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conIinued on page 187
Nikolaus Thumm

Intellectual
Property Rights
National Systems
and Harmonisation in Europe

With 34 Figures and 5 Tables

Springer-Verlag Berlin Heidelberg GmbH

Series Editors
Wemer A. Miiller
Martina Bihn

Author
Dr. Nikolaus Thumm
European Commission
Joint Research Centre
Institute for Prospective
Technological Studies
W.T.C., Isla de la Cartuja sin
41092 Sevilla
Spain
E-mail: nikolaus.thumm@jrc.es

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Preface

This book is the result of the PhD project I started four years ago at Europa-Kolleg
Hamburg. I had the great opportunity to work on it for one year at the European
University Institute in Florence and to finalise the oeuvre during my stay with the
European Commission's Institute for Prospective Technological Studies in Seville.

The subject matter of the book is intellectual property rights, patents in particular,
and their process of harmonisation in Europe. At the beginning of the work, the
intention was not to focus immediately on one narrow field in the huge realm of
intellectual property rights but rather to open my mind in order to capture a broad
variety of new ideas and concepts in the book. The work at three different
institutes in three different European countries over the period of four years
naturally exposed the work to diverging ideas and the exchange of views with
many people. This is one reason for the wide spread of topics ordered around the
given leitmotif, such as epistemological foundations, political background
information,. the protection of biotechnological inventions and the building up
process of intellectual property right systems in the countries of Central and
Eastern Europe.

In chapter two I take up Polanyi's differentiation of codifiable and tacit

knowledge. Applying these concepts to my own work I realise that this book is
only the visible and codified part of knowledge I was able to capture. It does not
cover the enormous intangible assets I was able to accumulate. I have to
emphasise that the time I spent on this book was first of all a time of personal
enrichment and learning, including also periods of pain and suffering combined
with many difficulties. The book is the codified manifestation of four years life
and work. Several books of totally different manner and subject would be
necessary to cover all the accumulated knowledge and experience.

I would like to express my gratefulness to the "Graduiertenkolleg

Integrationsforschung " at Europa-Kolleg Hamburg for generous funding over two
years. In particular, I would like to thank my supervisor Prof. Dr. Thomas
Straubhaar, who gave me the necessary freedom and supported all the activities, in
my not always direct way, to finalise the PhD. Finally, there are a number of
marvellous people in Florence and Seville I anonymously would like to thank for
putting up with me in difficult periods and always supporting me with advice and
positive energy.

Seville, May 2000

Nikolaus Thumm
Table of Contents

Preface .................................................................................................................... v

1 Introduction ................................................................................................... 1

2 Intellectual Property Rights, Innovation and Technological Knowledge .. ;... 5

2.1 Justifying Intellectual Property Rights ..................................................... 5

2.2 The Political Understanding ..................................................................... 9
2.2.1 Innovation ....................................................................................... 9
2.2.2 Intellectual Property Rights .......................................................... 10
2.3 The Innovation Process .......................................................................... 11
2.3.1 History .......................................................................................... 11
2.3.2 The Linear Model ......................................................................... 12
2.3.3 Interactive Model of Knowledge and Innovation Systems ........... 14
2.4 Technological Knowledge and Its Detenninants .................................... 15
2.4.1 Knowledge .................................................................................... 15
2.4.2 Information ............ .-................................................•..................... 17
2.4.3 Technological Knowledge ............................................................ 18
2.5 An Excursion into Epistomology and Its Implications for
, Intellectual Property .................................... ...... .... ... ... ...... ..... ...... ... ....... 19
2.5.1 Karl Popper's Understanding of the Growth of
Scientific Knowledge .................................................................... 19
2.5.1.1 Science ..................................................................................... 20
2.5.1.2 The Problem Solving Procedure .............................................. 22
2.5.1.3 Popper and Evolutionary Epistemology ................................... 23
2.5.1.4 Criticism ................................................................................... 23
2.5.2 The Growth of Scientific Knowledge Following Kuhn's
"The Structure of Scientific Revolutions" .................................... 24
2.5.2.1 Normal Science ........................................................................ 25
2.5.2.2 The Change of Paradigms ........................................................ 25
2.5.2.3 Technological Paradigms ......................................................... 26
2.5.2.4 Competition and the Creation of Knowledge ........................... 26
2.5.3 Summary ....................................................................................... 27
2.6 Conclusion .............................................................................................. 28

