lessons. The first is that there is no causal link between FDI and economic growth.34 As many experts point out, studies on the determinants of growth have tended to ignore FDI in their calculations. In reality, liberalisation of trade and FDI regimes is leading to recession in newly industrialising economies, by disrupting labour markets there and dampening growth. Furthermore, evidence suggests that FDI flows are far more sensitive to changes in short-term economic variables, such as exchange rates, than in long-term policy such as the availability or strength of IPR (as recent events in South East Asia have starkly illustrated). As UNCTAD has pointed out in sanguine terms, IPR is a relatively unimportant determinant of FDI.35 One way to understand that there is no correlation between FDI inflow and intellectual property rights is to scrutinise the R&D investments of TNCs overseas.36 Clearly, strong IPR is desired by TNCs which set up foreign production and research units. But it is not a prerequisite. Most R&D conducted by overseas affiliates of TNCs is of an adaptive nature: products and processes are being fine-tuned to local markets and manufacturing conditions. Hence, big risk R&D or big bang invention is not on the agenda in the first place. TNCs may even be encouraged by weak IPR regimes in the South. Such regimes tend to protect local adaptations of foreign innovations better than they protect foreign innovations. Thus, TNCs can conduct adaptive research and similarly corner markets at lower cost. All told, the determination of location for overseas R&D is far more predicated on local research infrastructure than the availability of strong IPR, especially in the chemical and food industries. Another way of looking at the FDI myth is to ask why it is that the developing countries' share of FDI inflows has gone up while their share in global technology transfer has gone down. The reason is partly because China, again, is absorbing the greater part of the FDI boom of recent years. These patterns do not correlate with a strengthening of IPR regimes. Neither China nor many other FDI magnets in the South developing countries have developed IPR systems. 4. The Economic Costs of TRIPs Any economic analysis of the TRIPs Agreement should encompass not only the alleged returns to developing countries but also the costs. The fact that there will be significant returns is dubious. TNCs will without doubt be encouraged to expand sales of IPR-protected goods and services under a general climate of enhanced IPR enforcement. This will particularly affect copyright protected goods. In the patent area, restrictions on compulsory licensing and treatment of importation as working of patents will encourage the expansion of some markets. However, the South should not expect increased or improved basic resources for national development, such as investment, technology transfer and enhanced local innovation. These should not be anticipated because of TRIPs or any other trade related IPR agreement. Some costs of implementing the TRIPs Agreement have been examined by UNCTAD and a few other authors. Others can be deduced from more general studies on the implications of IPR reform in the South. There are two sets of costs the straightforward costs and the hidden costs. 4.1 Straightforward costs of TRIPs Implementation of the TRIPs Agreement in developing countries carries with it a number of straightforward costs. These are obvious but in no way negligible. The first is that, aside from legislative change in actual laws, TRIPs must be enforced through judicial and administrative systems. The costs of reforming these systems vary from country to country. In Chile, this could tip the US$1.5 million mark, in Egypt US$1.8 million, Bangladesh over US$1.4 million and Tanzania at least US$1-1.5 million. These are estimates prepared for UNCTAD which in some cases leave out training of personnel.37 It is feared that the budgets necessary for reforms at the administrative, judiciary and legal levels will divert national resources from basic socio-economic programmes, especially in the least-developed countries.38 Another straightforward cost clearly anticipated will result from firms - which until TRIPs have been producing infringing goods, such as counterfeit entertainment, clothing or luxury items - suffering a decline in output. This means people will lose jobs and national economies will feel a downturn. In those countries which either produce or act as key transit points of counterfeit goods, the pinch may be quite harsh. Third, domestic pharmaceutical production will decline in developing countries because licence fees and prices will rise. In countries that have weak competition policies and that covers most developing countries this will be extremely detrimental. Poor people simply cannot afford expensive medicine, and TRIPs will allow foreign drug companies to not only jack up prices considerably, but also outlaw parallel imports and generic versions of patented drugs. 