U N ITED NATIONS CON FER ENC E ON TRADE AN D DEVELOPMENT

Virtual Institute Teaching Material on

Transfer of Technology

NEW YORK AND GENEVA, 2012

 NotE

The views expressed in this volume are those of the authors and do not necessarily reflect the views of the United
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© Copyright United Nations 2012
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ii
Acknowledgements

The teaching material on Transfer of Technology was prepared by the UNCTAD Virtual Institute under the
supervision of Vlasta Macku, in collaboration with the Intellectual Property Unit of UNCTAD's Division on
Investment and Enterprise.

The material was researched and written by Paolo Bifani, Fleur Claessens, Victor Konde and Joseph Clements.
Reviewing and updates were provided by Pedro Roffe, Constantine Bartel, Kiyoshi Adachi, Christoph Spennemann,
Ermias Biadgleng, Elisabeth Tuerk, Wolfgang Alschner, Michael Lim, Kathryn Stokes, Nora Circosta and Ina Peters.
The material was edited by Elizabeth Frances Kemf. Design and layout were created by Hadrien Gliozzo, and the
publication process was managed by Nora Circosta.

The financial contribution of the Government of Finland is gratefully acknowledged.

iii
 Table of contents

Note ii
Acknowledgements iii
List of BOXES v
List of figures v
List of TABLES v
List of abbreviations vi

1
INTRODUCTION 1

Key Issues in the Transfer of Technology 3

1 Common concepts and terms 4

2 Overview of market-related channels and sources of technology transfer 12
3 Overview of non-market-related sources 18
module

4 Direct and indirect support measures to facilitate technology transfer 22

5 Summary and review 24

2
Exercises and questions for discussion 26

The Technology Transfer Process 27

1 The transfer of technology – process and strategies 28

2 Trends in cross-border transfer of technology 30
3 Contractual agreements in technology transfer 40
module

4 Regulatory aspects of transfer of technology agreements: competition policies and related questions 48
5 Summary and review 51

3
Exercises and questions for discussion 52

Intellectual Property Rights and Technology Transfer 53

1 Overview of intellectual property rights – definitions and concepts 54

2 The role of intellectual property rights in the transfer of technology 71
3 Intellectual property rights and development: Who gains from intellectual property protection? 79
4 Summary and review 83
module

Exercises and questions for discussion 84

4
International Technology Transfer Related Agreements 85

1 Overview of the transfer of technology in international instruments 86

2 Historical development of transfer of technology instruments 88
3 International economic law and transfer of technology 89
4 Transfer of technology in other international instruments 98
module

5 Summary and review 101

Exercises and questions for discussion 102
Final exercises 102

ENDNOTES 103
Readings 109
Annex 118

iv
List of boxes

Box 1 Changes in techno-economic paradigms 10

Box 2 Sourcing of a radar system by Tanzania: the case of BAe Systems, United Kingdom 28
Box 3 A note on methodology 30
Box 4 Milonic Solutions Software Licence Agreement 44
Box 5 Complexities faced in agreements on access to genetic resources 47
Box 6 The concept of property and IPRs 54
Box 7 Intellectual property rights systems 56
Box 8 Unfair competition 61
Box 9 Source code and object code 62
Box 10 The case of the Japanese semiconductor industry 63
Box 11 Biotechnology 64

List of figures

Figure 1 An innovation system 10

Figure 2 Royalty and licensing fee payments, 1998, 2004 and 2008 (billion dollars) 32
Figure 3 Changes in global share of royalty and licensing fee payments, 1998, 2004 and 2008 (percentage) 32
Figure 4 Royalty and licensing fee receipts of the top five technology-exporting countries, 33
1998, 2004 and 2008 (billion dollars)
Figure 5 Inter-firm and intra-firm royalty and licensing fee receipts by the United States, 1986-2008 (billion dollars) 34
Figure 6 Trends in imports of capital goods, 1995-2008 (billion dollars) 35
Figure 7 Imports of capital goods as a proportion of total imports of selected regions, 1995-2008 (percentage) 35
Figure 8 Ratio of imports to exports of capital goods, 1995-2008 36
Figure 9 Number of industrial technology alliances by region, 1980-2006 38
Figure 10 Industrial technology alliances by technology, 1980-2006 39
Figure 11 Thailand’s export changes and FDI inflows, 1980-2004 119
Figure 12 The Republic of Korea’s main channels of technology transfer, 1991 122
Figure 13 Technology licensing in the Republic of Korea, 1970-1995 123

List of tables

Table 1 Transfer of vehicle production technology to the Republic of Korea 20

Table 2 Royalties and licensing fee receipts by the United States, 1986, 1996, 2004 and 2008 (billion dollars) 33
Table 3 R&D expenditures by Japanese and United States affiliates abroad, 1993, 1999 and 2007 (million dollars) 37
Table 4 Share of industrial technology alliances by region of firms involved, 1980-2006 (percentage) 39

v
 List of abbreviations

ACP African, Caribbean and Pacific Group of States

ACTA Anti-Counterfeiting Trade Agreement
AEC ASEAN Economic Community
ASEAN Association of Southeast Asian Nations
BIT Bilateral Investment Treaty
BRIC Brazil, the Russian Federation, India, China
BOI Board of Investment (Thailand)
BOP Balance of Payments
BUILD BOI Unit for Industrial Linkage Development (Thailand)
CAFTA-DR Dominican Republic-Central America-United States Free Trade Agreement
CARIFORUM Caribbean Forum
CBD Convention on Biological Diversity
CEO Chief Executive Officer
CFC Chlorofluorocarbon
CIS COMMONWEALTH OF INDEPENDENT STATES
ECAR Engineering Centre Airbus in Russia
ECOWAS Economic Community of West African States
EEC EUROPEAN ECONOMIC COMMUNITY
EPA Economic Partnership Agreement
EU European Union
FAO Food and Agriculture Organization
FDI Foreign Direct Investment
FTA Free Trade Agreement
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GPA Government Procurement Agreement
GSM Global System for Mobile Communications
GSPA-PHI Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property
HDD Hard Disk Drive
HD DVD High Density Digital Versatile Disk
IC Integrated Circuit
ICT Information and Communication Technology
ICTSD International Centre for Trade and Sustainable Development
IIA International Investment Agreement
IMF International Monetary Fund
INBio Instituto Nacional de Biodiversidad (Costa Rica)
IP Intellectual Property
IPR Intellectual Property Right
ISP Internet Service Provider
IT Information Technology
ITPGRFA International Treaty on Plant Genetic Resources for Food and Agriculture
LAC Latin American Countries
LCD Liquid Crystal Display
LDC Least Developed Country
M&A Merger and Acquisition

vi
 List of abbreviations

MERCOSUR Southern Common Market (Mercado Común del Sur)

MFN Most-Favoured-Nation
MIT Massachusetts Institute of Technology
MNE Multinational enterprise
MTA Material Transfer Agreement
NAFTA North American Free Trade Agreement
NIE Newly Industrialized Economy
NIEO New International Economic Order
NIS National Innovation System
NSF National Science Foundation
NSTDA National Science and Technology Development Agency (Thailand)
OBM Own Brand Manufacturing
ODM Original Design and Manufacture
OECD Organisation for Economic Co-operation and Development
OEM Original Equipment Manufacture
OIM Original Idea Manufacture
PBR Plant Breeders Rights
PCB Plastic Circuit Board
PTA Preferential Trade Agreement
R&D Research & Development
RAM Random Access Memories
SCPA Semiconductor Chip Protection Act
SITC Standard International Trade Classification
SME Small to Medium-Sized Enterprise
SPS Sanitary and Phytosanitary
SPS Siemens Plessey Systems
SPT Software Park Thailand
S&T Science and Technology
TBT Technical Barriers to Trade
TNC Transnational Corporation
TOT Transfer of Technology
TRIMS Trade-Related Investment Measures
TRIPS Trade-Related Aspects of Intellectual Property Rights
TSA Technical Service Agreement
UN United Nations
UNCLOS United Nations Convention on the Law of the Sea
UNCTAD United Nations Conference on Trade and Development
UNFCCC United Nations Framework Convention on Climate Change
UPOV International Union for the Protection of New Varieties of Plants
US-AEP US-Asia Environmental Partnership
USAID United States Agency for International Development
USTR United States Trade Representative
Vi Virtual Institute
WHO World Health Organization
WIPO World Intellectual Property Organization
WTO World Trade Organization

vii
Introduction
The transfer of technology (TOT) is regarded as “a
key element for enabling developing countries to
integrate into and compete in the global econo-
my as well as to meet their development goals”
(UNCTAD, 2005a: 5). For decades, TOT issues have
occupied an important place in international
economic development discourse. Historically,
the United Nations Conference on Trade and De-
velopment1 has been at the forefront of debate
and negotiations on TOT issues. Since the early
1970s, the organization has played a major role
in the conceptualization of the problematique, in
advancing understanding of TOT issues, the chal-
lenges, the opportunities and possible responses.
Over the years, knowledge of the complexities of
TOT issues has increased a great deal. Therefore,
this teaching material aims to provide a wealth
of new information on the multifaceted aspects
of the TOT process as well as bibliographic refer-
ences covering the important literature gener-
ated on the subject in the past four decades.
UNCTAD has played a leading role in exploring
and negotiating international instruments deal-
ing with TOT. Although efforts may have faltered
in the mid-1980s, TOT and ways and means of
tackling it at the international level continue to
dominate discussion in different fora. Transfer of
techonolgy has been integrated into multilateral
environmental agreements that emerged from
the United Nations Conference on Environment
and Development (the Rio Earth Summit 1992).
Debate over TOT continues to be lively, and in
many respects the topic is a divisive component
of negotiations such as the ongoing climate
change negotiations around the Kyoto Protocol
and the future of the United Nations Framework
Convention on Climate Change (UNFCCC).
On the other hand, TOT is central to policies of
many countries, international organizations
and agreements. For instance, among members
of the World Trade Organization (WTO) and in
implementation of the Trade-Related Aspects
of Intellectual Property Rights (TRIPS) Agree-
ment, TOT continues to capture the attention of
governments and policy makers on issues such
as balancing the needs to protect innovation
and the imperative of facilitating technology
transfer and dissemination. Recently, the World
Health Organization (WHO) also paid particu-
lar attention to similar issues, notably the need
to provide greater access to public health in de-
veloping countries. In May 2008, the WHO As-
sembly adopted a global strategy and plan of
action on public health, innovation and intel-
lectual property (IP). TOT is one of the key ele-
ments of the WHO strategy. One year earlier in
2007, the World Intellectual Property Organiza-
tion (WIPO) adopted 45 recommendations that
aim to implement a development agenda in
the context of international intellectual prop-
erty and within operations of the organization
itself.
UNCTAD also remains actively committed to TOT.
For example, a group of experts was convened
in February 2011 to consider the contribution of
foreign direct investment (FDI) to the transfer
and diffusion of technology and know-how for
sustainable development in developing coun-
tries, especially least developed countries (LDCs).
The meeting provided an opportunity to revisit
issues on TOT and intellectual property rights
(IPRs), among others, and to assess the contribu-
tion of FDI to the TOT process by examining coun-
try experiences and best practices.
1
 Underpinning this concern is the fact that the
international community views technology as
“an essential precondition for improving produc-
tivity, attaining industrial development and pro-
moting export growth” (UNCTAD, 2005a: 5). Both
the acquisition of technology and its diffusion
foster productivity and growth (Hoekman et al.,
2005: 1587). Card and Krueger (1995) argue that
there is “broad evidence that differences in tech-
nology, rather than differences in resources, are
the most important determinant of the pattern
of comparative advantage” (Card and Krueger,
1995: 349).
However, most of the technologies used in the
production and delivery of goods and services
are developed and owned by firms from a hand-
ful of countries. Estimates show that about 20
countries produce the bulk of the technologies
used globally (Margalioth, 2003). Hence, most
countries, especially developing countries, rely on
the technologies developed by others to improve
their productivity and meet their development
needs. International technology transfer is seen
as critical to narrowing the persistent techno-
logical and wealth gaps between developed and
developing countries, for integrating developing
countries into the global economy and enabling
developing countries to meet their international
obligations.
Given the above, the aim of this course is to in-
troduce and discuss key concepts related to in-
ternational technology transfer, and in particular,
2
the transfer of technology from technologically-
advanced countries to those that are lagging
behind. The teaching material comprises four
modules:
• Module 1 presents definitions of basic terms
and concepts, gives an overview of the vari-
ous channels and modes of international
technology transfer and the measures that
can be used to facilitate it. Three case stud-
ies comparing experiences and lessons from
Thailand, Chile and the Republic of Korea are
included in the annex to this module.
• Module 2 shows current trends in the in-
ternational transfer of technology and dis-
cusses the technology transfer process in
more detail, including a detailed summary of
typical contractual arrangements and other
regulatory mechanisms related to trade in
technology.
• Module 3 focuses on the complex relation-
ship between intellectual property rights and
international technology transfer.
• Module 4 explains and discusses internation-
al agreements dealing with related interna-
tional technology transfer issues.
Each module draws on case studies, additional
documentation to illustrate the various aspects
of TOT, and concludes with brief review sections
and questions for discussion.
 Module 1
Key Issues in the
Transfer of Technology
1 Key Issues in the Transfer of Technology
module
Objectives
After reading this module, students should be able to:
• Understand and better conceptualize technology transfer issues;
• Identify key factors that determine different channels and sources of TOT;
• Describe support measures that could be used to facilitate TOT;
• Understand the major differences between market- and non-market-related technology transfer
channels and sources;
• Assess practical TOT cases in developing countries.
Handbook
1 Common concepts and terms
1.1 Characteristics of technology
Transfer of technology may be understood – as
proposed in the negotiations on an international
code of conduct as “the transfer of systematic
knowledge for the manufacture of a product,
for the application of a process or for the render-
ing of a service” (UNCTAD, 1985). Recently, WIPO
conceptualized TOT in a broader sense as “a se-
ries of processes for sharing ideas, knowledge,
technology and skills with another individual or
institution (e.g. a company, a university or a gov-
ernmental body) and of acquisition by the other
of such ideas, knowledge, technologies and skills.
In the context of transferring technologies from
the public sector and universities to the private
sector the term ‘transfer of technology’ is used
in a narrower sense: as a synonym of ‘technol-
ogy commercialization’ whereby basic scientific
research outcomes from universities and pub-
lic research institutions are applied to practical,
commercial products for the market by private
companies” (WIPO, 2011a: 4-5).
Thus, “knowledge” is at the core of the notion
of technology transfer. It could be embodied in
hardware such as in plant, machinery and equip-
ment or disembodied in the form of patents,
know-how, trademarks, designs and licences in
general. Similarly, technology can be described
as “codified” – that is, it is contained in written
documents or registered designs – or “uncodi-
fied”, such as human skills and know-how. These
different aspects of technology also imply the
need for organizational structures and manage-
ment practices to effectively integrate machine-
embodied technologies with the required skills,
know-how and experience to operate and main-
tain them. This “techno-managerial” capacity is
an important element of successful technologi-
cal development.
4
Knowledge is a non-rival good, as it can be simul-
taneously used by many different agents and
constituencies; however, this does not mean that
acquiring or using knowledge is cost-free. The
non-rival nature of knowledge only implies that if
two different agents are willing to pay the cost of
adopting a new idea or a technology, they can do
so without interfering with each other’s decisions.
The concept of knowledge is broader than infor-
mation in that: “Knowledge, in whatever field, em-
powers its possessors with the capacity for intel-
lectual or physical action” (Foray, 2009: 10). Hence,
where it is easy to copy information at near zero
cost, reproducing knowledge is far more compli-
cated since “cognitive capabilities” are not easy
to transfer and depend on training (including
watching, listening, and imitating) (Foray, 2009).
The key characteristics of technology described
in this section imply not only a need for invest-
ments in hardware (machine-embodied technol-
ogies) and codified technologies (such as manu-
als, blueprints, and patents) but also in building
human skills and know-how, and organizational
structures that promote continuous “technologi-
cal learning”.
1.1.1 Publicly and privately developed technology
The public sector, including government research
institutions and universities, and the private
sector are the two main sources of funding for
research and development (R&D) of new tech-
nologies. Public sector funding is sometimes
allocated to R&D in the private sector, and vice
versa. The balance of intra-sector and inter-sector
funding allocation varies over time, from coun-
try to country and from industry to industry. The
development of the computer, for instance, was
heavily subsidized by government funding in
the early years, while contemporary research in
and engineering of computers is almost entirely
funded by the private sector (Barton, 2007).

Globally, the majority of applied R&D is funded
by the private sector, including R&D carried out
within enterprises and contracted out to uni-
versities and other public sector organizations.
However, governments often pursue strategies
that provide incentives to encourage private sec-
tor research. These incentives include tax or regu-
latory advantages, or exceptions from anti-trust
rules to encourage industrial firms to cooperate
with one another in the development of new
technologies.
The public sector supports research in various
ways, the most obvious being through direct re-
search funding for universities and laboratories.
Public funding is also often allocated to support
specific industries, and to realize specific national
goals. This most often occurs where a govern-
ment will be the main user of new technology,
e.g. for military, aerospace and energy purposes.2
In many countries, agricultural research is also
supported primarily with public funding.
The allocation of R&D funding across public and
private sectors highlights the issue of owner-
ship of knowledge. Exclusive proprietary rights
on a new technology are principally conferred
by patents, or other forms of intellectual prop-
erty rights. These exclusive rights might, under
certain circumstances, be seen as constituting
a barrier to access, in terms of high costs of end
products or licences, or conditions that allow
proper use of the new technology. Proprietary or
privately owned technologies have always been
more common in the private sector, whereas
much of the new, and often science-intensive
knowledge generated through public sector R&D,
has traditionally been treated as a public good. In
some countries, this trend is evolving, especially
in high-technology fields. Universities and other
public research institutions are increasingly us-
ing IPRs to protect the economic value of their
research findings.
The international community, including re-
searchers, government officials, civil society and
the private sector, have worked to develop mech-
anisms to encourage R&D in these areas and to
promote better access to proprietary technolo-
gies to address the urgent needs of vulnerable
sectors of the population.
Civil society groups and academia have argued
that the collective management of IPRs, includ-
ing the use of patent pools, can contribute to in-
creased innovation and access to medicines.3 In
recent years, some progress has been made to set
up patent pools to improve access to affordable
medicines for key global and neglected diseases.
Key Issues in the Transfer of Technology
module
Some civil society groups have also advocated the
use of monetary prizes as an alternative mecha-
nism to stimulate private investments in R&D.
For example, it has been suggested that donors
and governments consider offering prizes as an
alternative to marketing monopolies as a reward
for successful investments in R&D (Love and
Hubbard, 2007). The prize funding mechanism is
seen as an alternative to the patent system4. Ac-
cording to Love and Hubbard (2007: 2):
“What the prizes offer uniquely is an alter-
native to the marketing monopoly as an in-
centive for private investment. … If you can
divorce the incentive for innovation from
the product’s price to consumers, knowledge
goods, including the R&D for a new medicine,
can be placed in the public domain immedi-
ately”.
The prize model seems to be useful for solving
well-defined problems. It leaves the internation-
al intellectual property system unaffected and is
merely an additional means of providing incen-
tives for innovation.
The prize model was one mechanism that was
considered by the World Health Organization’s
Commission on Intellectual Property Rights, In-
novation and Public Health, whose final report
was published in 2006.5 The work undertaken
by the Commission was further developed and
resulted in the Global Strategy and Plan of Ac-
tion on Public Health, Innovation and Intellectual
Property (GSPA-PHI) adopted by the World Health
Assembly in May 2008. The GSPA-PHI identifies a
number of areas for future action including the
promotion of sustainable financing mechanisms
to make health products available in developing
countries.
Other incentive mechanisms that governments
might introduce to support R&D and drug and
vaccine development to address orphan diseases
include:
• R&D tax credits – tax relief on R&D costs on
orphan diseases;
• Advance purchase commitments – govern-
ment or international guarantees of sales for
products developed;
• Regulatory fast-tracking – a commitment to
speed up the regulatory process for firms that
carry out R&D on orphan diseases;
• Transferable IPRs – extension of the patent
term for one of a firm’s commercially-valuable
patents in return for their delivery of a com-
mercially-unfavourable product to address an
orphan disease.
5
1 Key Issues in the Transfer of Technology
module
Public-private partnerships have become in-
creasingly important in the development and
diffusion of pharmaceuticals, especially since
world leaders adopted the UN Millennium De-
velopment Goals in the year 2000. Several new
international partnerships have been formed,
with the aim of combating key global diseases.
Donors, recipient governments, research and
technical institutes, the private sector, and civil
society organizations have joined forces to fight
HIV/AIDS, malaria and other diseases. For exam-
ple, the Global Fund7 is committed to addressing
HIV/AIDS, tuberculosis and malaria in its work
programme, while the GAVI Alliance8 brings part-
ners together to fund and support immunization
programmes in the world’s poorest countries. An
important source of funding for R&D in the area
of global health are private philanthropic foun-
dations, notably the Bill and Melinda Gates Foun-
dation,9 which is also a major funder of research
into neglected diseases.
1.1.2 Economic growth and technology
Grossman and Helpman (1991) argue that “eco-
nomic growth centrally relies on technological
change through the creation of new products
and processes”. New broad areas of generic or
“enabling” technologies, such as microelectron-
ics, biotechnology and new materials, have stim-
ulated technological change across all sectors of
production. New technologies have also changed
the characteristics and performance of many
traditional products (UNCTAD, 1995). The impor-
tance of technology for production, economic
growth and socio-economic development has
steadily increased; thus, the term “knowledge
economy” has acquired common currency. As
a result, barriers to technology adoption are a
key determinant of international differences in
per capita income, and greater trade openness
can increase growth by lowering such barriers
(Parente and Prescott, 1994).10
Technology plays an increasingly central role in
production inputs, and the amount of knowl-
edge required in production processes has grown
remarkably. A 1992 study by the Organisation
for Economic Co-operation and Development
(OECD) showed that investments in “intangi-
ble” knowledge (for example, in R&D, training,
software development, design and engineering)
increased at three times the rate of investments
in tangible forms of technology between the late
1970s and early 1990s (OECD, 1992). The compo-
nent of knowledge-based products in interna-
tional trade has also been steadily increasing
(OECD, 2010; WIPO, 2011b).
6
A characteristic of technology and related know-
how is that the advantage of a certain new tech-
nology is significantly improved if it is widely
used, allowing the interoperability and inter-
connection of technological equipment – that
is, the “network effect”. The broad and rapid dif-
fusion of new knowledge embodied in a prod-
uct or process contributes to social wellbeing
and welfare. Hence, it is important that mul-
tiple firms have access and are able to use the
newly developed technology, which makes rapid
technology diffusion a key matter for economic
growth.11
1.2 Characteristics of technology transfer
The transfer of technology relates to any process
by which one party gains access to another’s
technical information and successfully learns
and absorbs it into its production process. It
may be embodied in products or disembodied in
ideas (Maskus, 2003: 3). Barton (2007: 3) describes
TOT as: “fundamentally a matter of the flow of
human knowledge from one human being to
another. This can be through education, the sci-
entific literature, or direct human contact”. He
points out that it is not the licences dealing with
legal rights to use particular technologies in par-
ticular contexts, but rather the human level that
dominates the managerial and economic reality
of a successful TOT exercise. He highlights that,
“close links between the basic researchers and
the manufacturing experts and even marketing
personnel contribute to competitiveness and ad-
vancement” (Barton, 2007: 3).
The two parties – the supplier and the recipient
– involved in formal technology transfer arrange-
ments are usually businesses; when this is the
case, TOT is to a large extent beyond the scope of
government intervention.
Technology transfer can be governed by explicit
contractual arrangements, such as licensing
between business partners, but it can also be
managed implicitly through the establishment
of subsidiaries and affiliates of transnational
corporations (TNCs) in other countries (Patel et
al., 2001: 4). Technology transfer transactions
may include not only the assignment, sale and
licensing of industrial property, but also related
know-how and technical expertise embodied in,
for example, models, instructions or guides. In
addition, TOT concerns the knowledge necessary
for the operation or functioning of a plant and
equipment, as well as the technological knowl-
edge necessary to install and use machinery or
materials.12

We can distinguish between non-commercial
and commercial technology transactions. Maskus
(2003) discusses how TOT occurs and highlights
the fact that a lot of (technical) information is
freely available in the public domain for various
diverse reasons:
“Markets for information are peculiarly sub-
ject to failures and there is justification for
addressing these with public policy. However,
not all technologies are transferred in private
markets between unrelated parties. Much
information flows within the boundaries of
firms and joint ventures. Further, knowledge
about production and management process-
es may be gained from reverse engineering,
reading published materials, training within
firms and laboratories, and attending profes-
sional conferences. Finally, much information
may be in the public domain. Note that the
public domain is filled both by public research
outcomes and by the decisions of firms not to
seek protection or to permit their intellectual
property protection to lapse” (Maskus 2003: 3).
Non-commercial TOT may also occur, for in-
stance, under international cooperation agree-
ments with developing countries. Examples of
non-commercial transactions are infrastructure
projects relating to education, scientific or agri-
cultural management.
1.2.1 Why is technology transfer important?
Over the last decades, technological develop-
ment has been rapid and the importance of
technology in economic activities has also gained
importance. At the same time, the development
of new technology has become more and more
globalized. The transfer and exchange of tech-
nology across countries has increased and this is
important for social and economic development,
especially in countries that lag in technological
development. The interdependent relationship
between globalization and technological change
has been described by Pietrobelli:
“[T]he rapid pace of technological change in-
duced by improvements in communications,
transportation, information technology [IT],
and by new materials, is facilitating the in-
ternational expansion of economic activities,
which in turn further accelerates technologi-
cal change. The product cycle of technology is
getting shorter, and technology may be trans-
mitted more quickly across countries. This can
result in effective cycles of cumulative causa-
tion linking faster technological change to
international competitiveness, to improved
Key Issues in the Transfer of Technology
module
access to international knowledge, and to fur-
ther technological changes. Such cycles may
enable countries to catch up with technologi-
cal leaders” (Pietrobelli, 2000).
Pietrobelli identifies an increasingly important
link between technological change and competi-
tiveness. Thus, access to new technologies can
be an important determinant of a company’s
competitiveness. Moreover, the critical role of
knowledge in development and comparative ad-
vantage has been noted by the former Secretary-
General of UNCTAD, Rubens Ricupero:
“The knowledge factor appears to be the most
important element in the shaping of the new
international economic order, as it alters radi-
cally the state of overall equilibrium created
by the century-old industrial world and the
associated comparative advantage that it has
enjoyed” (Ricupero, 1990).
However, access to new technology is in itself in-
sufficient to bring about enhanced competitive-
ness. Sideri highlights the importance of technol-
ogy absorption:
“Technology, or more specifically the ability to
utilise effectively the new technologies and
absorb them into the productive process, is
increasingly crucial in determining compara-
tive advantages, creating competitiveness,
and promoting economic growth and devel-
opment” (Sideri, 1994).
New technologies can lead to improvements in
productivity and result in a higher growth rate,
but only when they are incorporated successfully
in a production system. The question for the ma-
jority of developing countries and LDCs is how to
access technologies produced in industrialized
countries, absorb them into existing production
systems, and use them to achieve their sustain-
able development objectives.
Maskus asserts that TOT is essential for develop-
ing countries:
“The international flow of technological in-
formation and its successful integration into
domestic production and management pro-
cesses are central to the ability of developing
countries to compete in the global economy
and to narrow the technological gaps they
face compared to developed countries. Tech-
nological change is a principal source of sus-
tained growth in living standards and is es-
sential for transformation and modernization
of economic structures” (Maskus, 2004: 7).
7
1 Key Issues in the Transfer of Technology
module
Parente and Prescott (1994) found that barriers
to technology adoption explain the differences
in per capita income across countries. The cost of
access to technology and knowledge available in
the world economy may differ due to differences
in a country’s legal, regulatory, political, and social
factors. Hence, in some countries obtaining tech-
nology comes at a higher price and this retards
economic growth and development (Parente and
Prescott, 1994; Saggi, 2000).
In principle, economic growth and economic
theory anticipated convergence across countries
and TOT was thought to be a great facilitator
in realizing this process. Primarily, this was pre-
dicted because of the wide applicability of tech-
nology transfer (and the price of diffusion being
lower than its production). Nonetheless, technol-
ogy has not been transferred to all remote areas
of the world. Technology transfer has proved to
be difficult, particularly in some LDCs.
The technology transfer process often involves
several steps:
• Identification and unpackaging of suitable
technologies – usually there are multiple
sources and alternative technologies to car-
ry out a particular operation, but almost all
these alternative technologies are developed
to suit conditions in the home countries.
Without adequate knowledge and assess-
ment of a complete technology package, a
buyer may end up paying for some techno-
logical components that are not suitable
for local conditions or not required for the
recipient’s operations. Thus, it is important
to identify the most appropriate technology
from a variety of alternatives available and
unbundle (unpack) different components of
a technology package.13
• Access – a supplier may refuse to license or
sell his or her technology for various reasons,
such as a lack of IP protection, a preference to
enter international markets through foreign
direct investment, or provision of a high price
with conditions attached. The technology
supplier may not be interested in developing
country markets because of perceived lower
revenues vis-à-vis the time required for the
TOT process.
• Buying and transferring selected technolo-
gies from abroad – these are often expen-
sive. In addition, there are costs and time
constraints associated with logistics and the
training of staff by foreign experts, which are
necessary in order to use the acquired tech-
8
nology and equipment. Consequently, ade-
quate financing of the project is an important
prerequisite in commercial transactions.
• Adapting the imported technologies to suit
local conditions – imported technologies may
need to be modified to suit the local operat-
ing environment. For instance, imported ma-
chinery may have a higher production capac-
ity than the market size can accommodate in
a developing country, requiring production
to be scaled down. A developing country firm
may need the support of national research in-
stitutes or consultants in this task.
• Absorbing the acquired technologies within
the organization – a firm should try to under-
stand the imported technologies and make
them work efficiently. This typically requires
some in-house R&D capability.
• Improving the acquired technologies – the
recipient can improve imported technolo-
gies through incremental innovations. For in-
stance, a firm may modify the technology to
make use of locally available raw materials/
inputs rather than imported ones (material
substitution). Based on the imported tech-
nology, the recipient firm may produce new
products with better performance and great-
er functionality.
• New innovations – the different steps in-
volved in the TOT process provide the firm
with opportunities for learning and accumu-
lation of knowledge. The firm becomes expe-
rienced in developing new products and com-
peting in global markets. The success of firms
that followed this pattern include Samsung
and Hyundai in the Republic of Korea and Acer
in Taiwan Province of China.
International technology transfer often focuses
on the earlier stages of the above process and
gives less attention to the critical subsequent
stages of absorption, adaptation, increment, in-
novation and the diffusion of technology into the
wider socio-economic system.
1.3 What is technology diffusion?
Foray explains that a successful technology
transfer goes through a variety of processes be-
fore one can speak of the “consolidation” of the
transfer. These phases are: “the assimilation and
absorption of technological knowledge: adap-
tation to local conditions, absorption of subse-
quent improvements and generalization of the
transferred knowledge” (Foray, 2009: 4).

Technology diffusion may be seen as the spillover
of technological information or knowledge asso-
ciated with the introduction of a technology into
an enterprise or social service organization. On
the one hand, such spillovers may be viewed as
the unintended leakage of a technology from the
original user to others; on the other hand, it may
also involve the active wish of competing parties
to acquire the technology indirectly. The spillover
effect may be influenced by government policies.
Transnational corporations possess many ad-
vanced technologies, which they seek to exploit
abroad. They control the technology and often
the activities of their affiliates. However, the tech-
nologies that are transferred to an affiliate can
leak out, especially through manpower migra-
tion, to local firms. Most studies on the role of FDI
in TOT have largely concentrated on the level of
technology upgrading and innovation, as well as
the number of domestic players that benefit from
the presence of the investment. A simplistic ap-
proach is to view the presence of a TNC subsidiary
as a channel or pipeline through which technol-
ogy freely flows between the parent and its affili-
ates in developing countries, and subsequently to
other domestic firms through leakages.
In general, TNCs transfer the technologies to their
affiliates needed to manufacture the product(s)
or deliver the service(s) in the host economy at a
competitive price (Mirza et al., 2001). Parent com-
panies carefully select the technology they are
willing to transfer and are more willing to trans-
fer to their affiliates those technologies that are
used for process, quality and maintenance control
than those for product design and development.
However, local affiliates of TNCs can take active
roles to promote technology adaptation (to local
standards and needs) and to make upgrading
efforts. There is a growing recognition that the
impact of FDI on technology transfer may be re-
lated to the technological activities that affiliates
undertake in the host economy.14 In addition, af-
filiated firms may have to pay for further technol-
ogy and assistance they receive from their parent
firm in an almost arm’s-length fashion to satisfy
transfer pricing rules, which may enhance incen-
tives to become less dependent in the future.
For instance, a survey of 283 affiliates of TNCs and
1250 domestic firms in Argentina between 1992
and 1996 revealed that technology spillovers to
domestic firms took place where affiliates in-
creased R&D expenditure and offered training to
workers (Marin and Bell, 2003). Similarly, spillo-
ver effects were generated by affiliates that were
embedded in the domestic economy, in terms of
Key Issues in the Transfer of Technology
module
suppliers and linkages. This study failed to find
any spillovers purely related to the absorptive ca-
pacity of domestic firms, or a difference between
the sectors under investigation.
Thus, it seems that successful diffusion of im-
ported technologies through spillover effects de-
pends to an extent on local investments in build-
ing relevant human skills and knowledge and on
a system of effective inter-firm linkages that act
as conduits of new technology.
1.4 Innovation systems
Innovation includes the successful application
of new ideas, improvements to a process, prod-
uct or service, creation of a new use or device or
dimension of performance, or an advance that
solves a challenge or creates a new market.
Freeman and Perez (1988) and Freeman and
Soete (2007) assert that there are several catego-
ries of innovation:
• Incremental innovations – these are slight
improvements to a product, process or ser-
vice and generally occur as the production
activity is carried out. The majority of innova-
tions that occur are of this variety.
• Radical innovations – these are quantum
leaps in the performance of a product or ser-
vice that cater for a need or solve a problem,
or may be entirely new products or processes.
These occur through deliberate R&D activity.
• Changes in technology systems – these are
usually the result of several cumulative radi-
cal innovations and occur through the R&D
efforts of several organizations. This type of
innovation affects the entire industrial sec-
tor plus related sectors and the way work is
organized. Such innovations may usually re-
quire learning new skills and new organiza-
tional methods, for example, shifting from the
steam locomotive to electric locomotives, or
from typewriters to personal computers.
• Changes in techno-economic paradigms –
these are usually the result of several cumu-
lative changes in technology systems and
affect the entire economy or society. They are
often so disruptive that they tend to bring
about changes in the competitive position
of companies and countries. The leaders in
traditional technologies may be put to a dis-
advantage, while at the same time opportu-
nities may be opened up for newcomers to
establish strong competitive positions.
9
1 Key Issues in the Transfer of Technology

Box 1
module

Changes in techno-economic paradigms

With the emergence of electronics (that is, a new techno-economic paradigm), new economies such as Japan,
the Republic of Korea and Taiwan Province of China became leaders in some industrial segments, overtaking
several leading Western countries, which were at the forefront of the industrial revolution. Companies such
as Agfa and Grundig, which were once household names, have been surpassed by their newer competitors,
such as Sony, Panasonic and Samsung. Similarly new companies, such as Nokia, have overtaken traditional
leaders in telecommunications in the new cellular mobile telephone field.

A National Innovation System (NIS) is an analyt-
ical framework tool used to better understand
technological development at the national lev-
el. It is defined as “the network of institutions
in the public and private sectors whose activi-
ties and interactions initiate, import, modify
and diffuse new technologies” (Freeman, 1987).
The actors in this network include enterprises,
universities and research institutes, the govern-
ment, and other support institutions such as
industry associations, regulatory bodies, train-
ing centres and financial institutions. It is the
continuous interaction between these actors,
which creates learning opportunities and stim-
ulates innovation that characterizes a “healthy”
innovation system. Other “systems”, such as the
production system, the marketing system and
the finance system, become sub-systems of an
NIS in which collaborative learning takes place
(Lundvall, 1992). Arnold and Bell (2001) have
schematised the main elements of an NIS in the
figure below.

Figure 1
An innovation system

Framework conditions
• Financial environment • Propensity for innovation and entrepreneurship • Mobility
• Taxation and incentives • Trust • Education, literacy

Demand
• Consumers (final demand)
• Producers (intermediate demand)

Business system Education and research system

• Companies • Professional education
Intermediate organizations
• Farms and training
• Health care, etc. • Research institutes • Higher education and research
• Brokers, etc. • Public sector reasearch

Infrastructure
• Ranking, venture • IPR and information • Innovation and business • Standards and
capital system support system norms

Source: Arnold and Bell (2001), in UNCTAD (2007a: 58).

The concept of National Innovation System is
now widely supported and used as a framework
for analysis and policy dialogue. There is general
recognition that a “healthy” NIS, with effective
linkages between its constituent parts, is an en-
abling environment for successful transfer and
diffusion of technology.
1.5 Access to technology
At the global level, technology and innovation
have always been unevenly distributed, al-
though the “technology leaders” have changed
over time. In 1975, for example, an UNCTAD
study revealed that nationals of industrial-
ized countries like the United States, Germany,
France, Switzerland, the Netherlands and the
United Kingdom owned 84 per cent of all pat-
ents issued worldwide (UNCTAD, 1975).15 Nation-
als of developing countries, on the other hand,
held only one per cent of the patents within
their own states. More recent data shows a sim-
ilar dominance of a handful of countries with a
pattern of increasing patents among emerging
economies. In 2010, 75 per cent of all patents ap-
plications were made by residents of Japan, the
United States, China, the Republic of Korea and
Germany.16

10

Evidence shows that innovative activities today
are still concentrated in a few industrialized
countries. A handful of global corporations and
powerful economies control the production and
dissemination of most new technologies, includ-
ing production, information, communication
and biotechnology. For this reason, markets for
conventional technology are usually more com-
petitive than those for high technology. Pharma-
ceuticals and biotechnology account for the larg-
est amount of global R&D. This sector increased
its R&D spending by 5.5 per cent in 2009. Only
two other sectors, electronic and electrical equip-
ment, and chemicals, managed to grow their R&D
investment in 2009. Conversely, the automobiles
and parts sector decreased its R&D spending by
11.6 per cent, followed by technology hardware
and equipment (6.3 per cent).17
Statistics show that trade containing an intellec-
tual property component increased significantly
in the second half of the 20th century. For in-
stance, United States exports with a high IP con-
tent more than doubled from 9.9 per cent in 1947
to 27.4 per cent in 1986, amounting to more than
25 per cent of all its exports (Gadbaw and Rich-
ards, 1988: 4). According to information provided
by the United States Chamber of Commerce, in
2011 IP content represented more than 60 per
cent of United States exports.18
Therefore, it should come as no surprise that em-
pirical evidence also indicates that it is costly to
transfer technology across borders (Saggi, 2000;
Mansfield and Romero, 1980). Consequently, for
a country to benefit most efficiently from TOT, it
needs to invest not only in enhancing efforts to
create and improve national technological capa-
bilities in terms of access, but also to encourage
absorption of the transferred technology, and its
utilization for specific socio-economic develop-
ment needs.
“Technological capabilities may be subdivided
into four possible layers of skills sophistica-
tion. These include skills to use and operate
technology, skills to assimilate the acquired
technology, skills to upgrade and reverse-
engineer foreign technologies, and skills to
design and develop novel technologies. The
first two are basic and almost all firms posses
them. However, only a few firms are able to
upgrade and develop novel products. The lat-
ter two layers of skills can be built up through
learning and accumulation of knowledge
over a long period” (UNCTAD, 2005b: 4).
Most developing countries have comparatively
few high-tech industries and depend on indus-
Key Issues in the Transfer of Technology
module
trialized countries to obtain access to technology,
for example, through TOT. However, the technol-
ogy acquisition process can be hindered by the
weak capabilities of developing countries in ab-
sorbing and using these technologies. This view
is supported by Blakeney, who argues that the
main difficulty faced by developing countries in
the acquisition process of technology is the “in-
appropriateness of much of the available tech-
nology for their requirements and the absence of
a receptive and skilled work-force able to absorb
and apply the available technology” (Blakeney,
1989: 105).
In a study of National Innovation Systems in East
Asian countries, Mowery and Oxley (1995), found
that national absorptive capacity was the key
factor in determining the level of national ben-
efits brought about by international technology
transfer. Similar studies on NIS in other develop-
ing countries in Asia and Africa show the same.19
1.5.1 Less advanced countries as recipients
of technology
Since the 1970s, the UNCTAD Secretariat has been
promoting studies in the field of technology
transfer. These show the problems that techno-
logically less advanced economies face as tech-
nology recipients in the TOT process (UNCTAD,
1975). The following were identified as some of
the constraints encountered by technologically
less advanced economies:
• A number of limitations imposed by enter-
prises in the field of technical activity that
they are willing to transfer;
• Restrictive practices (such as exclusive grant-
back clauses and coercive packaging licences
that restrict use of competing technologies)
in contractual agreements that result in high
costs;
• Inadequate intellectual property regimes and
administrative practices that hamper effec-
tive utilization of the technology acquired;
• A series of implicit and explicit practices fol-
lowed by commercial enterprises that limit
the possibility of developing countries to
obtain access to the appropriate technology,
for the desired product under the necessary
terms and conditions, at the right time.
In technologically advanced countries, large
amounts of money are spent on R&D in the
public and private sector. This is not the case in
many poorer countries. Nevertheless, access to
technology can take place through a number of
non-commercial channels, such as reverse en-
gineering, imitation, personnel movement,20
11
1 Key Issues in the Transfer of Technology
module
technical information freely available in pat-
ent documentation, and in today’s vast oppor-
tunities offered by the Internet. In many cases,
imitation is among the only key source of tech-
nology at the firm level (UNCTAD, 2007a). In the
case of commercial transactions, most develop-
ing countries are import-dependent or, in other
words, net technology-importing countries. One
example of this is the reservations advanced by
developing countries21 in a number of interna-
tional fora to push for stronger protection and
enforcement of IPRs that might be perceived as
undermining their ability to engage in reverse
engineering, imitation, copying, and asking
higher prices. These reservations could be in the
production and sale of pharmaceuticals or in
restrictions on access to information products
(Maskus, 2000: x).
Developing countries are, of course, interested
in obtaining technology and acquiring informa-
tion under fair and reasonable conditions. Some
argue that this objective is best realized in prac-
tice “by refusing the rights of foreign firms to
profit from such transfers, or at least to restrict
sharply their exclusive rights to exploit technol-
ogy” (Maskus, 2004: 7). Developing countries thus
advocate for IP regimes that are balanced and
adapted to local circumstances.
2 Overview of market-related
channels and sources of
technology transfer
Technology comes in various forms, as described
in Section 1.1. The nature, level of sophistication,
strategy of the owner and needs of the user of
the technology often determine how it is trans-
ferred. There are different channels through
which technology can be transferred across in-
ternational boundaries. For instance, TOT can
take place through:
• Foreign direct investment;
• Trade in goods (especially capital goods and
technological inputs) and services;
• Licensing of technology (through patents);
• Technology alliances (public-private research/
partnerships);
• Personnel (labour) movements;
• Informal means (also referred to as non-mar-
ket channels of technology transfer) through
imitation, reverse engineering, decompila-
tion of software and technology spillovers.
This section will cover, in particular, FDI, trade
flows, technology licensing and industrial tech-
nology alliances.
12
2.1 Foreign direct investment
Foreign direct investment refers to an invest-
ment made to obtain long-term interest in en-
terprises operating outside the economy of the
investor. In addition, the investor’s purpose is to
gain an effective voice in the management of
the enterprise. Foreign investment often involves
the transfer of technological information that
is likely to be newer or more efficient than that
existing in local firms. In addition, technological
spillovers might come about from the retrieved
FDI, which can benefit the recipient country by
appropriate conditions for diffusion.
Foreign direct investment brings in products/ser-
vices that may be new to the host country and
the know-how relating to them. It may also bring
in new management and marketing expertise,
and further contribute to the development of
related technologies in a host country through
the creation of local supplier networks and tech-
nology diffusion. FDI can be undertaken either as
a joint venture with local investors or as wholly
owned by foreign affiliates.22
Foreign direct investment may take the form of
mergers and acquisitions (M&As), greenfield pro-
jects and joint ventures, among others. Technol-
ogy transfer through FDI may take place as part
of the agreements in M&As and joint ventures,
establishment of R&D projects abroad and in-
creased expenditure on R&D by affiliates. In this
case, one firm may obtain shares in another firm
in exchange for its technological, managerial and
financial contribution, or may decide to invest
abroad to exploit its technology.
A firm may also decide to invest abroad to tap
skills and knowledge resources in major tech-
nologically advanced hubs. In this case, the firm
may establish an R&D project to acquire (reverse
transfer) technology. The need to gain access to
key technologies, especially in knowledge-inten-
sive industries such as pharmaceuticals, IT, auto-
mobiles and biotechnology, is one of the reasons
a firm may seek to merge with or acquire another
firm with complementary advanced know-how
within or outside the country.
However, the attraction of FDI must be ap-
proached with care as some studies have shown
diverse outcomes resulting from foreign invest-
ment. On the one hand, studies suggest that FDI
is responsible for substantial technology diffu-
sion (Blomström and Kokko, 1997, in Hoekman et
al., 2005). This view is supported by an economet-
ric study that found that domestic firms in sec-
tors with a relatively high presence of TNCs show

more productivity (Kokko et al., 2001, in Hoekman
et al., 2005). On the other hand, other studies have
concluded that competing domestic firms do
worse as the presence of TNCs increases (Aitken
and Harrison, 1999, in Hoekman et al., 2005). For
instance, the OECD identifies a risk that the im-
port of foreign technology may reduce the R&D
efforts of local firms, which can be detrimental in
that it can lead to a lack of local receptors for fu-
ture technologies (Hoekman et al., 2005).
There is also an argument that investment by
TNCs may provide developing countries with
more efficient foreign technologies and result in
technological spillovers into the domestic mar-
ket of the recipient country because of labour
turnover and vertical linkages of technology
(Blomström and Kokko, 1997, in Hoekman et al.,
2005). Econometric studies have shown a diverse
picture: some have found that firms in sectors
with a relatively high TNC presence tend to be
more productive (Kokko et al., 2001, in Hoekman
et al., 2005), while others have noted that com-
peting domestic firms do worse when the foreign
presence in their industry increases (Aitken and
Harrison, 1999, in Hoekman et al., 2005). For in-
stance, “negative horizontal spillover effects may
occur if MNEs [multinational enterprises] siphon
off domestic demand or bid away high-quality
labour” (Hoekman et al., 2005: 1589). In addition,
imports of technology may reduce the R&D ef-
forts of local firms, which may have happened in
some sectors in China in the 1990s. However, the
presence of TNCs may also attract other services
such as banks, schools and shops, as it moves
more labour to a particular region.23
Studies have shown that integrated subsidiaries
of TNCs have a more positive effect on the local
economy than mandatory joint ventures:
“[T]here is a substantial difference in operat-
ing characteristics between subsidiaries that
are integrated into the international sourcing
networks of the parent MNEs and those that
are prevented from such integration by policy
barriers such as mandatory joint venture and
domestic content requirements. These differ-
ent characteristics include size of the plant,
proximity of technology and quality-control
procedures to global best practices, speed
with which production processes are brought
to the frontier, and cost of output. Integrated
subsidiaries have a more positive impact on
the host country, often accompanied by verti-
cal backward linkages and externalities. Iso-
lated affiliates have a less positive, and some-
times negative, impact on the local economy”
(Moran, 2004, in: Hoekman et al., 2005: 1589).24
Key Issues in the Transfer of Technology
module
Hoekman et al. have pointed out that the re-
search focusing on spillovers to local competi-
tors of TNCs missed the fact that TNCs typically
transfer technology to local suppliers. Mexico’s
maquiladora sector is a recent example of ver-
tical international technology transfer.25 Most
maquiladoras began as subsidiaries of United
States firms that shifted labour-intensive assem-
bly operations to Mexico.26 However, over time,
the maquiladoras adopted more sophisticated,
imported production techniques (Saggi, 2000).
It is important to remember that significant
amounts of FDI flows are determined by market
forces, political realities, economic performance,
natural resource availability and the perception
of investors inside the country. For instance, in
2005 nearly 65 per cent of FDI into Africa was
concentrated in the mining industry, and more
than 90 per cent of the FDI inflows to Angola,
Equatorial Guinea and Nigeria were in the pe-
troleum industry alone. The surge of FDI inflows
to the primary sector continued in the following
years; at the same time the service sector (par-
ticularly transport, storage and communication)
started to attract FDI (UNCTAD, 2007b). In 2009,
FDI inflows to the primary sector were at a low
level due to the collapse in commodity prices and
the drying up of international financial resources
(UNCTAD, 2010b).
Irrespective of the sector, investment capabili-
ties refer to the collections of knowledge bodies
and skills required to undertake an investment
project in a given area. These may include the
knowledge and skills needed to identify, pre-
pare, design, set up and commission new indus-
trial projects. Although part of this process may
take place in the country of origin (home), most
of it will occur in the destination (host) coun-
try. For example, exploration, feasibility studies,
pilot projects, surveys, the selection of location,
negotiations on the TOT arrangement and bar-
gaining for favourable investment conditions,
among others, are likely to take place in the host
country.
Once the decision to invest has been made, sever-
al technology-related activities take place. These
include acquisition of detailed engineering de-
signs, importation of equipment, acquisition of
key technology licences, recruitment and training
of workers, hiring of external experts, and instal-
lation of machinery, among others. FDI is often
accompanied by training, advice and support to
the affiliate. In addition, the affiliates themselves
may provide technology, training, advice and
support to their suppliers and distributors in the
country. The affiliate may also undertake R&D ac-
13
1 Key Issues in the Transfer of Technology
module
tivities to adapt its products and services to meet
local standards and needs, such as operating con-
ditions and consumer preferences. It may also
develop or adapt new production processes that
might not even exist in the parent firm.
The quality and quantity of technology trans-
ferred through FDI may not necessarily be related
to the volume of FDI or the size of the industry in
which the investment is made. For example, Thai-
land and the Republic of Korea have had similar
FDI inflows by volume since the 1980s and both
countries have excelled in the production and
export of electronic products. Yet, the Republic of
Korea is an accomplished producer and exporter
of branded high-technology products, while Thai-
land is largely a favoured destination for manu-
facturing projects. Therefore, a simple compari-
son of the volume or value of FDI between the
countries, even if the investment is in the same
sector of the economies being compared, may be
misleading. One way around this is to identify the
motivations of the investing firms. For instance,
most of the investment into Thailand sought to
exploit its comparative advantage of having a
cheap and abundant labour force. In contrast,
the Republic of Korea offered more highly skilled
workers, sophisticated consumers and access to
domestic technologies.
A case study on Thailand, presented in the an-
nex, examines policies and lessons that could be
drawn from the impact of FDI and TOT in the elec-
tronic industry.
The activities of the domestic (host country) firm
largely determine the quality of technology it
receives from its parent firm and the amount of
technology leakages. Domestic firms may include
sales outlets, assembly facilities, manufacturing
plants and design and production units. Each of
these activities involves varying levels of technol-
ogy sophistication and learning.
Additional factors that play a role in the success-
ful transfer of technology are the presence of an
effective R&D system, domestic research labo-
ratories and universities, and the existence of a
sound base of technical skills and human capi-
tal. These factors decrease the costs of imitation,
adaptation and follow-on innovation (Maskus,
2000; Hoekman et al., 2005).
Research has shown that a successful transfer
of technology depends on the “capacity to learn
and investments to apply technologies into local
production processes”. This is proven by the fact
that countries in the possession of “substantial
engineering skills and R&D programs for adap-
14
tion and learning are greater recipients of licens-
ing flows than others” (Yang and Maskus, 2001).
R&D activity in TNC subsidiaries in developing
countries is mostly focused on the “absorption
of parent firm technology and on its modifica-
tion for local markets” (Branstetter et al., 2005: 7).
Hence, R&D at home and abroad is very different
in nature and quality, at least in respect of TNCs
and their subsidiaries.
2.2 Trade flows
As pointed out, trade is a major source of tech-
nology transfer. The international trade in goods
brings new products embodying new ideas and
knowledge to a country. In addition, trade in both
goods and services may provide access to the
best practices of foreign firms to meet the de-
mands of customers and encourage greater ef-
ficiency (Higino Schneider, 2005).
Trade gives firms access to improved capital in-
puts such as machinery, which increases produc-
tivity and provides new opportunities for growth
for developing countries. It is thought that good
imports may embody innovations that are not
available in the importing economy; hence,
firms may gain insights from these innovative
products and improve and adapt them for the
local situation. Therefore, by providing access to
innovative products, trade can promote techno-
logical diffusion in the recipient country.
2.2.1 Trade in capital goods
Capital goods may be defined as high-value and
durable agricultural, industrial and commercial
machinery or tools, used in the production of
goods or delivery of services. In theory, signifi-
cant amounts of new knowledge are generated
through R&D investment to develop sophisti-
cated machinery for energy generation, commu-
nication, transportation, manufacturing, etc. The
export of such machinery transfers the knowl-
edge it contains as well as the knowledge on how
to install, operate and maintain the equipment
to the buyer. In general, exporters or sellers of
sophisticated machinery are required to provide
manuals that provide sufficient information to
enable qualified technicians and operators to as-
semble, use and operate the machines, as well as
guarantees for technical support. In some cases,
the seller may have to provide installation and
training services to the buyer. All these steps are
likely to transfer knowledge to the user.
As explained above, there are two different types
of technology that capital goods may embody:

• Technology as hardware, represented by capi-
tal goods themselves;
• Technology as information, represented by
the knowledge content that capital goods
may carry.
The ability of a country to learn from imported
machinery depends largely on its absorptive ca-
pacity and technological effort, and the knowl-
edge content the machinery embodies. Skilled
human capital and investment in R&D may be
vital in learning from imported machinery.
The knowledge content of the machinery in
question may also vary widely even if one is look-
ing at the same type of machinery. For example,
the knowledge embodied in personal computers,
servers and supercomputers varies very widely.
The amount of knowledge required to manage,
use, maintain and modify a supercomputer is dif-
ferent from that needed for a personal computer.
That should not detract from the fact that a firm
could buy hundreds of personal computers, link
them and obtain sufficient computing power
to rival that of supercomputers at a relatively
cheap cost and deliver a similar, or even higher,
level of learning. Therefore, the application of the
imported capital goods may also influence the
amount of knowledge transferred.
2.2.2 Trade in services
Technology transfer may occur through trade in
services such as the provision of architectural,
engineering, consulting, installation, research,
management, operational leasing, financial and
analytical testing services, among others. These
services, termed business and professional ser-
vices, are often needed to upgrade skills, get the
most out of capital goods investment, streamline
production systems, modify existing processes
and keep abreast with the next generation of
technological developments. More importantly,
services may transfer what is known as “tacit”
knowledge27 and organizational systems that are
often not easy to acquire.
Business services are key components of many
firms and sectors. Producer services play a piv-
otal role in linkage, coordination and control of
interdependent specialized facilities of a net-
work of firms. For example, IT has empowered
telephone service providers to distribute their
operations in a similar fashion as manufactur-
ing firms. Therefore, TOT through trade in servic-
es does not only take place through traditional
forms but may also take place through subcon-
tracting arrangements that mirror those used in
manufacturing.
Key Issues in the Transfer of Technology
module
An emerging area of services that is also likely
to be a source of transfer or diffusion of knowl-
edge is the provision of research, development
and testing services. In this case, a firm contracts
another firm or research centre to undertake re-
search in a specific field. In the biotechnology and
IT industries especially, there are firms whose
main activity is to undertake research, develop-
ment and testing services for others. In such cas-
es, the contractor may have to provide extensive
technical information to the contracted firm in
order for the required work to be undertaken; for
example, a contractor could be hired to develop
a product or ensure that the product is compat-
ible with technologies being developed by others.
Thus, the acquired knowledge will become useful
in implementing related activities.
2.3 Licensing
A licence is a contract between parties authoriz-
ing the use, reproduction, distribution or market-
ing of technological components mainly in the
form of IPRs (for example, patents, trademarks,
trade names, copyrighted materials, designs) or
know-how in general, in return for some form
of compensation. The basic reason for licensing
a technology is the business opportunity it pre-
sents to both the licensor (technology provider)
and licensee (technology recipient).
Technology transfer is often linked to patent li-
censing as an option to legally transfer propri-
etary-protected information embodied in an
invention. The provisions of the licence contract
define the rights and responsibilities of the two
parties: that is, the licensor and the licensee. In a
typical licence agreement, the licensee is normal-
ly granted access to an invention that is protect-
ed by a patent. In exchange, the licensee makes
a commitment to commercialize the invention
and pay the agreed fees, and subsequently make
royalty payments when the product reaches the
marketplace. The licensing of technology can
take place either within related firms such as in
the case of a parent-subsidiary relationship or
between unrelated firms at arm’s length. Most
licensing contracts involve the purchase of pro-
duction or distribution rights, and the technical
information and know-how required to utilize
these rights in practice. Thus, patents, trade se-
crets, copyrights and trademarks can in them-
selves serve as sources of knowledge transfer.
There is great potential for the licensing of
technology to developing countries to be an
important channel of TOT. For this to succeed,
competence is required in the recipient firms to
adequately negotiate the terms and conditions
15
1 Key Issues in the Transfer of Technology
module
of the licence and to dispose of the necessary
capacities to master and productively use the
technology. Thus, this channel might be unaf-
fordable to low-income countries, which cannot
meet, among others, the terms and conditions of
the licence (Park and Lippoldt, 2004). Large tech-
nology supplier firms usually have strong market
positions and, as a result, bargaining power that
allows them to design contracts with terms dif-
ficult to respond to circumstances prevailing in
low-income countries.
The factors determining whether TNCs license
or not are similar to those for FDI and include:
potential market size, country location, policy
certainty and transparency, governance issues
and political stability. Another important factor
is a guarantee from the licensor that technolo-
gies will not leak into the host economy through
copying or personnel movement to potential
competitors. If there is a perceived serious risk of
imitation or leakage into the hands of competi-
tors, a firm is less likely to transfer its more ad-
vanced technology through licensing. This way,
it can safeguard proprietary control more easily
(Maskus, 2000).
In development terms, licensing offers more than
just the granting of permission to the licensee to
use the technology. Often, the licensee may not
be able to successfully commercialize the tech-
nology without the active participation of the
technology developer. In some cases, the licensor
may have to assign staff to help the licensee suc-
cessfully commercialize it. Such support meas-
ures transfer more knowledge than if the licens-
ing process was a mere formalization of legal
requirements.
An independent inventor or start-up firm that
develops a technology may face the need to es-
tablish production and marketing capabilities to
bring the technology to consumers. If such costs
are high, it may be economically wise to license
the technology to a firm with a larger capital base
and established production facilities, marketing
channels and reputation with potential clients.
For instance, InsectiGen, an Athens-based start-
up biotechnology company, licensed its patented
BtBooster technology to Pioneer Hi-Bred Inter-
national for use in making better pest-resistant
crops.28 InsectiGen, a firm that made about
$100,000 in revenue in 2006, chose to sell to a
major player, Pioneer Hi-Bred, whose sales of seed
outside its main United States market grossed $1
billion in 2006. InsectiGen expanded the value
and market for its technology by licensing it to
a major seed company, while Pioneer Hi-Bred in-
16
creased its range of technologies and reduced the
risks, costs and timing of product development.
In general, all licensing agreements set bounda-
ries for such requirements as freedom of opera-
tion, risks assumed by the licensor and licensee,
modifications permitted, duration of the con-
tract, payment methods and value/share, if any.
Licensing is an important strategy for firms, es-
pecially those in highly innovative and rapidly
evolving sectors. Some firms practice both in-
licensing and out-licensing of technologies:
• In-licensing refers to licensing arrangements
that bring in technology developed outside
the firm for further development, production
and marketing. In this case, a firm may enter
into research collaboration and sign a licens-
ing agreement with another firm or centre.
For instance, Boehringer-Ingelheim had sever-
al such licence arrangements with health re-
search firms.29 A firm may favour licensing-in
technologies developed by partner academic
institutions and specialized research centres
to reduce the costs and risks of product devel-
opment and increase the number of products
under development.
• Out-licensing refers to the most common
form of licensing for maximizing the value of
and returns of investment on R&D. Technolo-
gies that a firm or centre have developed may
be easier to expand or commercialize further
by involving a partner with complementary
technologies, necessary skills, sufficient fund-
ing, production capacity and marketing chan-
nels. Several universities and research centres
maintain lists of products they wish to license
to others.
Therefore, licensing remains a major channel for
TOT: both intra- and inter-firm transfers often use
some form of licensing arrangement. However, it
is equally important to remember that not all li-
censing arrangements involve TOT. For instance,
a road or firearms licence does not represent TOT,
although it may facilitate development in the
area of interest.
A case study on the role that licensing and learn-
ing have played in the technological develop-
ment of the Republic of Korea is included in the
annex to Module 1.
2.4 Industrial technology alliances
Industrial technology alliances, as defined by the
United States National Science Foundation (NSF),

are “industrial technology linkages with the aim
of co-developing new products or capabilities
through R&D collaboration” (NSF, 2006, in UN-
ECA). There are at least four factors that promote
the development of technology alliances (Suarez-
Villa, 2004, in UNECA):
• The multidisciplinary nature of R&D activities;
• The complexity of R&D;
• The uncertainty of commercial success of
R&D products; and
• The cost of R&D activities.
Firms may seek alliances to spread cost, risks and
uncertainty, especially in knowledge-intensive
fields such as biotechnology where there are re-
strictive and lengthy regulatory regimes (Ernst &
Young, 2005, in UNECA). Some of these partner-
ships may strategically position a firm to gain
access to the public and private resources of its
partner(s), avoid regulatory and registration hur-
dles in foreign markets and access lucrative con-
tracts and markets.
In the life science industries, such as biotechnol-
ogy and biopharmaceuticals, and the informa-
tion and communication technology (ICT) sec-
tors, firms may engage in partnerships to create
a new firm for the development of a specific area
of technology, or its application. For instance,
Dow Chemicals and Cargill pooled their resourc-
es to establish NatureWorksLLC (formerly Cargill-
Dow),30 in order to develop biopolymers from
renewable resources by exploiting their comple-
mentary technologies.
From a development and TOT perspective, in-
dustrial technology alliances may be desirable
as they transfer tacit knowledge, management
skills and habits, and technologies, often at a fair
price. Alliances that include prestigious or high-
profile partners may be used in marketing and
to gain recognition and heightened reputation.
While being an important source of TOT, alli-
ances presume the existence of partners having
respective comparative and competitive advan-
tages sufficiently attractive to engage in this type
of operation.
2.5 Determinants of the commercial channel
or source of technology transfer
The domestic market structure plays a role in the
TOT process; in particular, a country’s market size,
the level of competition and the skills of the la-
bour force may determine the mode of transfer.
There are several other factors that may be rele-
vant in determining in each case the appropriate
source of TOT. These include:
Key Issues in the Transfer of Technology
module
• The business strategy of the technology own-
er – the owner may be interested in expand-
ing abroad to exploit further technological
advantages. However, firms see their technol-
ogy as a major component of their competi-
tive advantage and may be reluctant to trans-
fer the technology outside of a wholly-owned
company, as passing on their know-how to
competitors (or helping to “breed” competi-
tors) is often not in their interest. A firm may
choose M&A, franchising or developing new
projects, instead of licensing. Fast food chain
McDonald’s, for example, prefers franchising
to licensing its know-how to interested res-
taurant operators/owners separately.
• The business strategy of the technology
buyer – like technology owners, technology
buyers may wish to expand their size, extend
their global reach and get closer to knowledge
hubs. The merger with or acquisition of a firm
in a developed country or knowledge centre
operating at the frontiers of technology may
be preferred to licensing. On the other hand,
smaller firms that own technology may prefer
licensing their know-how to large or key play-
ers in the field to recoup their investment and
retain their independence.
• The capability of the buyer – both the tech-
nology seller and buyer wish to gain from the
benefits of a given technology. The ability of
the buyer to successfully bring the technol-
ogy to market, achieve economies of scale and
compete favourably in the national or global
market place may influence the technology
seller’s decision to license or establish an af-
filiate. The absence of an interested or ad-
equate buyer or partner may entail establish-
ing a production and marketing facility in, or
exporting the product to, the target market.
• The nature of the technology – there are
technologies that may be sector or industry
specific, complex, rapidly evolving or easy to
copy. To remain competitive, firms may pre-
fer to transfer such technologies to affiliates
or close partners. For instance, drug produc-
ers often keep the production and process
technologies within their network of firms
while licensing mainly the products (such as
patent-protected drugs, vaccines and equip-
ment). While every chemist knows how to
make aspirin, few can produce it at a competi-
tive market price. The difference may be in the
production and process technology.
• The sophistication and application of technol-
ogy – the sophistication of a technology may
17
1 Key Issues in the Transfer of Technology
module
either favour inter-firm or intra-firm transfer,
depending on its application. Inter-firm TOT
implies that the technology needs to match
(that is, be interoperable) with clients’ prod-
ucts (for example, Intel microchips with Dell
computers, or Microsoft Windows operating
system with Hewlett-Packard computers). The
application of a technology dictates whether
inter-firm transfers can be profitable for both
the technology owner and buyer. Indeed, Mi-
crosoft would lose revenue if the major origi-
nal equipment manufacturers (such as HP,
IBM, Dell, and Sony) sold their equipment pre-
installed with other operating systems.
• The home country policies of the technology
exporter – in general, technology exports are
encouraged in order to generate revenues
for the exporting country. However, countries
may restrict the export of technology to a
given country, or control the export of specific
technologies considered to be key to national
competitiveness and security. Among these
could be “dual-use” technologies31 (such as
pesticides and vaccine production technolo-
gies or the sale of supercomputers). In such
cases, establishing an affiliated firm abroad
(intra-firm transfer) may be a way around
such regulations.
• The domestic (host country) policies of the
technology-importing country – national
policies could impose major restrictions on
a technology-importing firm. Furthermore,
countries may limit the entry of foreign firms
into sectors regarded as critical to national
development and security (for example, wa-
ter, communications, energy and security),
thus making intra-firm TOT almost impossi-
ble. Conversely, countries may provide incen-
tives in their investment promotion strate-
gies for the import of technologies that are
better than those provided to established
firms. Such measures may facilitate intra-
firm transfers. Other policy and regulatory
regimes, such as competition policy and IP
regimes, also influence the mode of transfer.
Governments, exporters and importers may pre-
fer different modes/channels of TOT for various
reasons. Governments see technology transfer
as an integral part of their industrial develop-
ment and trade strategies. To meet such goals,
governments of technology-importing countries
wish to diffuse technology to all the key players
in any given sector. On the other hand, firms
see their technology as a major component of
their competitive advantage. Passing on their
know-how to competitors (or to help breed com-
18
petitors) is often not in their interest. From an
economic perspective, the mode of TOT should
be based on sound commercial interests of the
technology owner and user. Most technology
transfers take place without government influ-
ence. However, since technology is often one of
the determinants of the economic competitive-
ness of firms and countries, governments are
likely to introduce policies that encourage diffu-
sion of technology and promote development of
competition.
In this teaching material, examination of diverse
channels and sources of technology should in-
crease the understanding of how these might
play a role under different conditions and cir-
cumstances. However, this does not imply that
these various sources operate mechanically or
independently of each other. The case studies
from Thailand, Chile and the Republic of Korea
(in the annex), exemplify a mixture of approach-
es to TOT, based on circumstances and need. For
example, in the case of the salmon industry in
Chile, there is a pertinent description of how
technologies are transferred through various
channels including licensing, FDI, trade, for-
eign expertise know-how and supporting roles
played by public and private institutions. In or-
der to facilitate the understanding of how these
different channels function, the following sec-
tion expands on the role played by non-market
technology sources.
3 Overview of non-market-related
sources
This section describes the most common forms
of non-market-related sources for TOT as impor-
tant potential means of accessing technology, in-
cluding: movement of labour, access to technical
information, training and education, imitation,
open source innovation, and the so-called spillo-
ver effects resulting mainly from FDI.
3.1 Labour movement
Technology may be transferred through the
movement of skilled executives and technicians.
This often happens when skilled workers move,
normally on a temporary basis, from one country
to another to install and service equipment, dem-
onstrate techniques or run an operation until lo-
cal managers and technicians have acquired an
adequate skill level. Technology transfer may also
involve the movement of students and workers
from one country to another to undergo train-
ing, or when professionals return home or go to
a third country (“brain circulation”).

The role of labour as a channel for internation-
al TOT has been given more attention in recent
years (e.g. Barton, 2007). Some studies have found
that domestic labour turnover from TNCs to local
firms is limited, while others have claimed the
opposite (Hoekman et al., 2005: 1590). It is prob-
able that in countries where local firms are in
more advanced stage of technological sophisti-
cation, labour turnover is more likely. Hence, the
ability of local firms to absorb new technologies
is an important factor if labour turnover is going
to be a successful means of diffusion (Hoekman
et al., 2005: 1590).
However, policies that favour the international
transfer of personnel have brought about the
phenomenon of “brain drain”, implying that
many skilled, highly qualified, educated people
leave their home countries and do not return. As
a result, the home countries, in principle, do not
benefit from the knowledge gained by expatri-
ates and their experience abroad. Some countries
have initiated a process of reverse brain drain by
making it more attractive for intellectuals/busi-
ness people to return home after gaining expe-
rience in foreign countries. For instance, compa-
nies or governments may provide experienced
expatriates with job security or tax benefits in
setting up local businesses. There are several ex-
amples of countries that have managed to bring
back diaspora completely, or at least partially, to
contribute to the growth of their home econo-
mies. Scholars believe that it remains challeng-
ing for developing countries to facilitate tempo-
rary movement abroad and encourage returnees
to undertake local research and business devel-
opment (Hoekman et al., 2005: 1590).32
For example, China, India, the Republic of Korea
and Taiwan Province of China have benefited
from the expertise of professionals who received
overseas training and employment experience
(especially in the United States) and returned
home to work or serve in home-country facili-
ties. The movement of such professionals brings
business, builds technological alliances and pro-
motes understanding of global markets. Return-
ing professionals may also serve as local contacts.
In the case of Taiwan Province of China, the
number of returnees grew rapidly after the late
1980s, increasing from an average of about 400
in the 1970s to about 2,800 in 1990, and peaking
at about 6,500 in 1994. More than 80 per cent
of the returnees were from the United States.
A similar trend has emerged in China. It is esti-
mated that about 140,000 former students who
studied abroad returned to China between 1996
and 2000.
Key Issues in the Transfer of Technology
module
3.2 Training and education
Students returning from abroad may also pro-
mote technology transfer and knowledge dif-
fusion. Foreign students may acquire emerging
skills, develop relations and understand both
home and host country barriers. This could, in
turn, facilitate the diffusion of knowledge and
industrial development, and promote trade and
investment.
For example, Africa Online, one of Africa’s largest
internet service providers (ISP), was developed
by three Kenyan students at the Massachusetts
Institute of Technology (MIT) in 1994. One of the
students returned to Kenya in 1995 to establish
and manage the first local office, and its first ma-
jor investor was an American ISP. Africa Online
now operates in a number of African countries.
International students in higher education in-
stitutions could serve as transferors as well as
facilitators of technology transfer, since they
return to their home countries with new knowl-
edge, skills and experience acquired during their
stay abroad. This is also true for lecturers and re-
searchers who undertake periods of study or sab-
baticals in other countries.
However, it must be noted that access to tech-
nology through overseas education and training
involves similar concerns to the international
movement of labour. In particular, students spe-
cializing in high-demand areas of science and
technology (S&T) may have little motivation to
return to their home countries, if general condi-
tions are not favourable and conducive to expand
on the knowledge and skills acquired abroad.
3.3 Access to technical information
Technical information may be found in industrial
and scientific journals, databases, and other pub-
lications, and also accessed through internation-
al industrial and scientific conferences and their
reported proceedings.
Patents may be viewed as important sources of
new knowledge: patent databases contain tech-
nical information of potential commercial value
and a level of detail that is often not available in
other information resources. Such information,
which can be used in production and R&D, may
be accessible free of charge. One important ra-
tionale to patent protection is to encourage dis-
closure of the invention in exchange for a tem-
porary monopoly control over its use. Once the
term of the patent has expired, the knowledge is
considered to be in the public domain and may
19
1 Key Issues in the Transfer of Technology
module
be freely used. Furthermore, even though the
knowledge disclosed may not be used during the
patent term, it may trigger new developments by
a better understanding of the state of the art in a
particular technology.
Scientific publications provide another very use-
ful source of knowledge. As the gap between
basic research findings and their applications
in the development of new technology narrows
in many fields, scientific publications become
a good source of new knowledge and techni-
cal information. Basic research outputs may be
transformed directly into intermediate products
(for example, laboratory supplies) or incorporat-
ed into novel products and processes for use in
fields such as agriculture, health, food, cleaning
and textiles. Scientific publications are also use-
ful as sources of information about emerging
and future technological trends. In this respect,
the Internet offers an important variety of pub-
lications. Open policies in this area should pre-
vail in order to keep alive the potential of this
critical source of technical knowledge. Moreover,
Table 1
Transfer of vehicle production technology to the Republic of Korea
Period 1962-1967 1968-1974
Stage Assembly Manufacturing
Skills acquired Assembly and Inspection and
operational skills production
management
skills
Local content 21% 30%
Success Part-assembly of Complete as-
foreign models sembly of foreign
models
Source: Pacudan (1998: 165-168).
Note: EEC = European Economic Community.
The strategy of the Republic of Korea included
targeting long-term government support to
develop innovative capacity in specific indus-
tries through engaging first in low-tech opera-
tions to start a process of technological learn-
ing through imitation and through repeated
use of imported technologies (that is, learning
by doing). At the same time, complementary
investments were made in technical education
and in the development of other related areas
of policy. The success of the Republic of Korea’s
technological miracle was also due to a consid-
ered adjustment of IP policies that evolved from
laxer systems of protection, at an earlier stage
of industrialization, to a more sophisticated one
once the country achieved its higher stage of de-
velopment (Kim, 2003).
20
balanced copyright regimes should be sustained
(Okediji, 2006; Maskus and Okediji, 2010).
3.4 Imitating and learning by doing
The industrial policy of a country can play a cru-
cial role in promoting technology transfer. This
has been seen, particularly, in some of the East
Asian economies.
The development of the automotive industry in
the Republic of Korea provides a good example.
As summarized in Table 1, the country started
with the assembly of foreign models with about
20 per cent local content in the early 1960s. With-
in two decades, the country achieved mass pro-
duction. The Republic of Korea’s learning curve
was much shorter than that of leading automo-
bile manufacturing countries of the time (for ex-
ample, five decades for Japan). Key components
of the success in the Republic of Korea’s automo-
tive industry were the acquisition of technology,
further expansion of acquired knowledge and
improved operating systems.
1975-1981 1982-1990 1991-
Mass production Innovation Generation
Design, quality Front wheel drive Engine design
control and EEC designed vehicles skills
tests
85% 97% 100%
Mass Restyling and Local engine
production of local development development
model
3.5 Open source
Open source software has shown that innovation
can be achieved by other means than by linking
exclusive proprietary rights/ownership and in-
novation, and focusing instead on concepts such
as sharing, open access and cooperation. Today,
technological advancement has successfully ex-
tended the use of open source beyond the field
of software, for example, in pharmaceutical dis-
covery research.33
Hope (2006) describes how open source works:
“Open source business strategies actively
promote innovation by making technologies
available in easily-modified form, at low or no

cost, under licensing terms that allow users to
make changes to the technology and to use or
distribute the resulting modified versions as
they see fit.”
Accordingly, the technology is available for eve-
ryone to use and to advance; in exchange, any
improvements made to the technology must
remain freely available to all. The underlying ra-
tionale is that such “free revealing” may enhance
the value of the technology. For instance, in the
case of Linux/Unix the value is added by third
party software and open source development of
the underlying core of open source software.34
Hence, the innovation process itself has changed
over the past 10 to 15 years. There is a degree of in-
novation within the process of innovation (Gosh
and Soete, 2006). The idea of open source licens-
ing is to keep new knowledge freely available to
researchers and producers.
Hope (2006) further describes the main objective
of the open source strategy:
“The use value of a technology depends on
its accessibility. Accessibility is a function of
availability and affordability. Open source li-
cences aim to increase both availability and
affordability by making it possible for anyone
at all to become a distributor and by ensur-
ing that anyone who receives the technology
has freedom to operate – with the qualifica-
tion that under a copy left-style licence, the li-
censee is constrained to make any distributed
improvements available on the same terms as
the original licensed technology.”
The use of open source strategies to launch a
technology is mainly suitable for “fundamental
enabling technologies that are not a source of
competitive advantage for the companies in-
volved” (Hope, 2006). An open source strategy
is less suitable for high-tech productions that
involve enormous R&D costs and are subjected
to a short-life period because of competitive fol-
low-up technologies. Open source might be suit-
able where it “complements proprietary business
models by reducing costs, risks and product de-
velopment time” (Hope, 2006). Thus, open source
is suitable for creations involving basic technolo-
gies, and can facilitate efficiency, as it avoids un-
necessary duplication of efforts by technology
developers working in the same field.
Open source technology development has the
potential to become a very important vehicle for
technology transfer to resource-poor firms and
economies. As for other mechanisms, investments
Key Issues in the Transfer of Technology
module
are needed in building capacity to access, use and
improve the knowledge that is openly available.
3.6 Spillover effects
Once a technology has been introduced into a
country, does it subsequently diffuse throughout
the rest of the economy? The wider absorption
of foreign technology depends upon the capa-
bilities of the host country, including the capital
stock available to benefit from the technologies,
and the level of education (Saggi, 2000). On the
other hand, employment contracts that contain
clauses not to compete or use know-how gained
from the previous employer might restrict spillo-
vers into the local economy. For these reasons, un-
derstanding international technology spillovers
are crucial to explaining economic development.
One can distinguish “passive” spillovers from “ac-
tive” technological spillovers. The former gener-
ally arise through the import of more specialized
capital goods from developed countries: total
factor productivity increases simply because a
greater variety of specialized inputs are employed
in the production process. The latter occur when
innovation and learning are primarily “conscious
and purposive”. Where this is the case, local firms
not only adopt the technology but also possess
the technological capability to master and even-
tually improve upon technologies conceived in
other countries, thereby improving domestic
production and inventive activity (Crispolti and
Marconi, 2005).
Saggi (2000) argues that several recent plant-
level studies have failed to find positive spillovers
from FDI to firms competing directly with TNC
subsidiaries. In his view, these studies need to be
approached with care, as they treat FDI as exog-
enous. Second, FDI spillovers may be of a vertical
nature, rather than horizontal, which is normally
assumed in such studies. Saggi’s study shows
that successful spillovers of acquired technol-
ogy into a host country require a certain amount
of absorptive capacity to take advantage of in-
creased trade and FDI. Without adequate human
capital or investments in R&D, spillovers from FDI
are unlikely to occur. This highlights the signifi-
cance of countries’ policies toward open trade,
education, human capital accumulation and
R&D (Saggi, 2000: 39).
Foreign direct investment is generally considered
the channel or source through which active tech-
nology spillovers may actually occur (UNCTAD,
2011a). Research has also shown that the quality
as well as the amount of FDI is crucial in build-
ing on foreign technology for domestic socio-
21
1 Key Issues in the Transfer of Technology
module
economic advancement (Crispolti and Marconi,
2005: 17). Moreover, it is argued that trade may
also contribute to active technology spillovers by
exposing domestic firms to new products, foster-
ing reverse engineering and inducing innovation
or imitation by local competitors (Grossman and
Helpman, 1991; in: Crispolti and Marconi, 2005).
From 1980 to 2000, Crispolti and Marconi re-
searched two channels of international tech-
nology transfer, FDI and trade. They scrutinized
how R&D expenditures by advanced countries
affected total factor productivity levels in devel-
oping countries through these channels. They
found that both channels induce TOT between
countries, and that each developing country, for a
given amount of foreign R&D, enjoys larger spill-
overs, if its educational level is higher (Crispolti
and Marconi, 2005).
4 Direct and indirect support
measures to facilitate technology
transfer
A supportive enabling environment for technol-
ogy transfer is a crucial factor to enhancing this
process. However, there is no magic formula in
this respect and no one-size-fits-all model. Mod-
ules 1-4 of this teaching material often refer to
this factor. This section places particular empha-
sis on human capital development, government
contracts, taxation, R&D and matchmaking/
identification of appropriate technology. Other
sections deal with the importance of NSI and the
role governments should play in supporting its
operability. Moreover, coherent supportive poli-
cies are a major responsibility of governments
in this area. The latter was highlighted in 2011
by experts who were convened by the UNCTAD
Secretariat; these experts stressed that, “creating
a conducive regulatory environment was crucial
to enhance technology transfer, including the
development of promotion, protection and facili-
tating policies” (UNCTAD, 2011a: 8 (para. 31)).
4.1 Human capital development
Irrespective of the channel or source, TOT trans-
actions and arrangements involve people. One
needs qualified and informed personnel to iden-
tify the need, source, nature, cost and mode of
transfer of a given technology. The relationship
between human capital and TOT and develop-
ment has long been a subject of policy dialogue
within and between governments (UNCTAD,
2011a).35 In this respect, technology transfer may
be seen as the movement of ideas carried by peo-
ple, which could thus promote inter-firm TOT.
22
A critical mass of competent, committed and in-
novative personnel is central to any TOT initiative.
This is particularly important as technologies
embody the “intellectual human capital” of vari-
ous engineers and scientists (Zucker and Darby,
1996). It may require a talented and skilled team
to learn from acquired technologies, irrespective
of the mode of entry or channel of transfer.
At the level of enterprises, technological learn-
ing can be achieved through investments in, for
example, training and learning by doing. In this
respect, one of the most important measures
is the recruitment of skilled personnel. Further-
more, the implications of human capital develop-
ment needs in countries that are lagging behind
technologically may be daunting. Education and
training provision and the public research sys-
tem must fit not only with the existing needs of
the productive and social sectors, but must also
be continuously reviewed and adjusted to reflect
new and emerging technological trends and op-
portunities.
4.2 Government contracts
A government contract is a formal engagement
between the government and the interested
party(ies). This agreement specifies the nature
and type of goods and services the contractor(s)
will provide. It may also specify how these have to
be provided, and any other conditions that may
be attached.
In terms of technology transfer, government con-
tracts may be used to promote partnerships be-
tween local and foreign firms, influence the type
of technologies to be transferred, and develop
new technologies not available on the market.
Local firms could, thus, use government contracts
to acquire technology or enter into partnerships
with foreign players.
Many developing countries rely on foreign firms
to undertake technologically sophisticated and
challenging projects. For example, foreign firms
often implement government contracts for in-
frastructure projects such as bridges, power
stations and satellite systems. The inclusion of
contractual requirements, which ensure the
participation of local firms in the preparation of
bids, design, implementation, launch and main-
tenance of such infrastructure, can help to trans-
fer key information and knowledge of the entire
process involved in undertaking such projects.
Ensuring participation of resident firms is more
easily achieved in home countries that have suf-
ficient bargaining power, market attractiveness
and local capabilities.

For instance, the Chinese Government and Mi-
crosoft signed an agreement in 2003 that made
Windows the desktop operating system for gov-
ernment offices. In return, Microsoft was required
to reveal its Windows source codes – to allay the
security fears of the government – and cooperate
with the state-owned China National Computer
Software and Technology Service, the country’s
largest software development and integration
firm. Under the terms of the agreement China
and Microsoft co-developed products based on
Microsoft’s software platforms and trained 200
software developers and 120 architects within
one year. Rather than just engaging Microsoft to
wire up the government operations, the contract
was designed to promote technology diffusion
and development.
Another example is the March 2007 Airbus-Aer-
oflot deal, involving the purchase of twenty-two
A350 Airbus planes by the state-owned Russian
airline. This agreement includes participation of
Russian firms in the production of planes; a num-
ber of components for the production of Airbus
planes are manufactured by Russian plants and
one of Airbus’ design and engineering centres is
located in Russia.36 This deal with Russian firms
and the government, estimated to be worth
about $425 billion, follows the three partnership
agreements proposed in 2006 by Airbus and in-
cludes engineering and manufacturing of parts,
conversion of passenger planes to cargo planes,
and participation in design and manufacture of
new-generation Airbus planes.
4.3 Taxation
Taxation affects technology transfer by reducing
earnings for the transferor and increasing costs
for the transferee. Some of the technology-relat-
ed earnings, such as licensing fees, rents and roy-
alties, and others associated with technical and
professional fees, could discourage TOT. High tax
rates on employees’ earnings could discourage
expatriate workers, whose salaries may be even
higher.
The formulation of a tax policy with respect to
the importation of technology involves the bal-
ancing of conflicting objectives. On the one hand,
countries wish to facilitate the acquisition of
technology; on the other, they wish to derive, in
the form of tax revenue, a fair share of the profits
that accrue to the foreign owner of that technol-
ogy by virtue of the transfer. It is important to
balance the extent to which the importing coun-
try may tax the various transactions involved in
TOT and its needs to raise revenue without deter-
ring such transfers altogether.
Key Issues in the Transfer of Technology
module
Many countries provide tax incentives to attract
high-technology investors, often seen as desirable
for providing employment, boosting exports and
modernizing the economy. One approach is to re-
quire, in return for tax incentives, the transfer of
technologically advanced equipment and employ-
ees with skill levels above those prevailing in the
host country, investment in a sector of economic
and/or social interest and further technological
development in a new or emerging industry.
4.4 Research & development
According to the OECD Frascati Manual, R&D
comprises basic research, applied research and
experimental development (OECD, 2002: 30):
“Basic research is experimental or theoretical
work undertaken primarily to acquire new
knowledge of the underlying foundation of
phenomena and observable facts, without any
particular application or use in view. Applied
research is also original investigation under-
taken in order to acquire new knowledge. It
is, however, directed primarily towards a spe-
cific practical aim or objective. Experimental
development is systematic work, drawing
on existing knowledge gained from research
and/or practical experience, which is directed
to producing new materials, products or de-
vices, to installing new processes, systems and
services, or to improving substantially those
already produced or installed”.
Countries and firms investing in R&D are likely to
draw on existing knowledge and acquired tech-
nologies to meet their basic and applied research
or experimental development agendas. In many
cases, R&D capacity is a key determinant of the
quantity, level of sophistication, and successful
absorption of transferred technology.
Hence, firms that undertake R&D are more com-
petitive and diffuse more technologies than
those that do not. Such firms are likely to coop-
erate with other private and public knowledge
centres, develop technologies and products that
others may wish to acquire or require, and sup-
ply specialized services and materials needed
to undertake their R&D activities. This is one of
the reasons that governments often provide tax
incentives and infrastructure support (for exam-
ple, science parks) to their firms to encourage
them to undertake R&D activities.
23
1 Key Issues in the Transfer of Technology
module
4.5 Matchmaking/identifying appropriate
technology
One of the main challenges faced by developing
countries is to identify the most suitable tech-
nology available in the international knowledge
market to meet specific technology user needs.
This is especially important in those areas where
technology is changing rapidly. Matching those
who possess the necessary technologies with
those that need them may be difficult and costly
for developing countries with limited sources of
information.
The importance of matchmaking in facilitating
TOT is illustrated by the activities of the United
States–Asia Environmental Partnership (US-
AEP),37 a public-private interagency partnership,
supported by the United States Agency for In-
ternational Development (USAID). Founded in
1992, US-AEP brings together American business
enterprises and potential Asian customers. By
2002, it had matched over 700 Asian stakehold-
ers, attended to 5,000 requests from Asia and
accounted for successful transfer of about $1.4
billion worth of technologies. In 2002, the US-
AEP received the Government Award from the
Environmental Business Journal in recognition of
its work.
In one case, US-AEP worked together with the
main local stakeholders (India’s Central Ground
Water Board and the Rajiv Gandhi Drinking Wa-
ter Mission) and United States firms to identify
cost-effective and commercialized technologies
to remove arsenic from drinking water in In-
dia.38 The stakeholders selected two firms with
compact treatment systems for arsenic removal,
as their systems met the special needs of the
community. Approximately $4 million of water
treatment equipment was purchased from Apry-
on Technologies and Water Systems Internation-
al. When Apyron Technologies39 was contracted
it had already been working in India for several
years, providing an integrated water treatment
system that supplied safe water on demand (at
8-12 litres/minute). The latter is easy to maintain
by villagers and does not need electricity. This ex-
ample illustrates how an advanced technology
developed for United States urban homes was
adapted to meet the challenges of rural commu-
nities in India.
National governments have the potential to play
an important role in such matchmaking, espe-
cially in countries that are lagging behind tech-
nologically and where the private sector is largely
made up of small to medium-sized enterprises
(SMEs). First, governments may have more lever-
24
age to negotiate than do individual enterprises.
Also, the public sector may be able to dedicate
more resources to scanning and searching the
international technology markets, and to encour-
age local firms to acquire up-to-date or best-fit
technologies.
5 Summary and review
Technology is knowledge. Technological learning
is key to accumulating knowledge. Knowledge
can be:
• Embodied in many forms, including, for ex-
ample, hardware, patents, technical drawings,
and human skills and expertise;
• Tangible (such as a piece of equipment) or
intangible (for example, an engineer’s exper-
tise);
• Codified (for instance, in a patent or technical
manual) or uncodified (tacit knowledge, such
as the know-how to operate a particular piece
of machinery efficiently, is embodied only in
human skills and depends on experience – as
such, it cannot be codified);
• Proprietary (private) or public (in the public
domain).
Whether proprietary or public, knowledge acqui-
sition is rarely costless. The technology gap be-
tween technologically more advanced countries
and less advanced economies persists not only
because of difficulties to find out about, access
and afford new technology, but also because of
the high costs of building know-how, skills and
other technological capabilities to adopt, adapt
and diffuse (endogenize) the technologies. These
capabilities are collectively called “absorptive ca-
pacity”. At the national level, the extent of nation-
al absorptive capacity may be seen to be closely
linked to the concept of National Innovation Sys-
tem – a system of institutions, linkages and inter-
actions through which knowledge transfer takes
place within a country. Technologically more ad-
vanced countries differ from the others by their
more sophisticated and experienced NIS.
Knowledge markets are highly imperfect, and
government policy has an important role to play
in addressing market failures. Two areas are par-
ticularly important:
• Policies that build an enabling environment
for the successful absorption and diffusion of
technology;
• Policies that directly encourage and support
the inward international transfer of new (to
the country) technologies.

Globally, international technology transfer takes
place mainly between firms and “market” chan-
nels and sources. The most important of these are:
• Foreign direct investment, which may be in-
tra-firm (that is, between a parent and sub-
sidiary) or inter-firm. The volume of FDI in-
coming to a country is not a good indicator of
technological development in a country, as it
does not reflect either the quantity or quality
of technology transferred;
• Trade flows of technological or technology-
related goods and services: capital goods are
particularly important for technological up-
grading in a country, especially where there is
a certain level of local R&D capacity. Trade in
consulting, management, research and ana-
lytical services is also a potentially valuable
way to transfer knowledge, including tacit
knowledge;
• Licensing proprietary technologies, where
licensees pay a fee or other type of com-
pensation for the right to use a supplier’s
technology.
Other important channels and sources are non-
market and include:
• Labour mobility – the movement of employ-
ees between different organizations;
• Training and education (for international
technology transfer, this means that either
the “learner” or the “teacher” has acquired
knowledge outside the technology receiving
country);
• Access to technical information, such as that
found in patents, and in scientific journals;
• Open source technology development, which
started in the software industry, is now
spreading to other fields and involves free
participation in a collective continuous learn-
ing environment;
• Spillover effects, where technology diffuses
from one user to others in the same coun-
try, without any commercial agreement for
their transfer, often take place through labour
movements. Some owners of proprietary
technology try to protect against spillover ef-
fects, but they have an important role to play
in technology diffusion and national techno-
logical development. However, absorptive ca-
pacity is a prerequisite for spillover effects to
have a real impact.
Public supportive measures to facilitate inward
international transfer of technology include:
Key Issues in the Transfer of Technology
module
• Human capital development, or supporting
the development of human skills and exper-
tise through education, training and research;
• Government contracts, where appropriate
and feasible (such as in relation to infrastruc-
ture or energy projects), which result in en-
gagement directly with technology suppliers
and promote partnerships with local technol-
ogy users;
• Matchmaking, which might be contractual
(as above), but may also involve government
negotiation on behalf of, for example, a public
corporation;
• Tax incentives for FDI generally, but technol-
ogy transfer in particular;
• Support for local R&D to build absorptive ca-
pacity for foreign technology.
As pointed out, these various channels and
sources of technology acquisition and diffusion,
together with various public support measures,
do not operate as separate compartments or in
a vacuum. They interact in different forms and by
adopting distinct modalities under the circum-
stances at play. This is well illustrated in the three
country case studies presented in the annex to
this module. They show that the mechanisms
through which technology was acquired were
different: Technology transfer to Thailand came
mainly through FDI and trade flows; Chile used
a very diverse set of mechanisms including FDI,
licensing, trade flows and participation in dem-
onstration and other projects, and the Republic
of Korea made extensive use of licensing. Howev-
er, in all three cases, inward technology transfer
was accompanied by extensive public support.
Mechanisms used included tax incentives, pro-
vision of technical and training services, promo-
tion of partnerships and industrial/innovation
“clusters”, offering funding for start-up firms and
building supporting infrastructure.
Finally, a key point about government interven-
tion to support inward international technology
transfer is that the governments of Thailand,
Chile and the Republic of Korea formulated poli-
cies in order to implement their respective na-
tional strategies. The first step for a government
in deciding upon policies to facilitate interna-
tional technology transfer is to define and prior-
itize national objectives. In some cases, objectives
will be sector-specific, and the modalities for
technology transfer and policy measures needed
to facilitate it will differ significantly. The com-
mon elements of the technology transfer process
are covered in the next module.
25
1 Key Issues in the Transfer of Technology

Exercises and questions for discussion

module

1. How can the different market-related channels and sources of technology transfer contribute to bridging
the technological gap?
2. How do the different channels and sources of TOT contribute to building up domestic technological
capabilities? Which market channels are likely to contribute more? Why?
3. What are the benefits and challenges of technology transfer via FDI and trade? Which could be the possible
shortcomings of FDI under the circumstances of your host country?
4. How do strategic alliances and mergers and acquisitions contribute to effective TOT to developing
countries?
5. Which channels and sources of TOT are more likely to suit LDCs?
6. How can government intervention contribute to effective TOT?
7. Are performance requirements, e.g. conditioning FDI to concrete programmes to TOT to the host country,
adequate to facilitate technology transfer? Are they compatible with existing international trade rules?
8. Does the bargaining position of host countries and recipient firms play a role in the choice of the source
of technology acquisition and in the choice of public support measures to enhance the flow of foreign
technology?

26
 Module 2
The Technology
Transfer Process
2 The Technology Transfer Process

Objectives
module

After reading this module, students should be able to:

• Understand contractual agreements on the transfer of technology;

• Identify different types of agreements related to transfer of technology;
• Assess the major costs associated with the transfer of technology;
• Grasp the main trends in the transfer of technology and understand some of the data
and methodological problems associated with its measurement.

Handbook

1 The transfer of technology – process tation/trial, production and marketing. As a re-

and strategies sult, the characteristics and costs of the transfer
1.1 Development, transfer, assimilation and
innovation
Technology transfer relies on the existence of
technological capabilities of both the trans-
feror and the transferee. Simply speaking, once
a technology is produced, it can be transferred
to recipients who can further adapt the techno-
logical information to their own needs. Therefore,
technology is not a final product that can fit into
an existing system through minor adjustments
to, or replacement of, an earlier system. In other
words, it is not a standalone product (like a car
wheel or light bulb).
In many instances, technology that is transferred
represents only a small fraction of the total prod-
uct. Despite this, different technologies may be
required at different stages of a process, such as
product development, testing and dissemina-
tion. For example, the next steps in development
of a seed may also require the use of technology
developed by others. In this case, the product will
have to be sent to the field (from the laboratory)
for testing, further development and adaptation
to field conditions. The product may be sent back
to the laboratory to incorporate emerging/alter-
native technologies or for additional field trials
and certification. It may also be sent to seed pro-
duction units before the product can be delivered
to the final user. In terms of TOT, acquisition of
technologies can be seen to occur at different
stages: product design, development, experimen-
process may differ widely.
There are also varying motives for transferring
or acquiring a technology at a given stage of
the development process. When a transferor is
a dedicated R&D firm/institution or the acquir-
ing firm/institution is interested in including the
technology in its products under development,
there is a greater likelihood that partners would
be interested in early stage technology transfer
deals. However, larger producers and marketing
firms may be interested in products whose mar-
ket potential is already established or estimated
to be worthwhile. Such institutions are likely to
be interested in late stage technology transfer
arrangements.
1.2 Sourcing technology: challenges and pitfalls
Sourcing technologies, even simple ones, can pre-
sent a major challenge especially in rapidly evolv-
ing fields. There are several factors that present
major challenges when sourcing technology:
• A clear understanding of the need to be met;
• The skills of the user relative to the technol-
ogy being sought;
• The complexity of the technology and avail-
able alternatives;
• The relevance of the technology in question
and its comparative advantages when com-
pared with alternative sources;
• The economic relationship between the parties;
• The conditions attached to the transfer.

Box 2
Sourcing of a radar system by Tanzania: the case of BAe Systems, United Kingdom
In August 1992, Tanzania appointed a committee of experts to come up with specifications for a radar system
that would meet the country’s requirements. The experts recommended a joint radar system for military and
civilian use. In October/November 1992, the government floated tenders through selective bidding and asked
interested parties to apply. Companies were judged, based on the following criteria:

28
 Box 2
The Technology Transfer Process

module
Sourcing of a radar system by Tanzania: the case of BAe Systems, United Kingdom
• The capacity of the bidding company in manufacturing the needed equipment;
• The price of the equipment;
• Service after purchase;
• The procedure for getting funds for the purchase of the equipment;
• Equipment which would serve military and civil operations;
• The ability to ensure that the manufactured equipment would conform to the requirements stipulated
in the regulations and procedures of the International Civil Aviation Organization.

Of the eight firms that bid, Tanzania selected Siemens Plessey Systems (SPS), now part of BAe Systems. After
consultations with SPS, Tanzania agreed to buy the system in 1994 at an initial suggested price of $88 million.

In September 1997, Tanzania and SPS agreed on the list of components to be included in the radar system. It
was also agreed that the value of the project in the sales agreement be inclusive of equipment maintenance
contracts, training, spare parts and wages for expatriates. Tanzania obtained a soft loan from Barclays Bank in
line with the conditionalities set by the International Monetary Fund (IMF) and the World Bank.

The World Bank appointed an aviation expert from TECN-ECON of the United Kingdom to undertake an as-
sessment of the deal. The expert supported the plan to purchase the radar system. The World Bank appointed
a second expert from the United States who concluded that Tanzania should buy another type of radar from
the United States instead of the United Kingdom. In 2002, BAe Systems was issued with a licence to supply
the radar to Tanzania.

However, in 2007, both Tanzania and the United Kingdom concluded that the technology BAe Systems sup-
plied was primarily for military use, it was inadequate for civilian use, and that Tanzania could have acquired
a better system for a quarter of the price. This followed the launch of an investigation by the United Kingdom
watchdog, the Serious Fraud Office, into the activities of BAe Systems abroad.

Source: http://www.publications.parliament.uk/pa/cm200102/cmselect/cmfaff/718/718ap09.htm.

The BAe case (see Box 2) highlights some of the
key challenges in sourcing technology. In this
case, Tanzania did not have all the information
needed to know that the system was technologi-
cally outdated. The seller may have provided all
the technical information the buyer needed to
operate the technology, but the latter might not
have had sufficient information to compare the
seller’s technology with available alternatives.
It also reveals the interest of the technology buy-
er: Tanzania only solicited bids from a list of firms
of interest. Countries and firms do not just buy
complex technologies from the best or cheapest
sources, but rather from parties they may know
or trust. Political and strategic interests, inter
alia, could also override other criteria in selecting
sources of technology.
In addition, the technological capability of the
technology buyer may determine the amount of
tacit know-how and training required. In this case,
Tanzania included spare parts, maintenance, train-
ing and wages of experts in the sales agreement.
It is important to ensure that tacit know-how re-
quirements and capacity building are accommo-
dated within technology transfer agreements.
Often, in commercial TOT transactions, the cost
of technical services by technology suppliers can
form a large part of the total payment, and may
act as a major hindrance to technology transfer.
Moreover, the proprietary nature of the technol-
ogy or technologies in question will also consti-
tute an important factor in the overall deal.
The Tanzanian example shows the potential
shortcomings that a technology buyer needs to
be aware of, and can be summarized as follows:
• The costs of bundled technologies may be high-
er than if a range of different suppliers is used;
• The transferee may not be able to take advan-
tage of new or better alternative technologies;
• The transferee may also become overly de-
pendent on the technology supplier and this
may lead to the stagnation of in-house learn-
ing and innovation;
• The competitiveness of the transferee may
become inextricably linked to that of the tech-
nology supplier.
However, there are advantages in such dealings.
The technology recipient may for example ben-
efit from:

29
2 The Technology Transfer Process
module

• The technological experience of the supplier; discussion on indicators to measure technology

• The financial and market channels of the
technology supplier;
• A steady and deeper relationship with poten-
tial for repeat transactions – a single source of
related technologies;
• Preferable access to future technological de-
velopment by the supplier;
• Compatible intermediate goods, parts and
supplies.
It can, therefore, be seen that the “techno-mana-
gerial” capabilities of the technology-importing
firm (or other organization) are extremely impor-
tant for successful technology transfer.
2 Trends in cross-border transfer
of technology
As noted earlier on in this module, data on inter-
national TOT is relatively scarce, as few countries
outside the OECD report expenditures on technol-
ogy acquisitions from abroad on an internation-
ally comparable basis. Hence, available trend esti-
mates are largely based on data provided by major
technology supplier countries, which are compiled
regularly by the OECD Secretariat from the bal-
ance of payments (BOP) of the member countries.
Since the data provided by technology suppliers
rarely specify the origin of the receipts, it is dif-
ficult to establish an accurate indication of the
geographical distribution of international flows
of technology. OECD data are complemented by
data on trends of flows of technology derived
from data on FDI inflows, which are compiled by
international organizations such as UNCTAD, the
IMF and the OECD (see Box 3 for a more detailed
transfer and diffusion).
Although FDI is an important channel of technol-
ogy transfer, it is not the only one. The transfer of
technology through imports of capital goods and
licensing activities have been, and still are, rele-
vant channels. Licensing of technology, particu-
larly for process technology, has been historically
very important in the cases of Japan, the Republic
of Korea, Taiwan Province of China and in general
South and East Asian countries. Furthermore,
an important feature of the last 20 years is the
large increase in the volume and sophistication
of commercial transactions that have an intel-
lectual property component. Some of the factors
that have contributed to this trend are:
• The growing importance of intellectual prop-
erty for the introduction of new products and
processes;
• An increase in international trade in goods
embodying IP, as the share of manufactures
and services in total trade has expanded
and, within these categories, the share of the
“high-technology” group has increased;
• An increase in trade in counterfeit or IP in-
fringing goods, which has become a very con-
tentious issue as it can reduce market returns
to innovators;
• The strategic use of IPRs in commercial trans-
actions within the business community.
Despite the difficulties in accurate measurement,
the remainder of this section will, give an over-
view of recent trends in TOT using data on royal-
ties and licences, flows of capital goods, flows in
R&D and manufacturing projects and industrial
technology alliances.