3 Microeconomic Theory of Intellectual Property Rights .............................. 31

3.1 The General Theory ............................................................................... 31

3.2 Market Structure and Innovation ............................................................ 35
3.3 The Incentive to Innovate ....................................................................... 36
3.4 IPR (patents) as an Economic Indicator ................................................. 39
VIII

3.5 Conclusion.............................................................................................. 42

4 Macroeconomic Theory ofIntellectual Property Rights ............................. 44

4.1 Static Welfare Analysis ofIntemational Intellectual Property Rights .... 45

4.2 Criticism of the Static Welfare Approach .............................................. 47
4.3 Dynamic Welfare Analysis ofIntemational Intellectual Property
Rights ..................................................................................................... 47
4.4 Summary of Arguments ......................................................................... 54
4.5 Empirical Evidence on International Intellectual Property Rights ......... 56
4.6 Foreign Direct Investment and Intellectual Property Rights .................. 56
4.7 Trade and Intellectual Property Rights ................................................... 57
4.8 Conclusion.............................................................................................. 58

5 Harmonisation versus Differentiation ......................................................... 61

5.1 Global Aspects ....................................................................................... 63

5.1.1 Trade Related Aspects of Intellectual Property Rights (TRIPS) ... 63
5.1.2 The North-South Conflict Within the TRIPS Negotiations .......... 64
5.2 European Aspects ................................................................................... 66
5.2.1 Harmonisation Efforts in the European Union ............................. 67
5.2.2 The Directive on the Legal Protection of
Biotechnological Inventions ......................................................... 69
5.3 The Harmonisation Process in Central and Eastern European
Countries ................................................................................................ 70

6 Patent Protection for Biotechnological Inventions ...................................... 73

6.1 Introduction ............................................................................................ 73

6.1.1 Invention ....................................................................................... 74
6.1.2 Novelty ......................................................................................... 74
6.1.3 Inventive Step ............................................................................... 75
6.1.4 Industrial Applicability ................................................................. 75
6.2 Current Issues in Protection of Biotechnological Intellectual Property .. 75
6.2.1 The Directive on Legal Protection of Biotechnological
Inventions ..................................................................................... 75
6.2.2 Basic Principles of the New Legislation ....................................... 75
6.2.3 Are Patents Still an Adequate Protection Tool? ........................... 76
6.2.4 "Patenting Life" ............................................................................ 77
6.2.5 Ethical Concerns ........................................................................... 78
6.2.6 Biodiversity and Global Justice .................................................... 79
6.3 Management of Patenting in European Biotechnology .......................... 79
6.3.1 Methodology of the Survey .......................................................... 80
6.3.1.1 Data Construction .................................................................... 80
6.3.1.2 The Sample Constitution .......................................................... 81
6.3.2 The European Biotechnology Industry and Patenting ................... 85
 IX