4.2 Hidden costs of TRIPs TRIPs will result in quite a large number of hidden costs: some direct, some indirect; some explicitly derived from the TRIPs Agreement and others related to IPR in general. We only point to some major ones. The cost of monopolies The broad expansion of monopolies that TRIPs will facilitate in the world economy will bring about a rise in prices in certain markets and a lock-out on cheaper alternatives. The net effect in the pharmaceutical sector has been amply demonstrated people cannot afford expensive treatment and consumption declines, with companies recovering the theoretical sales loss through excessively high prices. Society pays the costs of such monopoly not only directly. Rent-seeking, R&D duplication, patent-pooling, licensing abuses and a whole slew of anti-competitive behaviour are extremely well-known in the OECD countries. Developed countries have thereby tried to control them through competition policies and anti-trust legislation in particular. TRIPs was forged and will be implemented with no such measures being required. This is truly a daunting prospect. Yet without competition policies that restrict licensing practices to protect the broader public interest, and without anti-trust legislation to block the formation of monopolies, Southern countries will not be able to cope with the subsequent market 'distortions'. And because TRIPs and various TRIPs-plus legislation39 open the floodgates to patenting of biological products and processes affecting food and health poor people in the South will all the more suffer these distortions. Reverse revenue flows The expansion of high minimal standards for IPR protection across all WTO member states will set the stage for greater perverse flows of revenue from South to North. One reason for this is that the North is by far the greatest player in the IPR system. Even in developing countries that do have active patent activity systems, one can see that most titles are going to non-nationals. TRIPs entrenches this through the application of National Treatment, whereby foreign nationals are allowed to enjoy exactly the same degree of intellectual property rights as normal citizens of a given country. Current outflows of royalties are simply bound to rise, putting pressure on foreign currency reserves. US manufacturers are eyeing US$202 million in unpaid agrochemical royalties and US$2.5 billion in unpaid pharmaceutical royalties from the South.40 This scenario is particularly unjust in the biodiversity-related industries. A study published by the UN Development Program shows that the real royalty irates are the TNCs, not the developing countries. If a 2% royalty was charged on biological diversity developed by local innovators n the South, the North would owe over US$300 million in unpaid royalties for farmers' crop seeds and over US$5 billion in unpaid royalties for medicinal plants.41 Erosion of the innovative fabric of the South It is not often recognised how much IPR as a so-called incentive to innovate works as a disincentive. Broad patents can have the perverse effect of stopping R&D. This has been documented in several sectors (e.g. the oilseed industry) and in fact 'blocking technology' has become the top strategic value of patenting today.42 This means that not only adaptations of patented technologies are stopped but completely alternative means of production which may be less harmful to the environment or less costly to the consumer - are not developed. The costs of this disincentive have not been calculated, to our knowledge. The expansion of IPR to biodiversity in the industrialised countries has brought with it a reduction in the flow of both genetic resources and information, especially in the plant sector.43 Developing countries can ill-afford this. Coupled with the lack of any link between IPR and investment, they will see their own terms of access to scientific information diminish. This will erode the capacity to generate indigenous technologies, leaving national scientists with few better options than working for TNCs. Implications of TRIPs for the Seed Sector Seed is the basis of agricultural production and livelihood systems, along with land and water. Agriculture represents a sizeable portion of the GDP of most industrialised countries and an overwhelming portion of that in the South. IPR legislation patents or sui generis plant variety protection has spurned a tremendous concentration in the sector over the past decades in the North, accompanied by vertical integration of plant breeding with agrochemical and food processing corporations. The top ten seed companies currently control 30% of the world's US$23 billion commercial seed market.44 The monopolies they are enjoying through patent protection are far reaching. Breeders are patenting entire species (cotton), economic characteristics (oil quality), plant reproductive behaviour (apomixis) and basic techniques in biotechnology (gene transfer tools). The US Department of Agriculture recently co-patented a gene that renders all plants sterile in the second generation, (the "terminator technology"). The patent extends to any plant in which