Box 3
A note on methodology
In addition to case studies, one can determine the importance of international technology diffusion on pro-
ductivity, efficiency and product quality in recipient countries, using aggregate data that correlates cross-
country trends in technology transfer proxies with growth in the productivity of several countries, by:

• Comparing the total factor productivity elasticities of foreign and domestic R&D – with the assumption
that when foreign R&D shares are comparatively higher than domestic R&D, the greater is the contribu-
tion of foreign R&D to the domestic productivity of the country;
• Modelling the relationship between R&D, productivity and technology diffusion of selected countries –
noting that one can examine changes in the impact of economic and technology policies on technology
diffusion.

The main assumption in these approaches is that R&D investment in one country may have a great effect on
the productivity of another country. Furthermore, countries that acquire technology from the leading nations
are expected to achieve a higher growth in productivity (Keller, 2001). Given what we know of technology
transfer in the current context, many of the notions used in these comparison methods are quite static and do
not accurately capture technology transfer. The reality is much more complex: countries that simply acquire
technology, but do not apply it to economic activities, do not have productivity gains.

30
 Box 3
The Technology Transfer Process

module
A note on methodology
Many of the models used in estimating the impact of technology diffusion may have a bias in aggregation. In
addition, they may assume the variables selected affect all the countries or firms in the same way. Therefore,
it is common, even where the main results (positive or no effect) may hold true, for different authors to arrive
at different levels of magnitude.

The challenge lies in the proxies used for technology transfer and their relationship with the actual TOT and
its impact on domestic learning. For example, there are two main types of FDI: greenfield FDI and cross-border
mergers and acquisitions. Greenfield FDI refers to investment in new production facilities (for example, new
buildings, mines, plants and factories, etc.) abroad. Such FDI is likely to result in importation of capital goods,
intermediate inputs, business services and licensing arrangements, among others that may entail accompa-
nied learning.

Cross-border M&As often involve the acquisition of one firm by another or merging of assets of two firms, and
may not always result in new facilities, creation of new jobs (often result in job losses) or further integration
into the local economy. A proportion of cross-border M&As (5 per cent in 1995, 44 per cent in 2000 and 17 per
cent in 2005) involves the swapping of shares. Such FDI is unlikely to facilitate technology transfer in the same
way as greenfield FDI.

However, cross-border M&As represent a large proportion of global FDI (78 per cent in 2005). Therefore, using
the gross figures of FDI to estimate technology transfer may distort the actual picture, unless one accounts for
investment that is unlikely to facilitate technology transfer and diffusion. Cases such as the purchase of Corus
in February 2007 by Tata (India) at about $9.6 billion will undoubtedly reflect a major rise in the outward FDI
figures of India, but do not necessarily present an equal rise in flow of technology to the United Kingdom or
India.

2.1 Royalties and licensing fees
The TOT across countries can be indirectly tracked
through payments made to technology-supplier
countries for the use of knowledge assets. The
use of IPRs (patents, copyrights, trademarks, trade
names, etc.) and technical services often attract
fees in the forms of royalties and licensing and
technical fees. Although some of these assets,
such as trademarks, do not necessarily represent
technology transfer, they may signal the exist-
ence of growing confidence and trust in domestic
industrial processing and cooperation that often
indicates an increasing use of better production
and service delivery techniques. By ensuring that
licensees meet minimum product or processing
standards internationally, owners of trademarks
and trade names can indirectly promote technol-
ogy upgrading and transfer.
Globally, there has been a significant and steady
increase in the trade in knowledge assets over the
last decade. Royalties and licensing fee receipts
were estimated to have increased from $65.2 bil-
lion in 1998 to $186.8 billion in 2008, while pay-
ments were estimated to have increased from
$69.8 billion to $195 billion over the same period
(UNCTAD calculations, based on IMF BOP statis-
tics). In other words, from 1998 to 2008 this trade
in protected knowledge has nearly tripled in value.
There are major differences among regions in
the trends of payments for technology. Between
1998 and 2008, Asia’s royalty and licensing fee
payments have increased from $7.6 billion to
$37.9 billion, while those in Latin American and
the Caribbean (LAC) increased from $2.8 billion
to $5.7 billion over the same period. Africa’s pay-
ment for technology rose from about $945 mil-
lion to $2.3 billion between 1998 and 2008.

31
2 The Technology Transfer Process

Figure 2
module

Royalty and licensing fee payments, 1998, 2004 and 2008 (billion dollars)

2008
North America
2004
1998

Europe

Asia

Africa

LAC

0 10 20 30 40 50 60 70 80 90

Source: UNCTAD calculations, based on IMF BOP statistics.

Note: North America is “Developed America”; Europe is “Developed Europe”; Asia is “Developing Asia”, Africa is “Developing Africa”,
LAC is “Developing America”, according to the country classification used by the UN Department of Economic and Social Affairs.

North America, Europe, LAC and Africa, saw istered an increase in its global share of pay-
their share of global payments for technology ments for technology over the same period (see
decline between 1998 and 2008, while Asia reg- Figure 3).

Figure 3
Changes in global share of royalty and licensing fee payments, 1998, 2004 and 2008 (percentage)

2008
North America
2004
1998

Europe

Asia

Africa

LAC

0 10 20 30 40 50 60

Source: UNCTAD calculations, based on IMF BOP statistics.

Note: North America is “Developed America”; Europe is “Developed Europe”; Asia is “Developing Asia”, Africa is “Developing Africa”,
LAC is “Developing America”, according to the country distributions used by the UN Department of Economic and Social Affairs.

Although there are noticeable changes, available
data on royalties and licensing fees also reveal
the concentration of technology in a few sup-
plier developed countries. The top five technol-
ogy-exporting countries accounted for about 85
per cent of royalty and licensing fee receipts in
2000. This figure declined to about 82 per cent in
2008, but remains very high. The United States
accounts for about half of the total receipts, al-
though its share has declined from about 55 per
cent in 2000 to 50 per cent in 2008. Japan’s share
was around 13 per cent between 2000 and 2008.

32
 Figure 4
The Technology Transfer Process

module
Royalty and licensing fee receipts of the top five technology-exporting countries,
1998, 2004 and 2008 (billion dollars)

100
2008
90 2004
2000
80

70

60

50

40

30

20

10

0
France Germany Japan United Kingdom United States

Source: UNCTAD calculations.

There are also other emerging beneficiaries in
the trade of knowledge assets outside the top
five countries. For instance, Canada, the Republic
of Korea and Sweden have registered a marked
increase in royalty and licensing fee receipts be-
tween 1998 and 2008. In 1998, Canada, the Re-
public of Korea and Sweden received $1,401 mil-
lion, $260 million and $1,114 million, respectively.
By 2008, these countries received $3,569 million,
$2,382 million and $4,588 million, respectively, in
royalty and licensing fees. Receipts as a propor-
tion of payment increased from 11 per cent to 42
per cent for the Republic of Korea, but decreased
from 52 per cent to 41 per cent for Canada over
the same period. In the case of Sweden, the ratio
increased from 118 per cent in 2000 to 249 per
cent in 2008. Such significant increase in the
trade in intangible assets suggests the broaden-
ing of global sources of technology.
The United States remains the world’s major
technology exporter. Its trends in technology
receipts and payments may reflect some of the
global changes in technology transfer. In addi-
tion, the United States data on royalty and licens-
ing fees are segregated into different categories.
Such segregated data could provide some in-
sights in global technology transfer trends of the
various categories of transactions.40
There are regional differences in the import and
use of United States intellectual assets. For ex-
ample, royalties and licensing fees paid to the
United States increased 32-fold for Asia, 16-fold
for LAC and 27-fold for Africa between 1986 and
2008 (see Table 2). Ireland, Switzerland, Japan,
Germany, Canada, and the United Kingdom ac-
counted for about 54 per cent of royalties and
licensing fees paid to the United States in 2008.

Table 2
Royalties and licensing fee receipts by the United States, 1986, 1996, 2004 and 2008 (billion dollars)
1986 1996 2004 2008

Europe 4.5 16.9 29.7 56.1

LAC 0.3 1.6 3.9 7.1

Africa 0.1 0.3 0.4 1.0

Asia 0.4 3.6 7.2 12.8

Total receipts 8.1 32.5 52.6 94.0

As a percentage of total receipts by the United States:

Europe 56.0 51.9 47.9 59.7

LAC 3.5 4.9 8.6 7.6

Africa 1.0 1.0 0.8 1.1

Asia 4.6 11.1 13.6 13.6

Source: United States Bureau of Economic Analysis (http://www.bea.gov/).

33
2 The Technology Transfer Process
module
However, Asia’s share of royalty and licensing fees
paid to the United States rose from 4.6 per cent
in 1986 to 13.6 per cent in 2008, while that of LAC
increased from 3.5 per cent to 7.6 per cent over the
same period. Africa and Europe witnessed a slight
increase in their shares of royalties and licensing
fees paid to the United States over the same pe-
riod, with a decrease between 1996 and 2004.
Most of the technology transactions are between
related firms, mainly parent firms and their af-
filiates abroad (Figure 5). In general, receipts by
the United States from affiliated firms remained
between 70 per cent and 80 per cent of total
receipts until 2006 (with a slight decline from
an average of 78 per cent in the late 1980s to
an average of about 74 per cent between 2000
Figure 5
Inter-firm and intra-firm royalty and licensing fee receipts by the United States, 1986-2008 (billion dollars)
70
Intra-firm
Inter-firm 60
Inter-firm industrial
process
50
Inter-firm general use
computer software
40
30
20
10
0
1986 1988 1990 1992 1994
Source: United States Bureau of Economic Analysis.
Note: Data series for “Inter-firm general use computer software” starts in 1998.
As stated earlier, royalty and licensing fees may
not necessarily reflect the quantity of technol-
ogy transferred, partly because most of the
transactions are between related parties and
include payments for, among others, copyright-
ed materials (for example, movies and music),
trademarks and broadcasting, that do not nec-
essarily represent knowledge transfer. Moreover,
payments between related parties may hide
other intra-firm transfers (for example, repatria-
tion of profits).
2.2 Flows of capital goods
Capital goods may be defined as high value and
durable agricultural, industrial and commercial
machinery or tools, used in the production or
delivery of services. For the purposes of this ma-
terial, capital goods refer to the traded sum of:
handling, electrical and non-electrical machin-
34
and 2006), and further declined to 67 per cent in
2008. Although the proportion of receipts from
unaffiliated firms increased from about 23 per
cent to 32 per cent of the total over the same peri-
od, receipts for industrial processes from unaffili-
ated firms declined from about 16 per cent to 10
per cent of the total receipts by the United States
over the same period. The rise in total payments
by unrelated firms is partly explained by the in-
crease in fees received for the use, distribution
and reproduction of computer software, which
has grown rapidly. By 2004, fees received by Unit-
ed States firms from unaffiliated parties for use
of computer software-related technologies alone
were $4.7 billion; the amount increased to $16.7
billion by 2008, accounting for more than half of
all receipts from unaffiliated parties.
1996 1998 2000 2002 2004 2006 2008
ery, telecommunication equipment and metal
work machinery or tools (SITC41 groups 723, 730,
744, 764, 771, 778 and 874).
Countries investing in manufacturing or deliv-
ery of services are likely to rely on these capital
goods to meet their goals. Furthermore, work-
ers learn and develop skills to operate, maintain,
install and, in some cases, modify imported so-
phisticated machinery. Imports of machinery
and equipment remain one of the key channels
through which technology is acquired. Stud-
ies have argued that imports of capital goods
are a good indicator for TOT or passing on R&D
benefits (technology spillovers) from the export-
ing countries to the importing countries (Keller,
1998; UNCTAD, 2007a). The rapid growth in capi-
tal goods imports may indicate growth in public
investment within the country, leading to the
adoption of newer technologies.
 The Technology Transfer Process

Globally, the import of capital goods has grown
rapidly over the last two decades. Such imports
increased 3-fold for Asia, North America, and
Europe and 4-fold for LAC and Africa between
1995 and 2006. Africa’s overall growth of capital
imports is lower than that of all LDCs, which is
about 8-fold over the same period. This may be
due to the fact that Asian LDCs, which are more
technologically diversified than African LDCs, ac-
count for a large share of the imports.
module
Europe, North America and Asia are the largest
importers of capital goods (see Figure 6). Im-
ports of capital goods by European countries in-
creased from about $34.1 billion in 1983 to about
$405.9 billion in 2008. Asia (excluding Japan)
became the second largest importer of capital
goods ($367.7 billion in 2008), surpassing North
America in 1990.

Figure 6
Trends in imports of capital goods, 1995-2008 (billion dollars)

450
North America
400 Europe
Africa
350
LAC
300 Asia
LDCs
250

200

150

100

50

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: UNCTAD calculations.

Capital goods account for between 6 and 11 per LAC spent more than 9 per cent of their total im-
cent of total imports across all regions in the port expenditure on capital goods.
time period 1995 to 2008 (see Figure 7). Asia and

Figure 7
Imports of capital goods as a proportion of total imports of selected regions, 1995-2008 (percentage)

11
North America
10 Europe
Africa
LAC
9
Asia

4
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: UNCTAD calculations.

Between 1995 and 2008, Europe and North Amer- times more on imports of capital goods than they
ica spent almost the same amount on imports earned in exports of similar goods. Asia and LAC
as they earned from exports of capital goods increased their exports of capital goods. In other
(see Figure 8). In contrast, LDCs spent about 20 words, earnings from their capital goods have

35
2 The Technology Transfer Process
module
grown in value to that of expenditure on simi-
lar goods. Although Africa’s expenditure remains
much higher than its earnings from capital
goods, imports declined from about 15 times the
value of exports to about 10 times. Overall, the
data reveal a generally progressive trend in the
acquisition of knowledge needed to produce cap-
ital goods in almost all regions, except for LDCs.
Figure 8
Ratio of imports to exports of capital goods, 1995-2008
100
North America
Europe
Africa
LAC
Asia 10
LDCs
0.1
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: UNCTAD calculations.
Note: Y-axis is in logarithmic scale; i.e. each space is 0.1 units between 0.1 and 1, 1 unit between 1 and 10, and 10 units between 10
and 100.
However, capital goods may be imported for the
manufacture and processing of various products
and services. An increase in the imports of capital
goods may signal the development of manufac-
turing capability in the importing country. For
instance, Tunisia’s imports of capital goods in-
creased from $443 million to $1.4 billion between
1995 and 2008, while its exports of electrical and
engineering machinery and transport equip-
ment increased from about $154 million to about
$881 million over the same period, according to
UNCTAD data. It is inconclusive that such growth
in Tunisia’s manufacturing sector is directly at-
tributable to the increase in imports of capital
goods. At the same time, such rapid growth in the
trade of manufactured electrical and transport
goods within a decade are unlikely to have been
achieved without the import of capital goods.
Furthermore, one may assume that inflows of
capital goods facilitated the TOT needed to pro-
duce the export goods and induced the develop-
ment of skills to maintain or adapt the imported
machinery to the local production environment.
2.3 Internationalization of R&D
The internationalization of R&D may take place
through four broad categories:
36
Nevertheless, regional trends have to be in-
terpreted cautiously since there can be large
intra-regional variations. For instance, Mexico
accounts for about 80 per cent of LAC’s earn-
ings from capital goods exports and about 50
per cent of the import bill of the region’s capital
goods.
• Location or investment in fully-owned or co-
owned R&D units abroad;
• R&D expenditure through foreign-affiliates;
• Subcontracting of R&D activities abroad;
• Indirectly passing on R&D activities to con-
tractors.
In many of these cases, the parent or contract-
ing firm may provide information, technologies
and support needed to meet the specific require-
ments of their next generation of products or
services. Depending on the needs, a firm may
choose to use one or more of these approaches
to meet specific goals cost-effectively.
There has been an increase in R&D expenditure
by foreign affiliates abroad. R&D expenditure by
foreign affiliates of Japanese firms grew from
about $1.8 billion in 1993 to about $4.3 billion in
2007. Similarly, R&D expenditure by majority-
owned foreign affiliates of United States parent
firms increased from $1.1 billion in 1993 to about
$35 billion in 2007 (UNCTAD, 2010c). In 2007,
expenditure on R&D activities by affiliates of
United States firms amounted to $65 million in
Africa, $1.1 billion in LAC and almost $4 billion in
developing Asia.
 The Technology Transfer Process

Transnational corporations have been shifting
their R&D activities to developing countries that
are quickly climbing up the knowledge ladder,
although developed countries remain the main
host locations of foreign R&D activities by TNCs.
In 2007, Japanese TNCs allocated 38 per cent of
R&D activities abroad in developing countries,
module
compared with only 6 per cent in 1993. For the
United States, the share of its firms’ foreign R&D
activities in the developing regions rose from 12
per cent to 15 per cent during the same period
(see Table 3). It should be noted that some devel-
oping economies in Asia, such as China and India,
have emerged as key nodes (UNCTAD, 2010c).

Table 3
R&D expenditures by Japanese and United States affiliates abroad, 1993, 1999 and 2007 (million dollars)
1993 1999 2007

Destination region/economy United United United

Japan Japan Japan
States States States

Total world 10 951.0 1 838.8 18 144.0 3 648.9 35 019.0 4 371.2

Developed countries 9 626.0 1 721.7 16 107.0 3 250.8 29 780.0 2 704.1

European Union 7 392.0 690.7 11 953.0 807.1 21 779.0 931.0

United States - 974.7 - 2 231.1 - 1 686.5

Developing economies 1 315.0 117.1 2 038.0 398.1 5 138.0 1 667.1

Africa 18.0 0.1 18.0 0.2 65.0 1.4

Nigeria 1.0 .. - .. 3.0 ..

South Africa 14.0 .. 14.0 .. 53.0 ..

Latin America and the Caribbean 383.0 8.1 612.0 8.2 1 149.0 761.1

Argentina 26.0 .. 26.0 .. 64.0 ..

Brazil 220.0 .. 288.0 .. 629.0 ..

Chile 4.0 .. 4.0 .. 48.0 ..

Colombia 6.0 .. 6.0 .. 16.0 ..

Peru 1.0 .. 2.0 .. - ..

Venezuela, Bolivarian Rep. of 19.0 .. 40.0 .. 20.0 ..

Asia 914.0 108.9 1 408.0 389.6 3 926.0 904.6

West Asia 11.0 .. 6.0 .. 56.0 8.8

Turkey 7.0 .. 6.0 .. 54.0 ..

South, East and South-East Asia 903.0 1.9 1 402.0 60.3 3 870.0 619.6

China 5.0 1.9 319.0 60.3 1 141.0 314.2

Hong Kong, China 74.0 .. 214.0 .. 96.0 34.0

India 3.0 .. 20.0 .. 449.0 ..

Korea, Republic of 16.0 .. 101.0 .. 995.0 ..

Malaysia 18.0 .. 161.0 .. 396.0 ..

Philippines 13.0 .. 31.0 .. 45.0 ..

Singapore 312.0 .. 426.0 .. 578.0 ..

Thailand 7.0 .. 7.0 .. 55.0 ..

South-East Europe and CIS - .. 1.0 .. 100.0 ..

Russian Federation - .. 1.0 .. 100.0 ..

Source: UNCTAD (2010c).

Note: CIS = Commonwealth of Independent States.

The location of R&D units of technologically
advanced firms in emerging knowledge hubs
is driven by the need to cut costs for R&D, and
to develop or adapt TNC products to meet the
needs of emerging markets. Such investment
may transfer skills and technologies to the host
country, at least when R&D activities are in-
volved. Countries that have developed a techno-
logical base of interest to high-technology firms
seem to attract R&D projects. It is, therefore, not
surprising that among developing countries
China, India and Singapore are the top ten loca-
tions of foreign R&D centres. According to offi-
cial Chinese statistics, 1,160 foreign R&D centres
were established in China by the end of 2007,
mostly after 2001 (OECD, 2008).

37
2 The Technology Transfer Process
module
Trends in R&D expenditure and investment are
important to TOT for a number of reasons:
• Technology spillover in FDI is associated large-
ly with firms that undertake R&D activities in
the host countries.
• R&D investments are increasingly taking
place in developing countries that dem-
onstrate significant potential to engage in
knowledge-based activities themselves. In
such cases, the FDI and related technology
licensing arrangements are often based on a
quid-pro-quo basis, where the recipients have
important contributions to make, such as pro-
viding market access through their distribu-
tion networks.
• R&D investments can enhance the techno-
logical base of recipient firms and countries.
Worker mobility from such firms to others in
the economy may facilitate the wider trans-
fer of assimilated skills. Confidentiality provi-
sions in employment contracts that survive
the employer-employee relationship may, on
the other hand, limit the wider dissemination
of assimilated skills and knowledge.
• R&D performance or product development
may be associated with the use of technology
belonging to others (or other facilities of the
same firm) and, as a result, indirectly promote
technology transfer into a firm or country.
Figure 9
Number of industrial technology alliances by region, 1980-2006
300
Europe-United States
Japan-United States
250
Europe-Japan
Triad-Non Triad
United States only 200
Europe only
Japan only
Non Triad only 150
100
50
0
1980 1982 1984 1986 1988
Source: Based on NSF (2010).
Note: Non Triad includes countries other than Europe, Japan or the United States.
As shown in Table 4, the number of industrial
technology alliances formed between Triad
and non Triad firms in the 1980s and 1990s av-
eraged about 10 per cent of the total per year
in each decade. Between 2000 and 2006 the
38
2.4 Industrial technology alliances
International (or cross-border) strategic alliances
are complex linkages between firms and institu-
tions often designed to reduce the costs, risks and
uncertainty associated with the development of
new products, production processes and market-
ing. They may also be used to facilitate access
to and TOT and information exchange. Usually,
knowledge flows between partners seeking to
co-develop, deliver or market products and ser-
vices are higher than between uninterested par-
ties (Gomes-Casseres et al., 2006). Partnering
arrangements may therefore, be considered as a
possible channel for the TOT.
As indicated in Module 1, industrial technol-
ogy alliances are “industrial technology link-
ages with the aim of co-developing new prod-
ucts or capabilities through R&D collaboration”
(NSF, 2006). Globally, the number of industrial
technology alliances grew rapidly from about
178 in 1980 to about 898 in 2006 (see Figure 9).
Approximately two-thirds involve at least one
United States-owned company, regardless of
location (NSF, 2010). In the last three decades,
most of the industrial technology alliances in-
volved firms in the United States, Europe and Ja-
pan – sometimes referred to collectively as “the
Triad”.
1990 1992 1994 1996 1998 2000 2002 2004 2006
average increased to 16 per cent. The number
of alliances formed between firms in the Triad
averaged 42 per cent, 38 per cent and 34 cent, re-
spectively, in the 1980s, 1990s and in the period
2000 to 2006.
 Table 4
The Technology Transfer Process

module
Share of industrial technology alliances by region of firms involved, 1980-2006 (percentage)
Between Triad Triad-Non Triad United States only Europe only Japan only Between Non Triad
1980 37.6 9.0 24.7 23.6 3.9 1.1
1981 46.4 8.8 21.5 16.6 6.1 0.6
1982 54.2 8.6 18.4 14.3 3.7 0.8
1983 44.3 4.6 24.9 16.9 7.2 2.1
1984 45.1 7.2 26.3 15.7 5.6 0.0
1985 39.3 7.2 19.0 23.7 9.6 1.2
1896 38.9 4.4 24.0 18.9 13.6 0.2
1987 41.9 6.7 27.4 15.1 8.7 0.2
1988 37.4 11.2 29.2 18.0 3.6 0.6
1989 40.2 10.8 23.1 24.7 0.6 0.6
1990 36.7 7.8 36.1 16.4 2.9 0.3
1991 47.4 2.4 37.1 11.2 1.8 0.0
1992 40.0 7.4 37.0 14.0 1.5 0.2
1993 39.3 7.7 40.7 10.4 1.3 0.6
1994 38.4 8.3 40.5 10.6 1.8 0.4
1995 36.6 9.5 39.2 12.6 1.7 0.5
1996 35.7 11.8 40.4 9.1 2.0 1.0
1997 33.0 11.3 43.7 10.9 0.5 0.5
1998 38.9 5.8 43.0 10.5 0.9 0.9
1999 36.7 9.5 40.7 8.5 3.2 1.4
2000 40.1 13.1 35.3 9.1 1.3 1.1
2001 34.6 12.4 34.9 14.3 2.2 1.7
2002 34.6 15.5 25.9 18.0 4.6 1.3
2003 30.4 18.3 32.0 11.9 4.9 2.5
2004 30.7 14.9 33.7 14.4 3.4 2.9
2005 31.5 17.8 31.8 11.9 2.8 4.1
2006 31.6 19.1 27.7 14.6 4.2 2.7

Source: Based on NSF (2010).

Other than regional concentration of industrial
alliances, there is also concentration by industries
or technologies. About 50 per cent of the indus-
trial technology alliances in 1980 involved firms
in biotechnology, information technology and
automotive firms. The share of alliances in these
three industries increased to 86 per cent in 2006
(with a high of 91 per cent in 2003). Most of the
alliances in the 1980s involved firms in IT, while
most of the growth in the last decade was record-
ed in biotechnology. In 2006, around 60 per cent
of the worldwide industrial technology alliances
focused on biotechnology, and 23 per cent focused
on information technology (NSF, 2010).

Figure 1 0
Industrial technology alliances by technology , 1980-2006

600
550 IT
Biotechnology
500
Automotive
450
400
350
300
250
200
150
100
50
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: Based on NSF (2010).

39
2 The Technology Transfer Process
module
Although these arrangements are concentrated
in developed countries, partnering arrange-
ments could, potentially, play a key role in the
development of technological capabilities in the
firms and institutions in developing countries.
Capacity built in this way would likely be special-
ized and related to specific products and services,
at least in the early stages. However, such part-
nering would also be useful in promoting the
adoption of good management and industrial
production standards in developing countries
that would have wider applicability and encour-
age innovation in other areas of activity.
For example, an international technology alli-
ance between Biocon Biochemicals of Ireland and
a local Indian start-up led to the development of
Biocon India, one of India’s largest biotechnology
firms. The partnership sought to develop and
manufacture industrial enzymes in India, which
were originally sourced from Japan. The success
of this partnership enabled Biocon India to grow
into a major supplier of enzymes to the United
States and European markets. Biocon India has
now expanded into other fields (for example,
pharmaceuticals and genomics) and has part-
nered with AstraZeneca, Glaxo and BMS, which
contribute to its research efforts (UNCTAD, 2004).
3 Contractual agreements in
technology transfer
As discussed in the previous section, licensing
is an important mode of technology transfer. In
theory, all contractual agreements between indi-
vidual firms, firms and institutions, and between
individual institutions may facilitate technology
transfer. In practice, however, only a few such
agreements could be characterized as technol-
ogy transfer agreements, which is the focus of
this section. For example, a contract between two
medical centres to exchange doctors in a defined
area, with a view of developing skills, products
and services using the technological advances
developed at one of the two centres, will be con-
sidered. In general, this section uses the terms
contract and agreement interchangeably.
There are various types of agreements that are
used to facilitate TOT. For the purposes of expla-
nation, licence agreements (Section 3.1) are sepa-
rated from other types of agreement (Sections 3.2
and 3.3).
3.1 Licence agreements
The ownership aspect is the most important el-
ement in any TOT agreement, although various
40
aspects of the ownership dimension also require
attention. First, a TOT agreement usually speci-
fies which aspects or portions of the technology
will remain in the property of the licensor, and
which will be transferred or authorized for use
during the duration of the contractual relation-
ship and under which conditions. Normally, a li-
censor wishes to retain and secure the rights in
all the technology being licensed, together with
any auxiliary and complementary proprietary
rights such as patents, trademarks, trade secrets,
and copyrights. Therefore, the agreement should
specify either that the licensor is the exclusive
owner of the technology to be transferred, in-
cluding complementary rights, or that the li-
censed technology is subject to other authoriza-
tions that need to be obtained by the licensor. In
other words, the agreement should ensure that
the licensor has full rights and authority when
entering into the transfer agreement.
Normally, an agreement stipulates provisions
concerning ownership and exploitation rights
in any technology that may be derived or based
upon the technology transferred. The licensor
and the licensee develop these provisions jointly,
or the licensee develops them alone. Usually, a
joint venture includes the joint ownership of any
derivative technology.
Transfer of technology agreements usually cover
all or some of the following issues:
Confidentiality
Despite the protection conferred by IPRs, espe-
cially patent and copyright, both the owner of
the technology and the buyer or licensee gener-
ally include specific provisions on confidentiality
in relation to information concerning, for exam-
ple, materials, specific know-how, and markets.
Both partners often require confidentiality: the
seller or licensor of the technology and the buyer
or licensee. Agreements normally specify which
aspects of the information are confidential and
which are not. Frequently, the period of time that
the specified information must be kept confiden-
tial is also indicated and for how long confiden-
tiality must be kept after the termination of the
agreement.
Purpose
This issue refers to how, and under which condi-
tions, the recipient of the technology may use it.
The agreement normally specifies whether the
purpose is commercial, for particular products,
processes, or for internal use by the licensee. In
the last case, it is possible that the licensee may

wish to adapt or modify the technology to the lo-
cal social, economic or environmental conditions,
or to incorporate it into another technology sys-
tem. The conditions for the eventual sub-licence
of the technology are normally also considered
under this issue.
Territorial scope
Usually, agreements on TOT refer to the geo-
graphical area in which the technology can be
used, sold or sub-licensed. The licensor may want
to limit the geographical area in which the final
products will be distributed. In other cases, the
licensor may be willing to transfer technology,
provided that its use is restricted to the market
of the recipient country and that no end products
are exported to third countries. A variant is that
the licensee is requested to sell domestically, but
any excess above local demand must be sold to
the licensor who will re-export the end products
to other countries. The opposite situation tends
to prevail in those countries that adopt an ex-
port-oriented pattern of development, and wish
to obtain the technology to establish or preserve
their presence in foreign markets. In this case,
the recipient country tends to restrict licensor’s
attempts to prevent the licensee from exporting
end products to other countries.
The licensor of the technology may wish to im-
pose territorial restrictions in order to benefit
from comparative advantages in the country
of the licensee (for example, endowment of re-
sources, cheap labour) to re-export production to
other countries. In this case, the agreement is re-
duced to a marketing arrangement, in which the
licensee acts as an overseas manufacturer of the
licensor, thus avoiding the need to establish its
own subsidiary in the recipient country.
Geographical restrictions are sometimes in-
cluded in agreements in order to prevent par-
allel importation, which refers to a situation in
which a protected product is purchased at a low
price in a low-price country and imported into
high-price countries, thus undercutting the lo-
cal price set by the exclusive rights holder. The
low-priced products are imported in parallel to
the official channels of distribution established
by the exclusive rights holder. By including ter-
ritorial restrictions to prevent parallel imports,
the licensor attempts to protect against (unfair)
competition from the licensee in the licensor’s
home country, and also to protect other licensees
from parallel imports into their countries. Hence,
the prevention of parallel imports through ter-
ritorial restrictions can be in the interest of both
a licensor and a licensee.
The Technology Transfer Process
module
Finally, geographical restrictions are often in-
cluded in order to assure compliance with export
regimes or regulations in the licensor’s country
or supranational regimes, as in the case of the
European Union (EU).
However, recipient countries of technology are of-
ten reluctant to accept geographical restrictions.
In the past, a number of developing countries
adopted stringent regulations on TOT transac-
tions whereby TOT agreements restricting the ex-
port of products manufactured with the licensed
technology were rejected. Today, these regula-
tions have been liberalized in most countries.
Exclusivity
The granting of exclusive rights is often a contro-
versial issue. While the licensee will generally try
to obtain exclusive rights over the technology in
their territory, this has both advantages and dis-
advantages for the owner or licensor. Conversely,
exclusivity minimizes transactions costs by using
as few licences as possible. Alternately, with only
one licensee, the risk of the licence being ineffec-
tive is higher because a single licensee’s capacity
to exploit the licensed technology is quantita-
tively limited.
The exchange of private goods involves inherent
exclusivity: if one person provides another person
with a product, other sellers are foreclosed from
providing the same product to them at the same
price. Provisions of this sort may be placed on ei-
ther party. A buyer may purchase the rights to a
technology under the restriction that it can resell
only in a specified market or country, or that it
can adopt the technology only for specified uses
and, in turn, has the right to be the only reseller in
that market. An exclusive supply restriction pre-
vents the seller from supplying a specified prod-
uct to any other purchaser. An exclusive dealing
contract prevents the buyer from purchasing the
product of any competing supplier (described
below).
Exclusive grant-backs
These provisions concern mainly the patent-
ability of improvements in the technology un-
der licence. The owner of the technology may
want to secure the IPRs of any new technology
that is developed by the licensee based on the li-
censed technology, and may consequently wish
to include provisions in the agreement known as
grant-backs. Grant-backs are exclusive rights as-
signed to future innovations or improvements to
a technology that are not known at the time a
contract is signed. By including grant-backs, the
41
2 The Technology Transfer Process
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licensor of a technology receives the exclusive
right to patent, in respect of all improvements to
a technology that the licensee makes in imple-
menting or adapting the technology to new uses.
A clause on exclusive grant-backs requires the li-
censee to accord the patent holder the rights to
any future inventions related to the licensed in-
vention.
The licensee is likely to be opposed to the inclu-
sion of this type of clause. In many countries a
grant-back to the owner of the technology is
deemed a restrictive or anticompetitive practice.
For example, in the Philippines any patentable
improvement made by a licensee cannot be pat-
ented in the name of the owner or licensor of the
original technology, nor exclusively assigned or
provided free of charge to the licensor.
Use restrictions
Frequently, agreements detail how the licen-
see may use the technology, including whether
it can be reproduced or copied (and if so, under
what conditions). These conditions are likely to be
found in the case of technologies that are easily
copied or duplicated (for example, software). The
owner of the technology may also stipulate use
restrictions when it is thought that proprietary
rights are inadequately protected under the laws
and enforcement mechanisms in the recipient
country.
Exclusive dealing
An exclusive dealing clause prevents the licensee
from adopting substitute technologies. It is the
equivalent of the exclusive dealing restriction
adopted in the distribution of products, under
which a retailer cannot carry competing brands.
It is in fact a guarantee against “free-riders” on
a firm’s investment (Marvel, 1982). Free-riding
implies a disincentive to promote the product
in the case of intangible assets such as intellec-
tual property. Free-riding affects the provision
of know-how; thus, the licensor might include a
clause in a licensing contract for exclusive deal-
ing in order to be protected against potential
free-riders.
A drawback of an exclusive dealing restriction
clause is that in an oligopoly or monopoly situ-
ation, the exclusive dealing clause may be used
to prevent the entry of competitors. This type of
restriction implies additional costs for the licen-
see. If the latter has a clear understanding of the
potential costs and sufficient bargaining capac-
ity, the licensee is better positioned to call for a
reduction of the transaction price.
42
Tying provisions and quality control
Often, the owner of a technology includes in an
agreement a second related technology or com-
plementary products and services. In this case it
is said that the second technology, product or ser-
vice is “tied” to the first. This clause ties the right
to buy one good to the obligation to buy all the
requirements of a second good from the same
seller. In a tying contract, the seller gains the ex-
clusive right to provide the second technology or
its complementary assets.
In many countries, competition laws do not per-
mit tie-in arrangements. For example, the Re-
public of Korea and Nigeria forbid unreasonable
tie-in agreements, but permit them, if it can be
demonstrated that they are necessary in order
to maintain quality standards. Japan also allows
tie-in agreements, if they are necessary to guar-
antee the effectiveness of the licensed patent, to
maintain the goodwill of the licensed trademark
and guarantee the secrecy of the know-how.
Sometimes, there is a risk that a licensor could
introduce stricter quality standards that can only
be fulfilled by using the licensor’s raw materials,
intermediate products, services or complemen-
tary technologies in order to circumvent tie-in
restrictive practices.
Most-favoured-client clause
This clause enables a buyer to receive the low-
est price offered by the seller during the dura-
tion of a contract. Thus, the seller would offer
a buyer a price reduction equal to the lowest
price offered to others. This is complemented by
a “meeting competition” clause, that is, a guar-
antee by the seller that it will meet any price
offered to the buyer by competing sellers. This
provision might be extended, under specific cir-
cumstances of the agreement, to include other
favourable conditions included in subsequent
contracts made by the supplier with other com-
petitor or clients.
Returns, revenues, fees, rents, royalties
This important and complex issue refers to the
mechanisms and forms of payment in which the
licensee remunerates the owner or licensor of
the technology. It also includes minimum perfor-
mance requirements, royalties structure and au-
dit rights. These mechanisms and forms of pay-
ment are subject to the laws and regulations of
the host country, and from which revenues, rents
or royalties are remitted to the owner or licensor
of the technology. The type or form of payment

depends on the type of agreement under which
the technology is sold or licensed.
A simple form of payment occurs when the tech-
nology is licensed or sold on a perpetual basis in
return for a lump sum. However, if the technol-
ogy is licensed for a defined period of time, the
most frequent form of payment is a licence fee.
When a technology is transferred to a partner,
whose main responsibility and interest is to mar-
ket the technology, payment is usually in the form
of royalty payments paid regularly on a monthly,
quarterly or yearly basis by the licensee, who in
turn is awarded a percentage of the income de-
rived from the marketing of the technology. If the
technology is, or can be, applied to different uses,
differential royalties may be chosen for each use
of the technology.
Royalties are determined on the basis of different
criteria. For example, they can be calculated on
the basis of the number of units (made or sold) of
the product that embodies the technology, or as
a percentage of the total revenue from the sales
of the product. A particular case is when the pay-
ment to be made by the licensee to the licensor is
based on the total units of a product sold by the
licensee, whether or not these units incorporated
the technology or product offered by the licensor.
An example of this is the early Microsoft contract
that required a royalty on each unit shipped by
downstream personal computer manufacturers,
rather than on the number of units of MS-DOS42
shipped. This variation is usually called output
royalty.
Normally, payment of fees and royalties is sub-
ject to the laws and regulations of the technol-
ogy-receiving country. In some cases, subject to
national law, the owner of the technology and
of an underlying patent cannot continue to col-
lect royalties after the underlying patent has ex-
pired. This appears to be the case in Japan and
the Philippines. However, in the EU, the owner
of the technology is permitted to spread the
collection of royalties over a period longer than
the patent life, or beyond the expiration of the
patent.
Moreover, there is also mixed forms of payment,
including royalties and separate fees for tech-
nical services, regular maintenance, or any ac-
companying know-how. This alternative is often
used to counteract low royalty rates or when the
underlying patent expires before the termina-
tion of the agreement. In this instance, although
the owner or licensor may not collect royalties on
the use of the patent, the owner will continue to
The Technology Transfer Process
module
receive fee payments on accompanying techni-
cal services and know-how until the agreement
expires.
Maintenance and training
The licensee obtains the guarantee that he or she
can always access maintenance and support ser-
vices from the licensor of the technology, while
the latter can collect separate royalties or fees for
these services.
Assignment of agreement
In general, agreements prevent both parties from
assigning the agreement to third parties. Howev-
er, some national laws allow licence agreements
to be freely assigned by both parties, unless the
non-assignment is clearly indicated in the agree-
ment.
Resale price maintenance
Resale price maintenance refers to a commer-
cial case in which the owner of the technology
establishes a price (usually specified as a mini-
mum price) at which the licensee may resell the
technology. Therefore the established price is
stipulated in the agreement. These types of con-
ditions are considered anticompetitive in many
countries; these include the Sherman Antitrust
Act (Section 1) in the United States and Japan’s
Guidelines on Unfair Trade Practices, which con-
cerns technology licensed in Japan.
Warranties and disclaimers
The most frequent warranty is an IPRs non-in-
fringement clause, whereby the owner (seller or
licensor) guarantees that the technology trans-
ferred does not infringe upon any proprietary
rights of third parties. Another type of warranty
relates to the performance of the technology. A
third type of warranty refers to the conformity
of the technology with applicable domestic and
international laws, standards and regulations.
Many of these warranties, particularly those on
the non-infringement of third parties’ IPRs, are
regulated in the legislation of the technology-
importing country.
No challenge clauses
Frequently, the owner of the technology wants to
avoid any challenge to the validity of the property
rights on transferred technology, and so a specific
clause to this effect is included in the agreement,
although the legality of this type of clause is
questionable under some legal systems.
43
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Duration, renewal and termination
In general, the terms of duration and the pos-
sibility and conditions of renewal are subject to
the laws and regulations of the host country. In
many cases, laws and regulations prevent the
licensing of technologies from extension be-
yond the expiration of the underlying patent
and other intellectual property rights (trade-
marks and copyrights). Yet some agreements
frequently go beyond the expiration of the un-
derlying patent.
The duration of an agreement is not exclusively
related to the technology itself or the underly-
ing property rights. Duration may also be deter-
mined based on an agreement’s impact on em-
ployment, non-compliance with labour laws, and
related legislation on compensation or indem-
nity upon termination of the agreement.

Box 4
Milonic Solutions Software Licence Agreement
The following extract, taken from the Milonic Solutions Software Licence Agreement, illustrates the type of
provisions that might be found in software licence agreements:

In this Agreement “Licensor” shall mean Milonic Solutions Ltd except under the following circumstances: (i)
if Licensee acquired the Product as a bundled component of a third party product or service, then such third
party shall be Licensor; and (ii) if any third party software is included as part of the default installation and
no License is presented for acceptance the first time that third party software is invoked, then the use of that
third party software shall be governed by this Agreement, but the term “Licensor”, with respect to such third
party software, shall mean the manufacturer of that software and not Milonic Solutions Ltd.

Licensor grants Licensee a non-exclusive and non-transferable License to reproduce and use for personal or
internal business purposes either the source code version of the Product in the case of DHTML/JavaScript or
otherwise executable, provided any copy must contain all of the original proprietary notices. This License does
not entitle Licensee to receive from Milonic Solutions Ltd hard-copy documentation, technical support, tel-
ephone assistance, or enhancements or updates to the Product unless a specific Product has been purchased
by the Licensee that clearly states otherwise. Licensor warrants that it has the right to grant the foregoing
license free and clear of third party intellectual property claims, and should any third party intellectual prop-
erty claims arise Licensor will defend and hold Licensee harmless from such claims.

Except as otherwise expressly permitted in this Agreement, or in another Licensor agreement to which Licen-
see is a party such as a distribution agreement, Licensee may not: (i) decompile, disassemble, reverse engi-
neer, or otherwise attempt to derive the source code for the Product (except to the extent applicable laws spe-
cifically prohibit such restriction); (ii) redistribute, encumber, sell, rent, lease, sublicense, or otherwise transfer
rights to the Product; (iii) remove or alter any trademark, logo, copyright or other proprietary notices, legends,
symbols or labels in the Product; or (iv) publish any results of benchmark tests run on the Product to a third
party without Licensor’s prior written consent.

There is no License fee for the Product as long as all action has been taken with regard to the free Product
instructions and the product is being used on a non-profit basis. Appropriate License fees are applicable if
the product is being used directly or indirectly in any commercial application or website. Multiple copies of
the product will each require separate Licenses. If Licensee wishes to receive the Product on media, there may
be a small charge for the media and for shipping and handling. Licensee is responsible for any and all taxes.

Without prejudice to any other rights, Licensor may terminate this Agreement if Licensee breaches any of its
terms and conditions. Upon termination, Licensee shall destroy all copies of the Product.

Source: Milonic Solutions (http://www.milonic.com/license.php).

3.2 Other technology transfer agreements
Sale (assignment) agreements
The sale or assignment of technology may trans-
fer all or most of the rights to the buyer. This may
occur as part of an acquisition of a firm by an-
other entity, or a merger between two firms, or as
a stand-alone intellectual assets transfer. When
such a sale transfers all the rights of the owner
to the buyer, an assignment of rights may be said
to take place. Assets such as copyrights, designs,
trade names and patents may be sold individu-
ally or be part of a business transaction.

44

Technical service agreements
A technical service agreement (TSA) may be used
to obtain technical support to overcome a prob-
lem, undertake a given task, or assign part of the
daily activity related to the transferred technol-
ogy to another party. A TSA may be a stand-alone
agreement or part of another agreement (for ex-
ample, a licence or a sale) and it may be offered re-
motely or physically. The agreement often defines
the use of facilities and personnel, costs, time, ac-
cess to ownership of know-how developed while
undertaking the agreement and liabilities. In gen-
eral, TSAs may be used to get help in transferring,
adapting, operating, maintaining and upgrad-
ing technology. The length of an agreement may
range from a few days to two years.
Collaborative agreements
Collaborative agreements are used when two or
more parties enter an alliance with the goal of
developing, producing or marketing a given tech-
nological product or service. Such an agreement
stipulates the place(s), the costs and facilities in-
volved, activities to be undertaken, the eventual
assignment and management of IPRs, confidenti-
ality conditions and sharing of any benefits that
may arise. One form of such collaboration is an
industrial technology alliance, an arrangement
where two or more parties agree to combine
their resources to develop new, or advance exist-
ing technology.
Research agreements
Research agreements are often used to obtain
R&D services in return for a fee. The financier or
sponsor will provide funding to another party
or parties to undertake research activities from
which the sponsor may obtain new knowledge.
Research agreements often contain conditions of
rights to select knowledge, publication oversight,
future licensing arrangements and confidential-
ity of information exchanged or generated. For
instance, industry and government departments
may contract research institutions, academic
centres and specialized research firms to under-
take research to meet a given task. In such cases,
the knowledge and technologies developed and
exchanged may be subject to a number of restric-
tions that may not allow publication, presenta-
tion, patenting or transfer to other third parties.
Franchising/distribution agreements
A franchise agreement is intended to enable the
franchisor (the successful business/service pro-
ducer) to help the franchisee (learner) replicate
The Technology Transfer Process
module
the franchisor’s successful business. The most
common form is a single-unit franchise (that is,
the franchisee runs only one unit). A more rare
form is the multiple-unit franchise (for example,
multiple single-unit operator or regional area op-
erator). Whichever form it takes, the franchisee
provides investment to use the franchisor’s trade-
marks, trade names, copyrights, technologies and
training services in order to provide the same
product/service to the consumer as the fran-
chisor. In a way, it combines the technical know-
how and experience of the franchisor with the in-
vestment and management of the franchisee to
deliver the products or services to the consumer.
The franchisee may have to pay upfront fees,
royalties and lease fees or buy equipment and
other services from the franchisor. The agree-
ments may specify the territories within which
the franchisee is allowed to do business, and
contain provisions for: handling of confidential
information; integration of the franchise in the
overall operation of the franchisor; payments the
franchisee will make; technical assistance to be
offered; lease or purchase of equipment; and fi-
nancial reporting.
Capital goods related technical assistance
agreements
The purchase of high-value, complex and dura-
ble machinery may be accompanied by several
agreements related to technology transfer. The
most common is technical assistance that may
come as standard, or in addition, to the purchase
of machinery. Such assistance may include instal-
lation, maintenance, training and upgrade of the
system.
Know-how contracts
A know-how contract often defines the products
or services that one party may provide to another.
These may include designs, manufacture, instal-
lation, maintenance, utilization, skills and train-
ing to be provided to meet a specific objective. It
may be a standalone arrangement or be included
as a part of other agreements, for example, turn-
key projects and capital good purchase agree-
ments.43
3.3 The transfer of genetic resources
The transfer of genetic material is a special type
of agreement, in that the intangible knowledge
that is transferred is embodied in living organ-
isms (or derivations thereof, such as a single
gene). Broadly, there are two quite different types
of arrangements:
45
2 The Technology Transfer Process
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• Bioprospecting agreements, where samples
or extracts from plants, animals, humans or
microorganisms are collected on an ongoing
basis or over a period of time. Typically, such
agreements are formed between biodiversity-
rich countries (as suppliers of genetic mate-
rial) and end users (usually firms) that may be
based in developed countries;
• Material transfer agreements, which are most
often used to facilitate the sharing of biologi-
cal material of potential commercial value for
research or other specific agreed purposes.
Bioprospecting agreements
The commercialization and transfer of genetic
resources can be accomplished by contracts be-
tween biodiversity-rich country providers and,
typically, prospecting firms, or end users in the
pharmaceutical, chemical, cosmetic, seed or oth-
er industries.
The providers of genetic material are a diversified
group of people and institutions ranging from
individuals who collect and sell samples for cash
payments to university and specialized prospect-
ing firms and brokers, to public research insti-
tutes, botanical gardens, local and indigenous
communities and other organizations. Institu-
tions often entering into contractual agreements
are non-profit organizations, such as research
institutions, botanical gardens or universities,
particularly those in developing countries that
engage in bioprospecting to supplement their
economic resources. These organizations usually
have established networks with similar institu-
tions that facilitate the acquisition of samples by
firms located in developed countries.
In a typical contract, the provider of genetic ma-
terial agrees to collect, taxonomically identify
and ship samples for screening to the request-
ing firms. Companies, laboratories, research in-
stitutes and universities in turn agree to com-
pensate the supplier in the form of: advance
economic resources, per sample fees; advance
payment; other occasional payments; reports on
the results of the screening process; training; roy-
alties on any successful compounds commercial-
ized from the sample provided; and the option of
filing a joint patent application.
The payments for samples are not standard, but
are determined on a case-by-case basis. They nor-
mally cover the cost of shipping from the field
to the bio-prospecting institution and from the
latter to the buyer, processing data, literature
searches, confirmation of initial field identifica-
tions and administrative costs. In addition, the
46
contracting firms frequently request exclusive
rights from the collector of the genetic material
for a given period of time.
In the case of bioprospecting agreements, two
aspects should be kept in mind. First, the pay-
ments made for samples, either in the form of
simple cash transfer, contingent payment or
cash up-front payment, mostly do not reflect the
potential commercial value of the genetic mate-
rial. They are only compensation payments for
travel, literature searches, collection, taxonomic
expertise and shipment of the samples. Second,
aspects such as the sharing of benefits, conser-
vation of genetic resources and compensation
or payment for the use of traditional knowledge
concerning the transferred resources, have been
largely ignored (or, at best, only partially consid-
ered) by transfer agreements. This situation is
changing, although at a slow pace. This is a re-
sult of stringent regulatory frameworks that are
being introduced as part of the Convention on
Biological Diversity (CBD) and other international
agreements, and the growing concern of govern-
ments in biodiversity-rich countries.
Certain types of contracts include long-term
agreements between large TNCs and institutes
or universities in developing countries. In these
cases, the partners engage in negotiation to
develop a long-term agreement on goals and a
work-plan. In this type of contract, the buyer of
the samples provides technical assistance to the
collecting institutions, equipment, training and
other non-monetary forms of compensation. In
addition, they offer advances, up-front payments
and royalties on the successful use of compounds
obtained from a sample. Normally, the larger the
advance and up-front payment, the smaller the
royalty rate. It is assumed that the royalty reflects
the value of the biological, intangible informa-
tion provided by the collector and embodied in
the genetic material, balanced by the relative in-
vestment that the recipient firm must make for
the development of a commercially successful
product. It may also include the risk of failure in
bringing a product to market.
For example in 1991, Merck, one of the world’s
largest pharmaceutical firms, entered into a bio-
prospecting agreement with Costa Rica’s Instituto
Nacional de Biodiversidad (INBio), which involved
an advance payment, plus an agreed royalty on
the future successful compounds obtained from
the samples provided by INBio. In this agreement,
Merck obtained exclusive commercial use of the
INBio facilities. There is also some vertical integra-
tion, which includes the provision of equipment
and facilities for processing and testing. Addition-
 The Technology Transfer Process

ally, INBio signed cooperative agreements with
the Missouri Botanical Garden and other institu-
tions, so that INBio could perform a number of
taxonomic and sample preparations, in addition
to the mere collection of genetic material.
Material transfer agreements
A material transfer agreement (MTA) is a special
type of contract normally used by the biotechnol-
ogy, pharmaceutical and seed industries as well as
academic and research institutes (mostly, but not
exclusively, in developed countries) to facilitate the
sharing of biological research materials for recip-
rocal gains (Gollin, 1995). MTAs specify the contrac-
tual rights and obligations of parties, including
third parties, involved in a transfer of biological
material. For the supplier, gains may be in the form
of up-front benefits, a trust fund, or future royal-
ties. For the recipient of the material, the benefits
sometimes include the right to apply for patents
if any of the material offers commercial potential.
The terms and conditions of transfer and for ac-
cess to the results and benefits arising from the
utilization of transferred genetic resources are
specified in a letter of agreement. MTAs often
involve two types of letters: the “implementing
letter agreement” in which the transfer of the
genetic materials is subject to a patent or pat-
ent application or is likely to be commercially li-
censed. The other type of letter used in all other
module
forms of transfer of biological and genetic mate-
rials is the “simple letter agreement”.44
This type of mutual agreement is increasingly be-
ing used when firms receive biological material
from other institutions, including ex situ collec-
tions such as botanical gardens. Companies wish
to have evidence that the acquired specimens
have been obtained legally, that the supplier or
intermediary have valid title to them and that
they are entitled to supply the biological material
to the company for commercial potential uses. In
addition, MTAs are used to transfer proprietary
genes for research use.
Normally, MTAs are brief, and are not necessarily
technical statements. They allow parties to nego-
tiate collaborative efforts for non-profit research
or for the commercial transfer and use of biologi-
cal material. They establish the rights of the ma-
terial providers and recipients, the obligations of
the recipient including the obligation to inform
the provider of any patent claims and/or innova-
tions leading to a patent application, as well re-
strictive conditions.45
Material transfer agreements are used for all
transfers of genetic resources under the Interna-
tional Treaty on Plant Genetic Resources for Food
and Agriculture.46 These agreements include
provisions for access and benefit-sharing under
the terms of the treaty.

