The Federalist Society

Intellectual Property Rights in the Developing World

Intellectual Property Practice Group Newsletter - Volume 1, Issue 2, Spring 1997

July 1, 1997

Clarisa Long

Part I of a two-part series of articles on international intellectual property protection.

International piracy of intellectual property rights has emerged as one of the most important foreign policy issues for many industrialized countries, particularly the United States. U.S. companies have suffered greatly from the lack of rigorous and uniform international standards for intellectual property rights. The absence of intellectual property laws in developing countries costs U.S. firms one dollar for every three dollars of revenue gained from exported products, PhRMA, Opportunities and Challenges for Pharmaceutical Innovation 3 (1996), while inadequate international enforcement of existing laws is estimated to cost U.S. industry up to $80 billion per year. Report of the United States Trade Representative's Intergovernmental Policy Advisory Committee (IGPAC) to the Congress of the United States on the Agreements Reached in the Uruguay Round of Multilateral Trade Negotiations 22 (1994).

New technologies remain one of the main sources of this country's economic growth. Because intellectual property is relied upon, in one form or another, by almost every segment of the economy, protecting intellectual property assets abroad is crucial to maintaining our position as an innovative leader.

The scope of intellectual property rights granted, and the degree to which those laws are enforced, reflect what a nation considers to be its best interest. The level of protection in industrialized countries is generally high, whereas intellectual property protection in the developing world varies widely, with many products excluded from protection altogether. Although the United States extends patent protection to seeds and plants, for example, the intellectual property laws of many developing countries explicitly or implicitly exclude most agricultural inventions. Until recently Brazil denied protection for pharmaceutical products on the grounds that private property rights for pharmaceuticals would make the products prohibitively expensive and would create technological dependency. The enthusiasm with which intellectual property rights are enforced by developing country governments varies even more than the level and scope of protection.

Because of minimal standards of protection and lax enforcement throughout the developing world, pirates have been able to copy a wide range of U.S. name-brand goods and protected products, invading other foreign markets and even the United States with them. The widespread extent of the problem, coupled with increasing concern on the part of businesses, has made protecting intellectual property on a worldwide basis a major component of the U.S. foreign policy agenda. The U.S. government has undertaken efforts to strengthen world-wide protection of intellectual property rights through bilateral consultations with problem countries and multilateral fora such as the General Agreement of Tariffs and Trade (GATT). Most developing countries have committed, pursuant to recent treaties, to raise their standards of intellectual property protection within a grace period. How quickly increased standards of protection will be adopted, and what form those standards will take, remains an open question.

It should be noted that although the terms "piracy," "counterfeiting," and "infringement" are frequently used interchangeably when discussing violations of intellectual property rights, they do not mean the same thing. Infringement is a legal term of art, and it refers to violations of a cognizable legal right for which redress can be sought in the courts. Piracy and counterfeiting are generic terms for all unauthorized uses of intellectual property, and they usually refer to copying products for financial gain. The distinction is an important one, because much of what U.S. businesses refer to as infringement is really copying of products for which most developing countries provide no legal protection and for which businesses have no recourse in foreign courts.

With the globalization of the world economy, developing countries are finding that maintaining competitiveness is a critical factor in development. Economists in the industrialized and developing world alike agree that the ability to develop and commercialize applied knowledge -- the end products of research and development -- is the main source of a country's economic growth. The lack of intellectual property protection in developing countries has generated a hostile environment for foreign and domestic investment that has hampered the economic growth potential of those countries. As policymakers in developing countries struggle to attract investment and world-class technologies to their shores, they are slowly realizing that, in the words of Yogi Berra, "we have seen the enemy and it is us."

The developing world is plagued by two problems with respect to intellectual property: a lack of formal laws providing an adequate scope of protection, and failure to enforce existing laws against violators. Most developing countries do not possess a legal tradition of protecting intellectual property rights. Although formal protection is available on paper in most developing countries, enforcement is largely nonexistent and even the best enforcement efforts are weak. The existence of formal laws without effective enforcement is as bad as the absence of laws altogether.

While the U.S. regards intellectual property rights as comparable to rights to physical property, developing countries use intellectual property protection as an economic policy variable. Developing nations have traditionally considered intellectual property to be the heritage of humanity, rather than an asset to be privately held. The resistance to strong protection for intellectual property rights is actually encouraged by the open support of international organizations. For example, the policy recommendations of the United Nations Committee on Technology and Development have been based on the assumption that weak intellectual property protection benefits less developed countries.

One of the reasons cited by developing nations for lax protection is that they fear the industrialized world would come to hold a monopoly on innovative technologies, particularly in the field of biotechnology, and would produce drugs and agricultural products that would be sold to the developing world at a high price. Developing countries have traditionally been forced to import high technology goods and services. As a result, there are few local interest groups or trade groups sponsoring strong protection of intellectual property rights.

Another reason for lax enforcement is that many developing countries have very successful pirate industries. For example, the pirate pharmaceutical industry in Argentina, one of the most consistent violators of intellectual property rights, is worth $4.6 billion and supplies the rest of Latin America with pirated copies of U.S.-patented pharmaceuticals. Its lobby, CILFA, is one of the five most active pharmaceutical lobbying groups in the world, and has been estimated to contribute an average of $60 million per year to the political campaigns of those members of the Argentine Senate and Chamber of Deputies who oppose the implementation of stronger patent laws. Pharmaceutical and software firms in Argentina opposing enhanced intellectual property protection, and their associations, have consistently outspent foreign firms and their trade associations by a margin of nine to one. Mark Siegelman, Department of Commerce, "Intellectual Property Protection: Argentina" 8-14 (n.d.) (unpublished manuscript).