the gene is inserted. Not only do farmers have to pay higher prices for patented seeds but they are prevented from reusing the seed. TRIPs will legalise and expand this trend to the developing countries. Article 27.3(b) of the TRIPs Agreement makes IPR on plant varieties compulsory in all WTO member states. Developing countries have until the year 2000 to implement this, while least-developed countries have until 2005. This provision will be reviewed in 1999, presumably because countries are given the option between patenting seed or devising sui generis IPR systems for plant varieties. No one is sure what an acceptable sui generis system is. The 1999 Review is a major opportunity to delete this obligation from TRIPs If TRIPs is not revised, developing countries will have to pay a premium on their own biological diversity and they will see their seed markets overtaken by TNCs and abusive patents. This will be at the expense of much untapped or unrecognised breeding potential among their own scientific and rural communities. It also throws up serious contradictions with negotiations in the biodiversity related flora, such as the CBD and the Food and Agricultural Organisation (FAO), where Farmers Rights and Community Rights over the biological materials they have developed and nurtured for millenia, are seeen as a priori rights. Conclusions and Recommendations This review of the economic implications of the TRIPs Agreement for developing countries underscores three major messages: TRIPs is imposing the wrong concept of innovation. Innovation is a crucial process to any country, developed or developing. Creative capacities of citizens should flourish so that societies are resilient in face of pressures, can devise new options and alternatives for sustainable development and generate a needed sense of well-being. TRIPs espouses one concept of innovation only. It does not recognise, much less promote, the kind of innovative processes and capacities that most developing countries are rich in and without which they cannot survive. We refer in particular to local systems of managing biodiversity, upon which both the world economy and local livelihoods intimately depend. These systems, the resources they generate and the knowledge they are founded on, will be depleted as Southern countries adopt IPR regimes under threat of trade sanctions from the technology rich. TRIPs' standards of novelty, industrial process and inventive step do not even admit the existence of other innovation systems other than western practice. This is to the long-term economic detriment of developing countries and is intellectually backward. TRIPs encourages dependency on one incentive only and it is a highly inefficient one. There are many forms of incentive that governments can offer researchers. These range from subsidies for public sector R&D to tax credits. IPR is only one option. And it is a very expensive option because monopolies are prone to abuse, especially in the absence of corrective measures like anti-trust legislation and licensing practice controls. The economic and democratic costs of IPR as an incentive to innovate from higher priced goods to reduced access to information - are extremely high and developing countries can least afford to rely primarily on this one tool. TRIPs is geared to lock out competition and encourage passive consumption of foreign technology in the South, to the benefit of TNCs. Applied to biodiversity, in which the South is ingeniously rich, monopoly systems such as IPR will benefit very few actors at the expense of the many others. TRIPs relies on a faulty cost-benefit analysis. The TRIPs Agreement will profit the industrialised countries far more than developing countries. Scandalously few nations control the bulk of the world's entire pool of investment funds and technology. The flows of both to struggling economies in the South are not going to be determined by TRIPs but by other calculations of pay-off to the North. Given current power relations and the biases ingrained in the IPR system, it is simply incorrect to assume that the South will gain more from strong intellectual property systems under TRIPs than it loses. Taking the hard economics and broader social aspects into account, governments, scientists, public interest groups and others should be encouraged to work out more promising systems to promote research and development in the South. At the very least: 1. The 1999 Review of TRIPs Article 27.3(b) should withdraw the obligation to provide any form of intellectual property on plant varieties or any other life forms, be it by patent or sui generis systems. This Review should not be delayed nor should it result in stronger IPR obligations as the North would have it. 2. The full-scale Review of the entire TRIPs Agreement scheduled for 2000, should invite a very broad assessment of the costs and benefits of the Agreement to developing and least-developed countries, and if the conclusion is negative the treaty should be scrapped. Particular attention should go to the application of TRIPs to biological diversity and how it will affect the economic resource base, indigenous knowledge, ethics and the terms of access to scientific information, as well as the control of societys food and medicine. 