Box 5
Complexities faced in agreements on access to genetic resources
Such contracts are difficult because they require not only legal and business expertise but also knowledge
of intellectual property, community rights, scientific methods, an intimate knowledge of the market for ge-
netic resources and traditional knowledge, and an understanding of the pharmaceutical, agrochemical, seed,
chemical, health care and cosmetic industries (and their research methods). These difficulties are particularly
important for most developing countries that suffer from a scarcity of trained corporate lawyers special-
ized in these issues and that have limited scientific and technological capacity to analyse the information
provided by a counterpart (pharmaceutical and chemical firms, or a bioprospecting or collecting institution).

Contracts for bioprospecting and access to genetic resources are advantageous, as they can be established
even in the absence of intellectual property regimes or legislation covering the access to genetic resources.
Contracts are a flexible instrument and, at least in theory and depending upon the bargaining capacity of the
government, can ensure that the country of origin of biological diversity will receive economic returns from
the use of its genetic resources. Eventually, the contract can also determine how the benefits will be distrib-
uted among the owners of the areas where the genetic material has been collected.

However MTAs also have shortcomings, some of which are inherent to the contractual approach itself, while
others refer to the current characteristics of existing contracts for genetic material and bioprospecting. So, for
example, many current genetic material contracts do not contain specific provisions requiring the disclosure
of information on the intended use of the genetic material.

An important shortcoming of contracts is that the net value of the genetic resource under consideration is
largely unknown: the collector gets a sample for detailed examination but the factual worth of the sample
and the elements contained in it are not easily ascertainable. Hence, these types of contracts are frequently
characterized by uncertainty.

47
2 The Technology Transfer Process

Box 5
module

Complexities faced in agreements on access to genetic resources

An additional problem relates to the enforcement of contracts. Frequently, in developing countries the en-
forcement, especially of genetic material contracts, is difficult because of the weakness of the institutional
machinery and the lack of experience and knowledge, and because enforcement of this type of contract can
be relatively expensive.

Finally, existing contracts involving genetic material, particularly if they include bioprospecting, have been
criticized for ignoring the interrelationship between traditional knowledge and the use of genetic resources;
they often do not include any provision concerning traditional knowledge and its transfer. With the passage
of the Nagoya Protocol to the Convention on Biological Diversity in 2010, countries that are going to ratify the
Protocol will adopt access and benefit sharing legislation that mandates that genetic resources and associ-
ated traditional knowledge are accessed with prior informed consent, and include some form of benefit shar-
ing resulting from that access. Contracts that involve genetic resources and associated traditional knowledge
will have to comply with domestic access and benefit sharing legislation.

4 Regulatory aspects of transfer technology is restricted to firms in the cartel. In

of technology agreements:
competition policies and
related questions
4.1 Restrictive practices and exclusivity
restrictions
In order to assess the private and social conse-
quences of various types of exclusivity, it is neces-
sary to make a distinction between the horizon-
tal and vertical effects of contractual restrictions.
The most common examples of horizontal effects
are contracts that facilitate price-fixing and con-
tracts that pool exclusive rights to license among
dominant firms, thus preventing entry by other
firms. In economic theory, such oligopolistic prac-
tices are identified with collusion or cooperation
among competitors in a product market in order
to gain extra rents or to create greater barriers to
entry into a product market for any newcomers.
In the case of technological innovation, competi-
tion is hindered by horizontal restrictive practic-
es which manifest themselves in three markets
or activities: the product market, in which the
product using or embodying the technology is
sold; the market for the right to use a technologi-
cal innovation, thus affecting diffusion; and the
R&D or other innovative process that leads to the
invention of new technologies and products.
For example, imagine the existence of a few
firms possessing most or all the assets specific
to a given innovation. These firms pool their pat-
ents, assign them to a jointly owned corporation
or agent and sign exclusive licensing contracts
with the corporation for the use of the innova-
tion. Thus, the licensing contracts exclude firms
outside the cartel. It is obvious that this arrange-
ment would have horizontal effects on the dif-
fusion of technology because the use of the
addition, if the firms signed exclusive grant-back
clauses that assign the rights of any improve-
ments or development of related technologies to
the joint venture, then the incentives for innova-
tion would be affected by the joint ownership of
any new technology. Again, there is a horizontal
effect resulting from exclusivity restrictions.
Contracts with horizontal effects in the diffu-
sion of technology are those that exclude firms
from licensing the use of patented technology
on some artificial basis. These effects result in
higher costs and prices of the final products set
by the technology holders. This could also even-
tually lead to gradual technological advances in
the field, since other firms are not able to license
the technologies to engage in any downstream
innovative activities. Therefore, restrictions re-
sulting in horizontal effects tend to be inefficient
while contracts generating vertical effects, such
as those designed to coordinate the incentives of
a licensor and the licensee, are likely to be more
efficient. Agreements that reduce competition in
a product market will lead to higher prices and
increased costs. Therefore, the inefficiencies re-
late to the higher costs that the excluded firms
must confront, the higher prices that consumers
have to pay and the effects of reduced competi-
tion in the product market.
The impact of increased concentration on inno-
vation is more ambiguous. If concentration in-
creases as a result of the merger of two competi-
tors in the same sector, it is possible to identify
two main effects on the incentive to innovate:
First, the merger between the two firms implies
the internalization of the competitive external-
ity, which is likely to reduce the incentive to in-
novate. Second, the merger of the two firms
generates greater internal capital. This in itself is
an incentive to increase in-house R&D activities

48

because internal capital for R&D is cheaper than
external capital.
4.2 Competition policies
Competition relates to the competitive condi-
tions in which learning and innovation take
place. In Schumpeterian theory, competition is
the main precursor to innovation. Competitive
market conditions for innovation imply low entry
barriers for new firms in any technological sector,
lack of monopolistic or oligopolistic conditions, a
good match of demand and supply parameters,
low information asymmetries and low transac-
tion costs to engage in inventive activities.
Competition policy is generally defined as: “those
government measures that directly affect the
behaviour of enterprises and the structure of
industry” (Khemani and Dutz, 1996). This con-
cept includes competition laws as well as other
measures aimed at promoting competition in
the national economy, such as sector regulations
and privatization policies. Competition laws are
also known as anti-trust or anti-monopoly laws.
Their purpose is to provide remedies to deal with
a series of anti-competitive practices, including
price fixing, cartel arrangement, abuses of domi-
nant position or monopolization, mergers that
limit competition and vertical agreements that
foreclose markets to new competitors. Thus, anti-
competitive behaviour can be affected by govern-
ment intervention.
In general, competition policies and laws are
more extensively developed and applied in de-
veloped countries, but in recent years they have
been accorded greater importance in developing
countries.
In certain situations, the government may con-
sider it necessary in the public interest to facili-
tate monopolistic behaviour through the regula-
tion of natural monopolies in critical areas such
as basic social services, the environment and
national security. Another situation in which
government intervention strengthens anti-com-
petitive behaviour is by adopting strategic trade
policies, procurement rules subsidies and other
similar measures to protect domestic industry.
Therefore, it should be kept in mind that the
scope of competition policy is not confined to the
control of anti-competitive business practices,
but includes policies oriented to the promotion
of productive efficiency, competitiveness and
consumer welfare. Anti-competitive behaviour
can be strengthened both by government inter-
vention and the effects of technological change.
The Technology Transfer Process
module
In all cases, the result is a process of income re-
distribution within the economy. The strategies
of TNCs, including M&As through direct invest-
ment and international cartels, transfer pricing
among subsidiaries and voluntary export re-
straints provide frequent examples of anti-trust
cases where the process of income redistribution
goes beyond national borders; these are likely to
provoke disputes among governments, as in the
case of those created by the adoption of trade
measures.
One could argue that competition policy is an
effective instrument for fostering efficiency,
economic growth and international competi-
tiveness. It could also be argued that competi-
tion policy promotes broad public interest and
satisfies socio-political objectives like inclusive
regional development, job opportunities and
the promotion of employment. In more general
terms, competition policy promotes total eco-
nomic welfare, taking into account the actual
and the potential cost-benefits to consumers as
well as to producers.
An effective competition policy is likely to pro-
mote a business environment that improves stat-
ic and dynamic efficiencies and leads to efficient
resource allocation, while the abuse of market
powers is prevented through competition. Com-
petition laws also prevent artificial entry barriers
and facilitate market access, which complement
other competition measures and policies.
A competition policy should, therefore, embody
two essential and complementary types of meas-
ures:
• Policies and measures that enhance compe-
tition in domestic markets, including liberal-
ized trade policy, relaxed foreign investment
and ownership requirements and economic
de-regulation;
• Measures and legislation to prevent anti-
competitive business practices and unneces-
sary government intervention.
Most existing competition policies are of a do-
mestic character; they have been enacted by
developed countries to deal with domestic com-
petition issues. Competition policy was originally
understood as a means to help small firms from
being overwhelmed by large companies. So far,
no agreed multilateral instruments have been
designed to govern international competition.
The issue of competition policy and law has
gained increasing relevance internationally,
particularly in trade negotiations under the
49
2 The Technology Transfer Process
module
WTO. However, the fact that the issue has been
brought up by developed countries and that the
approach adopted reflects mainly their position
on this has created apprehension as to whether
the subject will be examined in a comprehensive
and balanced manner, and whether such multi-
lateral competition agreement might deal effec-
tively with market power and the space left to
smaller players.
Competition policy and IPRs
In general terms, competition policy seeks to
prevent restrictive commercial practices that
impede the efficient production and diffusion of
goods and technologies. On the other hand, IPRs,
particularly patents, trade secrets and copyrights,
prevent the widespread copying of new inven-
tions and creative works, which would under-
mine the returns from invention.
One of the challenges faced by competition
policy is to ensure a high degree of inter-firm
rivalry in markets without jeopardizing reason-
able business arrangements that are neces-
sary to achieve efficiency. In most industrialized
countries, competition policies seek to provide
the necessary scope for efficient inter-firm ar-
rangements. These can, for example, be provided
by special treatment for R&D joint ventures. The
application of competition policy vis-à-vis IPRs
raises challenging issues.
There is an inherent fundamental conflict be-
tween the objectives of IPRs and those of com-
petition law. While the former seeks to protect
property rights and can create quasi-monopolis-
tic situations (thereby restricting competition),
competition law attempts to eliminate, or at
least reduce, all barriers to competition.
Some IPR practices can be considered as anti-
competitive when they attempt to extend market
power by blocking the entry into the market of po-
tential rivals, when they suppress inventive activi-
ties, or when they charge excessive prices. These
practices are contentious in relation to competi-
tion policy objectives and can be found mainly in
one of the following (Anderson and Gallini, 1998):
• Acquisition of patents;
• Transfer of technology through licensing ar-
rangements;
• Cooperative arrangements among innovative
firms.
In relation to patents, there are two aspects of
concern vis-à-vis competition laws: the length or
lifetime and the scope of the patent grant.
50
The length of the grant defines the period of time
during which reproduction or copying of the
invention is prevented. In other words, it deter-
mines the time that rivals have to wait in order
to access the protected innovation.
The scope determines the extent to which the
patent holder of the innovation has property
rights over related inventions. In other words, it
defines the set of products and processes close to
the innovation that are protected by the patent
granted to the innovation. The patent’s scope de-
termines the bargaining strength of the innova-
tor in negotiations with a potential licensee.
Competition policy and welfare effects
Competition policy can have three main effects
on the social surplus generated by innovation
(Gallini and Trebilcock, 1998):
• Provide ex ante incentives to innovate;
• Affect ex post incentives to transfer new tech-
nologies and products;
• Promote price competition in product mar-
kets that use the new products and processes.
As discussed in relevant sections of this module,
there are TOT cases in which competition laws
and IPRs may be in conflict. For example, this can
occur when the tying of restrictions and the ex-
tension of IPRs results in anti-competitive effects.
This is particularly likely if the licensor has mar-
ket power and uses tying requirements to extend
the scope of the patent monopoly. An alternative
form of tying that can be used by the licensor is
to license a bundle of products or set royalties
on the total sales of the licensee, as opposed to
the use of the licensed output. Another illustra-
tion is provided in the above-mentioned case of
Microsoft (see Section 3.1 of this module). In this
case, the United States Department of Justice de-
cided that the royalty requested by Microsoft on
the total computer sales foreclosed the market
to rivals because a manufacturer that included a
rival’s system would have to pay royalties to both
Microsoft and the competitor.
Grant-backs requirements, as discussed earlier,
may also infringe competition law. In one case,
the Supreme Court of the United States decided
against the licensor on the argument that grant-
backs created a double monopoly noting that the
“fruits of invention of an entire industry might
systematically be funnelled into the hands of the
original patentee”. Therefore, it has been sug-
gested that grant-back arrangements should be
avoided if they reduce incentives to research or
restrict rivalry in innovation markets (U.S. De-

partment of Justice and Federal Trade Commis-
sion, 1995).
4.3 Transfer pricing
Transfer pricing is largely a tax issue affecting
TNCs and their allocation of profits for taxation
between units or affiliates located in different
regions. A TNC may transfer technologies to its
affiliate abroad in order to manufacture interme-
diate products that are transferred to the parent
or another affiliate of the TNC, either abroad or
in the same country. The transfer price or price
charged on intra-firm transactions is supposed
to be the same as in inter-firm transactions.
However, differences in taxation rules between
countries may induce firms to allocate some of
their profits as technology costs (for example,
where there are tax exemptions for technology
imports) or not to report technology transac-
tions. As technology forms a large component
of global trade and investment, national govern-
ments would want such transactions to occur at
competitive market prices, that is, at arm’s length
in order to determine the proper taxes due to
them. This is especially important as many home
country tax authorities often claim the right to
tax profits on global TNC operations.
Thus, there are a number of challenges with
respect to intra-firm transfers of technology.
Some of the technology that a firm transfers to
its operations abroad may not be available for
sale to other parties. Transfer of knowledge and
skills may not be easy to assess and access to
management and operational assistance may
be priceless. In such cases, the arm’s-length
comparisons may not hold, and identifying a
market price for tax purposes might prove to be
extremely difficult.
5 Summary and review
Looking at the broad trends in international tech-
nology transfer, the following points emerge:
• The major exporters of technology are the
United States, Japan, the United Kingdom,
France and Germany. Technology sales are in-
creasing in Canada, Sweden and the Republic
of Korea.
• A large proportion of technology exchanges
take place among technologically advanced
countries in North America and Europe, and a
growing percentage of technology exchange
is increasing among emerging economies in
the South.
The Technology Transfer Process
module
• Most technology transfer transactions are be-
tween related firms, particularly parent firms
and their affiliates abroad.
However, the indicators used to assess these
trends, such as royalties and licence fee receipts,
imports of capital goods, and R&D and manufac-
turing contracts, are not complete measures of
technology transfer activities, either individually
or collectively. For example:
• Receipts for royalties and licensing fees are
not accurately reported, and in any case only
a proportion of technology is transferred un-
der licence.
• Capital goods flows, while associated with the
acquisition of new skills and opportunities for
technological learning as well as increases in
production, relate to manufacturing sectors.
• Internationalization of R&D and manufactur-
ing projects capture only a very limited pro-
portion of transferred technology.
Potential benefits of TOT are obvious, and in
many circumstances multifarious. Obviously,
these benefits involve costs associated with:
• Direct costs, such as purchase price, royalties,
licence fees and taxes;
• Indirect costs, including the costs of installa-
tion and adaptation, training and other learn-
ing activities, suspension of production dur-
ing installation, and the costs of labour and
materials in the period until the technology
starts to meet its expected performance level.
The supplier also incurs costs, such as labour
and materials used in making the sale, providing
manuals (and other technical material), consul-
tancy services and shipping. The costs of intra-
firm technology transfer are very difficult to es-
timate, as these are often not separated from
other revenue and expenditure streams.
Costs are also likely to be higher where the receiv-
ing firm has less absorptive capacity, particularly,
technical and techno-managerial skills, as the
process tends to be longer and include more
service support. Countries and firms with weak
knowledge infrastructure and lack of informa-
tion on the range of technologies available may
pay higher costs to import technology. Fragment-
ed and uncompetitive technology markets asso-
ciated with weak knowledge of buyers can lead
to differentiated purchase costs across different
countries.
Technologies are transferred under various types
of contractual arrangements:
51
2 The Technology Transfer Process
module

• Licence agreements, where the transferee is
allowed to use or reproduce the transferor’s
technology for a set period of time, usually
within specified limits (of use, confidentiality,
territory, etc.), in return for royalty payments
and/or licence fees;
• Sales agreements, where the technology and
rights to its use are sold, often as part of a
merger or acquisition;
• Technical service/assistance agreements,
where knowledge is transferred through the
provision of expert assistance (including
training) to the transferee;
• Collaborative and research agreements, which
relate to the shared development of technol-
ogy and include the transfer of knowledge
between partners;
• Franchising and distribution agreements,
which allow franchisees to use another firm’s
trademarks, copyright and technologies to
produce or distribute the same product as
the transferor;
• Bioprospecting agreements that have been
developed to facilitate the transfer of genetic
resources between biodiversity-rich countries
or areas and transferees from high-income
countries in a category of agreement where
the transferor is commonly a developing
country;47
• Material transfer agreements, used when dif-
ferent organizations wish to share biological
material for research and/or development
purposes.
National regulation of technology transfer is re-
flected largely in policies and legislation relating
to competition and restrictive business practices.
Competition policy consists of two complemen-
tary sets of measures:
• Policies that enhance competitiveness, such
as economic liberalization;
• Legislation and other measures to prevent
anti-competitive business practices.
It must be noted that there is an apparent con-
flict between the enforcement of competition
policy and laws and IPRs. The relationship be-
tween IPRs and technology transfer is discussed
further in Module 3.

Exercises and questions for discussion

1. Using a technology of your choice (for example, a computer software programme, a novel seed variety, or a
piece of manufacturing equipment), review the elements of a typical licensing agreement in Section 3 and
outline how you would negotiate a contract that is favourable to: (i) the buyer of the technology; (ii) the
seller of the technology.
2. What regulatory and policy mechanisms are necessary to support effective transfer of technology?
3. How can the business community in developing countries negotiate TOT agreements effectively, taking
into concern due consideration of technology recipient needs?
4. What are the factors that are most likely to determine the cost of a transferred technology to LDCs?

52
 Module 3
Intellectual Property Rights
and Technology Transfer
3 Intellectual Property Rights and Technology Transfer
module

Objectives
After reading this module, students should be able to:

• Understand key IPR concepts and issues;

• Understand the role of intellectual property rights in technology transfer.

Handbook

1 Overview of intellectual property introduction and the section on bioprospecting

rights – definitions and concepts agreements in Module 2).

Intellectual property rights are incentives for the
generation of socially useful, new information.
In industrialized countries, IPRs are considered
the most efficient market mechanism used to
induce industrial R&D, promote innovation and
facilitate the transfer and dissemination of tech-
nology.
The role of IPRs in the context of development,
and particularly as a vehicle to facilitate TOT, has
rather been controversial. As mentioned earlier,
in the 1970s under the auspices of the United
Nations, a group of developing countries began
to develop an international code of conduct on
technology transfer. Negotiations led to the es-
tablishment of a draft International Code of Con-
duct on the Transfer of Technology (TOT Code),
but the widely disparate perspectives of the in-
ternational community has hindered the legal
formalization or adoption of the code.
However, technology transfer provisions were
successfully negotiated as part of several inter-
national agreements, such as the CBD and the
UNFCCC. Later, the TRIPS Agreement was negoti-
ated during the Uruguay Round, which was the
next major multilateral attempt to reach mutual
agreement on the issue of technology (see the
Empirical evidence on the role of intellectual
property protection in promoting innovation
and growth in general, and attraction of TOT in
particular, remains limited and inconclusive. The
role of IP protection and technology transfer has
been the subject of many econometric studies,
but because technology transfer is complex and
difficult to measure, it is hard to reach definite
conclusions.
This module explores the relationship between
international technology transfer and IPRs. It
suggests to what extent intellectual property
policies can play a role in fostering development
and reducing poverty, and to what extent the
current TRIPS Agreement already plays a role in
facilitating TOT. Thus, some of the economic, em-
pirical and theoretical research available on the
relationship between intellectual property, for-
eign direct investment and international tech-
nology transactions are analysed. This module
addresses the issues of TOT between systems
of differing levels of development, in an era of
continuous strengthening and international
standardization of intellectual property regimes
initiated by the TRIPS Agreement and by further
developments in free trade agreements (FTAs)
(further discussed in Module 4).

Box 6
The concept of property and IPRs
The concept of property refers to a system of authority established by governments. It is a set of rights to con-
trol assets. In the case of intellectual property it refers to assets that arise from human ingenuity. The assign-
ment of property rights affects the bargaining powers of parties and thereby the distribution of income and
wealth. Since a reallocation of property rights often occurs by fraud, theft, simple robbery or other methods,
a system of property is complemented and supported by institutional enforcement mechanisms. There are
some assets for which private property rights are difficult to define and enforce, and intellectual property
rights fall among these types of assets.

54

1.1 Defining intellectual property
According to Article 2 of the 1967 Convention that
established the World Intellectual Property Or-
ganization, intellectual property includes rights
relating to:
• Literary, artistic and scientific works
• Performances of performing artists, phono-
grams, 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
• All other rights resulting from intellectual
activity in the industrial, scientific, literary or
artistic fields.
The subject matter of intellectual property is
new knowledge that leads to products, processes
or other forms of expression that are useful for
advancement of the cultural, scientific and tech-
nological base of society. Hence, intellectual prop-
erty is inherently intangible. It relates to the appli-
cation of knowledge and the expression of ideas
that can eventually be incorporated or embodied
simultaneously and in different geographical re-
gions in an unlimited number of tangible goods
(e.g., machinery, spare parts, artefacts, books, films,
etc.) (Bifani, 1990). However, and notwithstand-
ing recent efforts of harmonization, intellectual
property is territorial in nature and subject to the
laws of respective jurisdictions.
Traditionally, intellectual property covers two
branches of law: industrial property and other
intellectual property. The former includes: inven-
tions in all fields, industrial design, trademarks,
service marks, commercial names and designa-
tions, and protection against unfair competition.
The latter includes: literary, artistic and scientific
works, as well as performances of performing
artists, phonograms, and broadcasts; the last
three entities are normally designated as neigh-
bouring rights or copyright-related rights.
Scientific discoveries are not included in either
of the two categories. The Geneva Treaty on the
International Recording of Scientific Discoveries
(1978) defines a scientific discovery as “the recog-
nition of phenomena, properties or laws of the
material universe not hitherto recognised and
capable of verification” (WIPO, 2004). Because
scientific discoveries are not properly new knowl-
edge, they cannot be considered to be intellectu-
al property, unless they are applied to a particular
technology.
Intellectual Property Rights and Technology Transfer
module
The expression “industrial property” can be mis-
leading, as it is sometimes understood to be re-
stricted to the techniques, process or products
of the manufacturing sector. In fact, industrial
property refers to any new inventive solution to
technical problems of any economic and techno-
logical sector, including the design and appear-
ance of products and processes. The 1883 Paris
Convention for the Protection of Industrial Prop-
erty (Article 1.2) includes the following:
• Patents
• Utility models
• Industrial designs
• Trademarks
• Service marks
• Trade names
• Indications of source
• Appellations of origins
• The repression of unfair competition.
The concept of copyright can refer either to the
exclusive privilege granted to make a copy of lit-
erary or artistic creations (mainly in Anglo-Saxon
countries) or to the authorship itself (as in most
continental European countries). The distinction
is not semantic. It conveys a fundamental differ-
ence between two legal traditions: common law
and civil law and their approaches to copyrights.
The first protects works from being copied, while
the second protects the author, legally recogniz-
ing moral entitlement to compensation for artis-
tic or literary creation.
1.1.1 The TRIPS Agreement
The TRIPS Agreement deals with “categories of
intellectual property” which are the subject of
Sections 1 through 7 of Part II of the Agreement
dealing with:
• Copyrights and related rights (Section 1)
• Trademarks (Section 2)
• Geographical indications (Section 3)
• Industrial designs (Section 4)
• Patents (Section 5)
• Layout-designs (Section 6)
• Protection of undisclosed information
(Section 7).
The TRIPS Agreement makes references selectively
to some of the WIPO- administered conventions.
For instance, Article 2.1 of the TRIPS Agreement
indicates that members should comply with Ar-
ticles 1 through 12 and 19 of the Paris Convention
for the Protection of Industrial Property. Similarly,
Article 9.1 of the TRIPS Agreement requires mem-
bers to comply with Articles 1 through 21 of the
Berne Convention on the Protection of Literary
55
3 Intellectual Property Rights and Technology Transfer
module
and Artistic Works, while TRIPS Article 14 refers to
the protection of neighbouring or related rights.
Likewise, TRIPS Article 2 states that nothing in
Parts II, III and IV of its Agreement shall derogate
from existing obligations under the Rome Con-
vention for the Protection of Performers, Produc-
ers of Phonograms and Broadcasting Organiza-
tions and the Treaty on Intellectual Property in
Respect of Integrated Circuits.
It is important to note that the TRIPS Agreement
establishes minimum standards to be applied
by all members of the WTO. Individual member
states can choose to adopt higher standards of
protection, “provided that such protection does
not contravene the provisions of this Agreement”
(Article 1.1).
1.2 The economics of IPRs
Of all the different forms of IPRs, patents and
the patent system have historically been the
ones that have attracted the most interest from
economists. Section 1 of this module will, there-
Box 7
Intellectual property rights systems
“[D]espite their varying goals, all intellectual property rights systems basically concern policies involving the
use and flow of information […] copyright is thus used as a means to channel and control flows of informa-
tion […] [and] the patent system [are] designed primarily to foster scientific and technical information and
encourage the distribution of information, by making disclosure a condition of protection”.
Source: U.S. Congress (1986).
IPRs are legally enforceable rights that exclude
unauthorized users from exploiting the protect-
ed subject matter, or to set terms for its author-
ized use. However, for IPRs the issue is complicat-
ed because of the inherently intangible character
of the subject matter to be protected and be-
cause of the public good character of knowledge
and information. These intangibles are costly to
produce, but in many instances they are relative-
ly easy and cheap to transfer, to copy, to imitate
and to accumulate. Moreover, once generated
and disclosed, knowledge is in the public domain
and can be used by anyone having sufficient edu-
cation, skills and other resources to exploit it.
In the case of patents, a temporary monopoly
(a minimum of 20 years under the TRIPS Agree-
ment) enables IPR holders to recoup their invest-
ment in R&D and to capture additional rents
from the economic application of the new in-
novation. Stronger protection and enforcement
enhance the power of the IPR holder and may in-
crease prices of final products due to the greater
market power of patent holders. At the same
56
fore, make specific reference to patent regimes
to illustrate many general points; various other
forms of IPRs will be explained in more detail
later in the section.
Once new information is generated, it can usu-
ally be disseminated at marginal cost. Social
welfare demands that technological advances
be made widely available. However, the develop-
ment of new technology is not cost free; there-
fore, in most cases society needs to provide an
incentive for the necessary investment costs of
technology development – that is, a (socially)
non-optimal solution, whereby the innovator is
provided a “just” reward for a creation. This, in es-
sence, is the economic justification for IPRs.
The granting of IPRs is a means by which a state
awards protection under varying conditions and
periods of time to the creators of new knowledge
and information of practical application (tech-
nology) in exchange for the complete disclosure
of an invention – in the case of patents – and/or
diffusion of information.
time, some empirical studies have found that the
higher level of IP protection provided under the
TRIPS Agreement has increased trade (Maskus
and Penubarti, 1995 and 1997).
Stronger IPRs have the effect of producing a net
transfer of rents from countries that import tech-
nologies, owned by firms abroad, to countries
whose firms are the IPR holders. This implies that
net rent transfers from developing to developed
countries, since the latter are the major producers
of goods protected by intellectual property. This
was an issue largely discussed in the aftermath
of the conclusion of the TRIPS Agreement where
it was argued that “TRIPS represents a $20 billion
plus transfer of wealth from the technology im-
porting nations – many of which are developing
countries – to the technology exporters – few, if
any, of which are developing countries – that
may or may not be outweighed by future gains”
(UNCTAD-ICTSD, 2003: 5). Maskus (2000) found
that the United States, for example, would have
experienced net additional inflows of revenues of
$5.8 billion, whereas Brazil would have transferred

abroad an additional $1.7 billion for purchases of
intellectual property (Maskus, 2000: 184).
1.3 Justifications for IPRs
Technological knowledge has the characteristics
of public goods, meaning that they are non-rival
in use: they can be used without becoming de-
pleted, exhausted, or without their value being
substantially impaired so that one person’s use
of them does not diminish potential use by oth-
ers. A second characteristic of public goods is that
they are non-excludable, meaning that once they
are disclosed it might not be possible to exclude
unauthorized users. This latter feature is at the
heart of the “free-rider” phenomenon.
The returns that innovative firms, entrepre-
neurs, investors and inventors expect to collect
from their innovations are likely to vanish or to
be greatly reduced once they are disclosed. The
question arises how to allow a wide use of new
knowledge to benefit society at large, while at
the same time reward innovators adequately in
order to encourage and motivate them – and oth-
er potential inventors –to create inventions and
develop new ideas?
A country with a strong R&D system tends to fa-
vour a stringent intellectual property system in
order to advance the market position of its inno-
vators and to improve their ability to capture the
expected rent from their innovations. Intellectual
property protection is also an important stimulus
for R&D investments; it ensures within the global
multilateral trade regime that third parties can-
not easily copy products that result from R&D in-
vestments. Conversely, a country with a weak R&D
system and scarce innovative capacity will be mo-
tivated to have an intellectual property system
that facilitates diffusion and imitation. But, under
these circumstances it is possible that foreign in-
vestors and innovators would be reluctant to in-
vest in such a country and to transfer their propri-
etary technology. A stringent intellectual property
regime with strong enforcement is likely to result
in increases in the amount of royalty payments
to foreign IPR holders, especially in oligopolistic
sectors that undertake important R&D activities,
such as agrochemicals and pharmaceuticals.
1.3.1 IPRs and innovation
Frequently, the most persuasive argument made
in favour of stronger and enforceable IPR re-
gimes is that they should stimulate innovation
– or, more accurately, that they encourage invest-
ments in innovative activities. Hence, they are in-
struments of public policy.
Intellectual Property Rights and Technology Transfer
module
In order to understand the relationship between
IPRs and innovation, it is necessary to remember
the most important economic properties of sci-
entific and technological knowledge. Scientific
and technological knowledge have properties
that impact on how different policy incentives
can be used to promote their creation and dis-
semination.
Intellectual property can be in a codified form or
it can be tacit knowledge:
• Codified information is normally organized
and expressed in a compact and standard-
ized format, the knowledge is made explicit
through documents, blueprints, technical
standards, standard operating procedures or
routines to facilitate and to reduce the costs
of transmission, storage, verification and re-
production (David, 1992).
• Much knowledge cannot be codified since it
is tacit. It is knowledge acquired experimen-
tally, embodied in people and which is con-
text specific; it is difficult to formalize; it can
be transferred by demonstration and learning
processes, but may be difficult to keep appro-
priated and to sell.
Often, codified and tacit knowledge are related:
some tacit knowledge is usually needed in order
to utilize new codified knowledge. On the other
hand, codified knowledge is also difficult to pro-
tect, but can be controlled through granting IPRs.
A second important property of knowledge is
its public or quasi-public character. Knowledge
is a non-rival or public good, meaning that its
utilization by one person does not exclude its
utilization by others. Nevertheless, an inventor
can choose to keep new knowledge outside the
public domain and to exclude others from using
it. So, knowledge is not intrinsically available for
everyone, but the possibilities of exclusion de-
pend upon its codified or tacit character and the
costs incurred to exclude unauthorized access by
others.
The cumulative character of knowledge has fur-
ther implications with regard to advanced, evolv-
ing generic technologies such as biotechnology,
ICT and technologies for new materials. In these
areas, and particularly from the perspective of in-
novating firms, it has become extremely impor-
tant to access state-of-the-art knowledge. As a re-
sult, collaboration between innovators has been
increasing. This trend is reflected in the number
of new R&D partnerships established since 1975
(Roijakkers and Hagedoorn, 2006).
57
3 Intellectual Property Rights and Technology Transfer
module
R&D collaboration reveals that essential patents
may lead to oligopoly situations. This is, in fact,
what happened in the case of the Global System
for Mobile Communications (GSM) standard for
mobile phones, where the firms owning patents
(Ericsson, Motorola, Siemens, Nokia and Alcatel)
cross-licensed them. Cross-licensing is the prac-
tice of firms operating in the same, or in comple-
mentary sectors to license essential intellectual
property rights to each other, so that together
they are able to control the standardization pro-
cess. In the example given above, this led to a
number of alliances in the market and created
a de facto oligopoly (Bekkers et al., 2002). This is
because the exchange of patents was an indis-
pensable condition for the creation of the mobile
phone market (de Man, 2004).
1.3.2 Market failure problems
Markets within which international technology
transfer takes place are subject to at least three
problems. The first is asymmetric information,
meaning that technology suppliers cannot fully
reveal their knowledge without destroying the
basis for trade, while buyers cannot fully deter-
mine the value of the knowledge before buy-
ing it. This can lead to a second problem: large
transaction costs and inhibited technology flows.
Moreover, the enforcement of contracts involving
parties from different countries can be difficult. A
third problem is that:
”Externalities arise if the costs and benefits of
technology exchange are not internalized by
participants (Saggi, 2004). A major share of
benefits to recipient countries of [internation-
al technology transfer] is likely to arise from
uncompensated spillovers, wherein techno-
logical information is diffused into the wider
economy and the technology provider cannot
extract the associated economic value” (Hoek-
man et al., 2005: 1590).
Similarly, Maskus argues that “markets for ex-
changing technologies are inherently subject
to failure due to appropriability problems, spill-
overs, asymmetric information, and market
power” (Maskus, 2004: 1). Maskus also asserts
that there is a strong case for public interven-
tion to provide incentives to private agents to
engage in international technology transac-
tions, but he also sees the difficulties in achiev-
ing this. For instance, technology developers
take interest in:
“[R]educing the costs and uncertainty of mak-
ing transfers, along with protecting their
rights to profit from such transfers […] [and]
58
argue that effective protection and policy
supports for markets are necessary to in-
crease the willingness of innovative firms to
provide knowledge of their production pro-
cesses to firms in developing countries […] [In
contrast, technology importers are interested
in] acquiring knowledge at minimal cost […]
[and] this objective is best met by refusing
to protect the rights of foreign firms to profit
from such transfers, or at least to restrict
sharply their exclusive rights to exploit tech-
nology” (Maskus, 2004: 1).
It is the task of governments to provide support-
ive policies to limit the effects of market failure
and to increase welfare for society at large. Hoek-
man et al. (2005: 1590) argue that policies should
focus on:
• Increasing access of local buyers to the exist-
ing international stock of knowledge and im-
proving the ability of technology owners to
indicate the real value of their inventions to
buyers;
• Reducing the costs of acquiring and absorb-
ing existing technologies;
• Increasing incentives for domestic innovation.
1.3.3 IPRs and diffusion of knowledge
One of the purposes of IPRs, particularly patents,
is to disclose new knowledge. The disclosure is
made as part of an application for a patent or
other form of IPRs. According to the basic tenets
of IPRs, the disclosure should be sufficiently de-
tailed to permit the reproduction of the inven-
tion by other parties, once the term of the patent
has expired.
One of the benefits of IP protection is diffusion
of information. The patent system stipulates that
when inventors seek protection that they share
the information, which they used to fabricate a
product or create a process. This disclosure is nec-
essary in order to ensure dissemination of the in-
formation that is the basis of the patent itself. In
many cases, this information may be insufficient
for other inventors.
On the other hand, IPRs may inhibit diffusion
of information. This occurs in more significant
ways when the level of protection is much higher
than needed. For example, it has been argued
that granting IPRs on cumulative innovations in
the case of new technological domains, such as
biotechnology, impinges on the ability of down-
stream innovators to access essential knowledge
for subsequent, follow-on discoveries (Scotchmer,
1990; Gallini and Scotchmer, 2002).

The role of IPRs in international TOT has become
controversial, particularly in relation to the trans-
fer of technology to developing countries. One
could argue that the enforcement of IPRs facili-
tates the access of developing countries to an in-
ternational pool of technology. This argument is
based on two assumptions:
• An IPR system stimulates domestic invest-
ment in R&D and in inventive activity. Ef-
forts to increase skills and knowledge in the
domestic science and technology base also
enhance the ability of domestic enterprises
to assimilate and adapt foreign technology,
thereby improving their innovation capacity.
• Technology transfer is likely to occur only
when two partners have mutually common
interests. In most cases, studies have found
that IPRs promote more strategic partner-
ships between parties that have complemen-
tary technological competencies. Moreover, it
has been found that the presence of some lev-
el of technological capacity in the recipients is
a prerequisite for technology transfer.
Starting from the basic fact that the disclosure
of an innovation in a patent must be such that
it enables any skilled person to use the inven-
tion, and assuming that imitation and reverse
engineering are possible, then foreign owners
of technology have limited options to control ac-
cess to and use of their technology, whether they
transfer it abroad or not.
Countries that seek to achieve enhanced techno-
logical capabilities may show some reluctance to
offer strong IP protection until they are capable
of developing their own assets and become tech-
nology exporters. India and the Republic of Korea
are examples for such policies.
One of the arguments used by the United States
to include IPRs in the agenda for the multilat-
eral trade negotiations of the Uruguay Round,
which finally resulted in the TRIPS Agreement,
was that intellectual piracy was causing enor-
mous benefit losses to United States firms. In
1986, the United States estimated that its trade
losses due to piracy were between $43 and $61
billion (Hills, 1989). In 2001, trade losses (due to
piracy) to the United States were estimated at
$8.37 billion (IIPA, 2002). The same argument re-
garding intellectual piracy is being made in the
pursuit of the so-called “TRIPS-Plus” new gen-
eration of bilateral free trade agreements and
plurilateral agreements, such as the recently
concluded Anti-Counterfeiting Trade Agree-
ment (ACTA).49
Intellectual Property Rights and Technology Transfer
module
In recent years, weak intellectual property pro-
tection has been cited frequently as a significant
disincentive to licensing and technology transfer.
However, while evidence clearly indicates that
the strength of domestic IPR regimes in develop-
ing countries is a factor that owners of technol-
ogy consider when deciding to transfer or license
their innovations, there is little evidence that a
strong IPR regime in itself will encourage such
transfers. Many other factors come into play, such
as political stability, the investment climate and
the characteristics of local markets.
1.4 Patents
A patent is the exclusive right to make, use or sell
a particular application of a new idea and obliges
the patent holder to disclose the new knowledge
upon registration. It is, therefore, a mechanism
for the diffusion of technology.
Most IPRs do not arise automatically; patents
require a formal application to an appropriate
government institution before they are granted.
It should be noted that a patent does not protect
the basic scientific knowledge behind the inven-
tion, but rather the technological invention itself,
as described in the patent specifications. Once
the patent is registered and approved, it confers
on its owner exclusive rights or a temporary mo-
nopoly over the use of the invention. The claimed
monopoly, or quasi-monopoly, may relate to an
end product, an intermediate product or com-
ponent, a process, or a chemical compound. The
exclusive rights granted are time-limited so that
after a certain number of years (commonly 20
years from the filing date) the invention will be
in the public domain and available to the public
to use free of charge.
The nature of technology markets reflects the
economic imperfections associated with mo-
nopolies (exclusive rights of the patent holder).
In the case of transfer of technology to develop-
ing countries, the technology supplier, who is not
necessarily the innovator, has various means of
appropriating the benefits of the knowledge:
• The owner can sell it outright (for example, for
royalties in the case of patents, for fees if the
transfer is in the form of technical assistance,
or for a product price if the technology is em-
bodied in equipment).
• The owner can exploit it directly by investing
in productive facilities that will use the inven-
tion to generate income, or he can enter into
a variety of arrangements with local partners
(joint ventures, management contracts, etc.).
59
3 Intellectual Property Rights and Technology Transfer
module
The technology market is characterized by a
sharp imbalance between a seller of technology
and a buyer. Normally a seller has full knowl-
edge of what is being sold, while a buyer has a
very general and incomplete knowledge of what
is being bought. A buyer is often weakened by
lack of expertise (inadequate skills, lack of expe-
rience), insufficient capacity for testing, quality
control and adaptation, as well as information
gaps about the potential sources of related and/
or alternative technology supplies, and about the
technology itself.
The more capable a buyer, the greater the abil-
ity to “unpackage” any given technology and, vice
versa: the less capable the buyer, the greater the
need for a comprehensive package, as an inexpe-
rienced buyer is likely to pay higher prices for the
technology acquired.
Normally, technological weakness and informa-
tion gaps go together: a capable buyer of tech-
nology knows where and how to acquire it; the
above distinction is, therefore, made for analyti-
cal purposes and because technological weak-
ness and information gaps require different, al-
though complementary, policy measures. Such
weaknesses and gaps jointly contribute to make
the inherently flawed technology market more
imperfect, more so if the buyer is from a develop-
ing country and confronts a de facto highly mo-
nopolistic situation.
1.4.1 Patents in the TRIPS Agreement
The provisions on patents are key elements of
the TRIPS Agreement. Some important provisions
concern standards relating to patentability and
its exceptions, duration of protection and com-
pulsory licences.
• Article 27 indicates that member states may
not exclude any field from patentability as a
whole and they may not discriminate as to
the place of inventions when rights are grant-
ed. This is important for many developing
countries whose national IPR regimes, before
TRIPS, did not grant protection to pharma-
ceutical products at all, neither to pharma-
ceutical processes as well as to food products
and process. Great debate arose from this
provision. Concern was expressed mainly in
relation to the patentability of pharmaceu-
tical products and processes and the con-
sequences on the availability and pricing of
drugs and medicines in general, and their im-
pact on the efforts of many countries to build
up their domestic pharmaceutical and food
industries.
60
• Article 33 establishes that the minimum term
of protection must be for 20 years from the
filing date, which is longer than some IPR re-
gimes previously offered. Where this was the
case, it is clear that the extended period of
protection to patents is likely to have nega-
tive effects discouraging imitative efforts by
domestic firms and research centres. Further-
more, in an era of accelerated technological
change, it is possible that when a given tech-
nology finally enters the public domain it may
already be superseded by new protected tech-
nological innovations. TRIPS-Plus arrange-
ments, such as FTAs, provide for extensions
of this minimum term of protection to com-
pensate the patent holder for administrative
delays in the granting of the patent or in the
commercialization of products, such as phar-
maceuticals, subject to regulatory regimes
that requires special authorizations for the fi-
nal product to enter the commercial conduit.
• Under Article 31, the Agreement recognizes
the members’ rights to permit “other use
without authorization of the right-holder”,
which is tantamount to allowing countries to
grant compulsory licences, under certain con-
ditions that are specified in the Agreement.
An example of where a compulsory licence
would be allowable under TRIPS is to enable
local production of a patented drug to ad-
dress an outbreak of disease. Compulsory li-
cences must be non-exclusive and terminate
when the conditions under which they were
granted cease.
• In August 2003, following the Doha Decla-
ration on the TRIPS Agreement and Public
Health (2001), the General Council of the WTO
adopted a decision that waived the obliga-
tions under Article 31(f) of the TRIPS Agree-
ment that limits the use of compulsory li-
censing to the predominant supply of the
domestic market. This allowed countries with
manufacturing capacity to make and export
more pharmaceutical products to countries
with urgent public health needs and insuffi-
cient manufacturing capacity.
The TRIPS Agreement mentions specific cases for
granting compulsory licences:
• Emergency and extreme urgency
• Anti-competitive practices
• Public non-commercial use
• Dependent patents.
However, it does not limit the grounds under
which compulsory licences can be granted for

reasons of “public interest”, refusal to deal, etc.
Although the TRIPS Agreement legitimizes the
granting of compulsory licences, it establishes a
number of procedural conditions to be fulfilled
by public authorities.
1.5 Trade secrets and undisclosed information
Trade secrets are mechanisms that innovators
can use to keep control of their technological
innovations. Trade secrets have their legal basis
in common law principles that confer protec-
tion from the stealing of ideas or innovations.
Normally trade secrets are protected by contract
law,50 criminal laws under some circumstances,
or under unfair competition statutes in some
countries. The advantage of relying on this type
of protection is that one does not have to disclose
the nature and details of the innovation. There-
fore, the exclusivity of the trade secret holder
may last indefinitely. The disadvantage is that it
is very hard to keep a secret idea or innovation
from becoming common knowledge, and conse-
quently to prove that someone stole the idea be-
hind a concept. Normally processes that are kept
as trade secrets are those that are difficult to de-
Box 8
Unfair competition
Unfair competition is defined as: “any act that a competitor or another market participant undertakes with
the intention of directly exploiting another person’s industrial or commercial achievement for his own busi-
ness purposes without substantially departing from the original achievement” (WIPO, 1994).
The TRIPS Agreement does not provide any defi-
nition of “undisclosed information”, an expres-
sion that has been considered analogous to trade
secrets. Instead, it includes:
• Technical know-how such as design, process,
formula and other technological knowledge
resulting from experience and intellectual
ability;
• Data of commercial value, such as marketing
plans, customer lists and other business-re-
lated information that provides an advantage
over competitors;
• Test and other data submitted for the approv-
al of pharmaceutical and chemical products
for agriculture.
The TRIPS Agreement (Article 39.3) also deals with
the need to protect pharmaceutical data related
to the safety and efficacy of a pharmaceutical or
agricultural chemical product and submitted to
public authorities for purposes of commerciali-
zation of the product:
Intellectual Property Rights and Technology Transfer
module
cipher when the final product is commercialized
and used. Classic examples of industrial knowl-
edge protected by trade secrets are the Coca Cola
formula, and the high-yielding varieties of seed
that were at the origin of the Green Revolution.
The TRIPS Agreement is the first international
agreement expressly to require member coun-
tries to protect undisclosed information (Art.
39). More precisely, it requires countries to pro-
tect information that is commercially valuable,
secret and subject to measures to prevent un-
authorized disclosure against unfair commer-
cial practices. Furthermore, the TRIPS Agreement
provides that the obligation to protect undis-
closed information is limited to the protection
“against unfair competition” as provided in the
Paris Convention.
Unfair competition rules supplement the protec-
tion of patents and trademarks, but protection
against unfair competition does not grant ex-
clusive rights. Thus, in order to fulfil TRIPS obliga-
tions, the national laws of member countries can
only provide for remedies to be applied whenever
dishonest practices occur (UNCTAD-ICTSD, 2005).
“Members, when requiring, as a condition of
approving the marketing of pharmaceutical
or of agricultural chemical products which
utilize new chemical entities, the submis-
sion of undisclosed test or other data, the
origination of which involves a considerable
effort, shall protect such data against unfair
commercial use. In addition, Members shall
protect such data against disclosure, except
where necessary to protect the public, or un-
less steps are taken to ensure that the data
are protected against unfair commercial
use”.
The TRIPS Agreement allows countries the mar-
gin to implement this provision under their do-
mestic legal systems. Foreign trade agreements
go beyond the Agreement by specifying the spe-
cific modalities on how this protection should
take effect. The normal practice under these
TRIPS-Plus arrangements is that this type of data
should enjoy an exclusive protection of at least
five years.
61
3 Intellectual Property Rights and Technology Transfer
module

1.6 Copyrights and related rights
Copyrights involve, inter alia, the exclusive privi-
lege to make copies of, or to reproduce a particu-
lar tangible expression of knowledge. The sub-
ject matter of copyright protection includes all
original creations in the literature, scientific and
artistic domains, whatever the mode or form of
expression. They also refer to the use and flows
of information in computer software, software-
based products and services. The essential role of
copyrights is the facilitation of publications and
dissemination of above-mentioned creations. It
is important to note that copyright law protects
only the form of expression of ideas from copying,
not the ideas themselves.51 In general terms, cop-
yright protection grants exclusive rights to make
and distribute copies of specific expression and
of its derivative works (for example, translations).
Consequently, it concerns virtually all forms and
methods of public communication, including
mass communication.
Technological progress in the last 40 years has
enlarged the scope of copyright, overcoming the
commonly used concept of literary and artistic
works and extending it to the production of more
utilitarian creations such as databases, comput-
er programmes and architectural works.
In relation to TOT, it is worth making a few brief
references to computer programmes, which are
also protected by copyrights. Today, computer-
based technologies are a fundamental instru-
ment to access information and further technol-
ogy transfer. The development of software does
not generally incur the huge fixed costs of many
other innovative and productive activities, so it
offers important opportunities for countries at
a certain level of technological development to
build a local industry for the supply of software
to domestic markets, and also perhaps to enter
into the world markets (India is a case in point).
The TRIPS Agreement does not provide any defi-
nition of copyright and refers to the provisions
of the Berne Convention for Literary and Artistic
Works. Neither does TRIPS provide any definition
of computer programmes. The few national copy-
right laws that define computer programmes do
so along the following lines: an expression or a set
of instructions (combined instructions) that when
used in a computer make it function in order to
bring about some results. According to the TRIPS
Agreement and despite their functional character
(U.S. Congress, 1992), computer programmes are
to be protected as literary works, which in fact,
only protect the expression of knowledge and
ideas, rather than the knowledge itself. This is an
important point, as the characteristics of this area
of technology permit easy entry for new produc-
ers, who may be able to use the knowledge free of
charge to develop their own products.
The underlying knowledge in a computer pro-
gramme is, in effect, in the public domain – un-
like knowledge that is expressed in a patent. As
a result, some software producers have sought,
and obtained in some jurisdictions, patent pro-
tection for their software, as discussed below.

Box 9
Source code and object code
Protection is granted for computer programmes either in source code or in object code. The former is a com-
puter language formed by words, symbols and alphanumeric labels which although highly sophisticated is
nevertheless intelligible to human beings. In contrast, the latter is a machine language that employs binary
numbers and is unintelligible to human beings. Normally, computer programmes are distributed in object
code, i.e. in machine language, although most of them are written in a source code. A special computer pro-
gramme called a “compiler” permits the translation of one code into the other. The protection of computer
programmes through copyrights and, in some jurisdictions, patents, is complemented with the protection of
the “source programmes” through undisclosed information or trade secrets.