6.3.3 Perfonnance of Patenting in the Sample ....................................... 88

6.3.3.1 The Firm Presentation .............................................................. 88
6.3.3.2 Use of Patenting ....................................................................... 89
6.3.3.3 Patenting versus Secrecy .......................................................... 92
6.3.3.4 Infringement ............................................................................. 93
6.3.3.5 Research Collaboration and Patenting ..................................... 93
6.3.4 Route of Application ..................................................................... 94
6.3.4.1 International Patent Protection ................................................. 95
6.3.4.2 Assessment of the Different Routes ......................................... 95
6.3.4.3 Priority Applications ................................................................ 96
6.3.4.4 Direct Files at the United States Patent and Trademark
Office ....................................................................................... 97-
6.3.4.5 Direct Files in Other Countries ................................................ 98
6.3.4.6 Patent Family Development ................................. ~ ................... 99
6.3.5 Expenditures Related to Patenting ............................................... 100
6.3.6 Strategic Reasons for Patenting ................................................... 101
6.3.7 Harmonisation Issues ................................................................... 104
6.3.7.1 The Role of National Patent Offices ....................................... 105
6.3.7.2 Parallel Importation ................................................................ 106
6.3.7.3 European Patent Court ............................................................ 106
6.3.7.4 Grace Period............................................................................ 107
6.3.7.5 Provisional Applications and Other Improvements ................ 108
6.3.7.6 The New Directive on Legal Protection of
Biotechnological Inventions ................................................... 1OR
6.3.7.7 Article 11: The Farmers' Privilege ........................................ .110
6.3.8 Patentability ................................................................................. 111
6.3 .8.1 The Exclusions by Art 53 b EPC ............................................ 111
6.3.8.2 Animal Varieties ..................................................................... 111
6.3.8.3 Plant Varieties ......................................................................... 111
6.3.8.4 Nucleotide Sequences ............................................................. 112
6.3.8.5 Expressed Sequence Tags (ESTs) ......................•.................... I13
6.3.9 Remove all Ethical Issues from Patentability? ............................ 114
6.3.10 Major Findings of the Inquiry ...................................................... 115
6.3.10.1 By Country ......................................................................... 115
6.3.10.2 By Corporation ................................................................... 118
6.3.10.3 Mayor Findings .................................................................. 119
6.4 Conclusion............................................................................................. 121

7 Patent Protection in Central and Eastern European Countries ................... 124

7.1 Intellectual Property Rights, Technology and Trade ............................. 124

7.1.1 Technology Gaps and Catching-Up ............................................. 125
7.1.2 Technology and Trade ................................... ,............................. 126
7.1.3 The Trade Perfonnance in the CEEC ......................................... .128
7.1.4 Implications for Central and Eastern European Countries ........... 129
x
7.2 The Role of Intellectual Property Rights for Economic Growth
and for Closing Technological Gaps ..................................................... 130
7.2.1 The General Growth Influence of Intellectual Property Rights ... 131
7.2.2 Peculiarities of Economies in Transition ..................................... 132
7.3 The Performance in the Czech Republic, Hungary ,and Poland ............ 134
7.3.1 Historical Background ................................................................. 134
7.3.2 Czech Republic ............................................................................ 135
7.3.3 Hungary ,...................................................................................... 136
7.3.4 Poland .......................................................................................... 136
7.3.5 The General Structure of Patent Applications in the
Czech Republic, Hungary and Poland ......................................... 136
7.3.6 The Different Ways to Reach Patent Protection .......................... 142
7.3.7 The Structure of Origin of Non-Resident Applications ............... 143
7.3.8 The Use of Utility Models ........................................................... 144
7.4 Correlation of Trade and Patenting? ...................................................... 145
7.4.1 Patent Applications and the Import Structure .............................. 146
7.4.2 Patent Applications and the Export Structure .............................. 148
7.4.3 Conclusion ................................................................................... 149
7.5 Summary ............................................................................................... 149

8 Summary and Conclusion .......................................................................... 152

Appendix ............................................................................................................. 157

List of Figures ...................................................................................................... 175

List of Tables ....................................................................................................... 176

Literature ............................................................................................................. 177

1 Introduction

The subject of investigation of this work is the economic effect of intellectual

property rights (IPR) in general, and in particular, the harmonisation of such rights
in Europe. The study looks at the following issues: The justification of IPR, their
economic effect upon single markets, the economic impact of harmonisation of
different national systems of intellectual property rights and the question, who
benefits from such harmonisation. One particular aim is to put greater emphasis on
the practical aspects of the patent system, and, throughout case studies, to account
stronger users' needs. IPR and harmonisation as such, however, are too broad a
concept, whichmakes it indispensable to investigate theoretical considerations in
concrete case studies and to focus on specific issues. This is the reason, why this
work is build upon two individual case studies. One is looking at the internal
situation of the European Union by analysing the situation of patenting for
biotechnological inventions in Europe. The other looks at a European Union
related issue, that is the harmonisation and building-up process of intellectual
property right systems in Central and Eastern European countries.