3. The strengthening of IPR regimes should be pro-actively thwarted by other legal instruments related to biodiversity such as the CBD and the FAO Undertaking on Plant Genetic Resources. Moves to construe IPR as a tool for benefit-sharing with the South or as an option for indigenous peoples are based on faulty assumptions and a narrow assessment of the implications. 4. At the national level, governments should explore other systems to promote investment, R&D and technological capacity-building. Monopoly rights are the most expensive and hard-to-control means to try to achieve this. Almost inevitably they will benefit the already strong and wealthy at the expense of the poor and the wider society. Acronyms: IPRs - Intellectual Property Rights TRIPS - Trade Related Aspects of Intellectual Property Rights WTO - World Trade Organisation TNCs - Transnational Corporations R&D - Research and Development CBD - Convention on Biological Diversity GATT - General Agreement on Tariffs and Trade FDI - Foreign Direct Investment APEC - Asia-Pacific Economic Table 3: Economic Arguments for and against Strong IPRs in Developing Countries FOR AGAINST Growth and high standards of living are realised through technology generation which is stimulated by IPR. The 'most important factor' in the development of IPR has not been anticipated economic payoffs on the side of developing countries but plain 'political coercion' exercised by industrial countries, in particular the United States.45 By the late 1970s to early 1980s, the US government had acknowledged that a structural technology gap was seriously emerging between its economy and Japan's. Therefore, policy was directed to aggressively to freeze the artificial advantage still enjoyed by American industry through an expansive foreign IPR policy, coupled with weak antitrust and strong competition policy measures.46 It stimulates investment. Biotechnology corporations have been spending US$7.5 billion per year on R&D, and in 1995 alone over US$12 billion were invested in the sector,47 despite weak or uncertain patent protection in many of the worlds largest markets including the EU. Their biotechnology patenting directive has not even entered into force and is currently under dispute at the European Court of Justice. The profit motive, without IPR props, appears to work well enough alone even in a high-tech, high-risk R&D sector. This illustrates economists' finding that there is no correlation between investment and IPR, just as there is no confirmed correlation between investment in R&D and economic growth.48 It attracts foreign direct investment (FDI). Most FDI is concentrated in the hands of a small number of companies and flows within the same company across borders.49 Ten developing countries alone absorb 80% of all FDI flowing to the South. This must be weighed against payment of licences and royalties by all developing countries to foreign IPR holders, which drains precious reserves. It stimulates technology transfer from North to South. An estimated 70% of the global payments of royalties and licence fees (direct evidence of technology transfer) comprises transactions between parent TNCs and their foreign affiliates.50 TRIPs requires that importation of patented products or processes by the South constitute the actual 'working' of a patent in the purchasing country, therefore giving an illusion of technology transfer. It stimulates research and innovation . The relationship between monopolies and innovation is a shaky one. IPR essentially puts territorial borders around technologies and other inventions so that firms can capture higher rents (profit maximisation). There is no inherent relationship between patents and R&D. ... by allowing inventors to recoup R&D costs. Empirical evidence shows that in developed countries, industry recoups 15-20% of its R&D costs through patents whereas in a country like India, the figure for a domestic inventor is 0.5-2%.51 The reason often stated is that Indian invention is of an adaptive nature, which implies that strong patent rights are not the relevant mechanism to generate profits on R&D expenditure. In the public sector in the US, government-sponsored research through the university system hit the US$82 billion mark in 1995, generating 20,000 patent filings and US$1.5 billion in royalties a meagre 2% return on the investment.52 This is used to argue that the government should not invest in academic research because of low economic returns even when universities adopt an aggressive IPR policy. The public benefits of disclosure outweigh the costs of artificial monopolies in the marketplace. This argument is untenable. IPR does not guarantee disclosure. Trade secrecy ranks first as a method for protecting innovation in 43 industries across the US economy, especially in information technologies and biotechnology.53 In the biotechnology industry, written