1.7 Information technologies and computer
programmes
Regarding TOT, it is worth making a few brief
references to the implications of two radical
technological innovations that affected the con-
ventional system of IPRs, and had an enormous
impact on economic growth, international trade
and development. These two radical innovations
are information technologies (including com-
puter programmes) and biotechnology. They are
both knowledge intensive, difficult to appropri-
ate (thus the pressure from innovators for the
modification of IPRs) and relatively easy to trans-
fer. However, for technological followers, like
developing countries, to access and assimilate
technologies in these fields requires sufficient
human and other technological capabilities.

62
 Intellectual Property Rights and Technology Transfer

Information technologies are important since
they have resulted not merely in the introduction
of new products and processes to the markets,
but because they have also paved the way for a
completely new and extremely complex industry
with clearly defined branches: semiconductors
and computers, computer programmes and soft-
ware, multimedia, databases and a large array of
consumer electronics goods.
The semiconductor industry is a major subsec-
tor of the electronics component industry. It has
been customary to breakdown semiconduc-
tors into three categories: (i) discrete devices,
such as individual devices like transistors; (ii)
integrated circuits; and (iii) special purpose
devices (OECD, 1985). Technological progress in
the semiconductor industry is fundamentally
module
cumulative in the sense that any improvement
arises from or is based on the existing accumu-
lated stock of knowledge. In relation to IPRs and
the transfer of technology, two aspects will be
examined briefly here: integrated circuits and
the protection of layout-designs and computer
programmes.
Most scientific or knowledge-based high technol-
ogies are relatively easy to imitate and diffuse. It
was, therefore, not wholly unexpected when the
United States lost its early competitiveness in mi-
crochip production, particularly against Japanese
competition; Japan was accused of copying origi-
nal chip layout-designs, which led to the creation
of a new form of IPRs, or new protection system
through the Semiconductor Chip Protection Act
(SCPA) in 1984.

Box 10
The case of the Japanese semiconductor industry
The history of the semiconductor industry began with the United States initially leading the market and
Japan following. Yet, during the 1970s, the Japanese industry moved from a technological position of relative
inferiority towards state-of-the-art capabilities, in components, computers and telecommunications. By 1984,
Japanese firms dominated the production of Random Access Memories (RAM) worldwide, with between 60
and 90 per cent of the market for dynamic and static RAM, a product that United States firms had pioneered
and held the lead in until 1980.

To limit and control foreign entry as well as to attract TOT were critical to the early development of semi-
conductors and microelectronics in Japan. For example, the Japanese Government, through the Ministry of
International Trade and Industry, traded licences (that could have blocked Japanese development) belonging
to Texas Instruments in return for a share of the market.

The controlled access of foreign technology was combined with collaborative R&D promotional policies and
the encouragement of the diffusion of generic technologies among domestic firms. Government support was
given through large subsidies in the form of preferential, low interest loans and outright grants, premium-
price procurement by government agencies, important research investment and by continuous investment
in manufacturing. The development and expansion of the Japanese semiconductor industry provides an ex-
cellent example of a strategic policy for the import of TOT and the building up of a strong domestic competi-
tive industry.

In order to match increasing Japanese competitiveness, the United States approved, in 1984, the Semicon-
ductor Chip Protection Act to prevent copying of original chip designs and the commercialization of the in-
fringing chips, and of the products that incorporate them. In addition to the definition of the new regime
for integrated circuits (length of protection, compulsory registration conditions, etc.), the SCPA made special
provisions for reverse engineering and included stringent reciprocity rules, forcing Japan and the European
Community to adopt similar legislation.

The adoption of the SCPA in the United States motivated WIPO to establish an international regime on this
matter, which resulted in the adoption of the Washington Treaty on Intellectual Property in Respect of Inte-
grated Circuits in 1989. However, the treaty was never signed by the two main producers, the United States
and Japan. The TRIPS Agreement deals specifically with the protection of layout-designs (topographies) of
integrated circuits (TRIPS Articles 35-38).

Still, computer programmes were unprotected. grammes: in 1997, for example, about 12,000 soft-
Therefore, in the early 1990s computer pro- ware patents were granted in the United States.
gramme producers in the United States started They were also granted in Europe, although the
to apply for patents on their computer pro- requirements were stricter than in the United

63
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States. The fact that patents protect industrially
applicable ideas, which are not protected under
copyrights, has important implications: comput-
er programmes are now protected by copyrights,
trade secrets and patents.
Computer programmes introduced an addi-
tional element into IPRs: the possibility to pro-
tect the function performed by an invention.
The United States Patent and Trademark Office
now accepts what is called “functional claims”,
that is the protection of the function carried
out by an innovation. In traditional IPRs, copy-
rights protected the form – the expression of
an idea – while patents protected the invention
in terms of its physical characteristics, compo-
nents and design structure. Neither copyrights
nor patents protected what the invention does,
such as a software programme or – in the field
of biotechnology – bacteria in a fermentation
process.
Box 11
Biotechnology
Biotechnology is:
• “The application of science and technology to living organisms, as well as parts, products and models
thereof, to alter living or non-living materials for the production of knowledge, goods and services”
(OECD, 2005).
• “Any technique that uses living organisms or substances from these organisms to make or modify a
product for a practical purpose” (FAO, 2004).
• “A collective term for a group of technologies that use biological matter or processes to generate new
and useful products and processes” (UNCTAD, 2002).
Biotechnology introduces serious problems of
ownership, calling into question conventional
IPRs. The first controversial issue is whether liv-
ing organisms are patentable or not, and if they
should be considered inventions or discoveries.
The United States’ IP laws refer to discovery and
invention almost synonymously. However, most
laws make a distinction between them and con-
sider discoveries as non-patentable.
The traditional approach towards the patentabil-
ity of living organisms was drastically affected by
a series of important legal decisions initiated
in 1969 with the Rote Taube case on the patent-
ing of a process for animal selection. In 1980, the
Supreme Court of the United States granted a
landmark decision in the Chakrabarty case over
a patent for an engineered microorganism (U.S.
Supreme Court, 1980). The Chakrabarty case is
a milestone, for it established that the problem
was not of living versus non-living organisms but
rather of product of nature (living or not) versus
64
1.8 Biotechnology and the transfer
of genetic material
One of the key technological developments in
the last 30 years is the application of modern
molecular biology for the manipulation of bio-
logical processes and products. Strictly speak-
ing, the term “biotechnology” can be applied to
long-used processes. For example, in terms of the
production of cheese, beer, and wine, the concept
of modern biotechnology relates in particular to
technologies developed from the 1970s onwards.
There are many definitions of biotechnology re-
flecting its extensive range of techniques (such
as genetic engineering and monoclonal antibody
production) and fields of application: agriculture,
petrochemicals, pharmaceuticals, health care,
mining, industry, energy, environment, bioelec-
tronics and others. Some general definitions are
shown in Box 11.
human interventions. Later in 1985, the Hibberd
case involved a patent for a maize plant and its
components, in 1987 for an oyster, and in 1988 for
a mouse.
Another major concern is that biotechnology-
related IPRs are likely to jeopardize the exercise
of governments’ sovereignty over their genetic
resources, overriding any attempt to establish
international mechanisms based on the fair
and equitable sharing of the benefits arising
out of the utilization of genetic resources, as re-
quested in the CBD and the International Treaty
on Plant Genetic Resources for Food and Agricul-
ture (ITPGRFA). An issue here is the asymmetry
between industrialized and developing coun-
tries: biotechnology industries are largely con-
centrated in developed countries, while most of
the world’s biodiversity – the source of genetic
resources for industry, agriculture, pharmaceu-
ticals, agrochemicals, etc. – is concentrated in
developing countries.

1.8.1 International agreements concerning
genetic resources
Historically, genetic material has been consid-
ered to be the common heritage of humankind.
This changed with the coming into force of the
Convention on Biological Diversity, which estab-
lished the principle of national sovereignty of ge-
netic resources and set down provisions for gov-
erning access to them, and sharing the benefits
arising from their use.
The objectives of the CBD have been described
by some scholars as a “grand bargain” (Gollin,
1993) reflecting a compromise between the
technologically advanced countries and the
biologically rich developing countries, by which
the latter facilitate access to genetic resources
(CBD Article 15) in return for a fair and equitable
share of the benefits, such as technology trans-
fer (CBD Article 16). Hence, the traditional view
of genetic resources as the common heritage of
humankind with unrestricted access has shifted
to the concept of facilitated access, in the con-
text of a system based on shared benefits and
prior consent.
These principles have also been incorporated
into the 2001 ITPGRFA, a successor to the Inter-
national Undertaking on Plant Genetic Resources
under the auspices of the Food and Agriculture
Organization of the United Nations (FAO). Trans-
fer of technology is explicitly referred to in ITPGR-
FA whose main objectives are “the conservation
and sustainable use of plant genetic resources
for food and agriculture and the fair and equi-
table sharing of the benefits arising out of their
use, in harmony with the Convention on Biologi-
cal Diversity, for sustainable agriculture and food
security” (Art. 1.1). The treaty’s scope extends to
farmers’ varieties and wild materials and to new
biotechnological products such as commercial
crop and livestock varieties and breeding lines
(Art. 2). The ITPGRA applies both to in situ and ex
situ genetic resources. It also includes collections
under the national jurisdiction of the adhering
parties and the collections kept by international
centres that have signed agreements with FAO
for the access and sharing of benefits of the use
of germ plasm of their collections.
Concerning “access”, the Treaty states that: “[i]t
will be the policy of adhering governments and
institutions having plant genetic resources un-
der their control to allow access to samples of
such resources, and to permit their export, where
the resources have been requested for the pur-
poses of scientific research, plant breeding or ge-
netic resource conservation. The samples will be
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made available on the basis of mutual exchange
or on mutually agreed terms” (Art. 5). The FAO
Resolution 4/89 clarifies that “free access” does
not mean “free of charge”. However, arrange-
ments under the treaty should impose only the
minimum restrictions on the free exchange of
genetic materials covered by Article 2.1(a).
1.8.2 IPRs for genetic resources
One of the most controversial articles in the
TRIPS Agreement relates to “patentable subject
matter” (Art. 27). Under Article 27.3(b) “Members
may exclude from patentability plants and ani-
mals other than microorganisms, and essentially
biological processes for the production of plants
or animals other than non-biological and micro-
biological processes”. Therefore, while individual
countries may choose to exclude plants and ani-
mals from patentability, under the TRIPS Agree-
ment all members must allow microorganisms
to be patentable. However, “microorganisms”
is not defined in TRIPS, which allows members
some flexibility with regard to the patentability
of cellular and sub-cellular parts of living or-
ganisms (such as genes). Moreover, TRIPS does
not include a definition of the term “invention”;
therefore, countries are free to determine, in ac-
cordance with established principles of patent
law, whether substances that exist in nature
– including genes, cells, and other biological
matter – can be deemed to be “inventions” or
“discoveries” (the latter being excluded from pa-
tentability).
Members may choose whether to allow patent-
ing for plants and animals, but in the case of
plants, “Members shall provide for the protection
of plant varieties either by patents or by an ef-
fective sui generis system or by any combination
thereof” (Art. 27.3(b)). The most common alterna-
tive to patents for the protection of plant varieties
is a Plant Breeders Rights (PBR) regime. Members
are free to develop their own PBR or other sui gen-
eris system, but in practice many countries choose
to become part of the International Union for the
Protection of New Varieties of Plants (UPOV) (1991
Act of the UPOV Convention) in order to fulfil their
obligation for plant IPRs under TRIPS.
The original International Convention for the
Protection of New Varieties of Plants of 1961 in-
cluded two basic exemptions:
• The research, or breeders’ exemption, which
allowed the user of a protected variety to use
it as the basis to create and market a new va-
riety, as long as repeated use of the original
variety was not involved;
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• The farmers’ privilege, or exemption, which al-
lowed farmers to keep the seed of protected
varieties for use – but not sell – as planting
material for subsequent seasons.
However, the UPOV Convention was revised in
1991, which made the farmers’ privilege optional
for signatory nations. Until 1991, exclusive rights
were given to prevent the sale of the reproduc-
tive or vegetative propagating part of the plant
and commercial production for the purpose of
marketing the variety. The 1991 revision extends
protection from the propagating part of the vari-
ety to the whole plant.
As a result of the revision, PBR were strength-
ened, thereby conferring much more power to
the rights holder. The main purpose of PBR under
UPOV 1991 is to guarantee that the rents gener-
ated by the exploitation of a protected variety
accrue to the breeder. The revision was adopted
in order to provide incentives to the private sec-
tor to engage in commercial plant breeding by
granting distinct, uniform and stable rights to
individual plant breeders who develop new plant
varieties. Originally, the UPOV prohibited double
protection, i.e. the simultaneous use of patents
and PBR for plant varieties. This exclusion was
eliminated by the revision of the Convention in
1991 (UNCTAD-ICTSD, 2003).
Many scholars and institutions have expressed
their concern about the potential negative ef-
fects of patents on plants (IDRC, 1994). It has been
argued that:
• Patent protection discourages innovation or
breeding activities taking place at the farm level;
• Patenting will increase the cost for farmers
who will have to buy their seeds from large
TNCs without the possibility of saving seeds
for further sowing (prohibited by contractual
obligations);
• Patenting tends to create standardization
and homogenization, reinforcing monocul-
ture, contributing to the erosion of biological
diversity and increasing vulnerability;
• Patenting of specific traits (such as disease re-
sistance, yield, colour, taste, oil content, etc.) or
broad patents on genes, seeds and plants will
put the production and marketing of crucial
food crops under the monopoly of TNCs. Pat-
enting could, therefore, lead to increasing con-
centration of ownership in the pharmaceuti-
cal, chemical agrochemical and seed industry.
Broad patents in key areas of biotechnology also
discourage R&D, deter the entry of competitors
into the market, and thereby inhibit innovation.
66
1.9 The TRIPS Agreement flexibilities
Despite the many challenges imposed by TRIPS on
developing countries, the agreement neverthe-
less embodies flexibilities that can be resorted
to by governments in the enactment of their do-
mestic IPR legislation and S&T policy, particularly
for the promotion of innovation and the trans-
fer of technology (UNCTAD-ICTSD, 2005). These
flexibilities arise from provisions intentionally
introduced during the negotiation process, but
mainly from ambiguities in the text.
1.9.1 Patentability criteria and the scope
of patentability
The TRIPS Agreement clearly indicates that pat-
ents shall be available for “any inventions wheth-
er products or processes in all fields of technology
without discrimination as to the field of technol-
ogy” (TRIPS Art. 27.1). But the TRIPS Agreement
fails to define “invention”, leaving this task to
member countries. The lack of such a definition is
common in most national IP laws. Thus, in some
cases, invention and discovery are confused.
Scholars believe that to make a clear distinc-
tion between both concepts is difficult and that,
furthermore, scientific and technological evolu-
tion may alter any dividing line between the two
concepts. The legal interpretation of what is an
invention has also been broadened to incorpo-
rate radical innovations in biotechnology: this al-
lows the incorporation of biological materials as
possible inventions, which has been the trend in
most developed countries.
In addition, the concept of novelty in patent cri-
teria is now understood not only in the strict
sense of “not previously existent”, but also in a
broader sense of “not previously having been iso-
lated from its natural environment”, where such
isolation is needed to make it available and use-
ful. This interpretation has allowed the patent-
ing of isolated, purified or crystallized products
obtained from pre-existing natural substances.
Examples include among others: interferon, pu-
rified dextrose, some synthetically produced vita-
mins and chemical products artificially isolated
from natural substances. The same applies to
genes that are isolated from DNA.
Some developing countries do not acknowl-
edge the patentability of biological materials,
especially if they are pre-existent in nature. The
Andean Group and Argentine Patent Law, for ex-
ample, determined that substances that exist in
nature as well as their replication are not inven-
tions; hence, they are non-patentable. The Brazil-
ian Patent Law is even more emphatic. It states

that no invention can be claimed for “natural
living beings, in whole or in part, and biological
material, including the genome or germ plasm
of any natural living being, when found in na-
ture or isolated therefrom, and natural biologi-
cal processes”.52
The TRIPS Agreement also avoids defining the
conventional requirements for patentability:
novelty, inventive steps and industrial applica-
tion, leaving their interpretation to member
countries. In a footnote, the TRIPS Agreement
(Article 27.1) indicates that “the terms ‘inventive
step’ and ‘capable of industrial application’ may
be deemed by a Member to be synonymous
with the terms ‘non-obvious’ and ‘useful’ re-
spectively”.
1.9.2 Exclusion of certain subject areas
from patentability
Allowing exclusion from patentability of certain
subject matters, such as diagnostic, therapeutic
and surgical methods, plants and animals, where
related inventions may be deemed to be unethi-
cal or against public interest, gives flexibility to
legislators.
The TRIPS Agreement confers some freedom
to define patent claims determining the literal
scope of the inventor’s exclusive rights. This flex-
ibility has been largely exploited by developed
countries, particularly the United States, in the
case of functional claims. The principle of flexibil-
ity may also be exploited through the application
of generic claims, i.e. claims that cover a group or
family of substances. Broad generic claims have
been used in relation to biotechnology, particu-
larly in gene patents. The case is illustrated by the
above-mentioned Hibberd patent, as well as pat-
ents related to the introduction of a gene from
the microorganism bacillus thuringensis into
field crops, such as cotton and maize.
1.9.3 Compulsory licences
Probably one of the most important legal instru-
ments to facilitate the acquisition and use of
new technological innovation and to reduce the
social costs associated with patents has been the
compulsory licensing of patents. A compulsory
licence is the authorization accorded by govern-
ments or courts, to a party other than the holder
of a patent, to use the patented innovation with-
out the consent of the patent holder.
Issuing a compulsory licence for a new invention
has always been considered a means of ensuring
that society reaps the full benefits of the inven-
Intellectual Property Rights and Technology Transfer
module
tion and is thus compensated for the social costs
arising from the patentee’s exclusive rights. Intel-
lectual property rights are granted subject to the
patentability requirements, including novelty,
inventive step and industrial application, provid-
ed that the granting of exclusive privileges also
benefits society. Compulsory licensing, among
others, has been established to prevent abuses,
which result from the exercise of the exclusive
rights granted by patents, for example, failure to
work. (Paris Convention Article 5.5(2)). Thus, one
aim is to prevent the patent system from being
used as a mechanism to protect markets and
create barriers to entry, but rather to stimulate
technological development.
Historically, all countries have used compulsory
licences either to foster technology in strategic
economic sectors or in order to overcome unex-
pected critical social and economic problems.
In these cases, a government considers that it is
in the interest of society to restrain the exercise
of private rights granted under IP laws. In other
words, there are circumstances in which it is in
the public interest to use a new technology as
soon as possible. In these situations, social or
public interest has to take precedence over pri-
vate interests (Reichman et al., 2003).
In 1923, Canada introduced compulsory licences
to produce medicines and food with patented
processes, so as to facilitate the domestic produc-
tion of well-known drugs under generic names
and to keep down the prices of medicines. The
main purpose was to induce local production
or to reduce the effective term of the patent. It
contributed to the development of the domestic
generic drug industry, reducing drug costs for the
consumers (McFetridge, 1998).
Japan granted compulsory licensing for inter-
dependent patents and used revocation for not
utilizing the innovation continuously for three
years. In the United States compulsory licences
have been employed mainly as a remedy for the
anti-competitive use of intellectual property. The
anti-competitive use was mainly in the form of
cross-licensing of competing patents, tying53
or post-expiry restrictions.54 The United States
used compulsory licences in more than 100 anti-
trust case settlements, including drugs, chemi-
cal components and in general pharmaceutical
products, such as meprobamate, tetracycline and
other antibiotics, synthetic steroids and many
biotechnology patents owned by Ciba-Geigy and
Sandoz when they merged to create Novartis
(Sherer, 1999). In 1997, the United States Federal
Trade Commission considered that the merger
violated national anti-trust laws because the
67
3 Intellectual Property Rights and Technology Transfer
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merged company, which also controlled the bio-
technology firm Chiron, was a current or poten-
tial competitor for pharmaceutical and health
care products. An important and frequent source
of compulsory licensing in the United States
is through the mechanism of government use
(Reichman et al., 2003).
Those arguing that compulsory licensing can
be inconvenient, assert that, in orthodox trade
theory, requiring the domestic production of a
new innovation can have the same effects as a
non-tariff barrier: it impedes free trade and can
result in less than optimal location and scale of
production, higher prices to the consumer and a
loss of global welfare.
Normally, a government granting a compulsory
licence has to notify the patent holder. The Unit-
ed States Law 28, United States Code Section 1498
permits the government, government authori-
ties and its contractors to use patents without
advance notice to patent holders, but the latter
are allowed to seek compensation. Unorthodox
practices in the United States motivated com-
plaints by the European Union (European Com-
mission, 1997). However, when compulsory li-
censing is imposed to remedy anti-competitive
practices there is no requirement for prior noti-
fication to the patent holder.
As discussed above, under TRIPS Article 31, the
granting of compulsory licences is subject to a
number of procedural conditions (see Section
1.4.1).
1.10 IPRs and the competitiveness of firms
International competitiveness is an extremely
complex subject, as it encompasses competition
and business practice, trade, investment, technol-
ogy, fiscal and monetary policies.55 International
competitiveness requires increases in:
• Productivity
• Innovation
• Access to markets
• Economic growth.
Intellectual property rights play a role in all four
factors. It should be noted that when discussing
international trade and competitiveness, refer-
ences are often made to country competitive-
ness, total factor productivity and national tech-
nological capabilities, but it is in fact firms, not
nations, that compete in international markets
(Porter, 1990). However, given that companies
are becoming increasingly international and na-
tions increasingly promote the competitiveness
68
and the entry of their domestic firms into inter-
national markets, international competitiveness
is an issue where the interests of governments
and firms tend to converge.
The recognition that technological innovation
creates dynamic comparative advantages, which
can change the conditions of international com-
petition, compelled governments to adopt policy
measures to promote competitiveness. Particu-
larly relevant are those oriented towards creat-
ing, applying and protecting technology, includ-
ing tax incentives for firms to undertake more
R&D and stronger IP protection. Accordingly, the
role of technological innovation as an instru-
ment of competitiveness has received increasing
attention in academic research and in political
debates about international competitiveness.
Firstly, in order to explain international competi-
tiveness, understanding of how firms create and
sustain competitive advantage is required. Sec-
ondly, it is necessary to identify what policies and
measures governments implement in order to
facilitate the creation of competitive advantage
by domestic firms, and how government actions
facilitate and enhance their international com-
petitiveness.
1.10.1 Competitive advantage
The creation of competitive advantage is de-
pendent on the strategy of the firm and the
management of several factors that intervene
in the value chain. Although the value chain of
a firm should be managed as a system, rather
than a collection of separate components, this
teaching material, and in particular this module,
focuses on those aspects related to IPRs. Similarly,
in spite of the diverse policies and measures that
governments can design and implement to pro-
mote the creation of competitive advantage by
domestic firms to foster their competitiveness in
international markets, this module concentrates
on those measures and policies that are specifi-
cally related to IPRs.
In the field of innovation, firms can create compet-
itive advantage by discovering or inventing better
methods to do traditional things, improve tech-
nology and create new technologies and products.
Innovation cannot be separated from a firm’s stra-
tegic and competitive context: it is manifested in
product, technological and process changes, new
approaches to marketing and new forms of distri-
bution. In all these activities, IPRs play a role.
Firms that are able to perceive the significance of
their innovations at an early stage tend to move

rapidly in order to exploit them, and it has been
demonstrated that early movers have been able
to sustain their competitive position for dec-
ades. The classical example is provided by Ger-
man chemical firms that have sustained their
competitive position even before the beginning
of World War I. Early movers can also exploit
other advantages: they can reap benefits aris-
ing from the reduction of costs and the econo-
mies of scales inherent to the technology, and
they also initiate a cumulative learning process,
creating new know-how and complementary
intangible assets. Being the first mover allows
a firm to establish brand names and favourable
relationships with distribution channels and to
get the most appropriate location for facilities
or the best source of inputs and raw materials.
However, keeping the advantages of being a first
mover is not easy, and sometimes it is impossi-
ble. Frequently, imitators profit more than the in-
novator. The classical example is that of RC Cola,
a small beverage firm that first introduced cola
in a can. Competitors Coca Cola and Pepsi were
able to follow and overcome all the first-mover
advantages that the innovation provided to RC
Cola, which was eventually eliminated from the
market. The same happened to Bowmar, which
first introduced the pocket calculator. The com-
pany was unable to capture the benefits of its
innovation in face of competition from Texas In-
struments and Hewlett Packard.
From an international perspective, it should
be noted that, historically, countries such as
Germany, the United States, the United King-
dom and France have been technological lead-
ers and produced scientific and technological
breakthroughs and innovations. Other coun-
tries, mainly Japan, the Republic of Korea and
in general the new emerging economies have
imported technology from these technological
leaders. Technological leaders invest a larger
share of world R&D funds in basic research and
technological innovation, whereas latecomers
invest more in applied research and develop-
ment, first by imitation, then by improvement
of the process and products imported from the
technological leaders. In this way, they gain a
competitive edge in export markets, as they
learn to produce the same or similar products
at lower costs than the technological leaders,
and export them to the world market. Therefore,
technological leaders are losing the quasi-rent
of their investment on R&D. The erosion of their
competitive advantage, due to rapid assimila-
tion and imitation of technological innovation
by latecomers, has motivated technological
leaders to press for strong worldwide appropri-
ability regimes.
Intellectual Property Rights and Technology Transfer
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1.10.2 Complementary assets
Once a new technology emerges and enters the
market, competition tends to shift to price and
away from innovation. The successful entry into
the market should be followed by the manage-
ment of a new set of variables in order to main-
tain the competitive position of the innovator. At
this stage, it is important to make use of econo-
mies of scale and learning processes in order to
reduce unit costs. This shift does not imply that
the firm ceases to innovate. A different type of
innovation takes place: innovation is oriented
towards increasing efficiency and reducing costs.
In this phase the innovator may need specific
know-how, or complementary technologies or
assets. These complementary technologies and
assets can be generic, meaning they are not spe-
cialized or tailored to the innovation. Often ge-
neric complementary technologies are available
in the market, although they may be protected
by IPRs; in this case the innovator has to bargain
with the owner of the IPRs of complementary as-
sets and technologies. In the case of specialized
complementary assets, either they exist but are
owned by other firms or the innovator may have
to develop them in-house.
If complementary assets are crucial for the op-
eration of the innovation (and the innovation is
easy to imitate or operate in a weak appropria-
bility regime) the possibility for the innovator to
remain competitive and to keep the advantages
of being the first mover depends upon the terms
and conditions on which the required comple-
mentary assets can be accessed (Teece, 1986). In
a weak appropriability regime, the firms that
control and own – through IPRs – complemen-
tary assets, such as complementary technolo-
gies, specialized manufacturing capabilities and
distribution channels, are advantageously posi-
tioned vis-à-vis the innovator. When incumbent
firms possess a strong monopoly over specialized
assets and the innovator is in a regime of weak
appropriability, the profits of the innovation
could conceivably go to the firms possessing the
specialized assets (Teece, 1986; Hart and Moore,
1990). The alternative for the innovator, in this
case, is to attempt to acquire the firms that pro-
duce the complementary assets or to integrate
with them. This alternative might be particularly
favoured if the complementary assets are critical
for the operation of the technological innovation.
When the innovator operates in a strong, tight
appropriability regime, either because he or
she owns a patent that is difficult to imitate or
because the innovation is protected by a trade
secret, he or she enters the market in a strong
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competitive position and keeps the advantages
of being the first mover. If the innovator needs
complementary assets, the strong protection of
his or her intellectual property offers bargain-
ing opportunities to access contractual relation-
ships, such as licences, and service and supply
contracts. The innovator can also consider the
possibility of acquiring complementary assets by
integration, acquisition or merger with the own-
er of those assets. In this case, the innovator is in
a position to capture the benefits arising from
increased demand for the complementary assets
stemming from his or her own innovation. In
practice, the empirical evidence indicates mixed
modes of integration, including contractual rela-
tionships and mergers.
1.10.3 Size of firm
The above discussion should be examined in re-
lation to the size, and economic and technologi-
cal capabilities of enterprises. Frequently, small
firms that are highly technologically specialized
are able to generate new technological innova-
tions, but they lack the specialized assets to op-
erationalize them. In addition, they do not have
time and/or other resources to build the neces-
sary capacity and to enter competitively into the
market. It has been noted that when large firms
possess large specialized and complementary as-
sets, small firms owning IPRs of a relevant tech-
nological innovation are more or less forced to
license it to a large firm, otherwise the latter is
likely to acquire the small enterprise. A good ex-
ample is provided by the development of small
start-up biotechnology firms and pharmaceuti-
cal and agrochemical industries.
The advent of molecular biology and the expan-
sion of biotechnology led to the creation of many
small, high-tech start-up firms with strong capa-
bilities to innovate. However, large pharmaceuti-
cal and agrochemical companies dominate the
channels of distribution and the retail system,
and have been able, on the whole, to keep new-
comers out of the market. Small companies that
have invested heavily in biotechnology R&D were
usually outsiders in the market for agricultural in-
puts and drugs, and they subsequently faced con-
siderable barriers to market entry. This situation
has been further aggravated by the cartelization
of both agrochemical and pharmaceutical firms.
It should be kept in mind that agriculture, agri-
cultural inputs and products including food and
pharmaceuticals are highly regulated areas in
all countries. New products and processes have
to satisfy strict health, environmental and se-
curity standards before being commercialized,
70
and this is usually a long and costly process that
small firms may not be able to afford. This stand-
ardization is often demanded by oligopoly firms.
On one hand, they have developed sophisticated
routines to avoid hazards and to comply with
regulations themselves. On the other hand, they
use the standard setting as a mechanism to block
the entry of newcomers into the industry.
Large and small companies have different inter-
ests. For small firms, intellectual property protec-
tion is crucial. They are not able to scale-up the
process that they invent neither are they able to
commercialize the final product. Thus, they are
dependent on sharing or selling their technologi-
cal innovation to others, often large firms; hence,
they can only get a fair price if their new tech-
nology is protected. For large firms it is different,
they may prefer to keep their innovation a trade
secret in order to prevent rival firms from pursu-
ing the same research avenues.
Large firms can also try to control innovations in
their sector and keep a competitive edge on the
sector by filing generic or very broad patents. It
is in the interest of the innovator to stake a very
broad claim. This enables the innovator to con-
trol and appropriate a larger spectrum of poten-
tial new innovations that can be derived from
the original invention in order to capture a wider
market. Since IPRs concern not only physical, tan-
gible goods but also intangible assets, the paten-
tee tends to establish a rather broad number of
claims in order to deter competitors and to as-
sure the potential future developments associ-
ated with the original patent. A classic example is
the patent awarded to Cohen and Boyer at Stan-
ford University in the United States, in respect of
the recombinant DNA technique.56
The use of broad scope as a barrier to impede the
entry of competitors has, however, the effect of
slowing down the rate of invention and diffusion.
The diffusion of a new technology is affected by
the amount of embodied proprietary knowledge.
Broad scope implies a large proprietary com-
ponent of new knowledge that tends to deter
further technological development and to coun-
teract its diffusion process. A firm or a research
institution may hesitate to enter into a research
project that depends on the use of knowledge al-
ready appropriated by others because of the pos-
sible legal inconveniences. This concern was ex-
pressed by a senior vice-president of CETUS, one
of the most successful biotechnology start-up
firms in those days, who stated that: “[it] would
be unfortunate if patents of a very large scope
are granted … there’s going to be a very severe
chill on innovation” (Lehrman, 1988).

2 The role of intellectual property
rights in the transfer of technology
Given the rising share of knowledge-based prod-
ucts in the global economy, IPRs have become
very important for global trade. Kanwar and
Evenson (2001: 2) argue that:
“Given the shift in the ownership distribution
of innovations away from individuals towards
large corporations in ‘recent decades’, intellec-
tual property protection has arguably become
an even more important stimulus than hith-
erto; for such protection augments both the
means and the incentive to undertake expen-
sive innovation”.57
Realistically, it is unlikely that firms will voluntary
transfer their technology or trade their goods in-
corporating their technology, if there is a high
risk that their products will be copied. Knowl-
edge-intensive innovations, especially, may take
years to develop and improve, and R&D costs are
often very high. In addition, the preparation and
filing of patent applications (and in the case of
pharmaceuticals the clinical trials that must be
carried out in order to obtain marketing approv-
al) is a long and costly process, which can add a
number of years before an innovation can be suc-
cessfully brought to market. Consequently, firms
will be more reluctant to transfer technology and
sell technology products to countries where pat-
ent law or enforcement is weak and copying is
more likely to occur (Branstetter et al., 2005: 8).
A report issued by the Commission on Intellec-
tual Property Rights (2002) indicates that firms’
investment decisions are contingent on a num-
ber of factors and concludes that:
• To a large extent developing countries (that is,
the less technologically advanced developing
countries) will attract low-technology indus-
tries: therefore, IPRs are unlikely to be impor-
tant factors in the investment decision.
• If technologies are more sophisticated, but rel-
atively easy to copy, then IPRs may play, though
not necessarily, a significant role in investment
decisions, if the recipient country has both the
scientific capacity to copy, and if there is a suf-
ficiently large market to justify the costs of
patenting and enforcement (for instance in
the chemical and pharmaceutical industry).
• Studies have shown that the introduction of
IP protection has been associated with an in-
crease in imports, but has not contributed to
the investment in local production.
• In the case of high-technology industries and
for countries with sophisticated technological
Intellectual Property Rights and Technology Transfer
module
capabilities, technology owners may choose
to license their technologies, protected by the
intellectual property regime, rather than in-
vest directly in production.
• Existing IPRs may not really have a large im-
pact on investment flows where it is likely
that other factors will play a larger role.
These include geographical destination, size
of country, security, transparency and infra-
structure.
IP protection can, however, facilitate technol-
ogy transfer under licensing and stimulate trade
(Commission on Intellectual Property Rights,
2002: 23-24).
The promotion of IP protection by industrial
countries in the Uruguay Round was based on
the reasoning that strong IPRs would contrib-
ute to economic growth, because they would
stimulate domestic innovation, enhance flows
of FDI and stimulate TOT. Others asserted that
there was not enough proof (economic theory
or empirical evidence) for such a conclusion (Ab-
bot, 1998: 520). Sell (1998: 222) argued that in-
dustrialized countries simply assume a strong
relationship between IPR and economic growth,
since it is beneficial to their own interests (un-
derlining the need for international harmoni-
zation of IPRs). In an open letter to the Finan-
cial Times a group of scientists contended that
social needs rather than private profits are the
main drivers behind innovation, and that his-
tory shows scientific discovery has long been
greatly influenced by the desire to benefit soci-
ety (Rasiah, 2002: 25).
Viewpoints on the effects of strengthened IPRs
on economic development are widely disparate,
ranging from outright opposition to reforming
IPRs, to a strong belief that by doing so innova-
tion and growth will be encouraged. This section
aims to clarify the relationship between IPRs and
technology transfer by analysing a number of
empirical and econometric studies.
2.1 IPRs and foreign direct investment
In countries with weaker IPRs, there “may also be
substantial flows of FDI”, although these tend to
be for the purpose of “establishing sales and dis-
tribution outlets” rather than high-value produc-
tion or research and development facilities (Park
and Lippoldt, 2008: 4).
A study by Park and Lippoldt (2008) highlights
that between 1995 and 2005, following the adop-
tion of the TRIPS Agreement, developing coun-
tries and LDCs experienced a greater percentage
71
3 Intellectual Property Rights and Technology Transfer
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increase in IPR strength than the developed world
did. In addition, during this period, the develop-
ing and least developed countries experienced
large growth in flows of inward FDI, merchandise
and service imports, patent applications by for-
eigners, as well as increases in their R&D to gross
domestic product (GDP) ratios and patenting
by local residents. The empirical analysis in this
study centres on the evaluation of two hypoth-
eses regarding the experience of the developing
world with strengthened IPRs:
• IPRs stimulate technology transfer, particular-
ly the transfer of technology-intensive goods,
services and capital.
• IPRs stimulate local innovation both directly
and indirectly by stimulating the transfer of
technologies that foster innovation.58
The hypotheses address the net empirical ef-
fects of IPRs.59 The main empirical results sup-
port a positive assessment of both hypotheses.
Importantly, the study does not merely focus on
patents, but also on trademarks and copyright.
The study also found that trademark protection
in developing countries has been seen as an im-
portant step forward for reassuring investors in
manufacturing industries that they can combat
imitations (Park and Lippoldt, 2008: 8).
The first empirical evidence on the relationship
between the protection of IPRs in developing
countries and FDI flows is provided by Mans-
field.60 His findings are as follows: “the strength
or weakness of a country’s system of intellectual
property protection seems to have a substantial
effect, particularly in high-technology industries,
on the kinds of technology transferred by many
US firms to that country. Also this factor seems
to influence the composition and extent of US
direct investment there, although the size of the
effects seems to differ from industry to industry”
(Mansfield, 1994: 1).
Javorcik confirms that stronger patent rights
have a positive and statistically significant effect
on the probability of foreign investment in high-
technology sectors but finds that there is “an in-
significant effect in other sectors” (Javorcik, 2004:
39-62).
According to Park and Lippoldt, stronger patent
protection in developing countries is associated
with a greater expansion of United States op-
erations in the chemical, machinery, service, and
information industries in developing countries.
This reinforces the important role of IPRs in the
service industry. However, it is not associated
with a greater expansion of United States opera-
72
tions in the electronic and computer industries
of developing countries. It may be that United
States FDI in the electronics and computer indus-
tries of developing countries is largely for sales
and distribution purposes, so that there is less
sensitivity to the strength of local patent rights.
Nonetheless, IPR enforcement in general does
matter to all of these sectors, but the extent of its
importance tends to be sector specific (Park and
Lippoldt, 2008: 23).
It should be noted that this particular area of eco-
nomic research is relatively new and that empiri-
cal studies are needed. Economic research is con-
strained by insufficient or inadequate data and
the results are often ambiguous.61 This type of re-
search may assist policy makers in deciding what
strategies to follow in setting IPR and comple-
mentary policy reforms that help minimize costs
and maximize benefits. It requires the measure-
ment of the existence and strength of IPRs on a
consistent international basis. This is difficult,
since IPRs are perceived to fall into the category
of general rules supporting (or hindering) the le-
gal operation of business, along with competition
policies, environmental regulations and labour
standards. And unlike taxes and tariffs, IPRs are
not readily measurable. In addition, IPRs interact
in complex ways with other policies (in particular,
competition and investment policies) in reaching
their full effectiveness; thus, similar IPR regula-
tions in different countries can have diverse ef-
fects because of variations in market structure
and preferences (Maskus, 2000: 87-88).
As discussed above, the international IPR frame-
work has undergone significant changes over
the last two decades. Consequently, many devel-
oping countries have been obliged to radically
change their domestic IP laws to adhere to the
obligations derived from the multilateral trade
negotiations and other bilateral and regional
trade agreements. Knowledge and resources are
required to implement new rules into domes-
tic legislation and to increase understanding of
the potential impact of IPR policies and rules on
socio-economic development (Fink and Maskus,
2005: 2).
2.2 IPRs and trade: How trade-related are IPRs?
The inclusion of IPRs in the agenda of the multi-
lateral trade negotiations of the Uruguay Round
and the subsequent adoption of the TRIPS Agree-
ment exemplified recognition of the increasing
implications that technology and IPRs have for
international trade and concern about the use
of IPRs to segment international markets. In
general, all intellectual property legislation al-

lows rights holders to exclude competing foreign
substitutes of their products, even when such
substitutes are legitimately made under the leg-
islation of each respective country. These substi-
tutes are normally referred to as “grey goods” in
the context of trademark goods. This term is also
closely related to parallel imports, international
price discrimination, and in general, the pricing
practice and policy of the innovating firm which
eventually leads to dumping.
It is argued by property rights holders that the
segmentation of markets is needed in order to
prevent free-riding, and to facilitate efficient dis-
tribution systems. On the other hand, the use of
IPRs allows the holder to practice third degree
price discrimination, meaning the charging of
differing prices to different groups of consum-
ers based on their exogenous characteristics
(Hal, 1989). IPRs confer exclusive rights to supply
particular goods and provide firms with legal in-
struments for segmenting international markets
by excluding parallel imports. Consumer price
elasticities for goods embodying IPRs commonly
vary with income levels; therefore, an IPR holder
can establish a higher price in markets where the
elasticity of demand is low, relative to other mar-
kets. Countries with low-elasticity markets for a
specific patented product are adversely affected
by this type of discrimination, since they must
pay a higher price for it.
A different situation arises from the preferences
for product quality in different markets. Normal-
ly, local producers are better informed than the
patent holder about domestic consumer prefer-
ences and are better able to adapt the product to
these preferences. In this case, the patent holder
may consider it more convenient to license the
innovation to a local firm. The adapted product
may vary slightly across countries and a price dif-
ferential may arise between countries as a result
of this, reflecting differences in the willingness of
consumers to pay for the product. In a situation
where country prices differ, the possibility of free-
riding arises, especially when parallel imports of
a product from a third country into the domestic
market are passed off as local products.
Dumping cases happen frequently with new high
technology. The innovating firm may attempt to
discourage domestic firms from engaging in the
development of a competing product by estab-
lishing a large market share. With products that
contain proprietary technology, firms may en-
gage in dumping in the early stages of the prod-
uct cycle. Two situations can arise: The first occurs
when two competing firms offer a similar prod-
uct, but incorporate different standards. This is
Intellectual Property Rights and Technology Transfer
module
illustrated by the VHS versus Betamax video case:
two firms competed with two different standards
or formats in the early 1970s.62 In this situation,
both firms needed to attract as many consumers
as possible to their respective products in order
to create a large customer base in order to recoup
investment in R&D. The second situation occurs
when an innovating firm regularly exports at
prices below marginal cost in order to maximize
sales rather than profit, in order to capture a large
market. This practice is called “head-on-dump-
ing”. It was employed in export markets in the
1980s by Japanese semiconductor and electronics
firms (Hoekman and Kostecki, 2001).
Literature endorses the common assertion that
trade is an engine of growth. A study by Acharya
and Keller (2007) demonstrates that imports are
an important channel of technology transfer, al-
though the volume of transfer varies by country,
being greater in countries with “stronger absorp-
tive capacities”.63 Eaton and Kortum (2002) sup-
port the findings of this research and argue that
trade can increase the productivity of importing
countries by increasing their access to foreign
inputs and technologies. Moreover, studies have
shown that international trade flows increase,
especially in “patent-sensitive industries”, as a
result of enhanced patent rights among middle-
income and large developing countries, but not
among poor countries (Smith, 2001, in Hoekman
et al., 2005).
Maskus and Penubarti (1995) focus on the effect
of IPR regimes on trade, in particular whether the
distribution of bilateral trade among nations de-
pends upon the IPR regimes of importing coun-
tries. They have found that within the group of
“large developing countries”, strong IPR regimes
attract larger than expected flows of imports
from OECD countries.
Fink and Primo Braga64 show that stronger IPRs
have a significant positive effect on total trade,
but that this effect depends on “the type of tech-
nology” involved. The Fink and Primo Braga study
1999 looks at two different kinds of aggregates:
total non-fuel trade and high-technology trade.
In addition they use the Ginarte and Park index
to measure the strength of IPR regimes. The Gi-
narte and Park index grades the national IPR
regimes of 110 countries on a scale from zero to
five. In order to calculate the country’s place on
the list, Ginarte and Park (1997) created five cat-
egories:
• Extent of coverage
• Membership in international patent agree-
ments
73
3 Intellectual Property Rights and Technology Transfer
module
• Provisions for loss of protection
• Enforcement mechanisms
• Duration protection.
The study found that a system of strong IPRs has a
significant positive effect on bilateral trade flows
for total non-fuel imports and exports (Fink and
Primo Braga, 1999: 26). However, it did not find
this same effect on high-technology trade. Fink
and Primo Braga (1999: 28) argue that this out-
come is somewhat surprising: they would have
expected a positive trade effect for knowledge-
intensive goods. They offer the following possible
explanations for their findings:
• There is a possibility that strong IPRs cause
high-technology firms to serve foreign mar-
kets through FDI (substituting foreign trade);
• The Ginarte and Park index does not correctly
capture the IPR effect;
• There is a possibility that strong market
power effects, in the case of high-technology
goods, may offset positive market expansion
effects caused by stronger IPR regimes;
• Some knowledge-intensive goods are insensi-
tive to the destination country’s IPR regime;
as a result, other means than strengthening
IPRs may be more important in appropriating
investment in R&D (for instance, first-mover
advantage or rapid movement down the
learning curve).
The Fink and Primo Braga findings are similar to
those of other studies conducted by Maskus and
Penubarti (1995: 227-248) and Smith (1999, in Fink
and Maskus, 2005: 7), which also demonstrate a
positive link between trade and strong IP protec-
tion. However, Maskus and Penubarti did not find
such a link for very patent-sensitive industries and
Smith found no such link in countries that face
no threat of imitation. One may interpret these
results in a variety of ways. First, it seems likely
that TNCs do not base their export decisions on
IPRs in the poorest countries, where local threats
of reverse engineering are weaker. Patent rights
are more important in middle-income, large de-
veloping countries, where imitation is more likely.
As these countries reduce the threat of imitation
through stronger patents, foreign firms are more
likely to expand their volumes of trade. Second,
the products of many high-technology industries
are inherently difficult to imitate, so these trade
flows are less responsive to IPRs than those in
medium-technology or mature-technology sec-
tors. Finally, high-technology firms may decide to
serve foreign markets through FDI and licensing,
so that exports in these industries may be little
affected by variations in the degree of patent pro-
tection (Fink and Maskus, 2005: 7).
74
In contrast to Fink and Primo Braga (1999), Mans-
field (1994 and 1995) found that high-technology
industries require tighter IPR regimes. However,
IPRs alone may not stimulate knowledge trans-
fers. Bascavusoglu and Zuniga (2001) examined
the exports of French technology services to 19
countries and sectors in 1999. They found that
foreign IPRs can enhance such exports if the des-
tination markets have commercial potential in
terms of large markets and strong technological
capacities. Stronger IPRs in low-income countries
have an insignificant effect and may even deter
knowledge flows in low-technology sectors.
Existing IPRs may have an impact on interna-
tional trade flows. For instance, a company may
decide not to export its patented good into a
certain foreign market if it is likely that potential
pirates can diminish its profitability in that mar-
ket because of lax IPRs. In line with this reason-
ing, one would expect that an enhancement in
patent regulations in one country would result
in an increase of imports “as foreign firms would
face increasing net demand for their products
reflecting the displacement of pirates. On the
other hand, a firm may choose to reduce its sales
in a foreign market as a response to stronger IPRs
protection because of its greater market power
in an imitation safe environment” (Fink and Pri-
mo Braga, 1999: 2). Thus, we can conclude that
contesting market expansion and market power
effects imply that “the overall effect of IPRs pro-
tection on bilateral trade flows is theoretically
ambiguous” (Maskus and Penubarti, 1995, in Fink
and Primo Braga, 1999: 2). However, the reality is
that IPR enforcement, adherence to the existing
IPR treaties and TRIPS-Plus provisions play an im-
portant role in negotiations on FTAs and interna-
tional investment agreements (IIAs).
Maskus and Penubarti (1995) found that the ef-
fect of market expansion tends to dominate the
power of the market so that stronger IPRs on bal-
ance expand trade: “[O]ne reason may be that
the market power effect of IPRs dominates in
high-technology sectors. The plausibility of this
is that firms in technology-intense industries
may already possess some market dominance
from their technological superiority. Stronger
patent protection would then largely raise their
rents” (Park and Lippoldt, 2008: 10). In the case of
Hungary, which adopted higher standards of IP
protection to meet the accession requirements
of the EU, and subsequently most of the locally
owned firms in the pharmaceutical industry were
taken over by foreign multinationals, the market
share of local firms shrank from 70 per cent to
30 per cent (Raman, 2005). Another possibility
could be that stronger IPRs lead firms to switch