Political and business leaders in the developing world realize that raising the standards of intellectual property protection will create long-term benefits but short-term costs. Enforcing intellectual property rights are seen by politicians in developing countries as hampering their chances for reelection and, among other things, reducing campaign contributions made by lobbies representing local pirate industries. The benefits of defining and enforcing intellectual property rights, on the other hand, are more distant and less tangible. When governments are unstable, and when politicians do not expect to gain the long-term benefits of legal reforms, they do not have the incentive to make those reforms.

To the extent that developing countries grant formal protection for intellectual property, they often take away with the left hand what they have bestowed with the right. Three techniques developing countries use to weaken the protection afforded by intellectual property rights are issuing compulsory licenses, allowing parallel imports, and applying a working requirement test.

Many developing countries have traditionally imposed compulsory licensing agreements as a condition precedent to granting and enforcing intellectual property rights. For example, in many developing countries, if a patentee wants sell a patented product, the patentee is required to license, on fixed-rate royalty terms, the right to make, use, and sell that product. Local intellectual property holders are only marginally affected by such conditions because at present, only 1% of royalties from the licensing of intellectual property are generated by developing country nationals. See Carlos Prima Braga, The North-South Debate on Intellectual Property Rights, in Global Rivalry and Intellectual Property (1991). The U.S. has always opposed compulsory licensing clauses, particularly if they are coupled with fixed royalty payments.

Most developing countries also attempt to undercut the market power of a foreign national by allowing parallel imports -- that is, by allowing competitors, who have acquired the right to use a patent abroad, to sell a copy of the patented product locally in direct competition with the original owner of a patent.

Finally, a working requirement test means that unless the holder of a patent uses or produces the innovation within the national territory, other producers wishing to use the patented technique will be entitled to a license even without the patentee's consent.

This strategy of weakening and destabilizing intellectual property protection, although perceived by developing country governments to be in their best interest, conflicts sharply with the view of intellectual property held by the U.S. Because much intellectual property is produced only after considerable financial investment, the actual, perceived, and expected losses on the part of U.S. firms due to inadequate intellectual property protection influence the willingness of firms to transfer technology to the developing world.

The problem is compounded by the fact that piracy is easier than ever before. Today's high technology products, such as computer software and hardware, biotechnology, and pharmaceuticals, are extraordinarily information-intensive. It is the information contained in the innovation that is valuable, and digitized information can be copied with the touch of a button. (In contrast, when the value of an innovation is determined by its physical structure, and not by the cost of R&D, the marginal cost of copying is much higher.) Computer software, for example, is expensive to develop but easy to copy. In the pharmaceutical industry, the discovery process is extraordinarily resource-intensive, but once an effective drug is on the market, the compound is comparatively easy to synthesize. A copyist does not even need to invest much energy or creativity in figuring out how to copy a product, because U.S. law requires that the producer of the product reveal to the world how to make and use the product in exchange for receiving a patent.

The ease of copying is a relatively new development in the history of technology. Until a few decades ago, a person who attempted to pirate and mass-produce copies of a book in violation of copyright laws faced reproduction and publication costs that were not significantly lower than those of the original publisher. The nature of high-technology products makes even their low-tech variations easier to copy than ever before. For example, a cassette tape duplicator, made in the U.S. and available in Brazil for US $4000, can make three bootleg copies of a cassette tape simultaneously in ninety seconds.

U.S. firms find the strength of intellectual property protection abroad to be a factor more important to the decision to invest in a developing country than do firms from other countries in the industrialized world. The U.S. is also the most aggressive country lobbying to raise international standards of intellectual property protection: 67%. See Organization of Economic Cooperation and Development, Economic Arguments for Protecting Intellectual Property Rights Effectively 171 (1988). Because U.S. exporters have more of a stake in protecting intellectual property than do other industrialized countries, the U.S.'s more pronounced assertiveness seems to be justified.

With so much at stake, it is no wonder that industrialized countries, led by the U.S., have lobbied for protection of intellectual property rights in the developing world to be on par with those in the industrialized world. U.S. firms generating information-intensive technologies for export have been demanding that the U.S. impose trade sanctions or threaten to withdraw trade benefits as a way to punish developing countries' unauthorized use of intellectual property.

Past experience has shown that the U.S. cannot protect the intellectual property of its own nationals in the international arena through domestic policy alone. On the other hand, international treaties specifically devoted to intellectual property rights protection have been largely ineffective in dealing with piracy in the developing world. The most successful efforts, such as the Trade-Related Intellectual Property Rights Agreement (TRIPS) of the Uruguay Round of the GATT, have tied intellectual property protection to other issues such as foreign trade.

Part II of this article will discuss the international agreements that have been implemented to raise the standards of intellectual property protection, and the policies used by the U.S. to create incentives for foreign countries to respect U.S. intellectual property rights. The article will also provide examples of the gains that have been made and the problems that must still be addressed.

*Clarisa Long is the Abramson Fellow at the American Enterprise Institute for Public Policy Research in Washington, D.C., where she specializes in intellectual property law and the public policy issues surrounding genetic research and the biotechnology industry. She is also a Vice Chairman for Membership of the Intellectual Property Practice Group.

Related Links

TRIPs and Intellectual Property Protection in Emerging Markets

The Federalist Society