disclosure has been replaced by physical deposit of samples, and these samples are not available to the public. Firms deploy much effort to avoid disclosure of their patent portfolios.54 In the US, rejected patent applications the bulk of all filings are kept secret. Even if there is technical merit to rejected applications, researchers only see that fraction of technological information deemed worthy by the patent office.55 Also, strong IPR systems can be the cause of costly duplication of R&D investment or patent-racing, compounded by high enforcement costs.56 It generates technology, a fuel of national economic well-being. A recent survey in the United States dispels this claim. Over 80% of the companies contacted indicated that 'blocking technical areas' with no intention of working the invention was a prime motive for patenting. Patents are described as 'trump cards' to negotiate licences. In other words, the patent system regulates competition. It does not necessarily stimulate technology generation, much less diffusion. IPR is essential to free markets. IPR is a market distortion in itself: it is a government sanctioned monopoly and a subsidy. In open markets, IPR works as a mechanism to regulate competition between firms but not to relieve the market of barriers to trade because it is, by definition, a barrier to trade. In the long term, strong IPR system can result in price discriminations depending on demand elasticities.57 Patent-pooling, tied up sales, cross licensing, refusal to license, territorial restraints and many other market-distorting practices are common in countries with strong IPR systems.58 If implemented in absence of broader policies related to competition and trust prevention, IPR can give firms excessive control over markets. It is an indiscriminatory democratic system, subject to full public participation. The opposite is true: it is an expensive elitist system. A patent has to be defended by its owner, not the government. A typical lawsuit over one claim of an invention costs between US$25,000-US$200,000 today in the United States. Patent infringement litigation costs US$1 million in the US and $600,000 in Europe. Footnotes: 1 UN Conference on Trade and Development, The TRIPs Agreement and Developing Countries, UNCTAD, Geneva, 1997, p. 4. 2 USTR Report 1988 findings, as reported in Gregory Aharonian [email protected], 'PATNEWS: Global intellectual property losses for US companies', Internet Patent News Service, 23 October 1994. 3 Vickery G, Technology Transfer Revisited', Prometheus, Vol. 4 No. 1, 1985 ; Dunning J, Multinationals, Technology and Competitiveness, Unwin, London, 1988 ; Freeman C, The Challenge of New Technologies', Interdependence and Co-operation in Tomorrows World, OECD, Paris, 1987. 4 Patel S, 'The Technological Dependence of Developing Countries', Journal of Modern African Studies, Vol. 12 1974; UNCTAD, Trends in International Transfer of Technology to Developing Countries, UNCTAD, Geneva, 1986. 5 Strange S and Stopford J, Rival States: Rival Firms, Cambridge University Press, 1991. 6 Ng S, Pearson A.W. and Ball D.F., Strategies of Biotechnology Companies, Technology Analysis and Strategic Management, Vol. 4 No. 4, p. 351. 7 Marton K and Singh R, 'Technology Crisis for Third World Countries,' World Economy, Vol. 14 No. 2, 1991, p. 199. 8 UNESCO figures cited in Nagesh Kumar, 'Technology generation and technology transfers in the world economy: recent trends and implications for developing countries', INTECH Discussion Paper Series #9702, September 1997, p.11. URL: http://www.intech.unu.edu/publicat/discpape/9702.htm 9 Jonathan Putnam, 'The value of international patent rights', unpublished paper, 3 February 1997. 10 Whereas developed country members had to amend their intellectual property laws one year after the entry into force of the Agreement (i.e. 1st January 1995), developed country members have until the year 2000, and least-developed country members the year 2005. 11 Compulsory licenses have been a means by which countries have gained access to work or use proprietary technologies within their own territories. A compulsory license effectively obliges a company to license out its technology, or work a product locally, typically in exchange for access to markets. 12 Penrose E., The Economics of the International Patent System, Westport, Greenwood Press, 1973 13 Table adapted from Nagesh Kumar, (1997), op. cit., p. 6. 14 Idem, p. 7. 15 Idem, p. 9. 16 World Intellectual Property Organisation, IP/STAT/1994/b, WIPO, Geneva, November 1996. 17 Nagesh Kumar, (1997), op. cit., p. 16. 18 Idem, p. 21. 19 UNCTAD, World Investment Report 1997: Transnational Corporations, Market Structure and Competition Policy - Overview, UNCTAD, Geneva, 1997, p. 2. 20 Idem - this figure excludes investments controlled by non-equity measures such as corporate alliances. 21 Ronstadt R, 'International R&D: the establishment of R&D abroad by seven US multinationals, Journal of International Business Studies, Vol. 8, 1978. 