between different modes of technology transfer,
for example, from exporting (trade flows) to FDI.
However, many studies find that stronger IPRs
can stimulate trade in high-tech products. Smith
(1999) found that the impact of stronger patent
protection on trade depends on the importing
country’s capacity to imitate. In countries with
weak capacity to imitate, the weak capacity acts
as a de facto form of protection. Firms would not
actually need IPRs to appropriate the returns to
their innovation. Thus, in such circumstances
stronger patent rights provide greater market
power, which could outweigh any market expan-
sion effects. On the other hand, the empirical
results in Smith confirm that where the capac-
ity for imitation is high, a strengthening of IPRs
increases the flow of trade. This is confirmed in
Higino Schneider (2005).
Park and Lippoldt (2008) found that stronger
levels of patent protection make a significant
positive difference to the influx of high-tech
products, like pharmaceutical goods, chemicals,
aerospace, computer services, information, office
and telecommunications equipment, as well as
optics and precision equipment. Thus, goods
that are technology-intensive are particularly af-
fected by stronger patent protection in develop-
ing countries. For LDCs, the qualitative and quan-
titative impacts of patent rights on merchandise
imports are weaker (Park and Lippoldt, 2008: 22).
Patent rights are a dominant influence because
service imports are more sensitive to levels of
patent protection, holding other variables con-
stant. Most of the control variables (index of free
trade, GDP per capita, IPR enforcement, and legal
effectiveness) have a positive effect on service
imports. The possibility to positively engage in
free trade influences the merchandise imports
of developing countries, but may induce sub-
stitution effects in developed countries and in
LDCs. That means that they encourage a switch
from merchandise imports (trade flows) to in-
ward FDI.
Park and Lippoldt found that in terms of service
imports, patent protection and IPR enforcement
are positively associated with the importation of
communication services, computer services and
royalties. Their results suggest that stronger IP
protection helps attract imports of services that
are knowledge-based or technology-intensive.
Imports of equipment and materials may help
stimulate R&D to the extent that increased R&D
results in a rise in innovative outputs, for which
local residents file for patent protection, and that
enhanced resident patenting will be positively
associated with merchandise imports (Park and
Lippoldt, 2008: 24).
Intellectual Property Rights and Technology Transfer
module
2.3 Sector specificity, technology and
the role of IPRs
Mansfield (1994 and 1995) indicates that in rela-
tively high-technology industries like chemi-
cals, pharmaceuticals, machinery, and electrical
equipment, a country’s system of IP protection
often has a significant effect on the amount and
kinds of technology transfer and FDI. He points
out that when assessing the influence of IP pro-
tection, the type of industry (sector) matters, as
well as the type of activity (e.g. R&D, assembly
or sales activities). For instance, in the chemical
and pharmaceutical industry, over 80 per cent of
the IPR managers found the strength or weak-
ness of IP protection to be important with regard
to investments in R&D facilities, but only 20 per
cent said it was important with regard to sales
and distribution outlets. For investment in ru-
dimentary production65 and assembly facilities,
about 30 per cent said that such protection was
important. For investment in facilities to manu-
facture components or complete products, about
50 to 60 per cent said it was important. For all
types of investments other than in sales and dis-
tribution outlets, the chemical industry (includ-
ing the pharmaceutical industry) has the largest
percentage of firms that regard IP protection as
important, followed by the electrical equipment,
metals, and machinery industries. IP protection
matters the least for the food and transportation
equipment industries (Mansfield, 1994: 22.).
Furthermore, research indicates that the strength
or weakness of an IPR regime influences invest-
ment in joint ventures where they “contributed
advanced technology” (Mansfield, 1995: 5), espe-
cially in the chemicals and pharmaceutical in-
dustries, and to a lesser extent in the machinery
and electrical equipment industries. In all three
countries addressed by Mansfield – the United
States, Germany and Japan – it was found that if
levels of IP protection are perceived as low, they
affect business decisions on whether to transfer
the “newest or most effective technology” (Mans-
field, 1995: 7) to wholly-owned subsidiaries. Also,
in relation to licensing their technology, firms are
reluctant to transfer their newest or most effec-
tive technology to unrelated firms in cases where
the level of IP protection is weak. This has proven
true for the chemical and pharmaceutical indus-
try, but to a much lesser extent for the machinery
and electrical equipment sector.
Mansfield also points out that national laws
protect various industries in different ways. In
addition, the competence and aggressiveness
of one country’s firms may differ from industry
to industry: there is often little correlation be-
75
3 Intellectual Property Rights and Technology Transfer
module
tween one industry’s evaluation of the strength
or weakness of IP protection in a particular coun-
try and another industry’s evaluation of the same
country.67 For instance, in some industries, such
as metals and transportation equipment, it is rel-
atively difficult to copy a firm’s technology with-
out many expensive and complex complemen-
tary inputs, while in the pharmaceutical industry
it is relatively easy for local firms to imitate an
innovator’s new products”.
Mansfield argues that research-intensive firms,
with products or processes that are relatively
easy to imitate, are more reluctant to make
substantial investments or transfer advanced
technology to countries with weak IP protection.
Nonetheless, most of the firms addressed (espe-
cially the ones outside the chemical industry), as-
serted that IP is only one of a number of factors
influencing their investment decisions. A firm
with limited R&D investment perceives IP to be
relatively unimportant. IP is regarded as more
important in decisions relating to the transfer of
advanced technology, rather than in investment
decisions. Many chemical industries are reluc-
tant to transfer relatively new or advanced tech-
nology to anything other than wholly-owned
subsidiaries. If IP protection is perceived as weak,
it is more likely that investment in wholly-owned
subsidiaries will focus on sales and distribution
outlets or to rudimentary production and assem-
bly facilities, and not to R&D facilities.
A potential benefit of the strengthening of IPRs is
that such protection may induce foreign firms to
produce and sell technologically advanced goods
in the IPR reforming country. This was reaffirmed
in interviews with TNC managers who said that
technology transfer within TNCs is sensitive to
the perceived strength of IP protection (Mans-
field 1994; Lee and Mansfield 1996). In Lee and
Mansfield’s research (1996), managers expressed
that they generally sought to avoid the transfer
of strategically sensitive technology to unaffili-
ated parties, regardless of the perceived strength
of the IPR regime.
2.4 IPRs and innovation
How can we measure the impact of IPRs on the
innovative capacity of a country’s industrial
sectors? Statistics on licensing offer one way of
measuring the use of IPRs, but this information
is not easy to obtain as licensing is primarily a
private activity. R&D data may be another way
of measuring, but may not always be available
when undertaken by the private sector. Another
common method is to look at the statistics gath-
ered by IP offices on the number of trademarks
76
and patents filed over a period of time in a coun-
try by its residents (as opposed to non-residents),
as well as the effects of IPR reform on the number
of trademarks and patents filed. An important
limitation is that this approach does not take
account of other types of IPRs, such as copyright,
trade secrets, geographical indications, know-
how, databases or research data compilations.
The number of patents registered does, however,
provide a rough indication on the importance at-
tached to innovation and the role local creation
and innovation plays within a certain territory
(Yap, 2006: 8; WIPO, 2011b).68
However, it cannot be assumed that a greater
number of patents equates to higher levels of
inventive activity. For instance, a report prepared
for the Council on Foreign Relations (a non-
partisan think tank on the foreign policy of the
United States) stated that although the number
of United States patents had increased, there
was no available evidence that enhanced patent
protection had stimulated innovation. The report
concluded that except for the pharmaceutical,
biotechnology and machinery industry, invent-
ing firms did not view patents as crucial for their
technology investment decisions (Maskus, 2006,
in Kamperman Sanders, 2007). That is why the
apparent link between strong IP protection (both
in terms of law and enforcement) and inventive
activity and investment has to be approached
with caution.69
Kanwar and Evenson (2001) studied the factors
behind technological change, and their prime re-
search question was whether a regime of strong-
er intellectual property protection encourages
innovation.70 They concluded that the existence
of IPRs provides a stimulus for innovation. They
looked for an empirical relation between the
protection of intellectual property (proxied by an
index of patent rights) and technological change
(proxied by R&D investment expenditure) and
found that the former encourages the latter, in-
sofar as IP protection was found to have a strong
positive association with R&D investment.
Their study also showed that countries with
high educational levels, ceteris paribus, invest
significantly more in R&D. They established that
the strength of IPR is positively associated with
R&D. Thus, they found that countries with strong
IP protection tend to have larger proportions of
their GDP devoted to R&D (Kanwar and Evenson,
2001: 18). They argued that their research results
provide some evidence for developing countries
that adherence to the TRIPS Agreement may be
important to them in the long run. However,
they stress that the strengthening of the laws

in the statute books should be reflected in prac-
tice through effective enforcement (Kanwar and
Evenson, 2001: 4).
Higino Schneider also examined the role of high-
technology trade, IPRs and FDI in determining na-
tional rates of innovative and economic growth.
The study indicated that (Higino Schneider, 2005:
529-547):
• High-technology imports are positively re-
lated to levels of domestic innovation both in
developed and developing countries;
• Foreign technology has a stronger impact on
per capita GDP growth than domestic tech-
nology;
• IPRs affect the innovation rate, but this impact
is more significant for developed countries;
• The results regarding FDI are inconclusive.
A study of the Association of Southeast Asian Na-
tions (ASEAN)71 found that the majority of ASEAN
countries have only made limited use of IPRs as
an economic development tool. The study indi-
cates that there is very little, if any use of IP for
technology collaboration and development, rais-
ing finance, licensing and technology transfer
where a lot of the value of IP lies locked up (Yap,
2006: 11). Myanmar, Cambodia, the Lao People’s
Democratic Republic and, to a lesser extent, Viet
Nam and Thailand, face language barriers, which
affect communication with potential technol-
ogy partners (even within ASEAN). Moreover, lack
of access to IPR information in local languages
hinders the utilization, understanding and de-
velopment of intellectual property concepts.
Some countries, including Myanmar, Cambodia
and the Lao People’s Democratic Republic, do not
even have local intellectual property administra-
tion systems in place. The study concludes that
ASEAN countries are in need of understanding
and awareness (also at inventor/manager level)
of IPR concepts and need time to adopt these
concepts to local development needs. The ASEAN
Secretariat, in collaboration with the German
Federal Government, initiated a joint project to
increase capacity building for the ASEAN Secre-
tariat in relation to IPRs. The project aimed to
build up regional institutional capability within
the ASEAN Secretariat for effective and timely
implementation of the ASEAN Economic Com-
munity Blueprint (AEC Blueprint).72
Park and Lippoldt (2008) found that developing
country patent applications (by both residents
and non-residents) and expenditure on R&D (as
a percentage of GDP) tend to have a positive and
significant relationship to the strength of patent
rights. Furthermore, imports of goods and servic-
Intellectual Property Rights and Technology Transfer
module
es and FDI inflows are also significantly and posi-
tively associated with non-resident patenting in
developing countries. This association suggests
that foreign imports and FDI contain patentable
technological assets for which non-residents
have a vested interest in seeking protection. Thus,
stronger patent rights in developing countries
appear to have the potential not only to stimu-
late international technology transfer in general,
but also to encourage the transfer of new tech-
nologies.
Technology transfer via trade flows and FDI has
been one important input in developing local
technological capabilities in Brazil, the Russian
Federation, India and China (BRIC), thus stimu-
lating economic growth. However, the study also
points out that IPRs do not operate in a vacuum:
there are complementary factors that help facili-
tate technology transfer. These include the qual-
ity of infrastructure, government policies and
regulations, size of country and market struc-
ture. There are also complementary factors that
help facilitate innovation, such as the quality of
research institutions and the extent of collabo-
ration among different research organizations.
(Park and Lippoldt, 2008: 5). Similarly, Higino Sch-
neider (2005) concluded that the rate of innova-
tion is determined by market size, high-technol-
ogy imports from developed countries, the stock
of human capital, the level of R&D expenditure,
infrastructure and the level of IP protection.
Copyright and trademark protection rights are
less strongly associated with technology trans-
fer than patents. As a result, strengthening these
rights has less of an impact on FDI. Nonetheless
in some sectors, in particular the software in-
dustry, copyright protection may be more of a
decisive factor as it is often the only legal means
of protecting an intellectual property asset. For
example, in the EU, computer programmes are
not patentable, but they may be protected under
copyright laws). In the case of trademarks, a well-
established system of protection and enforce-
ment might also be a factor among more decisive
macro-framework considerations that influence
FDI decisions.
Park and Lippoldt (2008) found that the quality
of research institutions is important for resident
patenting, whereas university-industry collabo-
ration is not a statistically significant determi-
nant. The latter may be more important in the
R&D stage, where firms and academia collabo-
rate on basic research. At the patenting stage,
firms may want to keep R&D results confidential,
and rely less on collaboration with academia. In
most countries, the United States Bayh-Dole type
77
3 Intellectual Property Rights and Technology Transfer
module
of law does not exist (encouraging publicly fund-
ed university research to be patentable).73
Patent protection is a statistically significant de-
terminant of the number of patent applications
filed by residents. Moreover, each of the modes of
technology transfer, including inward FDI, mer-
chandise imports and service imports, is also a
significant determinant of resident patenting
when considered individually. Park and Lippoldt
found that when all three modes are considered
jointly, merchandise imports are most significant.
Imports of equipment and materials may help
stimulate R&D; if enhanced R&D results in higher
innovative outputs, for which local residents file
for patent protection, increased resident patent-
ing will be positively associated with merchan-
dise imports (Park and Lippoldt, 2008: 24).
Different elements play a role in explaining in-
novation in developing and developed countries:
“Market size and infrastructure are the domi-
nant factors in explaining innovation in de-
veloping countries; while high-technology
imports, human capital, and R&D expendi-
tures appear to have a stronger impact on de-
veloped countries. [...] They suggest that IPRs
have a stronger impact on domestic innova-
tion for developed countries and might even
negatively impact innovation in developing
countries. These results may be indicative of
the fact that most innovation in developing
countries may actually be imitation or adap-
tive in nature. Therefore, providing stronger
IPRs protects foreign firms at the expense of
local firms. The policy implication here is not
to discourage intellectual property protec-
tion in developing countries, but to generate
incentives for its strengthening in a way that
appropriately reflects domestic development
interests. Innovative activities and IPRs are
complementary in nature [one strengthens
the other; author’s note]; therefore, developed
countries would benefit by supporting R&D
activities in developing countries” (Higino
Schneider, 2005: 543).
However, it has been shown that: “foreign tech-
nology (measured as the growth of per capita
high-technology imports) has a stronger impact
on per capita GDP growth than domestic tech-
nology” (Higino Schneider, 2005: 543). There are
also other factors that impact upon innovation
in developing countries, many of which are not
supported by the kinds of data that are cur-
rently available. It has been found, for instance,
in innovation surveys conducted among low-
performing developing countries, that collabo-
78
ration variables and firm level prototyping and
design capabilities have a significant impact on
their ability to innovate (Oyelaran-Oyeyinka and
Gehl Sampath, 2010; Lundvall et al., 2010). Data
on these variables are hard to find and uniform
methodologies may take some more time to
materialize.
2.5 TRIPS, trade and technology transfer
From the review of the literature presented
above, it can be concluded that the impact of
stronger IPRs on technology transfer depends on
the level of development of the receiving country,
its socio-economic circumstances, the comple-
mentary policies in place, the type of industry
(sector) involved, the quality of the technology
and the mode of technology transfer. Hence, it
can be argued that IPR regimes should ideally
be highly differentiated between countries, and
flexible to the needs of different sectors within
countries. However, international negotiations
on IPR regulations have moved towards increas-
ing standardization across countries and sectors,
and TRIPS was a major milestone in this trend.
It has been suggested that the recent trend of
upward protection and enforcement of IPRs ad-
versely affects the conditions for access, costs
and the use of technology in developing coun-
tries, and therefore, the prospects for economic
growth and development.
These recent trends, initiated thanks to TRIPS,
have reinforced the proprietary character of IPRs,
strengthening the position of technology hold-
ers, while at the same time weakening their dif-
fusion role. This situation may result in increased
royalty payments and impositions of restrictions
on licences as well as of anti-competitive practic-
es in contractual licences related to IPRs. The fact
that the exploitation of IPRs could catalyse anti-
competitive behaviour and be used by IPR hold-
ers to impede competition has been discussed
mainly in academic and political spheres.74
The use and exploitation of IPRs may result in
trade restrictions or can adversely affect the
transfer and dissemination of technology and
knowledge. These are called restrictive contracts
or concerted practices (UNCTAD-ICTSD, 2005).
Anti-trust laws and regulations are used to deal
with this anti-competitive behaviour, but the ex-
perience of developing countries in dealing with
these matters is limited.
In this situation, developing countries can refer
to Section 8 of the TRIPS Agreement that estab-
lishes some conditions for the control of anti-

competitive practices that “constitute an abuse”
of IPRs and “restrain competition, [which] may
have adverse effects on trade and may impede
the transfer and dissemination of technology”
(Article 40.1).
Depending upon the effect caused, anti-compet-
itive practices can be of three types (UNCTAD-
ICTSD, 2005):
• Abuse of intellectual property rights by holders;
• Unreasonable restraint of trade;
• Adverse effects on the international transfer
of technology.
TRIPS Article 40 permits member countries to
adopt, consistent with the other provisions of
the agreement, appropriate measures to prevent
or control practices such as exclusive grant-backs,
conditions preventing challenges to validity75
and coercive package licensing.76
3 Intellectual property rights and
development: Who gains from
intellectual property protection?
A study by Branstetter et al. (2005) indicates that
IPR reform increases royalty payments and R&D
expenditures of United States TNC affiliates, as
well as the level and growth rate of patent fil-
ings by non-residents. Therefore, this study in-
dicates that the reform has very positive results
for technology owners who seek opportunities
to explore new markets. The study also sug-
gests these results collectively imply that United
States multinationals respond to changes in
IPR regimes abroad by significantly increasing
technology transfer to IPR-reforming countries.
Nevertheless, these results are not sufficient to
show that IPR reform is welfare enhancing for
IPR-reforming countries. For instance, the study
“does not consider the impact of reforms on lo-
cally owned firms that may be displaced after
reforms nor does it examine the effects of the
reforms on the pace of innovation in non-re-
forming countries” (Branstetter et al., 2005: 27).
There is also limited evidence to show to what
extent IPR reform impacts on domestic innova-
tion or to what extent newly introduced tech-
nologies diffuse to local industry. Branstetter et
al. found that stronger IPRs could have both mar-
ket expansion effects, enabling the rights holders
to exclude imitators and enjoy a larger market
for their products, and market power effects, in-
creasing royalty payments on technologies by
constraining the quantity supplied (through in-
creased prices), resulting in immediate positive
results for right-holders.
Intellectual Property Rights and Technology Transfer
module
Fink and Primo Braga argue that – from a static
partial equilibrium point of view – trade flow
from the host (source) country is likely to benefit
from strong IP protection, because it can cap-
ture increased monopoly profits from the sale of
goods abroad (Fink and Primo Braga, 1999: 21-22).
According to Branstetter et al. the supporters
of strong IP protection believe that IPR reform
will induce more innovation and foster rapid
economic growth. They argue that if such ad-
ditional innovation is mostly concentrated in
advanced countries, a strengthening of IPR will
accelerate TOT between countries, ensuring that
all countries will benefit.77 Their findings reveal
that royalty payments for technology transferred
to affiliates increase at the time of reforms, as
do affiliate R&D expenditures and total levels
of foreign patent applications. Branstetter et al.
examine how technology transfer within United
States multinationals has changed in response
to a series of IPR reforms carried out by 16 devel-
oping countries from 1982 to 1999. Throughout
the 1980s and 1990s, multiple countries under-
took legal reforms, substantially changing their
patent laws. According to the authors:
“Each reform can be classified according to
whether or not it expanded or strengthened
patent rights along five dimensions: (1) an
expansion in the range of goods eligible for
patent protection; (2) an expansion in the ef-
fective scope of patent protection; (3) an in-
crease in the length of patent protection; (4)
an improvement in the enforcement of pat-
ent rights; and (5) an improvement in the ad-
ministration of the patent system” (Branstet-
ter et al., 2005: 14).
The study showed that increases in royalty pay-
ments and R&D expenditures are concentrated
among affiliates of parent companies that used
United States patents extensively prior to the re-
form, and are, therefore, expected to value IPR re-
form most. Increases in royalty payments exceed-
ed 30 per cent over the 17-year period studied. The
authors also found that R&D spending (viewed as
complementary to technology imports from the
parent firms) increases after IPR reform. In addi-
tion non-resident patenting also increased in the
post-IPR reform period. However, no change in
resident patent filings was observed.
3.1 IPRs and level of development
Research has shown that as developing coun-
tries become more technologically advanced
they need access to more sophisticated, higher
performance technologies. Developed countries
79
3 Intellectual Property Rights and Technology Transfer
module
provide stronger IP protection than developing
countries.78 Research by Ginarte and Park has
shown that the underlying factors which influ-
ence patent protection levels are the country’s
level of R&D activity, market environment, and
international integration, which also correlate
with its level of development. The research has
demonstrated that R&D activity influences pat-
ent protection levels only after a country’s re-
search system reaches a critical size. Therefore,
it is important to foster the development of re-
search capacity when increasing patent protec-
tion levels in countries with lax IP protection, in
order to create incentives for protecting patent
rights (Ginarte and Park, 1997).
Not surprisingly, technology that is still develop-
ing and improving is more difficult to obtain than
more mature technologies. Demand for more ad-
vanced technology, once a country reaches a cer-
tain threshold level of development, may result
in internal and external pressure to increase lev-
els of IP protection, especially patent protection
(Correa, 1999: 12). An UNCTAD case study (2006a:
3) indicated that:
“In the early stages of industrial develop-
ment, countries can rely on imported tech-
nology and simple modifications, but success
may depend upon local capacity to assimilate
foreign technology as well as to upgrade and
adapt it to local needs and the local environ-
ment. This may involve ‘learning by doing’ or
‘trial and error’. ... All countries borrow ideas
and information from others that have more
advanced knowledge in the field of interest
in order to quickly raise their technological
standards. Countries use public scientific and
technological institutions to acquire, adapt
and diffuse technologies in the early stages.
As the industry develops, complex relation-
ships develop between knowledge developer,
specialized technology suppliers, marketing
agents and distributors. At this stage, tech-
nology is needed not only to boost productiv-
ity but also to meet the demands of distribu-
tion channels and international markets”.
According to Fink and Maskus (2005: 4) the ca-
pacity to absorb technology is important in de-
termining how influential the role of IPRs is in
establishing economic growth:
“A weak IPR regime might allow domestic
firms to imitate foreign technologies and
thereby contribute to economy wide produc-
tivity and income growth. That perspective
assumes, however, that firms can master all
components of new technologies, includ-
80
ing both codified knowledge and know-how,
without the participation of foreign intel-
lectual property holders. If that were not the
case, stronger IPRs could be better suited to
promoting technology diffusion, by enhanc-
ing access to knowledge-intensive foreign
inputs and promoting formal technology
transfer through joint ventures and licensing
agreements”.
In determining whether or not a country’s sys-
tem of IP protection is too weak, Mansfield (1994:
12) concludes that TNCs have a particular interest
in three questions:
• Can the country’s laws protect their technolo-
gy? (For instance, some countries do not allow
chemical or drug products to be patented.)
• Is there an adequate legal infrastructure in
the country? (Many developing countries con-
tain few patent attorneys or other specialists
in this area.)
• Do the relevant government agencies in the
country enforce the laws and provide prompt
and equitable treatment to foreign firms?
Falvey and Foster (2006) argue that in the long
run stronger IP protection can reap rewards,
in terms of greater domestic innovation and
increased technology diffusion, in developing
countries where there is sufficient capacity to
innovate. However, in developing countries with-
out such capacity, it has little impact on innova-
tion and diffusion, and in fact may impose addi-
tional costs.
Hence, the level of development of a particular
country should be a factor taken into consid-
eration while deciding on the appropriate level
of IPR legislation. Countries at different stages
of development may use the flexibilities in the
TRIPS Agreement to try to maximize net poten-
tial benefits for their development.
The impact of IP protection on growth, innova-
tion and technology diffusion in developing
countries is likely to depend upon a number of
factors. While stronger IP protection in the poor-
est countries is not likely to lead to substantial
benefits in terms of innovation or technology
diffusion, the administrative cost of developing
a patent system and the enforcement of TRIPS,
along with the potential abuses of market power
in small closed markets suggests that such coun-
tries could lose out from TRIPS. Stronger IP pro-
tection in the poorest countries may also inhibit
or lengthen the imitative stage of development
that seems to be a common stage in the develop-
ment of innovative capacity in many industries.

Policies aimed at improving the business envi-
ronment and encouraging imports of technol-
ogy embodied in goods could potentially reduce
costs, though their probable impact on other
development-related goals needs to be carefully
weighed. In middle-income developing countries
the potential for benefits from TRIPS is stronger.
Here existing firms engaging in imitation could
be encouraged through stronger IP protection
to shift resources towards adaptive innovation.
Stronger IP protection is likely to increase trade
and FDI flows into countries with existing imi-
tative ability, thus enhancing technology trans-
fer. Policies to enhance the potential benefits of
TRIPS would help develop domestic innovative
capacity by encouraging R&D and investment in
education, along with policies aimed at opening
markets to foreign imports and encouraging in-
ward FDI.
Foray (2009: 43) argues that in the case of LDCs,
“the number, scale and domains of [technology
transfers] cannot be left to depend on general
economic operations such as [foreign direct in-
vestment] or infrastructure construction; neither
can they take the form of market transactions
alone [licences]. In all these cases, the particular
circumstances and conditions prevailing in LDCs
imply a suboptimal level of [technology trans-
fer] in relation to the needs of these countries”.
Therefore, he argues that TOT has to be specifi-
cally directed and tailor-made to the needs of
these very poor countries. Foray further argues
that the focus should be on projects in which the
technology transfer is “the primary product […]
but entails a low expected private profitability for
the technology-owning firm” (Foray, 2009: ix). In
other words, attention should be paid to projects
that would not take place under “general eco-
nomic operations”, such as semi-humanitarian
projects. Clearly, this form of technology transfer,
where commercial returns are small, “requires
the provision of additional incentives” within the
framework of public-private partnerships (Foray,
2009: ix).
Maskus (2004: 15) also argues there are inher-
ent shortcomings in markets for technology that
justify public intervention. He views intellectual
property as one form of intervention, which can
support international technology transfer and
also create market power. He refers to empiri-
cal research that suggests that enforceable pat-
ents can increase inward flows of international
technology transfer in middle-income and large
developing countries, but notes that they prob-
ably have little impact in LDCs. As a consequence,
TRIPS alone will have little impact on technology
acquisition for poor countries.
Intellectual Property Rights and Technology Transfer
module
We can conclude that different levels of industri-
alization within society have diverse needs in re-
spect to IP protection, which in turn leads to vary-
ing results regarding TOT and economic growth.
3.2 IPRs and development in Asia
Technological globalization implies increasing
technological interdependence, which means
that TOT from one country to another plays a
crucial role in economic growth and develop-
ment. Transfer of technology was paramount in
the economic growth of Japan during the 1960s
and later, in the cases of the Republic of Korea,
Hong Kong (China), Singapore, and more recently
Thailand and Indonesia, where export oriented
high-tech industries have been developed.
Various factors account for the rapid growth of
international technology transfer:
• The acceleration of technological develop-
ments at the global level, which in itself has
been dependent upon technology absorption
and transfer;
• The convergence of international capital and
factor markets has permitted TNCs to access
capital and labour at favourable rates, provid-
ing them with investment capital for overseas
projects irrespective of plant location;
• Advances in international communication
and transportation have contributed signifi-
cantly to the rapid implementation of tech-
nology transfer across borders;
• The competitive reality and evolution of glob-
al markets have compelled business to keep
up with the prevailing technological state of
the art. To acquire a technological competitive
advantage is sine qua non for success in an in-
creasingly competitive global market; conse-
quently, firms place technology management
at the heart of corporate strategy.
It is also evident that an advanced system of IP
protection has a counter-effect at the early stag-
es of industrialization. This is demonstrated by a
study carried out by Kim (2003) who verified that
under high levels of intellectual property protec-
tion, few countries are likely to emerge as newly
industrialized economies (NIEs).
During the 1960s and 1970s, the Republic of
Korea was in the “mature technology” stage of
development, in which it acquired, assimilated,
and improved generally available mature foreign
technology through “duplicative imitation”. The
intermediate technology stage was reached in
the 1980s and 1990s through aggressive efforts
to strengthen technological capabilities and fo-
81
3 Intellectual Property Rights and Technology Transfer
module
cus on “creative imitation”, which was possible
because IPRs at that time were very lax. As a re-
sult of this process, firms in the Republic of Korea
mastered the manufacturing technologies for
low-cost products. Their next step was to upgrade
their indigenous capabilities and start producing
more value-added products, enabling increases
in local wages, and at the same time responding
to emerging competitive threats from labour-
intensive production in the second-tier devel-
oping countries. Hence, the focus shifted from
labour-intensive mature technologies to more
knowledge-intensive intermediate technologies
across all sectors. Policies were amended to at-
tract foreign technology transfer through formal
mechanisms, for example, the recruitment of
foreign personnel to stimulate local R&D efforts,
and investment in upgrading university research
and diversifying research (Kim, 2003: 21).
According to Kim, patent right holders were not
strict on controlling duplicative imitation of ma-
ture technology as this technology was not re-
sponsible for their own competitive edge. In con-
trast, technologies at the intermediate stage were
a lot more complex and difficult to acquire, absorb
and adopt. Foreign patent owners exerted more
control over the technologies in the “intermediate
stage” since these technologies still played an im-
portant role in expanding their international busi-
ness activities and ensuring their competitiveness
(Kim, 2003: 3). For these reasons, corporations in
the Republic of Korea began to use more formal
routes to acquire new technologies, such as FDI
and foreign licensing.79 Patent statistics show an
increase in patenting activity in the country dur-
ing this period, including a significant increase in
the number of local patents registered.
Only a few of all the operating TNCs have es-
tablished R&D centres in the Republic of Korea.
These centres are rather small and intended
mainly to adapt “their products to local market
needs” (Kim, 2003: 4). This is a “common prac-
tice” for most R&D centres of TNCs in develop-
ing countries. Over the years, the greater share
of total R&D expenditure shifted from the public
sector to the private sector, due to enlarged inter-
national competition and through a supportive
policy environment.
Also, government research institutions played a
big role in strengthening the bargaining power
of local enterprises in acquiring sophisticated
foreign technologies, on favourable terms or
through self learning (Kim, 2003: 24).
National innovators engaged extensively in
cross-border patenting.80 The electronics busi-
82
ness flourished, as did the pharmaceutical in-
dustry. Initially, small local pharmaceutical firms
entered the market as importers/distributors of
packaged finished drugs, gradually progressing
to the formulation and manufacture of their
own products using imported raw materials. By
applying reverse engineering to accelerate tech-
nological learning, it was possible for small firms
to gradually develop into larger sized companies
capable of producing chemical compounds. This
technological development process in firms was
complemented by a regime of IPRs that was in
line with national socio-economic needs. The
Republic of Korea provided protection only for
process patents, but not for product patents
in the chemical, cosmetics, and pharmaceuti-
cal industries. Importantly, these favourable IPR
policies allowed local producers to work around
patented processes and to produce chemical
and pharmaceutical products. It is argued that
without these lax IPRs the pharmaceutical com-
panies could not have reached their current lev-
el, where they are capable of undertaking R&D
activities and developing new drug compounds
(Kim, 2003: 5).
This case study on the development of the Re-
public of Korea illustrates the following lessons:
• Strong IP protection is more likely to hinder,
rather than facilitate technology transfer and
indigenous learning in the “early stage of in-
dustrialization” when learning takes place
through reverse engineering and duplication
imitation of mature foreign products.
• Only after countries have accumulated suf-
ficient indigenous capabilities with extensive
science and technology infrastructure to un-
dertake creative imitation does the protection
of intellectual property become an important
element in technology transfer and industrial
activities.
• If adequate protection and enforcement of
IPRs is genuinely intended to enhance devel-
opment, policy makers should seriously con-
sider differentiation of IPRs commensurate
with the level of economic development and
the needs of key industrial sectors.
A number of South-East Asian economies, like
Thailand, Malaysia, Indonesia, Viet Nam and the
Philippines are at the “mature technology” stage,
undertaking duplicative imitation of existing
foreign products with cheap labour forces. Ac-
cording to Kim, coastal China and the East Euro-
pean countries are unlikely to follow this route
since they already have a history of technological
accumulation and had reached the “duplicative
imitation” stage before they opened their econ-

omies. It is more likely that these countries will
progress quickly to (and possibly through) the
“intermediate technology” stage.
3.3 IPRs and differentiated impacts
As discussed earlier, studies have shown that
sector-specificity greatly determines whether IP
protection plays a role in attracting technology
transfer and establishing economic growth. In
addition, the impact of IP protection on econom-
ic growth is highly sensitive to a country’s level
of development, depends on the business type of
activity (for example, production, assembly, sales
or R&D activity) and is also technology-depend-
ant (Lall and Allbaladejo, 2003; Reichman, 1998:
585). For particular industries, like the chemical
and pharmaceutical industries, and for particu-
lar activities, such as FDI, the existence of IP pro-
tection may be a significant factor in the decision
process of whether companies are willing to in-
vest. Some studies indicate that IP protection is
crucial in attracting high technologies, but other
studies contradict this.
Research has also shown that only after countries
have accumulated sufficient indigenous capabil-
ities, including extensive science and technology
infrastructure to undertake creative imitation,
does protection of intellectual property become
an important element in technology transfer and
industrial activities. Obstacles to efficient inter-
national technology transfer flows remain: these
include insufficient R&D activities in developing
countries, the limited technological base neces-
sary to absorb and adapt technology to local
needs and generate innovations.
IP protection can have a positive effect on eco-
nomic growth and attract technology transfer,
but only in the long term and only after countries
have reached a certain level of industrialization.
Developing countries vary greatly in economy
and technology infrastructure and innovation
competence. The majority of studies indicated
that for the poorest countries, IP protection will
have counter-effects on their socio-economic de-
velopment needs as it restricts opportunities for
reverse engineering and imitation. The prerequi-
sites of TRIPS do not give enough room for the ab-
sorption of the basic technology and knowledge
to be able to stimulate capacity building in those
countries (Rasiah, 2002: 44). The LDCs, especially,
are constrained from benefiting from the exist-
ing IPR framework as they are still dealing with
basic development imperatives such as educa-
tion, health system, infrastructure and basic
communication. It is possible that an obligation
to implement stringent IPR regimes could un-
Intellectual Property Rights and Technology Transfer
module
dermine the fulfilment of these basic needs and
utilities. Moreover, without the necessary infra-
structure in place it is impossible to achieve ade-
quate enforcement compliance. It is noteworthy
that LDCs, in the framework of TRIPS, still enjoy
a number of flexibilities including a renewable
general waiver to implement the agreement as a
whole and a special waiver regarding the imple-
mentation of the provisions dealing with phar-
maceutical protection; the latter expires in 2016.
The TRIPS Agreement seeks to promote uni-
form minimum standards of intellectual prop-
erty protection, leaving a number of aspects of
implementation and enforcement to national
design. However, in many developing countries
the administrative infrastructure is lacking or
insufficient to fulfil the requirements of TRIPS.
Article 66.2 obliges developed country members
to provide incentives to their enterprises and in-
stitutions for the purpose of promoting and en-
couraging technology transfer to least developed
country members. However, commitment under
Article 66.2 seems to be of a “best-endeavour” na-
ture. Many of the activities listed in the reports
presented by developed countries in fulfilment
of Article 66.2 amount to training and other
capacity-building activities, which do not neces-
sarily lead to technology transfer (Moon, 2011).
However, as suggested above, under the TRIPS
Agreement, LDCs enjoy a number of flexibilities
that need to be made operational.
4 Summary and review
Intellectual property rights take different forms,
including patents, trademarks, copyright, and
industrial designs. In most cases, protection is
awarded for a limited time period, after which the
intellectual property can be used freely by any-
one.81 Trade secrets can also be used to protect
intellectual property, but these are not governed
by IPR regulations.
With respect to technology transfer, two forms of
IPRs are particularly important:
• Patents, which are used for industrially ap-
plicable products and processes, and which
can also be used for biological material such
as plants, animals, microorganisms and sub-
cellular material like genes.
• Copyrights, which were developed to protect
against unauthorized copying or reproduc-
tion of literary and artistic works, but which
are now also used for computer programmes
and databases.
83
3 Intellectual Property Rights and Technology Transfer
module

Trademarks and other designations of origin are
not directly related to TOT, but could be instru-
mental in facilitating the commercialization of
goods and services.
The rationale of IPRs is that they will stimulate
innovation in that they:
• Provide an incentive to invest in inventive ac-
tivity through the award of a temporary mo-
nopoly over the right to exploit the invention
commercially;
• In the case of patents, force disclosure of the
protected knowledge so that it is in the pub-
lic domain and can be used freely by others
in their own innovative endeavours once the
term of the patent has expired.
However, it can also be argued that IPRs can, in
some instances, limit the diffusion of knowledge:
for the period of protection, the use of the knowl-
edge is restricted and may be under-utilized
(from society’s point of view).82
Weak protection of intellectual property in a
country has been associated with a process of na-
tional technological development that is initially
based on reverse engineering and the imitation
of technologies that have already been developed
elsewhere. At a certain stage in the development
process, it makes sense to strengthen IPRs to:
• Reassure foreign suppliers in order to access
high-tech products and processes;
• Provide an incentive for local innovators to in-
vest in innovation.
Studies have found that a country’s stage of de-
velopment may determine whether it will ben-
efit from stronger IPR regulations.
Weak IPRs can act as a disincentive for foreign
technology suppliers to transfer technology to
a country, but studies indicate that this may ap-
ply more to some sectors than others. For exam-
ple, IPRs are important in the chemical industry
(including pharmaceuticals), but much less im-
portant in the food and transport industries.
Moreover, stronger IPRs are more important in
countries with sufficient technological capabili-
ties for imitation: in countries where technologi-
cal capabilities are lacking, this in itself inhibits
imitation; therefore, IPRs become less relevant.
Similarly, the type of technology to be transferred
is important in determining the relevance of
strong IPR regimes. Where the technology can eas-
ily be imitated, IPRs become important, but where
the technology is very complex and/or relies on
complementary inputs (including other complex
technologies) to function, then it will be difficult
to imitate even without the protection of IPRs.
Evidence on the link between IPRs and trade in-
dicates that IPRs may be an important factor for
trade with middle-income countries and in high-
tech industries, but less so for low-income coun-
tries and relatively low-tech industries.
The TRIPS Agreement, one of the suites of agree-
ments that came out of the Uruguay Round of
multilateral trade negotiations, sets minimum
common standards for national IPR regimes,
with the objective of encouraging international
technology transfer. However, national IPR re-
gimes may be tailored in certain ways, according
to national needs and objectives, through what
are known as the “TRIPS flexibilities”. Notably,
countries may:
• Decide whether an innovation is patentable
according to a national definition of “inven-
tion”;
• Allow some types of innovation to be exclud-
ed from patentability on the grounds that
they pose a threat to public order or morality,
or threaten human, animal or plant health;
• In certain circumstances, issue compulsory
licences for the use of protected technologies.
The provisions of TRIPS in relation to technology
transfer, together with technology and IPR-relat-
ed provisions in other international agreements,
are covered in the next module.

Exercises and questions for discussion

1. What is the underlying rationale for instituting IPR systems?
2. What are the main types of IPRs that can be used to facilitate the transfer of technology?
3. What are the main problems that developing countries face, when using IPRs to foster the transfer of tech-
nology? List the key factors that policy makers need to bear in mind while designing IPR regimes.
4. How can TRIPS flexibilities be used by developing countries to foster inflows of technology and the building
up of domestic technological resources?
5. How do IPRs and competition policy interact?
6. How can IPRs enhance firm and country competitiveness?

84
 Module 4
International Technology Transfer
Related Agreements
4 International Technology Transfer Related Agreements
module
Objectives
After reading this module, students should be able to:
• Understand the different international agreements dealing with the transfer of technology;
• Analyse their provisions on technology transfer and their impact on developing countries;
• Outline policy options for developing countries to stimulate TOT and build technological capacity.
Handbook83
1 Overview of the transfer of
technology in international
instruments84
No single multilateral treaty exists that deals
exclusively with TOT. In recent decades, however,
provisions relating to TOT have been incorporated
into various international instruments. Most of
these instruments have broader objectives and
TOT is one component of the broader bargain-
ing deal. Some concern international economic
relations and may thus also relate to the chan-
nels of technology transfer (i.e. trade in goods,
investment and licensing).85 Other instruments
relevant to TOT relate to the protection of global
commons (i.e. biodiversity and environment).
Sections 3 and 4 provide a more detailed analysis
of the role of TOT in these different subject areas.
The instruments that deal directly or indirectly
with TOT-related questions can be grouped ac-
cording to their differing forms and membership:
• Multilateral instruments – these are univer-
sal or quasi-universal in their membership
instruments, such as agreements on trade in
goods and services (WTO), intellectual proper-
ty rights (WIPO, WTO), and exploitation of nat-
ural resources, biodiversity or environmental
protection (such as the Vienna Convention for
the Protection of the Ozone Layer or the Con-
vention on Biological Diversity).
• Interregional instruments – these concern
economic cooperation agreements between
economic blocs such as the Interregional
Framework Cooperation Agreement between
the Southern Common Market (MERCOSUR)
and the EU, the Economic Partnership Agree-
ments (EPAs) between members of the Af-
rican, Caribbean and Pacific Group of States
(ACP) and the EU.
• Regional instruments – these include eco-
nomic cooperation agreements (e.g. the Eco-
nomic Community of West African States
(ECOWAS)), trade and investment agreements
86
(e.g. the North American Free Trade Agree-
ment (NAFTA), the ASEAN Investment Area), in-
tellectual property right agreements (e.g. the
ASEAN Framework Agreement on Intellectual
Property Cooperation) and energy agreements
(e.g. the ASEAN Energy Cooperation). They also
comprise cooperation on sustainable devel-
opment (e.g. the Summit of the Americas on
Sustainable Development) and environmental
protection (such as the Bamako Convention on
the Ban of the Import into Africa and the Con-
trol of Transboundary Movement and Man-
agement of Hazardous Wastes within Africa).
• Bilateral agreements – these deal with eco-
nomic cooperation covering trade (such as
the FTA between Chile and the United States)
and investments (such as the bilateral invest-
ment treaty (BIT) between Jordan and the
United States).
1.1 Role of international instruments
While no single multilateral regime on TOT ex-
ists, international instruments play an impor-
tant role for the global transfer of technology in
at least three ways.
First, international instruments may set up ex-
plicit means and mechanisms to facilitate TOT.
They can foster a more equitable diffusion of
knowledge by remedying market imperfections
and enabling developing countries to take great-
er part in the global economy. In particular, these
mechanisms can facilitate transfer by improving
access of disadvantaged countries to technology.
In addition, TOT mechanisms in international in-
struments may also strive to improve a recipient
country's technology absorption capacity, i.e. by
providing technical assistance.
Second, international instruments influence TOT
implicitly by establishing the regulatory frame-
work in which states and private actors interact
and technology is diffused. In particular, these
instruments set out the "rules of the game" that
govern the channels of technology transfer. In

this sense, TOT (through traded goods) is gov-
erned by trade law, and TOT (through FDI) is in-
fluenced by investment law. These rules may, for
instance, balance the interests of creators, recipi-
ents and users of technology, or inhibit discrimi-
nation by mandating national treatment and
most-favoured-nation (MFN) treatment to goods,
services, IP protection and investment. Not only
do these different systems of rules and principles
coexist, but they often also overlap especially in
the field of IP protection where investment, trade
and IP-specific WIPO rules apply simultaneously,
resulting in a highly complex web of norms.
Finally, international instruments may create
institutions that pool technology and diffuse in-
formation. Standardization bodies create glob-
ally recognized technical guidelines that can be
used by developing countries to access developed
countries’ markets more easily. In other cases,
the process of gathering, updating and diffusing
knowledge occurs directly in international nego-
tiations and treaty making. For instance, agree-
ments relating to the environment may contain
obligations ensuring that predefined benchmarks
are reached (such as a reduction in emissions of
chlorofluorocarbon (CFC) by a certain percentage
over a set period of time). Often, such internation-
al standard setting is coupled with mechanisms
that assist developing countries in meeting these
standards, i.e. through technical assistance.
1.2 Features of TOT provisions in international example of a TOT provision limited to LDCs can be
agreements
Individual TOT mechanisms often differ in terms
of their impact on the ground. How "transfer and
diffusion" provisions can be effectively translated
into practice depends mainly on four aspects: the
nature of the provisions (mandatory or best-en-
deavour), their addressees, the terms and condi-
tions, and the modes of implementation.
First, TOT provisions may contain mandatory
obligations or “best-endeavour” commitments.
Best-endeavour provisions do not require, but
encourage or exhort certain behaviour for tech-
nology transfer cooperation among the parties
addressed. The 1992 Rio Declaration, for instance,
states in Principle 9:
"States should cooperate to strengthen en-
dogenous capacity-building for sustainable
development by improving scientific under-
standing through exchanges of scientific and
technological knowledge, and by enhancing
the development, adaptation, diffusion and
transfer of technologies, including new and
innovative technologies".
International Technology Transfer Related Agreements
module
Mandatory provisions require certain positive or
negative actions by the contracting parties. For
instance, Article 8.1 of the United States–Uruguay
BIT (2007) stipulates that:
"[N]either Party may, in connection with the
establishment, acquisition, expansion, man-
agement, conduct, operation, or sale or other
disposition of an investment of an investor of
a Party or of a non-Party in its territory, impose
or enforce any requirement or enforce any
commitment or undertaking (f) to transfer a
particular technology, a production process,
or other proprietary knowledge to a person in
its territory".
Second, the parties to TOT provisions may vary
between instruments. In most cases, obligations
target states, often making distinctions between
developed and developing countries. Some instru-
ments make an even more specific distinction
among the parties by identifying groups of coun-
tries, i.e. LDCs. The main objective of such distinc-
tion is to assign differing obligations to different
categories of parties, so that TOT can be facilitated
from countries with stronger capabilities, i.e. devel-
oped countries, to countries with lower capacities,
i.e. developing countries. The Convention on Bio-
logical Diversity, for instance, provides in Article 18
that "each contracting Party shall promote techni-
cal and scientific cooperation with other Contract-
ing Parties, in particular developing countries". An
found in CBD Article 20(5).86 In contrast to agree-
ments that target states, other instruments ex-
ist that are directed at the private sector like the
OECD Guidelines for Multinational Enterprises. Fi-
nally, some provisions like TRIPS Article 66.2 are of
a hybrid nature, insofar as they mandate govern-
ments to encourage technology transfer to LDCs
by national enterprises and institutions.
Third, the implementation of TOT provisions de-
pends also on the terms and conditions under
which the transfer takes place. Various agree-
ments use different terminology, which may point
to diverging roles that market and non-market
considerations play in TOT. In some agreements,
the provisions call for “fair and most favourable”
terms of diffusion,87 whereas other agreements
emphasize the “commercial nature” of technolo-
gy transfer.88 Another aspect relates to the condi-
tions surrounding the transfer. The Montreal Pro-
tocol is a particularly interesting case. Developing
countries’ obligation to phase out their CFC use is
dependent upon the effective implementation by
developed countries of the financial cooperation
and TOT provisions of the Protocol. A similar provi-
sion is to be found in the UNFCCC.
87
4 International Technology Transfer Related Agreements
module
Fourth, TOT provisions – as far as they provide
for implementable obligations – differ in their
mechanism of implementation. Some agree-
ments have in-built mechanisms for interna-
tional cooperation (which may require the in-
tervention of international organizations), or
there may be a special institutional setup for
implementation (for example, the International
Seabed Authority). In addition, benchmarks and
performance indicators can help to assess the
effectiveness of implementation. In the same
vein, monitoring and progress evaluation are
important follow-up elements in the imple-
mentation process potentially coupled with an
enforcement system. Where such control mech-
anisms are absent or deficient, TOT provisions
may risk not being properly implemented. The
debate on a follow-up mechanism in the WTO
Working Group on Technology Transfer regard-
ing Article 66.2 of the TRIPS Agreement consti-
tutes one current attempt to improve imple-
mentation of an international TOT instrument
(Moon, 2011).
With these general remarks in mind, Section 2
provides a brief insight into the history of the in-
ternational legal framework on TOT.
2 Historical development of transfer
of technology instruments
Following decolonization, the access to and
transfer of technology became an increasingly
important topic for newly independent states.
Deliberations on technology transfer took place
against the background of broader efforts by
developing countries to reform global economic
relations.89
In 1974, the UN General Assembly adopted the
United Nations Declaration for the Establish-
ment of a New International Economic Order
(NIEO) aiming at altering the international eco-
nomic system in line with the developing coun-
tries’ interests.90 Along with the Declaration of
a Programme of Action, a Charter of Economic
Rights and Duties of States91 as well as a non-
binding UN Set of Multilaterally Agreed Equita-
ble Principles and Rules for the Control of Restric-
tive Business Practices (1980)92 were adopted.
In 1977 the UN General Assembly mandated ne-
gotiation on a code of conduct on TOT.93 Nego-
tiations on a code of conduct on TOT within the
framework of UNCTAD aimed at enhancing the
participation and success of developing coun-
tries in the global economy. The issues at stake
were mainly:
88
• High costs involved in TOT;
• Restrictive clauses hindering host country use
of the technology;
• Measures that could facilitate fair and reason-
able terms and conditions in TOT agreements
and modalities for international cooperation.
These international efforts were grounded in
the experience of national technology transfer
regimes established in a number of developing
countries to review TOT transactions, to control a
number of clauses in licensing contracts and to
put a ceiling on the price of technology (Barton,
2007). The intention was to expand and legitima-
tize these practices at the international level.
The UNCTAD Secretariat put forward five basic
objectives and principles, which could be incor-
porated into an international code of conduct on
TOT. These were:
• The need for international regulatory action;
• Encouragement of the transfer of unpack-
aged technology;94
• Improvement of access to technology at fair
and reasonable prices and cost;
• The effective performance of transfer ar-
rangements;
• Assurance of the development of host country
technological capabilities.95
In this historical overview it is interesting to re-
call that the Preamble to the draft TOT Code rec-
ognizes the “role of science and technology in
the socio-economic development of all countries,
and in particular, in the acceleration of the devel-
opment of the developing countries”. It adds that
mutual benefit sharing of technology is seen as
a fundamental right as “technology is key to the
progress of mankind and that all peoples have
the right to benefit from the advances and de-
velopments in science and technology in order to
improve their standards of living”.
At the time of the code negotiations, the complex
characteristics of technological development
and the prerequisites for successful technology
transfer and diffusion were not well studied or
understood. As a result, the negotiations focused
largely on the terms and conditions of acquir-
ing technology. Technology was not treated dif-
ferently from other products and the process of
technology transfer was considered to be like
any other transaction between a seller and a
buyer. Hence, local learning of new skills and ac-
cess to information to absorb newly acquired
technology was not given much consideration.
Moreover, firms were assumed to operate with
full knowledge of the market for inputs, includ-

ing technology. In addition, it was assumed that
technologies were selected according to their
utility for local needs (Roffe and Tesfachew, 2001:
381). In brief, the way that the technology transfer
process is perceived by governments and key eco-
nomic agents has changed over time, from mere
access to attention to appropriate absorption of
technology (Roffe and Tesfachew, 2001).
Barton has observed that today’s world differs
from the 1970s and 1980s for two key reasons.
First, a number of developing countries have be-
come technologically more advanced. There are
many more trained scientists and technologists,
and the level of science-based industry and the
magnitude of national scientific research and fi-
nancing programmes have also increased. These
changes were more pronounced in the middle-
income and largest nations such as Brazil, China
and India, and much less evident in the poorest
nations, such as many countries in sub-Saharan
Africa. Second, globalization and the spread of
free trade have led to many industries favour-
ing production facilities that serve more than
one country. The result has been increasing spe-
cialization and trade, both in components and in
finished products that have origins in a number
of nations.96 As part of this trend, production
chains are now often spread over a number of
countries. Barton (2007: 1) gives the example of
computer chips that may be designed in one na-
tion, manufactured in a second, diced and tested
in a third, assembled into computers in a fourth,
with related software developed in a fifth.
All these developments have resulted in a much-
changed business climate: firms in developing
countries now have to face not only global but
also domestic competition. Moreover, they have
to find a place in an already established and in-
tricate international production structure. Now,
it is impossible for a country to have firms that
lead in all areas of technology, and in some areas
there can only be a few centres of excellence in
the world (Barton, 2007: 1). Countries need to find
their “niche” or their competitive advantage. This
is actually the case in some fields of clean energy
technology where countries such as Brazil, China,
and India, emerge as important actors in the de-
velopment and commercialization of biofuels,
wind and solar energy (UNEP et al., 2010).
In recent decades policy makers paid greater at-
tention to IP protection, resulting in more rigor-
ous approaches to the protection and enforce-
ment of IP protection, and implying that firms
have fewer possibilities to learn by imitating
existing technologies (Barton, 2007: 2). Hence,
developing countries are latecomers in an es-
International Technology Transfer Related Agreements
module
tablished market and do not have the same op-
portunities to learn by trial and error, as Europe,
North America and Japan could in earlier times.
As a result of these paradigmatic trends, a shift
in attention has taken place, from stressing the
importance of technology transfer (the more the
better), to emphasizing the adequate absorption
of technology into society. The new focus lies on
what happens to the technology once it has been
transferred and how is it adapted at the recipi-
ent country level. This relates mainly to the skills
necessary to operate and adapt a technology, as
well as factors, such as an adequate and stable
regulatory framework and propitious invest-
ment climate.
3 International economic law and
transfer of technology
Following the unsuccessful negotiations on a
draft International Code of Conduct, the consid-
eration of TOT issues re-entered the international
economic agenda, particularly at the time of the
Uruguay Round of multilateral trade negotia-
tions, which led to the establishment of the WTO
in 1995.
As pointed out above, international instruments
relevant to TOT exist in various different fields
ranging from trade law to environmental con-
cerns including soft law standards. The following
section provides a detailed insight into selected
international instruments. The focus lies on mul-
tilateral, regional and bilateral agreements on in-
ternational economic relations such as the WTO
agreements, international investment agree-
ments and FTAs or related treaties. In addition,
a number of international treaties dealing with
natural resources, biodiversity, environmental
protection as well as other international non-
binding arrangements containing TOT provisions
will be examined.
3.1 The WTO agreements and technology
transfer
The WTO seeks to reduce trade-related barriers
and settle disputes over trade matters, with the
aim of contributing to economic growth and de-
velopment. The WTO agreements encompass a
body of rules regulating governmental conduct
in relation to international trade in goods, servic-
es, investment and IP, all of which are important
channels of technology transfer. In addition, the
multilateral trading system provides for special
access to technology for developing countries,
especially in IP and services and contributes to
89
4 International Technology Transfer Related Agreements
module
international pooling technology by referring to
international standards. Brief reference is also
made to the intergovernmental WTO Working
Group on Technology Transfer.
Agreements falling under the umbrella of the
WTO make often reference to technology trans-
fer. This is the case particularly of the General
Agreement on Trade in Services (GATS), the Agree-
ment on Trade-Related Investment Measures
(TRIMS), the Agreement on the Application of
Sanitary and Phytosanitary Measures (SPS), the
Agreement on Technical Barriers to Trade (TBT),
the Government Procurement Agreement (GPA)
and the TRIPS Agreement.
Outside the scope of the WTO, the Convention on
Biological Diversity includes provisions on tech-
nology transfer and benefit sharing in relation to
biodiversity and genetic material. In addition, bi-
lateral investment treaties and various preferen-
tial trade agreements (PTAs) influence incentives
and conditions for the use of technology and TOT
(Maskus, 2004: 7).
These agreements are very often characterized
by their use of common terminology: they ac-
knowledge that technology transfer is important
in facilitating the creation of a sound and viable
technological base in developing and least devel-
oped countries. Further, they recognize that tech-
nology transfer is important to enable the inte-
gration of developing countries into the global
economy, while meeting international obliga-
tions and commitments set out in multilateral
treaties.97 However, few concrete mechanisms to
implement these objectives have been devised or
adopted, and as a result expectations in this area
continue to be elusive.
In general, the existing international rules on
international technology transfer are of a “best-
endeavour nature” – that is, the agreements stip-
ulate that efforts should be made, but no rules or
performance standards are set to ensure imple-
mentation. This is in contrast to regulations of IP
protection and enforcement, which are of a more
stringent nature and which set out a system of
rights and obligations subject to strict monitor-
ing schedules.
3.1.1 Trade in Goods
The General Agreement on Tariffs and Trade
(GATT) signed in 1947 is at the origin of the mul-
tinational trading system and concerns trade in
goods. It seeks to promote trade liberalization
while safeguarding other legitimate policy con-
cerns such as morals, public health and the envi-
90
ronment. Together with the establishment of the
WTO in 1995, the membership also concluded a
number of additional agreements that have an
important link with technology transfer through
trade in goods, services, investment and set up a
new framework dealing with trade-related as-
pects of intellectual property.
The TRIMS Agreement
In the area of investment – less ambitious com-
pared to other WTO sectors – the TRIMS Agree-
ment deals with performance requirements in
investment-related operations. Thus, TRIMS re-
stricts the use of performance requirements that
contradict the GATT principles of national treat-
ment (Art. III) and the elimination of quantita-
tive restrictions (Art. XI).98 Since the agreement
is limited in scope to trade in goods, it does not
deal with investment measures i.e. mandatory
requirements on foreign enterprises, for exam-
ple, to transfer technology. However, even with
its limited scope, the agreement can still have a
bearing on TOT. It constrains governments to con-
dition trade in goods i.e. by mandating domestic
and foreign enterprises to use locally manufac-
tured products. Since performance requirements
may be an industrial policy tool to allow local
manufacturers take part in global value and pro-
duction chains, TRIMS places limits to public in-
tervention in these related areas.
Agreements on technical barriers to trade and
the application of sanitary and phytosanitary
measures
Technical requirements or sanitary and phy-
tosanitary standards for certain classes of goods
(for example, plants and animal products) may
raise non-tariff barriers to trade. The TBT and
SPS Agreements encourage WTO members to
base their measures on international standards.
Developing countries’ products based on inter-
national standards can thus access developed
markets more easily. The Preamble to the WTO
Agreement on TBT99 refers to the potential of
standard setting to promote TOT from developed
to developing countries.
“Recognizing the contribution which interna-
tional standardization can make to the trans-
fer of technology from developed to develop-
ing countries" (emphasis added).
If members deviate from international standards,
they need to be able to justify their measure on
scientific grounds (in case of SPS) or demonstrate
that the international standard is ineffective and
inappropriate to achieve a legitimate objective (in

case of TBT). Transparency and advance notice on
changes in these national standards may help de-
veloping countries to cope with any changes. Tech-
nical assistance to developing countries may often
be necessary to help to build capacities for formu-
lating and implementing standards.100 Again re-
ferring to the Preamble of the TBT Agreement:
"Recognizing that developing countries may
encounter special difficulties in the formula-
tion and application of technical regulation
and standards and procedures for assessment
of conformity with technical regulations and
standards, and desiring to assist them in their
endeavour in this regard”.
Article 11 of the TBT Agreement contains specific
requirements to provide technical assistance es-
pecially to developing country members to reap
the full benefits of international standards set-
ting and the entailing pooling of technology.
The SPS Agreement101 also provides for technical
assistance support to developing countries in im-
proving access to and absorption of technology
embodied in health-related international stand-
ards. Article 9 (“Technical Assistance”) states:
“1. Members agree to facilitate the provision
of technical assistance to other Members, es-
pecially developing country Members, either
bilaterally or through the appropriate inter-
national organizations. Such assistance may
be, inter alia, in the areas of processing tech-
nologies, research and infrastructure, includ-
ing in the establishment of national regula-
tory bodies, and may take the form of advice,
credits, donations and grants, including for
the purpose of seeking technical expertise,
training and equipment to allow such coun-
tries to adjust to, and comply with, sanitary or
phytosanitary protection in their export mar-
kets" (emphasis added).
In sum, pooling of technology through interna-
tional standards accompanied by the provision
of technical assistance to reap the benefits of
standard setting is an important TOT-related as-
pect of the TBT and SPS Agreements.
3.1.2 The General Agreement on Trade
in Services
The General Agreement on Trade in Services aims
to expand international trade in services through
the progressive liberalization of services trade
(e.g. the negotiation of specific commitments for
providing national treatment and market access
to foreign service providers). GATS also aspires
International Technology Transfer Related Agreements
module
to increase developing countries’ participation
in trade in services, among others, through the
strengthening of their domestic services capac-
ity, and their efficiency and competitiveness.
There are several ways in which GATS is relevant
for TOT.
In Article IV (“Increasing Participation of De-
veloping Countries”), GATS specifically refers to
technology-related matters, including access to
technology on a commercial basis. Among oth-
ers, it stipulates:
“1. The increasing participation of develop-
ing country Members in world trade shall be
facilitated through negotiated specific com-
mitments, by different Members pursuant to
Parts III and IV of this Agreement, relating to:
(a)   the strengthening of their domestic
services capacity and its efficiency and
competitiveness, inter alia through access
to technology on a commercial basis; …
2. Developed country Members, and to the ex-
tent possible other Members, shall establish
contact points within two years from the date
of entry into force of the WTO Agreement to
facilitate the access of developing country
Members’ service suppliers to information, re-
lated to their respective markets, concerning:
(a)  commercial and technical aspects of
the supply of services;
(b) registration, recognition and obtaining
of professional qualifications; and
(c) the availability of services technology”
(emphasis added).
TOT-related issues are also mentioned in the
GATS Annex on Telecommunication, notably
Paragraph 6 (“Technical cooperation”). While the
connection between paragraph 6(c) (on coopera-
tion with relevant international organizations)
and TOT is a rather remote one, Paragraph 6(d)
addresses the opportunities for recipient LDCs in
encouraging companies to assist in TOT.
GATS Annex on Telecommunication, Para. 6(c)
states:
“In cooperation with relevant international
organizations, Members shall make available,
where practicable, to developing countries
information with respect to telecommunica-
tions services and developments in telecom-
munications and information technology to
assist in strengthening their domestic tel-
ecommunications services sector".
GATS Annex on Telecommunication, Para. 6(d)
states:
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“Members shall give special consideration to
opportunities for the least developed countries
to encourage foreign suppliers of telecommu-
nications services to assist in the transfer of
technology, training and other activities that
support the development of their telecom-
munications infrastructure and expansion
of their telecommunications services trade”
(emphasis added).
In the context of GATS, attention is generally
given to the negotiation of rules and of country-
specific commitments for the further liberaliza-
tion of trade in services, and less to issues related
to TOT. However, some developing countries have
carefully negotiated their specific liberalization
commitments: in so doing, they explicitly re-
served their right to impose certain TOT-related
performance requirements on foreign investors
(which otherwise could be considered in viola-
tion of national treatment commitments). For
instance, Qatar in its horizontal commitments
on mode 3102 (commercial presence of a foreign
supplier) specifies:
“Foreign commercial presence may be re-
quired to provide certain benefits in the form
of technology transfer, research and develop-
ment programs, technical or marketing as-
sistance and educational or training of local
manpower” (emphasis added).103
Similarly, India in its horizontal commitments on
mode 3 states:
“In case of collaboration with public sector
enterprises or government undertakings as
joint venture partners, preference in access
will be given to foreign service suppliers/enti-
ties which offer the best terms for transfer of
technology” (emphasis added).104
Thus, GATS, while recognizing the importance
of technology transfer for development, stops
short of requiring developed country members
to transfer technology to developing country
partners. The onus is, therefore, on developing
countries to make best use of the provisions
and flexibilities of the international agreements
to ensure that they retain the policy tools that
they may consider necessary for fostering TOT –
as was done, for instance, in the cases of Qatar
and India. However, this in itself implies a need
not only for absorptive capacity in the produc-
tive sectors but also for relevant policy, legal and
technical expertise, along with negotiating ca-
pacity, at the government level.
92
3.1.3 The TRIPS Agreement provisions on
technology transfer
One argument advanced in support of the TRIPS
Agreement was that enhanced protection and
enforcement of IPRs would result in increased
technology transfer (including both by trade
in goods and FDI) and simultaneously stimu-
late domestic innovation. Civil society groups,
academics and developing country officials have
voiced concerns that implementation of the
TRIPS Agreement would not add to the economic
growth of developing countries, but rather limit
access to technology by raising costs instead. Cor-
rea notes that “[t]he North-South technological
gap has continued to grow since the adoption of
the Agreement” (Correa, 1999: 1).105
From the outset of the Uruguay Round negotia-
tions, many developing countries were opposed
to accepting multilateral rules on IP protection in
the context of GATT-WTO (Gervais, 2003; Correa,
1999; UNCTAD-ICTSD, 2005) that would require
countries to establish and enforce comprehensive
minimum standards and would limit the possi-
bility of favouring domestic over foreign creators.
The very incorporation of IP protection within the
scope of a trade agreement was new. Intellectual
property was not seen as trade-related and could
easily have remained exclusively within WIPO.
The reluctance of developing countries to bring IP
protection into the Uruguay Round was overcome
to a large extent by considerations including:
• Market access in the context of the so-called
“single undertaking” – the TRIPS Agreement
was part of a “package” of agreements that
was expected to lead to concessions such as
the opening of markets to agricultural prod-
ucts, textiles and other products of interest to
developing countries.
• Rules on enforcement and dispute settlement
– the TRIPS Agreement was subject to the Un-
derstanding on Rules and Procedures Govern-
ing the Settlement of Disputes intended to fa-
cilitate compliance and coherence within the
system. This was considered a better option
than the situation ex ante where unilateral
trade sanctions prevailed.
We examine below a number of provisions in the
agreement dealing with TOT matters.
Articles 7 and 8 of the TRIPS Agreement
The TRIPS Agreement recognizes in Article 7 (“Ob-
jectives”) that the transfer and dissemination of
technology is one objective of the global intellec-
tual property system:

“The protection and enforcement of intellec-
tual property rights should contribute to the
promotion of technological innovation and to
the transfer and dissemination of technology,
to the mutual advantage of producers and us-
ers of technological knowledge and in a man-
ner conducive to social and economic welfare,
and to a balance of rights and obligations”.
Nonetheless, the TRIPS Agreement provisions
provide little guidance as how technology trans-
fer should be facilitated. However, the impor-
tance of this provision is not to be underesti-
mated, particularly with respect to the overall
interpretation of the Agreement (UNCTAD-ICTSD,
2005). It allows for a balance of rights and obliga-
tions, and also of benefits for producers and users
of knowledge. Much is to be said on the relevance
of this provision in the overall context of TRIPS.
As discussed below, an operational effect of this
provision is dealt with in the case of LDCs in Ar-
ticle 66.2. More broadly, the operationalization of
this objective is left mainly to the design of in-
tellectual property regimes at the national level;
in order to respond to this broad objective these
would need to be designed in a way of promoting
and facilitating the transfer and dissemination
of technology.
Article 8 (“Principles”) of the TRIPS Agreement
lays down its underlying principles:
“1. Members may, in formulating or amend-
ing their laws and regulations, adopt meas-
ures necessary to protect public health and
nutrition, and to promote the public interest
in sectors of vital importance to their socio-
economic and technological development,
provided that such measures are consistent
with the provisions of this Agreement.
2. Appropriate measures, provided that they
are consistent with the provisions of this
Agreement, may be needed to prevent the
abuse of intellectual property rights by right
holders or the resort to practices which un-
reasonably restrain trade or adversely affect
the international transfer of technology”.
However, it should be noted that “appropriate
measures” need to be consistent with the other
provisions of the TRIPS Agreement. (UNCTAD-
ICTSD, 2005)
With regard to Article 8.2, the agreement deals
in Article 40 more specifically with one aspect of
abuses of intellectual property in the context of
licensing agreements. In effect, Article 40 (“Con-
trol of Anti-Competitive Practices in Contractual
Licences”) provides, inter alia:
International Technology Transfer Related Agreements
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1. Members agree that some licensing prac-
tices or conditions pertaining to intellectual
property rights which restrain competition
may have adverse effects on trade and may
impede the transfer and dissemination of
technology.
2. Nothing in this Agreement shall prevent
Members from specifying in their legislation
licensing practices or conditions that may in
particular cases constitute an abuse of intel-
lectual property rights having an adverse ef-
fect on competition in the relevant market.
As provided above, a Member may adopt,
consistently with the other provisions of this
Agreement, appropriate measures to prevent
or control such practices, which may include
for example exclusive grantback conditions,
conditions preventing challenges to validity
and coercive package licensing, in the light
of the relevant laws and regulations of that
Member.
In other words, Article 40 contains an enabling
provision, consistent with the agreement, to
legislate at the national level on licensing con-
ditions which restrain competition having ad-
verse effects on trade and transfer of technology
(UNCTAD-ICTSD, 2005).
Article 66.2 of the TRIPS Agreement
Article 66.2 deals with the facilitation of TOT in
the case of the LDCs. It requires action to facili-
tate technology transfer flows:
“Developed country Members shall provide
incentives to enterprises and institutions in
their territories for the purpose of promot-
ing and encouraging technology transfer to
least-developed country Members in order
to enable them to create a sound and viable
technological base”.
Notably, this obligation, considered binding on
developed country members was reaffirmed in
Paragraph 7 of the 2001 Declaration on the TRIPS
Agreement and Public Health.106
There are several interesting aspects to Article
66.2. First, it requires only developed countries
to provide such incentives, and only with regard
to LDCs. No obligations or rights are created for
other low- and middle-income developing coun-
tries or for economies in transition. Second, it is a
positive obligation, as affirmed by the Doha Dec-
laration. Third, there is presumably an effective-
ness test implicit in this article. Although noth-
ing in the wording requires incentives to actually
achieve increases in TOT, a failure to be effective
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would reduce the meaningfulness of both Article
66.2 and Article 7. In fact, the last sentence im-
plies that such incentives should be carried out
in order to enable LDCs to create a technological
base, which makes the effective transfer of tech-
nology an expectation. Finally, Article 66.2 does
not mention IPRs specifically. Thus, developed
countries could establish whatever incentives
they find appropriate, including limitations on
the scope of intellectual property protection that
do not otherwise conflict with provisions of TRIPS
(Maskus, 2003).
The implementation of Article 66.2 has been
an important item in the deliberations of the
Council for TRIPS in recent years.107 A monitor-
ing system of compliance has been established
that reviews the periodical reports submitted by
countries regarding their respective implemen-
tation in terms of measures introduced in home
countries to facilitate the TOT by institutions and
firms to LDC host countries. There are no easy and
silver bullets solutions to this question. A num-
ber of studies and reports have examined this
issue and made suggestions on how progress
could be made in this area (Foray, 2009; Moon,
2008 and 2011).
3.1.4 The WTO Working Group on One important objective of the WIPO Develop-
Transfer of Technology
To respond to concerns expressed by developing
countries on TOT in general, the 2001 Doha Min-
isterial Conference agreed “to an examination, in
a working group under the auspices of the Gen-
eral Council, of the relationship between trade
and transfer of technology, and of any possible
recommendations on steps that might be taken
within the mandate of the WTO to increase flows
of technology to developing countries.” The work-
ing group has been in a deliberative mood and no
concrete recommendations have so far emerged,
particularly given the lukewarm approach taken
to this work by most of the technology exporting
countries.108
3.2 The WIPO Development Agenda109
As noted throughout this teaching material,
there is a long history of integrating development
concerns in the intellectual property architecture
and there is a close link to the genesis and evo-
lution of the system. Among the recent develop-
ments, the Declaration on the TRIPS Agreement
and Public Health, adopted at the WTO Ministe-
rial Conference in Doha in 2011, was prompted
by the gravity of public health problems afflict-
ing many developing countries and the impact
of intellectual property protection on the pricing
94
of medicines. The legal suits launched by major
pharmaceutical international firms challenging
the effort of the government of South Africa to
the use TRIPS flexibilities initiated the discussion
in the WTO that led to the Doha Declaration.
A more ambitious attempt to bring back devel-
opment issues to the IP debate, namely in WIPO,
was the initiative for a development agenda. In
support of such an agenda, Argentina and Brazil
argued that IP protection is a public policy instru-
ment involving benefits as well as costs, depend-
ing on a country’s level of development. Action
was therefore needed to ensure that IP costs do
not outweigh the benefits, particularly in the
case of less developed countries:
“A vision that promotes the absolute benefits
of intellectual property protection without
acknowledging public policy concerns un-
dermines the very credibility of the IP system.
Integrating the development dimension into
the IP system and WIPO’s activities, on the
other hand, will strengthen the credibility of
the IP system and encourage its wider accept-
ance as an important tool for the promotion
of innovation, creativity and development.”110
ment Agenda was to mainstream the develop-
ment dimension into all activities of the or-
ganization. The proponents sought to promote,
among others, “a deeper reflection on the de-
velopment implications of current and new ap-
proaches to different IP policy choices and inter-
national norm setting, as well as a more accurate
and pervasive discussion on the consequences of
their adoption by countries at different stages of
social, economic and technological development”
(WIPO, 2005).
In 2007, after three years of intensive delibera-
tions and negotiations, WIPO Members agreed
on 45 recommendations aimed at integrating de-
velopment considerations in all aspects of WIPO’s
work.111 Among the most relevant recommenda-
tions are those targeted to deepen the analysis
of the implications and benefits of the public
domain; to initiate discussions on how to further
facilitate access to knowledge and technology; to
promote pro-competitive licensing practices to
foster creativity, innovation and TOT; and to pro-
mote the use of flexibilities in the TRIPS Agree-
ment. Finally, in an attempt to redress former
practices, the agenda recommended that norm-
setting activities shall: be inclusive and mem-
ber-driven; take into account different levels of
development; take into consideration a balance
between costs and benefits; be a participatory

process, which takes into consideration the in-
terests and priorities of all WIPO Member States
and the viewpoints of other stakeholders, includ-
ing accredited inter-governmental organizations
and non-governmental organizations; and be in
line with the principle of neutrality of the WIPO
Secretariat.
TOT-related questions are dealt with in a number
of recommendations:
• Recommendation 23: “Member States, espe-
cially developed countries, to urge their re-
search and scientific institutions to enhance
cooperation and exchange with research and
development institutions in developing coun-
tries, especially LDCs”.
• Recommendation 25: “To explore intellectual
property‑related policies and initiatives neces-
sary to promote the transfer and dissemina-
tion of technology, to the benefit of developing
countries and to take appropriate measures
to enable developing countries to fully under-
stand and benefit from different provisions,
pertaining to flexibilities provided for in inter-
national agreements, as appropriate”.
• Recommendation 28: “To explore support-
ive intellectual property‑related policies and
measures member States, especially devel-
oped countries, could adopt for promoting
transfer and dissemination of technology to
developing countries”.
• Recommendation 29: “To include discussions
on intellectual property-related technology
transfer issues within the mandate of an ap-
propriate WIPO body”.
• Recommendation 30: “To undertake initia-
tives agreed by Member States, which contrib-
ute to transfer of technology to developing
countries, such as requesting WIPO to facili-
tate better access to publicly available patent
information”.
• Recommendation 31: “To undertake initiatives
agreed by Member States, which contribute
to transfer of technology to developing coun-
tries, such as requesting WIPO to facilitate
better access to publicly available patent in-
formation”.
• Recommendation 45: “To approach intellec-
tual property enforcement in the context
of broader societal interests and especially
development‑oriented concerns, with a view
that ‘the protection and enforcement of intel-
lectual property rights should contribute to
the promotion of technological innovation
and to the transfer and dissemination of tech-
nology, to the mutual advantage of producers
and users of technological knowledge and in
a manner conducive to social and economic
International Technology Transfer Related Agreements
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welfare, and to a balance of rights and obliga-
tions’, in accordance with Article 7 of the TRIPS
Agreement”.
There are ongoing initiatives projects in WIPO
providing for a range of activities that will ex-
plore possible initiatives and IP-related policies
for promoting technology transfer, particularly
for the benefit of developing countries. “It will
consist of five progressive phases towards de-
veloping a new platform for Technology Transfer
and IP Collaboration, namely: (i) the organiza-
tion of a High Level International Expert Forum
on ‘Technology Transfer and IP: Common Chal-
lenges Building Solutions’ to analyze the needs
in the area of technology transfer and propose
a New Platform for Technology Transfer and IP
Collaboration; (ii) the elaboration of a number
of analytic studies, including economic studies
and case studies on international technology
transfer, that will provide inputs for the High-
Level Expert Forum; (iii) the creation of a Web
Forum on ‘Technology Transfer and IP: Common
Challenges Building Solutions’; (iv) five Regional
Technology Transfer Consultation meetings; and
(v) the incorporation of any adopted set of rec-
ommendations resulting from the above activi-
ties into WIPO programs”.112 These initiatives and
projects are ongoing and WIPO is expected to
continue to work on TOT and other development
issues directed by the Committee on Develop-
ment and Intellectual Property.
3.3 International investment agreements and
technology transfer
International investment agreements are trea-
ties negotiated between two or more countries
to protect investment of investors of one party
in the territory of another (UNCTAD, 2006b: 3). By
committing to protect foreign investment in IIAs,
host countries seek to attract FDI and foster lo-
cal development. FDI is one important channel of
TOT to developing countries.113 Hence, host coun-
try policies for the promotion and protection of
foreign investment have implications on inward
flow of technologies. In addition to providing
general protective principles aimed at guaran-
teeing a stable investment climate conducive to
the attraction of FDI and technology, some IIAs
also contain specific mechanisms for TOT and
technical assistance.
According to UNCTAD, more than 6,000 inter-
national investment agreements are in force
(UNCTAD, 2011b). In recent years, IIAs have prolif-
erated including at the regional and interregion-
al levels. The majority of these IIAs are bilateral
treaties, but increasingly "other IIAs" such as FTAs
95
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include investment chapters as well. Also, the
content of IIAs has changed over the last 50 years.
In 1959, when the first IIA was concluded, agree-
ments were limited in scope and simply aimed
at protecting investments of investors from de-
veloped countries in the territory of developing
countries. From the 1990s onwards, new ele-
ments such as liberalization commitments and
restrictions on performance requirement were
added to some IIAs. The trend towards IIAs that
are more “sophisticated and complex in content"
(UNCTAD, 2006b) is accompanied by efforts to re-
balance investment commitments so as to main-
tain policy space i.e. to protect the environment
or to preserve industrial policy tools (UNCTAD,
2010b and 2011b). In part, this evolution is due
to changing investment realities. Among others
developing and transition economies play an in-
creasingly important role not only as destination
for but also as sources of FDI (UNCTAD, 2011b).
TOT provision in IIA preambles
A number of IIAs explicitly designate TOT as one
of the agreement's goals, namely in their pre-
ambular sections. The preamble to the ASEAN
Comprehensive Investment Agreement, for in-
stance, reads: "recognizing that a conducive in-
vestment environment will enhance freer flow
of capital, goods and services, technology and
human resource and overall economic and so-
cial development in ASEAN". The preamble in the
Ugandan model investment treaty is even more
affirmative: "convinced that the promotion and
protection of these investments would succeed
in stimulating transfers of capital and technol-
ogy between the two countries in the interest of
their economic development".
Technology transfer provisions and perfor-
mance requirements
To reap the full benefits of foreign investment,
recipient countries sometimes impose “perfor-
mance requirements” which are intended to alter
the behaviour of investors in line with the eco-
nomic needs of the host country. For instance, in-
vestors may be required to hire local employees, or
to transfer technology if they seek to take advan-
tage of investment incentives, such as tax holidays.
Some recent treaties explicitly prohibit the impo-
sition of such performance requirements, adding
to the list of prohibited trade-related investment
measures already contained in the above-dis-
cussed TRIMS Agreement. These prohibitions in-
clude: requirements to establish a joint venture
with domestic participation; requirements for a
minimum level of domestic equity participation;
96
requirements to locate headquarters in a spe-
cific region; employment requirements; export
requirements; restriction on sales of goods and
services in the territory where they are produced
or provided; requirements to supply goods pro-
duced or services provided to a specific region
exclusively from a given territory; requirements
to act as the sole supplier of goods produced or
services provided; requirements to transfer tech-
nology, production processes or other propri-
etary knowledge; and research and development
requirements. Some IIAs do not allow compul-
sory requirements of technology transfer. For in-
stance, the United States model BIT in Article 8(1)
(f) excludes performance requirements "to trans-
fer a particular technology, a production process,
or other proprietary knowledge to a person in
its territory". But, in some of these agreements,
performance requirements are allowed when
they are offset by comparable incentives.114 The
potential ban of performance requirements
would weaken the leeway that governments
have to negotiate in investment operations
forms of enhancing transfer of technology. Trea-
ties containing such limitations on performance
requirements typically also allow for reserva-
tions or non-conforming measures. Therefore,
countries negotiating such provisions may wish
to consider carving-out sectors where they want
to maintain or prospectively enact performance
requirement on technology transfer.
Other recent model IIAs go in the opposite direc-
tion and address foreign investors directly and
mandate a transfer of technology. The model
investment treaty of Botswana states in Article
11 that "Investors of one Contracting Party in the
Territory of the other Contracting Party shall to
the extent possible, encourage … the transfer of
technology".
In sum, while IIAs are, in principle, conducive to
the attraction of foreign investment, and tech-
nology transfer, some of their provisions, in par-
ticular, limitations on performance requirements
may constrain the regulatory space within which
countries that are in a position to bargain better
deals can pursue their economic development
policy. It is also to be noted that a regular provi-
sion in BITs is the inclusion of IP protection in the
definition of foreign investment, an aspect not
conventionally looked upon in the broader con-
sideration of the implications of such agreements
in terms of policy space and its consequences.
3.4 TOT in free trade agreements
Regional and interregional FTAs have proliferated
in the past decade, partly in response to a lack

of progress in multilateral trade negotiations.
These agreements cover, among others, diverse
denominations, namely: regional trade agree-
ments, partnership agreements and trade pro-
motion agreements. These agreements typically
expand on WTO commitments and often include
investment and IP-plus chapters.
One example of a best-endeavour clause on the
facilitation of access to environmentally friendly
technology can be found in the Japan-Swiss FTA,
Article 9(1) on the promotion of trade in environ-
mental products and environment-related ser-
vices (2009):
"The Parties shall encourage trade and dis-
semination of environmental products and
environment-related services in order to fa-
cilitate access to technologies and products
that support the environmental protection
and development goals, such as improved
sanitation, pollution prevention, sustainable
promotion of renewable energy and climate-
change-related goals" (emphasis added).
FTAs also make regular references to competi-
tion policies. In the case of the United States, the
agreements signed with a number of develop-
ing countries deal with this issue by almost re-
producing TRIPS Article 8.2.115 For example, the
Dominican Republic–Central America–United
States FTA (CAFTA–DR) provides:
“Nothing in this Chapter shall be construed to
prevent a Party from adopting measures nec-
essary to prevent anticompetitive practices
that may result from the abuse of the intel-
lectual property rights set out in this Chapter,
provided that such measures are consistent
with this Chapter”.116
The same type of provision is found in FTAs or
partnerships agreements recently signed with
the European Union. This is, for example, the case
of the Economic Partnership Agreement between
the EU and the Caribbean Forum (CARIFORUM)117
where a number of provisions complement the
reference to competition issues. The CARIFORUM
EPA places the chapter dealing with IP protec-
tion in a broader context of innovation policies
(Spence, 2008).
The chapter focuses on the need for support for
national and regional innovation systems in the
Caribbean and emphasizes the importance of as-
sisting the commercialization of Caribbean inno-
vations in the EU market. The underlying rationale
is that IP protection should contribute to estab-
lishing a viable technological and innovative base
International Technology Transfer Related Agreements
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in the country (in line with TRIPS Article 66.2). In
the latter case, it is noteworthy that compared to
TRIPS Article 66.2, the EPA extends the provision to
all developing countries party to the Agreement.
In addition, the focus on innovation highlights
the fact that the majority of technological innova-
tions in small economies (developing or least de-
veloped countries) are of an incremental nature
reliant on access to information and knowledge
to carry out improvements and build on existing
innovations (South Centre/CIEL, 2006: 3).
Thus, Title IV, Chapter 2 (“Innovation and intellec-
tual property”) of the CARIFORUM EPA provides
that its objectives are to:
"(a)  promote the process of innovation, in-
cluding eco-innovation, of enterprises located
in the Parties;
(b)  foster competitiveness of enterprises and
in particular micro-, small- and medium-sized
enterprises of the Parties;
(c)  facilitate the production and commerciali-
sation of innovative and creative products be-
tween the Parties;
(d)  achieve an adequate and effective level of
protection and enforcement of intellectual
property rights;
(e)  contribute to the promotion of techno-
logical innovation and to the transfer and dis-
semination of technology and know-how;
(f)  encourage, develop and facilitate coopera-
tive production and development activities in
the creative industries between the Parties,
as well as to develop lasting relationships be-
tween the Parties' creative communities;
(g)  promote and strengthen regional coop-
erative activities involving the outermost re-
gions of the European Community, so as to al-
low these regions and the CARIFORUM States
to mutually benefit from their proximity and
neighbourhood situation by developing an
innovative and competitive regional area.”
More specifically in its operational part dealing
with TOT (Art. 142), the CARIFORUM EPA provides:
"1.  The EC Party and the Signatory CARIFORUM
States agree to exchange views and informa-
tion on their practices and policies affecting
transfer of technology, both within their re-
spective regions and with third countries. This
shall in particular include measures to fa-
cilitate information flows, business partner-
ships, licensing and subcontracting. Particu-
lar attention shall be paid to the conditions
necessary to create an adequate enabling en-
vironment for technology transfer in the host
countries, including issues such as develop-
97
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ment of human capital and legal framework.
2.  The EC Party and the Signatory CARIFORUM
States shall take measures, as appropriate,
to prevent or control licensing practices or
conditions pertaining to intellectual prop-
erty rights which may adversely affect the
international transfer of technology and that
constitute an abuse of intellectual property
rights by right holders or an abuse of obvious
information asymmetries in the negotiation
of licences.
3.  The EC Party shall facilitate and promote the
use of incentives granted to institutions and
enterprises in its territory for the transfer of
technology to institutions and enterprises of
the CARIFORUM States in order to enable the
CARIFORUM States to establish a viable tech-
nological base. The EC Party shall endeavour
to bring any known measures to the attention
of the CARIFORUM EC Trade and Development
Committee for discussion and review.”
The above-cited three measures are also to be
found in more recent agreements signed by the
EU in 2011 with Peru–Colombia and with Central
American countries.
4 Transfer of technology in other
international instruments
Aside from agreements relating to the commer-
cial channels of technology transfer (trade, invest-
ment and IPRs), other international instruments
are also relevant to TOT. These include both soft
law instruments and legally binding treaties. TOT
provisions are especially frequent in biodiversity
and environmental protection treaties.
Sectoral agreements
Some agreements cover trade and investment
issues, but are limited to specific sectors. One
such sectoral agreement is the Energy Charter
Treaty118 entered into force in 1998 addressing
investment, trade and transit issues relating to
energy. Article 8 specifically deals with transfer of
technology:
"(1) The Contracting Parties agree to promote
access to and transfer of energy technology
on a commercial and non-discriminatory ba-
sis to assist effective trade in Energy Materials
and Products and Investment and to imple-
ment the objectives of the Charter subject to
their laws and regulations, and to the protec-
tion of Intellectual Property rights.
(2) Accordingly, to the extent necessary to give
effect to paragraph (1) the Contracting Parties
98
shall eliminate existing and create no new ob-
stacles to the transfer of technology in the field
of Energy Materials and Products and related
equipment and services, subject to non-prolif-
eration and other international obligations."
Instruments relating to common heritage of
mankind
Transfer of technology provisions are also provid-
ed in the area of extraction of natural resources
considered to be part of the common heritage of
mankind. For instance, the United Nations Con-
vention on the Law of the Sea (UNCLOS)119 cre-
ated the International Seabed Authority, which
is mandated with the acquisition and transfer of
technology with respect to the ocean's sea bed
and subsoil situated beyond the limits of nation-
al jurisdictions. UNCLOS Article 144.1 provides:
”The Authority shall take measures in accord-
ance with this Convention: (a) to acquire tech-
nology and scientific knowledge relating to
activities in the Area; and (b) to promote and
encourage the transfer to developing States
of such technology and scientific knowledge
so that all States Parties benefit therefrom”.
Multilateral environmental agreements
Transfer of technology is a prominent feature
in the majority of multilateral environmental
agreements. Agreements relating to environ-
mental protection like the Basel Convention on
the Control of Transboundary Movements of Haz-
ardous Wastes and Their Disposal (1992), the Vi-
enna Convention for the Protection of the Ozone
Layer (1985), the Montreal Protocol on Substances
that Deplete the Ozone Layer (1987), and climate
change treaties include provisions on TOT.
The UN Framework Convention on Climate
Change (1992) Article 4.7 outlines the rationale
behind TOT in the climate change regime:
"The extent to which developing country Par-
ties will effectively implement their commit-
ments under the Convention will depend on
the effective implementation by developed
country Parties of their commitments under
the Convention related to financial resources
and transfer of technology and will take fully
into account that economic and social devel-
opment and poverty eradication are the first
and overriding priorities of the developing
country Parties" (emphasis added).
A financial mechanism is envisioned in Article
11 of the UNFCCC to facilitate TOT. More recently,

and as result of the CBD 16th meeting of the
Conference of the Parties held in Cancun (2010),
a technology mechanism was established to ac-
celerate technology development and transfer in
support of action on adaptation and mitigation
(ICTSD, 2011).
Convention on Biological Diversity
The CBD recognizes in Article 16 that "both access
to and transfer of technology among Contract-
ing Parties are essential elements for the attain-
ment of the objectives of this Convention" and
mandates a transfer of technology to developing
countries on "fair and most favourable terms".
In addition, the convention contains provisions
for scientific and technical cooperation and as-
sistance for developing countries and LDCs in re-
lation to TOT in Article 18 to ensure the effective
implementation of the agreement.
Also the Cartagena Protocol on Biosafety to the
Convention on Biological Diversity120 includes a
provision on assisting developing countries in ca-
pacity building for TOT. Article 22.1 states:
“The Parties shall cooperate in the develop-
ment and/or strengthening of human re-
sources and institutional capacities in bi-
osafety, including biotechnology to the extent
that it is required for biosafety, for the purpose
of the effective implementation of this Proto-
col, in developing country Parties, in particular
the least developed and small island develop-
ing States among them, and in Parties with
economies in transition, including through
existing global, regional, subregional and na-
tional institutions and organizations and, as
appropriate, through facilitating private sec-
tor involvement”.
A more recent complement to the CBD is the 2010
Nagoya Protocol. The Protocol on Access to Genet-
ic Resources and the Fair and Equitable Sharing
of Benefits Arising from their Utilization to the
CBD aims at sharing the benefits arising from
the utilization of genetic resources in a fair and
equitable way, including by appropriate access
to genetic resources and by appropriate transfer
of relevant technologies, taking into account all
rights over those resources and to technologies,
and by appropriate funding.121
The protocol sets out a number of obligations to
contracting parties in relation to access to ge-
netic resources, benefit sharing and compliance
having a bearing on TOT matters. For example, on
access to generic resources, it mandates to create
International Technology Transfer Related Agreements
module
conditions to promote and encourage research
contributing to biodiversity conservation and
sustainable use. In the case of benefit-sharing
obligations, domestic measures are to provide for
the fair and equitable sharing of benefits arising
from the utilization of genetic resources, with the
contracting party providing genetic resources.
Utilization includes research and development on
the genetic or biochemical composition of genetic
resources, as well as subsequent applications and
commercialization. Benefits may be monetary or
non-monetary, e.g. royalties and the sharing of
research results. Finally, in the case of compliance
obligations, it provides that measure are to be tak-
en to monitor the utilization of genetic resources
after they leave a country, including designating
effective checkpoints at any stage of the value
chain, such as research, development, innovation,
pre-commercialization or commercialization.
Soft law instruments
Non-binding documents such as guidelines and
principles that spell out rights and commitments
are also referred to as soft law instruments. The
OECD Guidelines for Multinational Enterprises
(latest revision 2011)122 represent such voluntary
principles and recommendations by govern-
ments that are addressed to multinational en-
terprises. The guidelines outline the rules of con-
duct that TNCs should observe in their activities
and investments. Section IX on S&T provides, for
example, that enterprises should:
 “1. Endeavour to ensure that their activities
are compatible with the science and technol-
ogy (S&T) policies and plans of the countries
in which they operate and as appropriate
contribute to the development of local and
national innovative capacity.
2.  Adopt, where practicable in the course of
their business activities, practices that permit
the transfer and rapid diffusion of technolo-
gies and know-how, with due regard to the
protection of intellectual property rights.
3.  When appropriate, perform science and
technology development work in host coun-
tries to address local market needs, as well
as employ host country personnel in an S&T
capacity and encourage their training, taking
into account commercial needs.
4.  When granting licenses for the use of in-
tellectual property rights or when otherwise
transferring technology, do so on reasonable
terms and conditions and in a manner that
contributes to the long term sustainable de-
velopment prospects of the host country.
5.  Where relevant to commercial objectives,
develop ties with local universities, public re-
99
4 International Technology Transfer Related Agreements
module
search institutions, and participate in co-op-
erative research projects with local industry
or industry associations.”
A further example of soft law is the 2008 WHO
Global Strategy and Plan of Action on Public
Health, Innovation and Intellectual Property. One
element of the GSPA-PHI deals with TOT that,
among others, reiterates the relevance of TRIPS
Article 7:
“33. North-South and South-South develop-
ment cooperation, partnerships and net-
works need to be supported in order to build
and improve transfer of technology related
to health innovation. Article 7 of the TRIPS
Agreement states that the protection and the
enforcement of intellectual property rights
should contribute to the promotion of tech-
nological innovation and the transfer and
dissemination of technology, to the mutual
advantage of producers and users of techno-
logical knowledge and in a manner conducive
to social and economic welfare, and to the bal-
ance of rights and obligations.”123
The TOT element of the Global Strategy suggests
a number of initiatives that could be undertaken,
such as:
“(4.1) promoting transfer of technology and
the production of health products in develop-
ing countries
(a) explore possible new mechanisms and
make better use of existing mechanisms
to facilitate transfer of technology and
technical support to build and improve
innovative capacity for health-related re-
search and development, particularly in
developing countries
(b) promote transfer of technology and
production of health products in develop-
ing countries through investment and ca-
pacity building
(c) promote transfer of technology and
production of health products in devel-
oping countries through identification of
best practices, and investment and capac-
ity building provided by developed and de-
veloping countries where appropriate.
(4.2) supporting improved collaboration and
coordination of technology transfer for health
products, bearing in mind different levels of
development
(a) encourage North-South and South-
South cooperation for technology trans-
fers, and collaboration between institu-
tions in developing countries and the
pharmaceutical industry
100
(b) facilitate local and regional networks
for collaboration on research and develop-
ment and transfer of technology
(c) continue to promote and encourage
technology transfer to least-developed
country members of the WTO consistent
with Article 66.2 of the Agreement on
Trade-Related Aspects of Intellectual Prop-
erty Rights
(d) promote the necessary training to in-
crease absorptive capacity for technology
transfer.
(4.3) developing possible new mechanisms to
promote transfer of and access to key health-
related technologies
(a) examine the feasibility of voluntary
patent pools of upstream and down-
stream technologies to promote innova-
tion of and access to health products and
medical devices
(b) explore and, if feasible, develop possible
new mechanisms to promote transfer of
and access to key health-related technolo-
gies of relevance to public health needs of
developing countries, especially on Type II
and III diseases and the specific R&D needs
of developing countries in respect of Type
I diseases, which are consistent with the
provisions of the TRIPS agreement and
instruments related to that agreement,
which provide flexibilities to take meas-
ures to protect public health.”
In the process of operationalizing the TOT provi-
sion of the Global Strategy, the WHO, in partner-
ship with UNCTAD and the International Centre
for Trade and Sustainable Development (ICTSD),
and with funding by the European Union, imple-
mented a project on improving access to medi-
cal products in developing countries through
local production and related technology trans-
fer. The project involved identifying the main
challenges and obstacles of local production in
developing countries and providing evidence-
based recommendations on their feasibility and
sustainability.
The joint work involved stakeholder analysis,
trends survey, stakeholder workshops and case
studies. The UNCTAD Secretariat led the case
studies. The case studies carried out in different
regions included TOT and local production pro-
jects with different characteristics, such as the
geographic location of the production facility;
the public or private character of the investment
and the corporate form of the arrangement;
the type of product involved; and the source of
technologies. The objective was to indentify the
drivers of the decision to produce locally and the

modes of TOT, and to develop the methodology
and recommendations of the project based upon
direct experience.
5 Summary and review
There is no comprehensive multilateral treaty
governing the international transfer of technol-
ogy. However, provisions relating to TOT have
been incorporated into various types of interna-
tional agreements – multilateral, interregional,
regional and bilateral – that deal with the TOT-
related channels such as trade, investment and
licensing in the treatment of IPRs. They deal with
a range of other issues, including biodiversity, cli-
mate change and transboundary movements of
hazardous waste.
In general, international instruments fulfil at
least three functions with respect to TOT. First,
they aim as a general principle at facilitating
TOT by improving access to technology and
build absorption capacity through cooperation
and technical assistance. Second, these instru-
ments impact TOT implicitly by setting out
the "rules of the game", governing technology
transfer questions such as trade, investment
and IPRs. Third, some of these instruments pool
technology internationally by setting interna-
tional standard, which is often accompanied
by assistance to developing countries to meet
these standards.
Provisions dealing explicitly with technology
transfer may be more or less effective depending
on: (i) the nature of the provision (mandatory or
best-endeavour); (ii) their terms and conditions
(“fair and most favourable” terms of diffusion or
access to technology on a "commercial basis");
(iii) modes of implementation (follow-up and
monitoring); and (iv) addressees (states or pri-
vate actors). In multilateral agreements in par-
ticular, the provisions on technology transfer are
often worded vaguely and place no clear obliga-
tions for leading technology supplier countries
to transfer technology to less technologically ad-
vanced countries.
Only one attempt has been made in the past to
develop a more comprehensive international
agreement on technology transfer – this was the
draft International Code of Conduct on the Trans-
fer of Technology, which was negotiated under
the auspices of UNCTAD during the late 1970s
and 1980s. Member states held widely dispa-
rate perspectives on technology transfer, and no
agreement was ever reached for final adoption of
the draft TOT Code.
International Technology Transfer Related Agreements
module
A number of current international agreements
recognize the importance of technology trans-
fer to developing countries. These include the
agreements under the umbrella of the WTO (par-
ticularly GATS, TBT, SPS and TRIPS), international
investment agreements, free trade agreements,
and multilateral environmental agreements,
such as the CBD and UNFCCC.
The TRIPS Agreement has the following specific
provisions relating to technology transfer:
• Article 7 states a basic principle of TRIPS that
the protection of IPRs should “contribute to
the promotion of technological innovation
and to the transfer and dissemination of tech-
nology”.
• Article 8 allows member states to devise ap-
propriate measures to prevent the abuse of
IPRs by rights holders which will “adversely
affect the international transfer of technol-
ogy”, providing that the measures do not run
counter to the other provisions in TRIPS. Pro-
visions in Article 40 dealing specifically with
anticompetitive practices in licensing agree-
ments complement Article 8.
• Article 66.2 requires developed member
states to provide incentives to their own en-
terprises and institutions “for the purpose
of promoting and encouraging technology
transfer to least developed country Members
in order to enable them to create a sound and
viable technological base”.
The SPS and TBT Agreements both refer to the
setting of standards. The TBT Agreement iden-
tifies international standards as important for
encouraging technology transfer to developing
countries, and the SPS Agreement relates to pro-
visions for standards in respect of certain classes
of goods, such as plants and animal products.
Furthermore, both agreements foresee technical
assistance to support developing country mem-
bers in complying with these standards.
GATS contains provisions to support improved
access to technology for developing country
members, especially in the field of telecommu-
nications.
The WIPO Committee on Development and Intel-
lectual Property is responsible for overseeing the
implementation of the WIPO Development Agen-
da. Of the agenda’s 45 recommendations, several
encourage scientific cooperation and technology
transfer focusing on IP policies and mechanisms
that are supportive of technology transfer. The
WIPO Secretariat has devised a project to imple-
ment TOT-related recommendations.
101
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International investment agreements may also
have an impact on TOT. In some cases they limit
the use of performance requirements on tech-
nology transfer by host countries, which could be
used to promote access to technology not explic-
itly referred to under the TRIMS Agreement. On
the other hand, some IIAs actively foster technol-
ogy transfer by signalling TOT among the agree-
ment's objectives and including provisions that
encourage technology transfer.
Free trade agreements expand on multilateral
trade rules and on investment rules. They also
include related TOT provisions, among others, on
competition policy and general principles on the
promotion of innovation.

Exercises and questions for discussion

1. Is a "Multilateral Agreement on Technology Transfer" feasible (or even possible) or is the compartmental-
ized nature of current TOT-related instruments actually better apt to promote technology transfer?
2. Who should be the addressees of TOT-related obligations: the home states of traders, investors and patent
holders or the private actors themselves?
3. What other novel provisions (sector specific clauses, new mechanisms on implementation, institutional
arrangements) could be added into IIAs and FTAs to promote technology transfer?
4. How can the consistency and interplay between different international instruments be improved to ben-
efit technology transfer, i.e. TOT on a commercial basis (GATT) versus TOT on fair and equitable basis (CBD)?

Final exercises
1. You are the newly appointed chief executive officer (CEO) of a small/medium-sized manufacturing enter-
prise (you decide what your firm produces) which has stagnated over a period of years: productivity is low
and the firm is using obsolete technology. On the other hand, your labour costs are low and your brand is
familiar in the regional market. How will you go about:
(a) Accessing improved foreign technology?
(b) Building absorptive capacity within the firm?
2. You are an innovator (you decide what your innovation is) and would like to set up your own business, but
you have little available capital.
(a) What are your options for exploiting your innovation?
(b) What factors would you take into consideration in selecting a strategy to build up your business?
3. Your government has decided to support the development of a specific industry (you choose the industry
– it can also be an area of agriculture if you wish) with a view to it becoming a major exporting industry in
the future. You have been tasked with the organization of a stakeholder meeting to discuss and report back
on the aspect of technological upgrading and future development within the industry.
(a) Who (what types of stakeholders) would you invite to participate in the meeting?
(b) What would be on the agenda for discussion?