22 Mansfield E and Romeo A, Technology transfer to overseas subsidiaries by US-based firms, Quarterly Journal of Economics, Vol. 95, pp. 737-750, 1980. 23 See Kamien M and Schwartz N, Market Structure and Innovation, Cambridge University Press, 1982, and Firestone O, Economic Implications of Patents, 1971, University of Ottawa Press, Ottawa. 24 UNCTAD, Trends in the International Transfer of Technology, 1986, op. cit. 25 Cohen W. M. and Levin R, Empirical Studies of Innovative Activity, in Stoneman P, (ed.), Handbook of the Economics of Innovation and Technical Change, Handbook of Industrial Organisation, Vol. II, Amsterdam. 26 See 'A patent cure-all?', The Economist, London, 15 June 1996 for a discussion of Michael Kremer, 'A Mechanism for Encouraging Innovation', HIID Discussion Paper No. 533, May 1996. 27 Kumar N and Siddharthan N, Technology, Technology, Market Structure and Internationalization: issues and policies for developing countries, Routledge and UNU/INTECH, 1997, p. 25. 28 Organisation for Economic Co-operation and Development, National Innovation Systems, OECD, Paris, 1997, and ibid, Fiscal Measures to Promote R&D and Innovation, OCDE/GD(96)165, OECD, Paris, 1996. 29 OECD, (1997), Patents and Innovation, op. cit., p. 23. 30 Ronald Hirshorn, 'Foreign Direct Investment and Market Framework Policies: Reducing Friction in APEC Policies on Competition and Intellectual Property', Strategis, No. 4, October 1996, Canada, http://strategis.ic.gc.ca 31 Bengston D, 'Exogenous factors affecting research institutions in developing countries,' International Journal of Technology Management, Vol. 4, 1989, pp. 317-333. 32 See, for example, Belay Seyoum, 'The impact of intellectual property rights on foreign direct investment', Columbia Journal of World Business, Vol. 31 No. 1, Columbia University Graduate School of Business, New York, Spring 1996. 33 Japan External Trade Relations Organisation, JETRO White Paper on Foreign Direct Investment 1998, JETRO, Tokyo, 1998, http://www.jetro.go.jp 34 Richard Kozul-Wright and Robert Rowthorn, 'Spoilt for Choice? Multinational Corporations and the Geography of International Production', Oxford Review of Economic Policy, Vol. 14 No. 2, Summer 1998. 35 UNCTAD, (1997), The TRIPs Agreement, op. cit., p. 17. 36 See Nagesh Kumar, 'Intellectual Property Protection, Market Orientation and Location of Overseas R&D Activities by Multinational Enterprises', World Development, Vol. 24 No. 4, 1996, pp. 673-687. 37 For detailed breakdowns see UNCTAD, (1997), The TRIPs Agreement, op. cit., pp. 23-26. It is worth remarking that assuring biological scientific expertise among patent office staff, to accommodate the biotechnology industry, is a long and difficult process in most countries, even the United States. The US Patent and Trademark Office ran-up a monstrous three-year backlog in processing applications due to retraining of staff in biological sciences. 38 UNCTAD, (1997), The TRIPs Agreement, op. cit., p. 2. 39 Cf., in particular, the regional IPR arrangements facilitated under the auspices of NAFTA, FTAA, the Central American Undertaking, and APEC. 40 Rural Advancement Foundation International, Conserving Indigenous Knowledge: Integrating Two Systems of Innovation, UN Development Program, New York, 1994, p. 17. 41 Idem, p. 17. 42 OECD, (1997), Patents and Innovation, op. cit., p. 29. 43 See Gaia and GRAIN, 'Ten Reasons Not to Join UPOV', Global Trade and Biodiversity in Conflict, No. 2, May 1998. 44 Rural Advancement Foundation International, 'Seed Industry Consolidation: Who Owns Whom?', RAFI Communiqué, July/August 1998, http://www.rafi.org/communique/ 45 Susan K. Sell, 'Intellectual property protection and antitrust in the developing world: crisis, coercion and choice' in International Organization, Spring 1995, WPF, Massachusetts Institute of Technology. 46 US Information Agency, 'Intellectual Property in the Global Marketplace,' Economic Perspectives, Vol. 3 No. 3, USIA, Washington DC, May 1998. 47 Figures from Pat Roy Mooney, The Parts of Life: Agricultural biodiversity, indigenous knowledge and the role of the third system, Development Dialogue, Dag Hammarskjold Foundation, Uppsala, Special Issue 1996:1-2. 48 Willian Lesser, 'Economic arguments for and against patents and plant breeders' rights' in Equitable patent protection in the developing world: issues and approaches', Eubios Ethics Institute, 1991 49 UNCTAD, World Investment Report (1997), op. cit. 50 Idem. 51 Manjula M. Luthria, World Bank, 'IPRs and developing countries', in Technet Think-Tank on IPRs and developing countries, sponsored by World Bank and WTO, 2 May 1998. See http://www.vita.org/technet/iprs 52 Gregory Aharonian [email protected], 'US academic licensing' in Internet Patent News Service, 23 March 1998. 53 Organisation for Economic Co-operation and Development, Regulatory reform and innovation, OECD, Paris, circa 1996. 54 OECD, (1997), Patents and Innovation, op. cit. 55 Jonathan Putnam, (1997) op.cit. 56 UNCTAD, (1997), The TRIPs Agreement, op. cit. 57 Idem. 58 Organisation for Economic Co-operation and Development, Competition policy and intellectual property rights, OECD, Paris, 1989.