1 02
ENDNOTES
1 Established in 1964 as an organ of the United Nations
General Assembly, UNCTAD was set up as the focal point
within the UN for the integrated treatment of trade and
development and the related issues of finance, investment,
technology and sustainable development.
2 For an overview of the mechanisms for supporting re-
search and trends in publicly developed technology, see
Barton (2007: Chapter 3).
3 Patent pools are examples of the collective management
of IPRs; for instance, they normally involve an agreement
between two or more patent owners to pool their patents
and subsequently license them to one another or to third
parties, and they usually involve standard licensing terms
to licensees, with a percentage of the licence fee being al-
located to the patent owner (royalties). A pool may “involve
simple cross-licensing among two or more competitors, in
order to share a handful of patents necessary for the manu-
facture and sale of a particular product, or it may involve
a large, industry-wide pool open to anyone, encompassing
hundreds of manufacturers and thousands of patents, as
well as other intellectual property, such as rights to use
data, know-how or trademarks” (KEI, 2007: 1).
4 The patent system provides the inventor an exclusive right
to make, market or use an invention for a set amount of
time in return for disclosure of the patent. After the lapse
of the patent duration the invention enters the public do-
main.
5 Other mechanisms that were discussed by the Commis-
sion include patent pools (especially for the development
of vaccines) and open collaboration projects (following
the example of the Human Genome Project). In addition,
the Commission considered a proposal for the negotiation
of a global medical R&D treaty, which sought an ongoing
commitment from governments to spend a percentage of
national income on R&D and develop new mechanisms to
finance R&D (WHO, 2006).
6 At the time of writing a WHO Consultative Expert Work-
ing Group on Research and Development: Financing and
Coordination is currently deliberating on how to secure
additional financing and modalities for research and de-
velopment activities relevant for the control and treatment
of the diseases covered by the GSPA-PHI.
7 http://www.theglobalfund.org.
8 http://www.gavialliance.org.
9 http://www.gatesfoundation.org
10 The World Bank (1999: 16-56) also underscores the impor-
tance of market openness, stronger IPRs and foreign direct
investment as important channels for acquiring imported
knowledge, especially in developing countries.
11 For instance, at the time of writing the Apple iPhone is the
second most popular smartphone after the BlackBerry,
with a 28 percent share of the United States smartphone
market in the first quarter of 2010 (see http://blog.nielsen.
com/nielsenwire/online_mobile/iphone-vs-android/#).The
iPhone’s initial inability to communicate with corporate
computer systems running Microsoft Exchange hindered
its growth in that market. In order to increase sales, Apple
announced a low-cost software development kit that out-
side programmers could use to create programmes for the
iPhone, as it had been limited to only running applications
that Apple included. In order to attract corporate custom-
ers, Apple developed the iPhone capacity to work directly
with the Microsoft Exchange software, allowing it to in-
teract closely with corporate networks and e-mail systems
in much the way that BlackBerry devices do. Since the 3G
model, the iPhone is integrated with Microsoft Exchange,
which in part resulted in the sale of 6 million 3G iPhones
within 50 days, in contrast to the first iPhone, which sold 6
million in one year – a perfect example of network effects
(The New York Times, 7 March 2008, “Apple to Encourage
iPhone Programmers”).
12 This was acknowledged in Art. 1.3(d) of the UNCTAD draft
International Code of Conduct on the Transfer of Technol-
ogy.
13 Unbundling involves dividing the technology package into
different components for assessment, e.g. division into
“core” equipment, “support” equipment, software, etc. A de-
veloping country may already possess some support equip-
ment, in which case it need not buy those machines just
because they are part of the package. It can save money by
using the support machines that are available within the
country.
14 Other factors, such as age, corporate culture, motivation,
size and market position, also play a role.
15 Patent activity is a commonly used indicator of innovative
activity, although there are weaknesses in using patent
data in this way.
16 The WIPO statistics show an increase in patent applica-
tions and in the delivery of patents. In 2010, approximately
1.98 million patent applications were filed around the
globe, 307,293 of which coming from residents of China.
The total number of patents granted in 2010 was 908,862
(WIPO, 2011c).
17 See the 2010 R&D Scoreboard, United Kingdom Depart-
ment for Business Innovation and Skills, at: webarchive.
nationalarchives.gov.uk/20101208170217/http://www.inno-
vation.gov.uk/rd_scoreboard/default.asp?p=3.
18 See United States Chamber of Commerce, Global Intellec-
tual Property Center, 9 February 2011, at: http://www.the-
globalipcenter.com/sites/default/files/2011_Global_Intellec-
tual_Property_Center_Priorities.pdf.
19 See Oyelaran-Oyeyinka and Gehl Sampath (2009), among
others.
20 For instance, many graduates from India and Taiwan Prov-
ince of China learned valuable skills in Silicon Valley during
the Internet boom and subsequently returned home to
start their own companies.
21 It should be pointed out that in the prevailing interdepend-
ent economic system with productive activity organized
around global value chains, there are few countries that
could be characterized as net technology exporters.
22 For more information about FDI and modes of transfer, see
UNCTAD (2010a).
103
 23 This was demonstrated in an UNCTAD case study of the
salmon industry in Chile (see annex), which has contribut-
ed to the general development of the region. At that time,
it employed about 45,000 workers directly and indirectly,
and brought about a general improvement in regional in-
frastructure and services. In that specific region, the pov-
erty index decreased from 40 per cent to 13 per cent be-
tween 1990 and 2003, while the index of extreme poverty
decreased from 24 per cent to 7 per cent (UNCTAD, 2006a).
24 A case study by Javorcik (2004) examined backward linkages
and technology spillovers using data from Lithuanian firms
over 1996-2000 and found that productivity is positively af-
fected by a sector’s contacts with TNCs but not by their pres-
ence in the same industry. Thus, these results support the
existence of vertical spillovers from FDI.
25 A maquiladora is a factory that imports materials and
equipment on a duty-free and tariff-free basis for assem-
bly or manufacturing, and then re-exports the assembled
product, usually back to the originating country.
26 Other examples of vertical spillovers are, for instance, In-
tel’s investment in Costa Rica. Larrain et al. (2000) show
that local suppliers benefited substantially from Intel’s in-
vestment. Also, in the electronics sector, foreign investors
helped their local subcontractors keep pace with modern
technologies by assigning technicians to the suppliers’
plants to help set up and supervise automated production
and testing procedures.
27 Tacit knowledge is what is known and understood, but can-
not be stated explicitly or codified: it depends mainly on
experience. Thus, tacit knowledge cannot be transferred
easily, or at arm’s length. One simple example of tacit
knowledge is how to drive a car (or ride a bicycle).
28 Pioneer licensed BtBooster technology in 2005.
29 http://www.boehringer-ingelheim.com/corporate_profile.
html.
30 http://www.natureworksllc.com/.
31 The term “dual use” was originally coined for technologies
that have both civilian and military applications. In recent
years, and with heightened concerns about the misuse of
technology for terrorist purposes, the term is often used to
refer to any technology that can be deployed for harmful,
as well as beneficial, purposes.
32 See also UNCTAD (2009a) and Kuznetsov (2006). An over-
view of the World Bank’s Global Diaspora Project can be
found at: http://web.worldbank.org/WBSITE/EXTERNAL/
WBI/WBIPROGRAMS/KFDLP/0,,contentMDK:21972086~page
PK:64156158~piPK:64152884~theSitePK:461198,00.html.
33 The greater size of chemical, biological and medical data-
bases, new software and more powerful computers has
facilitated collaboration efforts in order to rapidly develop
knowledge and products (Foray, 2009: 39).
34 Linux is a free Unix-type operating system originally cre-
ated by Linus Torvalds with the assistance of developers
around the world. Developed under the GNU General Pub-
lic License, the source code for Linux is freely available to
everyone. IBM supports Linux on all IBM servers.
35 In an historical example, the measures that the then state
of Venice (today part of Italy) undertook in the 1470s to
promote manufacturing included the active facilitation of
1 04
skilled migrant workers. These measures included the pro-
tection of inventions after their use had been demonstrat-
ed, tax holidays for two years for skilled immigrant workers,
and controlling the migration of domestic skilled workers.
In subsequent centuries, several developed and developing
countries have designed similar measures to promote TOT.
36 The Engineering Centre Airbus in Russia (ECAR).
37 http://www.usaep.org/.
38 Approximately 200 million people were exposed to arsenic
poisoning due to contaminated water in some rural parts
of India and Bangladesh. Arsenic poisoning causes can-
cer of the skin, lungs and bladder, and may lead to death
(Ahmed et al., 2001).
39 http://www.apyron.com/.
40 One has to keep in mind the differences in trade and FDI
patterns between the United States and the various re-
gions that may affect technology transfer. For instance, 48
per cent of Africa's imports originate from Europe while
about 45 per cent of LAC imports come from the United
States. Trade, as one of the conduits for technology transfer,
is likely to influence royalty and licensing fee payments and
receipts from the United States to regions that are not its
main trading partners.
41 According to the Standard International Trade Classifica-
tion (SITC), 3-digit level, these groups are: 723 civil engineer-
ing equipment, 730 metal working machinery and tools,
744 mechanical handling equipment, 764 telecommunica-
tion equipment, parts and accessories, 771 electrical power
machinery and parts, 778 electrical machinery and equip-
ment, and 874 measuring and controlling equipment. At
regional level inclusion of other groups such as textile ma-
chinery did not change the curves.
42 Microsoft Disc Operating System, was the operating sys-
tem for personal computers at the time.
43 See, e.g. the Know-How Contract between Shanghai For-
eign Trade Corporation with Shanghai Engineering Ma-
chinery Works and Delmag Maschinenfabrik Reinhold
Dornfeld GMBE+CO at: http://www.apevibro.com/pdfs/
diesels/semwagreement.pdf.
44 See e.g. the Uniform Biological Material Transfer Agree-
ment at: http://www.ott.nih.gov/NewPages/UBMTA.pdf
45 Annex I of the Bonn Guidelines on Access to Genetic Re-
sources and the Fair and Equitable Sharing of Benefits Aris-
ing out of the Utilization of Genetic Resources includes a
list of suggested elements for MTAs.
46 See http://www.planttreaty.org/.
47 Most of the biodiversity-rich countries are in poorer re-
gions. However, there are some areas in developed coun-
tries that are also particularly rich in biodiversity, and that
have developed bioprospecting arrangements. Yellowstone
National Park in the United States is a notable example.
48 See Mansfield (1994 and 1995); Ginarte and Park (1997); Park
and Lippoldt (2004 and 2008); Branstetter et al. (2005);
Maskus (2000); Maskus and Okediji (2010); WIPO (2011a).
49 On 1 October 2011, eight ACTA negotiating partners signed
what is characterized as the highest-standard plurilateral
agreement concerning the enforcement of IPRs. Accord-
 ing to the Office of the United States Trade Representative
(USTR): "The Anti-Counterfeiting Trade Agreement (ACTA)
is a groundbreaking initiative by key trading partners to
strengthen the international legal framework for effec-
tively combating global proliferation of commercial-scale
counterfeiting and piracy. In addition to calling for strong
legal frameworks, the agreement also includes innovative
provisions to deepen international cooperation and to
promote strong intellectual property rights (IPR) enforce-
ment practices. Together, these provisions will help to sup-
port American jobs in innovative and creative industries
against intellectual property theft.” See http://www.ustr.
gov/acta.
50 For example, employment contracts in innovating firms
usually include clauses that prohibit employees from di-
vulging information about the firm’s trade secrets.
51 For example, if an article in a scientific journal expresses
findings or ideas that might have commercial value, those
ideas are not protected. Copyright only prevents the writ-
ten article from being copied or reproduced without per-
mission of the copyright holder.
52 Brazilian Patent Law (9279) of 1996, Article 10.IX, see http://
www.wipo.int/wipolex/es/details.jsp?id=515.
53 Tying arrangements are the same as coercive package
licensing clauses referring to restrictions “imposing ac-
ceptance of additional technology, future inventions and
improvements, goods or services not wanted by the acquir-
ing party or restricting sources of technology, goods or ser-
vices, as a condition for obtaining the technology required”
(UNCTAD, 1985).
54 This encompasses all restrictions imposed on a licensee
after the patent has expired. Imposing post-expiry restric-
tions on a licensee can be deemed anti-competitive as the
licensor still claims an exclusive position, although he or
she has already lost his or her exclusive right.
55 See UNCTAD (2005c) for a full discussion and definition of
term.
56 In the early 1970s, Cohen and Boyer discovered that “restric-
tion enzymes” could “cut” DNA (acting like a biological pair
of scissors) at specific points along its length. This led to
their development of “gene splicing”, or recombinant DNA
(rDNA) technology.
57 This claim is supported by the following figures: In the
United States, the share of all patents issued to individual
inventors was 91 per cent in 1901 but by the early 1980s this
had reduced to fewer than 19 per cent (Scherer and Ross,
1990, in Kanwar and Evenson, 2001).
58 The Park and Lippoldt study uses data from 1990 to 2005,
thus covering the IPR reform that the TRIPS Agreement
brought about. It distinguishes between merchandise
imports and services imports as measures of technology
transfer via trade, and examines imports and inward FDI
by sector, particularly those that are high-tech. Service im-
ports include intangible goods such as communications,
computers and royalties. Merchandise imports include
pharmaceuticals, office and telecom equipment, chemi-
cals, optics and precision equipment, electronic and elec-
trical equipment and aerospace.
59 For instance one could also argue that IPRs hinder TOT,
for example, by increasing the costs of research inputs by
creating patent thicket, which requires costly licensing
negotiations to resolve, or by blocking important techno-
logical components needed by other innovators (Park and
Lippoldt, 2008: 14).
60 Mansfield’s research (1994) focused on 100 major United
States firms in six manufacturing industries: chemicals (in-
cluding drugs), transportation equipment, electrical equip-
ment, machinery, food and metals. The results were based
on a combination of survey data, interview studies and sta-
tistical analysis.
61 Maskus and Penubarti (1995) and Fink and Prima Brago
(1999) studies encountered the problem that the strength
of IP protection may be an endogenous variable. Neverthe-
less Fink and Primo Braga argued that the degree of endo-
geneity may not be too severe if one takes into account that
most IPR regimes were established before the 1960s and
that the level of protection remained fairly constant until
1989-1990, the years of the Fink and Primo Braga estima-
tion (Fink and Primo Braga, 1999: 32).
62 A more recent example involves the competition between
Toshiba’s High Density Digital Versatile Disk (HD DVD) for-
mat and the Blu-Ray HD DVD.
63 Measured by the level of local R&D investments.
64 The study conducted by Fink and Primo Braga in 1999 uses
a gravity model of bilateral trade flows and estimates the
effects of increased protection on a cross section of 89 by 88
countries. A previous study (Maskus and Penubarti, 1995)
that estimated the effect of IPRs on international trade
flows by using an augmented version of the Helpman-
Krugman model of monopolistic competition, indicated a
positive link between tighter patent protection on bilateral
manufacturing imports (trade flows) into both small and
large developing countries (Fink and Brimo Braga, 1999: 23).
65 Rudimentary production and assembly facilities are those
involving basic technologies that are reasonably well
known to all firms in the relevant industry.
66 Mansfield’s study addressed firms from Japan, the United
States and Germany. Mansfield conducted interviews with
managers of major companies. A manager of a major Japa-
nese chemical and pharmaceutical company responded to
the question of whether IP protection plays a role in the
transfer of high technology goods as follows: “Transfer of
top-grade technology is possible only to the subsidiaries on
the following three terms and conditions: (i) the majority
of which stocks we own; (ii) to which we may dispatch key
persons; (ii) which may fully control technology of produc-
tion disclosed and/or transferred by us. However, even in
this case we have difficulty in controlling a 'trade secret'.
We are not willing to transfer the top-grade technology to
such developing countries as being weak on their system of
patent and trade secret protection. Therefore, as an inevita-
ble consequence, the amount of investment by us becomes
small and we are obliged to expand our investment little
by little while taking in the situation in such countries”
(Mansfield, 1995: 25).
67 For example, in chemicals and pharmaceuticals, United
States firms are more likely to regard protection in devel-
oping countries addressed too weak to permit FDI and the
transfer of their most advanced technology, more so than
Japanese firms. However, in this regard, in the machinery
and electrical equipment industry, there is hardly any dif-
ference between the United States and Japan. This can
be explained by arguing that Japan is a world leader in
105
 machinery and electrical equipment, but is not as strong
in the chemical and pharmaceutical industry (Mansfield,
1995: 21).
68 The INSEAD Global Innovation Index 2011 provides further
insights and measurement of innovation. See http://www.
globalinnovationindex.org/gii/main/previous/2010-11/Full-
Report_10-11.pdf.
69 Fink and Maskus (2005) argued that neither strong IPRs,
nor bilateral investment or free trade agreements, auto-
matically yield an increase in technology transfer and FDI.
Moreover, countries with weaker IP protection, such as
China and Brazil, have been able to attract more FDI than
countries that made IPRs part of their development goals
– such as some countries in sub-Saharan Africa (Maskus
2004: 54).
70 To examine this question they use country panel data on
R&D investment, patent protection and other country-spe-
cific characteristics.
71 ASEAN includes Brunei Darussalam, Cambodia, Indonesia,
the Lao People’s Democratic Republic, Malaysia, Myanmar,
the Philippines, Singapore, Thailand and Viet Nam.
72 The AEC Blueprint, endorsed by ASEAN leaders in Novem-
ber 2007, established a roadmap for transforming ASEAN
into a single market and production base. In November
2004, the ASEAN IPR Action Plan 2004-2010 was endorsed,
placing IPRs in the context of integrated social, economic
and technological development. The ASEAN Secretariat has
to implement the IPR Action Plan, the Copyright Coopera-
tion Plan and the AEC Blueprint. Aim of the joint project is
to explain the nature of EU proposals and provide a range
of options to the ASEAN Secretariat with respect to their
negotiation and, if desired, possible future implementa-
tion. Further, it will make observations with respect to the
negotiations and propose strategies for the future with
the ultimate aim of ensuring coordination and coherence
of IP positions in FTA negotiations, taking into account their
multilateral negotiations and commitments.
73 The Bayh-Dole Act, also referred to as University and Small
Business Patent Procedures Act, has been part of United
States legislation since 1980. It gives universities, small
businesses and non-profit organizations in the United
States intellectual property control of their inventions that
result from federal government-funded research. The act,
sponsored by two senators, Birch Bayh from Indiana and
Bob Dole from Kansas, was enacted by the United States
Congress on 12 December 1980.
74 See, for instance, Correa (2007). For the particular area of
pharmaceutical innovation, see WHO (2006: 128).
75 So-called no-challenges clauses relate to obligations on
the licensee not to challenge the validity of IPRs held by
the licensor.
76 See tying arrangement above.
77 This research used affiliate-level data on United States
multinational firms and aggregate patent data to test if
legal reforms that strengthen IPR increase the transfer of
technology to multinational affiliates operating in reform-
ing countries.
78 Rasiah (2002: 44) distinguishes three groups of developing
countries: the newly industrialized economies, in which a
high-tech infrastructure is at hand to meet the demands
106
of the TRIPS Agreement; the second-tier NIEs, being econo-
mies which are slowly going up, but the high-tech infra-
structure has not yet been installed to that extend that
they can actively participate in TRIPS; and the LDCs togeth-
er with the non-European transition economies and the
poorest developing economies.
79 Statistics show a booming change in FDI, licensing and
capital goods import. For instance, FDI increased from $218
million during 1967-1971 to $1.76 billion during 1982-1986.
Moreover, R&D expenditure increased from $26.6 million
in 1971 to $12.2 billion in 2000, making it one of the fastest
growing economies in the world.
80 Examples of successful firms from the Republic of Korea
are Samsung and LG Electronics.
81 There are exceptions; for example, protection of trade-
marks may be renewed indefinitely, on the payment of a
periodic fee.
82 It is also possible that once the term of protection has ex-
pired and the knowledge becomes freely available, it is al-
ready outdated.
83 This module draws on relevant UNCTAD material and gen-
eral literature including but not limited to UNCTAD (2001).
84 As explained in Module 1, TOT is generally understood as
any process by which one party gains access to another’s
technical information and successfully learns and absorbs
it into its production process. Technology may be trans-
ferred embodied in products or disembodied in ideas. In
line with this definition, this module provides an overview
of international instruments relevant for TOT.
85 See Module 1 on TOT channels and sources.
86 "The Parties shall take full account of the specific needs
and special situation of least developed countries in
their actions with regard to funding and transfer of
technology."
87 CBD Article 16.
88 GATS Article IV (1) reads: “The increasing participation of
developing country Members in world trade shall be facili-
tated through negotiated specific commitments, by differ-
ent Members pursuant to Parts III and IV of this Agreement,
relating to: (a) the strengthening of their domestic services
capacity and its efficiency and competitiveness, inter alia
through access to technology on a commercial basis” (em-
phasis added).
89 For a thorough overview of the history of technology trans-
fer, see Patel et al. (2001).
90 The UN Declaration for the Establishment of a New Inter-
national Economic Order aims to provide developing coun-
tries with access to: “the achievements of modern science
and technology, and promoting the transfer of technology
and the creation of indigenous technology for the benefit
of the developing countries in forms and in accordance
with procedures which are suited to their economies”
(General Assembly Resolution 3201 (S-VI) of 1 May 1974:
Para. 4(p)). Key points developing countries envisaged in
the NIEO include: (i) improving their terms of trade; (ii) the
reduction of tariffs by developed countries; (iii) the regu-
lation and control of practices of TNCs operating on their
territories, including the right to nationalize or expropriate
them on their terms; (iv) to increase transfer of technology,
 for instance, by reducing licensing costs and providing de-
velopment assistance (Sell, 1998: 81).
91 Resolution adopted by the General Assembly 3281 (XXIX).
Charter of Economic Rights and Duties of States, 12 Decem-
ber 1974, UN Doc. A/RES/29/3281. Available at: http://www.
un-documents.net/a29r3281.htm.
92 For further details, see http://r0.unctad.org/en/subsites/
cpolicy/docs/cpset/cpsetp2.htm.
93 See UN Resolution 32/188 of the General Assembly (1977) at:
http://www.un.org/documents/ga/res/32/ares32r188.pdf.
94 Packaged foreign technology includes assembly processes,
product specifications, production know-how, technical
personnel and components and parts.
95 These objectives and principles were based on the outcome
of negotiations from the Working Group on the Code of
Conduct on Transfer of Technology of the Pugwash Confer-
ences on Science and World Affairs and the decisions made
by the General Assembly (Patel et al., 2001: 7).
96 Also, non-equity modes of investment have proliferated
such as contract manufacturing or the outsourcing of ser-
vices. See UNCTAD (2011b) for further discussion.
97 For an overview of existing technology-related provisions
in international instruments, see UNCTAD (2001).
98 The general criteria used for a requirement to be prohib-
ited are: (i) that it is mandatory and enforceable under
domestic law or under administrative ruling; or (ii) that
compliance with the requirement is necessary to obtain an
advantage. In other words, TRIMS also covers government
incentives to encourage firms to use domestically made
products in lieu of imported products.
99 See http://www.wto.org/english/docs_e/legal_e/17-tbt.pdf.
100 The same applies in respect of environmental standards in
manufacturing products in developing countries.
101 See http://www.wto.org/english/tratop_e/sps_e/spsagr_e.
htm.
102 There are four modes of trade in services under GATS:
Cross-border supply is defined to cover services flows from
the territory of one member into the territory of another
member (e.g. banking or architectural services transmitted
via telecommunications or mail).
Consumption abroad refers to situations where a service
consumer (e.g. tourist or patient) moves into another
member's territory to obtain a service.
Commercial presence implies that a service supplier of
one member establishes a territorial presence, including
through ownership or lease of premises, in another mem-
ber's territory to provide a service (e.g. domestic subsidiar-
ies of foreign insurance companies or hotel chains); and
Presence of natural persons consists of persons of one
member entering the territory of another member to sup-
ply a service (e.g. accountants, doctors or teachers). The An-
nex on Movement of Natural Persons specifies, however,
that members remain free to operate measures regarding
citizenship, residence or access to the employment market
on a permanent basis.
103 See GATS/SC/120.
104 See GATS/SC/42.
105 This concern was also expressed by Argentina and Brazil
in 2004 in a proposal to establish a Development Agenda
for WIPO. The text of their original proposal is available at:
http://www.wipo.int/edocs/mdocs/govbody/en/wo_ga_31/
wo_ga_31_11.pdf. The debate that followed led to the adop-
tion of the WIPO Development Agenda by the WIPO Gen-
eral Assembly on 28 September 2007 approving a set of
reform proposals aimed at placing development concerns
at the heart of the institution's work (ICTSD, 2007).
106 See http://www.wto.org/english/thewto_e/minist_e/
min01_e/mindecl_trips_e.htm.
107 For further information on the Council for TRIPS delib-
erations on Article 66.2, see http://www.wto.org/english/
tratop_e/trips_e/techtransfer_e.htm.
108 For further information on the work of the working group,
see http://www.wto.org/english/tratop_e/devel_e/dev_wkgp_
trade_transfer_technology_e.htm.
109 This section draws heavily on Roffe (2010).
110 See "IX – Conclusion" at: http://www.iprsonline.org/resourc-
es/docs/BrazilArgentina_WIPO.pdf.
111 See http://www.wipo.int/ip-development/en/agenda/rec-
ommendations.html.
112 WIPO Committee on Development and Intellectual Proper-
ty, Project on Intellectual Property and Technology Transfer:
Common Challenges – Building Solutions (Recommenda-
tions 19, 25, 26 and 29), CDIP/4/7, 15 March 2010. See http://
www.wipo.int/meetings/en/doc_details.jsp?doc_id=131655.
113 IIAs contain general protective provisions aimed at re-
ducing political and regulatory risks arising in relation to
long-term investment. These treaties limit the right of a
host country to discriminate against and between foreign
investments, specify the conditions for a lawful expropria-
tion with compensation and mandate a fair and equitable
treatment of investment. Most importantly, the majority
of these agreements provide investors with a direct right
to challenge a governmental measure in alleged case of
breach of an IIA before international arbitration. These
commitments, coupled with private means of enforce-
ment, are meant to provide foreign investors with a stable
and predictable regulatory climate. Host states, in turn,
hope to attract FDI by signing IIAs and to gain access to
foreign technology. However, IIAs may not automatically
lead to an increase in FDI inflows. Since IIAs are part of the
general policy framework for foreign investment, they are
only one of the many factors that impact on a company’s
decision in determining where it would like to make an in-
vestment. As a consequence, IIAs alone can never be a suf-
ficient policy instrument to attract FDI. Other host country
determinants, in particular economic factors, play a more
powerful role. However, developing countries stand to ben-
efit from engaging in IIAs in terms of increasing their at-
tractiveness for FDI (UNCTAD, 2009b).
114 The 2004 United States model BIT includes a footnote to
Article 8.1 that provides for this exception: "For greater cer-
tainty, a condition for the receipt or continued receipt of an
advantage referred to in paragraph 2 does not constitute
a ‘commitment or undertaking’ for the purposes of para-
graph 1." See http://www.state.gov/documents/organiza-
tion/117601.pdf.
107
 115 See http://www.ustr.gov/trade-agreements/free-trade-
agreements for a list of countries that have signed FTAs
with the United States and the nature of the provisions on
competition in the respective chapters dealing with IP.
116 CAFTA-DR, Chapter 15 (“Intellectual Property Rights”), Art.
15.1(15). See http://www.ustr.gov/trade-agreements/free-
trade-agreements/cafta-dr-dominican-republic-central-
america-fta/final-text.
117 See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=
OJ:L:2008:289:0003:1955:EN:PDF.
118 http://www.encharter.org.
119 See http://www.un.org/Depts/los/convention_agreements/
texts/unclos/closindx.htm.
120 Adopted on 29 January 2000 as a supplementary agree-
ment to the CBD and entered into force on 11 September
2003. See http://bch.cbd.int/protocol/publications/cartage-
na-protocol-en.pdf.
121 For further information, see http://www.cbd.int/abs/
122 See http://www.oecd.org/document/28/0,3746,
en_2649_34889_2397532_1_1_1_1,00.html.
123 See http://apps.who.int/gb/ebwha/pdf_files/A61/A61_R21-
en.pdf.
124 This section is based on UNCTAD (2005b).
125 The study shows that “the production of electronic goods
may be divided into three major stages that can be per-
formed separately: design, manufacture and assembly.
The design stage requires extensive and intensive tech-
nical knowledge, and investment in R&D to develop
novel products and processes, while the manufacturing
of components requires capital-intensive investment for
mass production. Finally, the assembly of the final prod-
ucts is capital- and labour-intensive and requires lower
skills than the other stages of production” (UNCTAD,
2005b: 19).
126 Parties to the Plaza Accord of 22 September 1985 agreed
to devalue the dollar relative to the Japanese yen and the
German deutsche mark. This led to a decline of 51 per cent
in the exchange rate of the dollar by 1987. The goal was to
alleviate the United States current account deficit and help
the economy of the United States emerge from recession.
108
127 Where 1 = FDI brings little new technology, and 7 = FDI is an
important source.
128 Physical productivity may be defined as the quantity of
output produced by one unit of production input in a given
unit of time.
129 The value added per unit of labour input.
130 “For the electronics industry, the need to protect designs of
electronic systems is very important. The development of
a new layout design of an integrated circuit requires sub-
stantial investment. However, the design can easily be cop-
ied and built using components that are readily available
in the market place” (UNCTAD, 2005b: 9). Likewise, software
development is important in the electronics industry and
requires substantial investment, but software is relatively
easy to copy and reproduce (UNCTAD, 2005b: 9).
131 This section is based on UNCTAD (2006a).
132 Based on the UNCTAD study from 2006, the Chilean salm-
on industry did not yet attain the efficiency and environ-
mental standards of competitor countries such as Norway:
“The technologies needed to handle waste, reduce the
use of antibiotics and improve the harvesting of fish are
just emerging. Similarly, the regulatory agencies have not
kept pace with the rapid expansion of the industry. This is
important in ensuring that environmental standards are
maintained for the future development of the industry”
(UNCTAD, 2006a: 30).
133 Other major successes of Fundación Chile include the de-
velopment of technologies used to vacuum-pack or seal
beef, the implementation of quality control and certifica-
tion of export fruit, the introduction of berries into Chile
and the creation and diffusion of technology in the forestry
sector. See http://www.fundacionchile.com/.
134 This led to a short-term unemployment problem for edu-
cated nationals from the Republic of Korea in the 1960s,
until industrial development allowed their absorption into
the workforce (Kim, 2000).
135 These classifications are taken from Fransman (2000).
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Further readings

Correa C. (2005). “Can the TRIPS Agreement Foster Technology Transfer to Developing Countries?” In: Maskus K. and Reichman J.H.,
Eds. International Public Goods and Transfer of Technology under A Globalized Intellectual Property Regime. Cambridge, Cambridge
University Press: 227 ff.

ESCAP (1984). Costs and conditions of technology transfer through transnational Corporations. United Nations publication. ESCAP/
UNCTC Publication Series B, No. 3, ST/ESCAP/283. New York and Bangkok.

Girvan, N. (2005). “Lessons from the Struggle for a New International Technology Order”. Second Annual Surendra Patel Lecture on
Development, South Perspectives. South Centre, Geneva. 4 November 2005.

James, J. and Watanabe, D. (1985). Technology Institutions and Government Policies. Houndmills Basingstoke, Palgrave MacMillan.

Lall, S. (2001). The Economics of Technology Transfer. Cheltenham and Northampton, Edward Elgar.

Mowery, D. and Rosemberg, N. (1989). Technology and the Pursuit of Economic Growth. Cambridge, Cambridge University Press.

Navaretti, G.B., Schiff, M. and Soloaga, I. (2003). “The knowledge-content of machines: North-South trade and technology
diffusion”. Flowenla Discussion Paper, No. 22. Available at: http://www.migration-research.org/EastWest/dokumente/Flowenla22.
pdf.

Torlak, E. (2004). “Foreign Direct Investment, Technology Transfer and Productivity Growth in Transition Countries: Empirical
Evidence from Panel Data”. Discussion Paper No. 26. University of Göttingen, Center for Globalization and Europeanization of the
Economy. Available at: http://wwwuser.gwdg.de/~lstohr/cege/Diskussionspapiere/26_Torlak.pdf.

UN-DESA (1974). The Role of the Patent System in the Transfer of Technology to Developing Countries. United Nations Department
of Economic and Social Affairs. United Nations publication. New York and Geneva.

117
 Annex
Case studies: Thailand, Chile and
the Republic of Korea
1 FDI and technology transfer –
the case of Thailand’s electronics
industry124
Thailand has been successful in building up an
internationally competitive electronics industry
and in integrating itself into the global economy.
Thailand shifted from an import-substitution to
an export-oriented development strategy and
liberalized the economy to promote trade and
investment. The Thai electronics industry has
acquired most of its technology through FDI and
trade flows. Pro-active government policies to
create an enabling environment included low
tariffs for imports needed to produce electron-
ics export units, loosening of controls on foreign
ownership of firms and provision of essential
infrastructure (UNCTAD, 2005b: 27). These liberal
economic policies, coupled with the availabil-
ity of a skilled but low-cost labour force, made
Thailand an important location for the export-
oriented production activities of TNCs. Govern-
ment policies induced industries to move pro-
duction bases to the rural areas through tax
incentives and provision of support infrastruc-
ture, and into sectors of importance, including
agriculture and electronics. Despite being a ma-
jor exporter of hard disk drives (HDD), the indus-
try’s activities were largely limited to assembly
operations in the field of computers, computer
parts and integrated circuits (IC). These are indi-
cations of growing manufacturing capabilities,
but according to UNCTAD’s research the design
and product development skills remained low.
Thai domestic firms were largely subcontractors
of TNC affiliates.125
118
Thailand was one of the major recipients of FDI in
South-East Asia in the 1980s and 1990s (Brimble
and Sherman, 1999). Flows of FDI into Thailand
had been small prior to the 1980s. The Plaza Ac-
cord,126 which resulted in the appreciation of the
Japanese yen and the currencies of the newly
industrialized economies, played an important
role in facilitating FDI flows as firms relocated
to cheaper manufacturing destinations such as
Thailand. For example, in 1988 net FDI flows ex-
ceeded $1 billion for the first time and increased
to over $7 billion in 1998 (see Figure 11). An esti-
mated $48 billion was invested in Thailand be-
tween 1980 and 2004. Of this, 27 per cent and 16
per cent of the investment came from Japan and
the United States, respectively, while the NIEs and
the EU countries accounted for 35 per cent and 13
per cent, respectively. The origins of FDI changed
over time; for instance, the share of FDI inflows
from the United States increased from about 19
per cent in 1996 to 25 per cent by 1998, but de-
clined to 23 per cent in 2002.
Flows of FDI have transferred the skills and
knowledge needed to produce manufactured
export goods. Foreign direct investment played a
key role in the development of the electronics in-
dustry in the country. Furthermore, the industry
moved on from the assembly of low-technology
consumer products (for example, television sets)
to the assembly and manufacture of high-tech-
nology products, such as HDD. More complex
technologies were acquired to assemble ad-
vanced electronics products, such as microwave
isolators. This achievement reflects the fact that
the electronics industry acquired the capacity to
source, adapt and operate foreign technologies,
as well as the capacity to upgrade and improve
assembly processes.
 Figure 11
Thailand’s export changes and FDI inflows, 1980-2004
80
70
60
50
40
per cent
30
20
10
0 0
1980 1984 1988
Source: UNCTAD (2007c).
However, manufacture and design capabilities
remained limited to a few subsectors. The HDD
subsector acquired strong manufacturing capa-
bilities but less research and product develop-
ment capabilities at the time.
Similarly, the Thai semiconductor industry had
some capacity in process design (largely in the
assembly process), but lacked manufacturing
capacity and the ability to design new products.
On the other hand, the plastic circuit board (PCB)
subsector had a strong manufacturing capac-
ity, with Thailand emerging as one of the major
manufacturers of PCBs. In 2003, Thailand’s out-
put of PCB components exceeded $700 million in
sales (Runckel, 2004). Thailand’s PCB sales were
expected to exceed the $1 billion mark in 2006.
Flows of FDI facilitated the transfer of produc-
tion, management and process technologies to
Thailand (Enos, 1989). The participation of TNCs
facilitated the development of local contractor
manufacturers and provided knowledge of ex-
ternal market needs (for example, standards). In
addition, some TNC affiliates helped some local
firms to upgrade technologies and skills to meet
their own requirements.
Thai firms perceived FDI as a major source of
new and advanced technology (IMD, 2004). On a
scale of 1 to 7 of FDI technology transfer effective-
ness,127 Thailand scored 5.2, not far behind Malay-
sia (5.8) and Singapore (6.3).
However, few firms assimilated and mastered
foreign technologies to enable them to under-
take technology upgrading or reverse-engineer-
ing activities. Even fewer firms had the capacity
to design and develop novel products. This may
be explained by the fact that technology diffu-
8
Agriculture
7 Manufacture
FDI (billion $)
6
5
billion $
4
3
2
1
1992 1996 2000 2004
sion in the electronics industry has largely oc-
curred within the production networks of TNCs.
As contract manufacturers, Thai firms needed
only the capacity to develop efficient and flexible
assembly or manufacturing platforms to meet
the needs of their customers. This has limited
their innovative activities to process upgrade and
design.
In general, the performance of the Thai electron-
ics industry, in terms of physical productivity,128
closely matched that of other Asian competitor
countries. However, in terms of value-added pro-
ductivity,129 the Thai electronics industry per-
formed at a lower level than that of Singapore
and Taiwan Province of China. According to a
2002 study, where value-added productivity per
employee in the electronics sector was compared
with a notional 100 per cent for the United States,
Singapore scored 72 per cent, while Thailand
scored only 8 per cent (McKinsey, 2002). This re-
flects the fact that the industry operated largely
at the assembly stage.
In an attempt to change this pattern – to move
from being a contractor to an original equip-
ment manufacturer – the Thai government has
adopted policies to promote the attraction of
technology transfer, its diffusion and local inno-
vation, in an attempt to upgrade foreign tech-
nologies and promoting novel product develop-
ment.
Thailand’s IP regime was developed to meet the
needs of the electronics industry and provide an
attractive FDI destination. Thailand enacted its
Patent Law in 1979, introduced protection for in-
tegrated circuit designs in 2000, and revised its
copyright laws in 1995 to meet the demands of
TRIPS and protect software.130
119
 The National Science and Technology Develop-
ment Agency (NSTDA) established the Industrial
Consultancy Services in 1992. The goals of the
project were to encourage Thai enterprises to
use local and foreign technical consultants, and
channel industrial problems to research institu-
tions and universities. The programme provided
3,000 baht per day (approximately $95) for pre-
liminary problem diagnosis, not exceeding two
days, and up to 50 per cent of the cost of consul-
tancy for problem solving and technology devel-
opment activities. To qualify for support, the firm
must register and have manufacturing facili-
ties in Thailand and be at least 51 per cent Thai-
owned. In addition, the firm must be interested
in improving productivity. The use of experts has
helped many participating firms to improve or
produce new products and/or processes.
In 1997, NSTDA set up the Software Park Thailand
(SPT), a government agency to stimulate the
development of the Thai software industry, pro-
mote innovation and facilitate the development
of start-up firms. The cluster offers technology
transfer services. Among its strategic partners
are Oracle, IBM, Intel, Microsoft, and the Centre
of Excellence for Computer Security and Internet
Thailand. The establishment of SPT has facilitated
technology transfer within and outside the Park
and encouraged knowledge flows between ten-
ants, NSTDA, participating universities and TNCs.
The Thailand Board of Investment (BOI) also devel-
oped a programme called the BOI Unit for Indus-
trial Linkage Development (BUILD). The objectives
were to encourage the development of support
industries, strengthen the relationship between
suppliers and contractors, help small to medium-
sized contract manufacturers to improve their
productivity, and facilitate cooperation between
foreign and domestic firms. In 2004, the pro-
gramme received the World Association of Invest-
ment Promotion Agencies award for best practice
in promoting linkages that facilitate technology
transfer and innovation. A number of firms in the
electronics industry, such as Hitachi, Toshiba, IBM,
Fujitsu, Canon and Sony, are involved in BUILD. It
addresses such issues as business policies on pur-
chasing and subcontracting and technology con-
fidentiality. The linkages it promotes include those
with TNCs in Thailand and abroad. It is estimated
that about $148 million worth of transactions took
place in BUILD in 2001 (UNCTAD, 2005b: 21).
In terms of TOT and upgrading, BUILD provides
training courses to SMEs to help them upgrade
their production and product standards, qual-
ity and reliability. The programme also provides
matchmaking services and arranges visits by
1 20
SMEs to the facilities of contractors. BUILD has
enabled participating SMEs to acquire technolo-
gy and innovative capacity to improve the quality
of their products. The programme has played an
important role in encouraging the development
of contract manufacturers and the transfer and
development of technologies, as well as encour-
aging technology diffusion and spillovers.
The government has subsequently developed
additional support programmes. One such step
is the development of the Thailand IC Design
Incubator to promote semiconductor design ca-
pabilities, and the training and certification of IC
layout designers. It is hoped that it will attract IC
designers from abroad and help bring together
different players in the semiconductor subsec-
tor (industry, universities and public institutions)
to collaborate or enter into strategic alliances to
promote knowledge exchange. This may encour-
age innovation, skills development and the crea-
tion of stronger linkages and greater trust.
The NSTDA has also commissioned the HDD
cluster development project to develop and im-
plement several projects to address the needs
of the HDD subsector. The project seeks to make
the subsector more competitive, increase the lo-
cal content of assembled products, and promote
design and product development capabilities.
Currently, the industry relies on imports for high-
technology components. The cluster is intended
to promote strong partnerships between public-
and private-sector players, skills development,
improve support infrastructure and facilitate
the development of innovative industrial policies
(Afzulpurkar and Brimble, 2004).
2 National efforts in technology
transfer – the case of Fundación
Chile131
A study by UNCTAD demonstrated that technol-
ogy transfer has enabled Chile to build a globally
competitive and innovative salmon industry over
the last two decades. The salmon industry has
become one of Chile’s main export sectors and a
significant contributor to regional development.
Chile has actively promoted scientific and tech-
nological innovation that adds value to or gener-
ates industries based on its natural resource at-
tributes, and hence stressing the importance of
focusing on its competitive advantage (UNCTAD,
2006a: 1). Chile is now a major player in the pro-
duction and marketing of salmon products:132
“[S]almon production in Chile grew about 17-
fold between 1990 and 2002. Its share in the
 global production of farmed salmon and trout
increased from about 10% in 1990 to about 35%
within the same period. […] The industry’s ex-
ports increased from about $291 million in 1993
to about $1.4 billion in 2004. Chilean salmon is
now being exported to new markets in Asia
and Eastern Europe” (UNCTAD, 2006a: 2).
The study indicated that FDI did not play a major
role in the early stages of the industry develop-
ment but grew steadily over the last two decades.
The entry of large foreign firms has facilitated the
introduction of new technologies and the expan-
sion of production, fostered vertical integration
and increased the average size of firms. It is es-
timated that about $300 million of FDI was in-
vested in the industry between 1989 and 2003.
The study demonstrated that technology is
transferred through various channels, “such as
technology licensing, foreign direct investment,
trade, and participation in technology exhibi-
tions, demonstrations and projects”. Moreo-
ver, the study showed that, “irrespective of the
channel used, successful transfer of technology
involves several innovative processes needed to
adapt the technology to local operational condi-
tions. Such activities may include ‘trial and error’
steps, imitations, minor modifications, and up-
grade steps needed to improve productivity and
efficiency or reduce the cost of the transfer pro-
cess” (UNCTAD, 2006a: 3).
The development and expansion of the salmon
industry is largely attributed to the central role
played by various public and private support in-
stitutions. For instance, the government stimu-
lated the industry by the introduction of regu-
latory agencies at an early stage. In the 1970s it
created the Office of the Undersecretary for Fish-
eries, and the Fisheries and Protection Divisions
(under the Ministry of Agriculture) to strengthen
the development and regulation of fisheries and
other agencies that link entrepreneurs with gov-
ernment institutions. These agencies focus on
data analysis for the fishing industry, such as fish
stock assessment and determining the margin
of dumping, as well as arranging food safety and
quality control technologies in the salmon indus-
try, and representing the views of the producers.
This proved very important in dealing with in-
ternational disputes, marketing and technology
development.
Although adaptation and imitation played a role
in the emergence of the industry, domestic inno-
vative capacity was needed for it to become com-
petitive in the global market. It was necessary to
increase the value of the product (by improving
sanitary standards), invest in developing an inno-
vative capacity in salmon farming and in inter-
national networks, and reduce production costs
compared to other main competitors.
The study found that the government played an
important role in the development of the indus-
try, introducing tax exemption on expenditures
incurred in training workers, promoting stand-
ards and international networks, facilitating the
emergence of a producer association and en-
hancing cooperation between technology devel-
opment institutions and industry.
Chilean salmon firms have increasingly devel-
oped joint ventures with other international pro-
ducers. Moreover, the study indicated the benefi-
cial side effects for socio-economic development:
“Banks and insurance companies, consultancy
and engineering services, research centres and
universities have been developed in the region
to support the industry" and thus the education
level has improved as well as the physical infra-
structure (UNCTAD, 2006a: 27). Significantly, this
case study also showed that TOT is not purely a
private-sector activity, but that the public sectors
of technology-exporting and technology-import-
ing countries can play an important role.
Fundación Chile was created in 1976 by the Chil-
ean Government and the United States company
ITT to develop ways of diversifying the Chilean
economy by creating new companies based on
natural resources. Fundación Chile creates firms
to demonstrate new technologies and to serve as
vehicles for TOT. Once the firms have grown, they
are sold to the private sector. In the process, Fun-
dación Chile recoups its investment and moves
on to the next sector or stage of development.
Since its inception, it has established more than
40 enterprises, of which about 30 have been sold
to the private sector.
Among these firms is Salmones Antártica, which
started the farming of Pacific salmon. Fundación
Chile established Salmones Antártica as a lim-
ited company in 1982 to demonstrate the tech-
nical and commercial feasibility of large-scale
salmon farming, breeding and production. The
firm carried out research activities on farming
procedures, artificial reproduction and genetic
manipulation, and established salmon farming
marine centres.
The rapid growth of Salmones Antártica led to
the construction of new farming plants and the
expansion of fishmeal production and processing
plants. In addition, Salmones Antártica provided
technical assistance to small and emerging pro-
121
 ducers. Between 1985 and 1987, Fundación Chile
created three other firms in the salmon industry,
all of which were subsequently commercialized.
Fundación Chile has contributed to the devel-
opment and consolidation of aquaculture by
continuously searching for appropriate foreign
technologies and new fish farming opportuni-
ties, and providing technical assistance to local
producers. It has also worked with other national
and regional institutions and supported the spe-
cialization of Chilean professionals in the differ-
ent disciplines related to aquaculture in Ameri-
can training centres.
Fundación Chile also facilitated the formation
of the Association of Producers of Salmon and
Trout. The association has played a major role
in enabling Chilean producers to gain access to
international markets, establishing production
and product standards for Chilean salmon and
developing the “quality seal” that is now adopted
by its members as a tool to promote salmon ex-
ports. The Fundación Chile remains one of the
major players and supporters of aquaculture.133
Figure 12
The Republic of Korea’s main channels of technology transfer, 1991
4.0% 1.1% 1.1%
Licensing 6.5%
Attachments abroad
Technology training
Capital imports 12.3%
FDI
Suppliers
Expatriates
Others
20.9%
Source: Based on Kim (1998: Table 2).
However, the development process was more
complex. Lee (2000) identifies three phases of
industrial and technological development in the
Republic of Korea:
• Phase 1, from the late 1960s to the end of the
1970s, was the “imitation phase”, which saw
the development of scale-intensive industries
engaged first in assembly and manufacture;
• Phase 2, from the early 1980s to around 1990,
was the “internalization” phase, where ac-
quired technologies were absorbed and dif-
fused, and more advanced innovative capa-
bilities were nurtured;
• Phase 3, from around 1990 onwards, is termed
the “generation” phase, during which the Re-
1 22
Currently, it supports diversification, technology
development in several areas, upscaling and the
sale of some of its aquaculture projects.
3 Licensing and learning – the case
of the Republic of Korea
Over a period of several decades, starting in the
1960s, the Republic of Korea transformed itself
from a largely agrarian economy into a modern
industrial nation with leading global brands (for
example, Hyundai, Samsung, LG) in some fields,
such as motor vehicles, and electrical and elec-
tronic products.
In respect of technological development, the
Republic of Korea has become a famous case
of “arm’s-length” inward technology transfer
through licensing, rather than through the en-
couragement of FDI. A study in the 1990s reported
that licensing was the leading channel for inward
technology transfer, followed by overseas train-
ing for workers, local technology training, capital
goods imports, and then FDI (see Figure 12).
31.8%
22.4%
public of Korea became a leading innovating
nation.
Technology licensing became increasingly im-
portant in the second phase of development – as
shown in Figure 13, which coincides with the rap-
id development of the microelectronics industry.
The figure also shows a sharp drop in the num-
ber of technology licences from the start of the
“generation” phase, but a huge increase in the
expenditure on licences: this may indicate very
selective licensing of complex, advanced (and
therefore, expensive) technologies. In contrast,
technology-licensing activity in the “imitation”
phase was at a relatively low level. But many of
the capabilities to select desired technology for
licensing, negotiate favourable licence terms,
and absorb and build on licensed technologies,
were actually built up during this first phase.
Figure 13
Technology licensing in the Republic of Korea, 1970-1995
2000
1800
1600
1400
1200
1000
800
600
400
200
0 0
1970 1975 1980
Source: Based on Lee (2000).
In the Republic of Korea, the expansion of edu-
cation at all levels, and in particular the devel-
opment of engineering and technical expertise,
started in the 1960s.134 Also during that decade,
the government of the Republic of Korea devel-
oped its long-term strategy for industrialization,
targeting the development of selected industries,
and nationalizing all the banks in order to con-
trol the financing of the transformation of the
economy (Kim, 2000).
The 1960s and 1970s saw major government in-
vestment in building science and technology in-
frastructure: the Korean Institute of Science and
Technology was established in 1966, the Minis-
try of Science and Technology in 1967, and many
government-funded research institutes were set
up during the 1970s. The research institutes were
not important suppliers of new technologies, but
rather they were important training grounds for
scientists and engineers, and also attracted high-
qualified professionals from the Republic of Ko-
rea back from overseas. But it was the Republic of
Korea’s industrial policy, rather than S&T policy,
that conditioned the country’s process of techno-
logical change (Lee, 2000).
According to Lall (2000), in particular, industrial
policy focused on:
• Restriction of imports;
• A strong export orientation, with subsidies for
targeting industries;
• Subsidized credit in targeted areas;
• Support for large conglomerates, called chae-
bols.
These capabilities were critical to the success of
the Republic of Korea’s electronics industry, and
other industries.
2000
1800
Licensing expenditure
(million $)
1600 Number of licences
1400
1200
million $
1000
800
600
400
200
1985 1990 1995
The government strictly controlled FDI until the
mid-1980s. Nevertheless, there was substantial
FDI in the Republic of Korea during the early
phase of industrial development, and a great
deal of technological learning by using and imi-
tating took place (Hobday, 2000). Moreover, expe-
riences and learning were diffused across chae-
bols involved in diverse industries, which led to
rapid diffusion of technological – and especially,
techno-managerial – capabilities (Kim, 2000).
The government invested heavily in the chae-
bols, and supported firm-level efforts in R&D and
technical training (Hobday, 2000). The country’s
focus on exports forced the firms themselves to
invest in R&D and other efforts to keep up with
global best practices and seek out new technolo-
gies (Lall, 2000).
In the early 1980s, the Republic of Korea’s industry
moved into the “internalization” phase of techno-
logical development, which was characterized by
more intensive R&D efforts, and a proliferation of
Original Equipment Manufacture (OEM) agree-
ments. These were agreements, whereby firms
from the Republic of Korea would manufacture
the branded products of overseas firms – particu-
larly, firms in Japan and the United States – to the
same specification as the original product. OEM
agreements ensured access to overseas mar-
kets as well as access to new technologies. OEM
agreements often included technology-licensing
agreements (Hobday, 2000). However, intellec-
tual property protection in the Republic of Korea
was not strongly enforced during the early 1980s,
and a great deal of imitative technology was de-
veloped, especially for relatively simple electrical
123
 consumer goods (Kim, 2003). As the 1980s pro-
gressed, licensing became used more often for
complex technologies that were difficult to imi-
tate, or which relied on complementary inputs
for their use.
Until the 1980s, technology licensing was also
subject to prior government approval, not in or-
der to restrict the inward flow of technology but
rather with the intention of helping firms secure
the best possible license terms (Lee, 2000). An im-
portant objective of technology licensing in the
Republic of Korea was training and the transfer
of tacit knowledge. For example, when a petro-
chemical plant was set up using technology from
the United States firm Dow Chemicals, it was
part of the agreement that:
“[T]he Korean [sic] engineers would be trained
by Dow in the application of all aspects of
Dow’s current technology – basic process de-
sign, detailed equipment design and procure-
ment, construction, testing, start-up, opera-
tion, and maintenance – and in the techniques
employed in securing improvements to any
petrochemical technology” (Bell, 1984: 196).
In the 1980s, through increased investments in
R&D, the accumulation of technical skills, learn-
ing through using and through feedback from
both suppliers and overseas customers, many
firms progressed from OEM agreements to Origi-
nal Design and Manufacture (ODM) and Original
Idea Manufacture (OIM, i.e. where a product de-
veloped in the Republic of Korea is sold under an-
other firm’s brand name) agreements, and from
there to Own Brand Manufacturing (OBM).135
As the technological capabilities of firms in-
creased during this period, restrictions on FDI
were eased to encourage investment in joint ven-
tures. But it is important to note that the earlier
restrictions were not intended to discourage the
inward flow of capital, but rather to “de-couple”
capital and technology flows, which “contributed
to internalizing transferred technology” (Lee,
2000: 276). In the late 1980s, IPR reforms were
introduced to strengthen the protection of intel-
lectual property (Lee, 2000). By 1990, the Republic
of Korea was considered to be a generating coun-
try for new technologies. During the 1990s, joint
ventures gave way to joint development agree-
ments between firms in the Republic of Korea
and in technologically advanced countries, espe-
cially Japan and the United States (Duysters and
Hagedoorn, 2000).
One example is the firm LG, which started mak-
ing simple, low-cost consumer electrical goods
124
(such as televisions and microwaves) under for-
eign brand names (including Toshiba, Hitachi
and Sony), but is now itself a leading brand in the
global market. In 1995, LG bought out the United
States based Zenith Electronics Corporation, for
which it had previously manufactured consum-
er electricals under an OEM agreement. In the
same period, the company set up a joint venture
with IBM to develop notebooks, PCs and servers,
and established other technology alliances with
Toshiba and Samsung (Duysters and Hagedoorn,
2000). LG also invested heavily in key new tech-
nologies such as Liquid Crystal Display (LCD) and
formed partnerships with firms such as Philips to
ensure access to advanced and emerging tech-
nologies (Hobday, 2000).
Licensing was – and still is – an important chan-
nel of technology flows for firms from the Repub-
lic of Korea. Since the early 1990s, however, out-
licensing of technology has become increasingly
significant. In 1995, there were 123 technology-
exporting licences from the Republic of Korea,
compared to 236 technology-importing licences;
in 1985, the figures included seven exporting li-
cences, compared to 454 importing licences (Lee,
2000). Some firms from the Republic of Korea
and their partners in joint development agree-
ments are also cross-licensing their technologies.
But it is important to remember that technology
licensing was used in a very specific context in
the Republic of Korea. This included strong gov-
ernment coordination of, and intervention in, the
industrialization process, protection of certain
targeted industries in their early stages, govern-
ment control of the financial system, and large
investments in education before the process of
industrialization was underway. Furthermore,
the Republic of Korea’s transformation took
place during a time – especially in the 1970s –
when there was “relatively little competition for
foreign investment or technology”, world interest
rates were low, and the Republic of Korea did not
enforce strong IP protection. Lee therefore, con-
cludes that, “Korean policy toward [FDI] and tech-
nology licensing cannot be emulated by other
countries” (Lee, 2000: 289).
Perhaps the key lessons learned from studying the
strategy of the Republic of Korea are: technology
licensing was used in the 1980s very specifically
to acquire technological capabilities, including
absorptive capacity and a build up of innovative
capacity, and not to simply increase productivity;
the success of this channel of technology trans-
fer relied on a range of pre-existing technological
and techno-managerial capabilities, deliberately
built up over the previous two decades.