Attempts to harmonise national systems of patents trade marks and industrial

design in Europe date back to the very beginning of the European Community.
The task rose in importance and was driven forward with the creation of the
common market. Free flow of goods and services required that owners of
intellectual property rights regarded the European Community as one market with
a uniform protection in all member states. At first the issue was restricted mainly
to harmonisation, but gradually attention turned to the creation of a community
wide law. The major difficulty, however, in carrying out this task was always the
persistence of member states in treating intellectual property as an essential task of
national sovereignty. The concrete progress with harmonisation is relatively small
given the length of time already devoted to the process within the Union'.
Harmonisation of industrial property rights within the community rests on a key
prerequisite: their importance as a stimulus of innovation and economic progress.
From an economic point of view there are serious doubts, both on a micro- and
macro-economic level about this assumption, and yet no definite proof for the
causal link exists. Lawyers and politicians take the innovation stimulating effect
for granted, which is one reason why intellectual property rights are considered to
be fundamentally of public interesf.

For an overview on major European harmonisation efforts, see appendix I.

See e.g. Govaere [1996] page 16 and also compare session 2.2.
2

The explanations of the book refer to intellectual property rights for technology
based knowledge, i.e. industrial intellectual property, given by patents, trade
marks and industrial design, excluding all kind of artistic property rights, like for
example copyright protection. Even though the theoretical considerations in the
first chapters are also valid for trade marks and industrial design, the focal point
within the case studies in chapters six and seven is on patent protection.
Intellectual property rights are fundamentally national rights contradicting with
the fact that firms are acting more and more internationally. This is the reason why
the analysis should include a comprehensive theoretical framework, including
micro- and macroeconomic aspects. The twofold analysis is applied to both the
theoretical explanation in chapter three and to the empirical part, split into a
micro- and macroeconomic case study in chapters six and seven.

The. selection of biotechnology as subject of the microeconomic case study in

chapter six is due to several reasons. Biotechnology is one of the core technologies
of the next millennium and is considered to be one field where Europe still has to
catch up especially with the United States and the field has been subject of recent
harmonisation in Europe. The analysis looks at several of the "hot issues" of
patenting in biotechnology in a critical way, it analyses the general motivation for
patenting in biotechnology, its overall use and relationship to secrecy as an
alternative to protection. Ways of application are important in order to illustrate
how the current patent system works, but they are also important in order to point
out insufficiencies of the system. Administrational fees of the system play an
essential role and one core element of the analysis are the ways of strategic
patenting as well as different issues of harmonisation for patenting in the
European Union. The definition of patentability and related ethical questions is a
further central element in the analysis of the biotechnological case study in chapter
six.

With the increasing international trade and the rising international economic
interconnection, cross border technology diffusion is rising a lot in importance.
Firms are acting on world markets, whereas intellectual property right systems
remain part of national competition policies3 • What is the role of intellectual
property rights in the process of international technology diffusion? Do national
intellectual property rights build up barriers against the diffusion of technological
knowledge? This and similar questions have to be considered within the
macroeconomic part of the study. For international firms the maintenance and
protection of their technological assets is essential. With the TRIPs agreement in
the GATT negotiations and the international agreements of the Paris, Bern and
Rome Convention some issues of international intellectual property right
protection have already been solved, but the process of international
standardisatiol). is still an incomplete one, especially in Europe. Harmonisation of

Siebert [1991] p. 810.

 3

intellectual property rights on a macroeconomic level has to take into account

national differences and peculiarities. Economic analysis suggests two possible
conclusions from harmonisation of national systems of IPR:
Hypothesis 1: An internationally standardised system of intellectual property
rights is necessary as a guarantee of innovation rates. It provides the
basis for the international diffusion of technology and has a positive
influence on all participating countries4 •
Hypothesis 2: Intellectual property right systems strengthen and benefit primarily
the position of international· companies from major innovative
countries. They restrain inter-country technology diffusion and an
efficient allocation of resources. They mainly shift economic rents
towards already innovative countries5 •

The analysis has to take further into consideration how far national borders, i.e.
national innovation systems with different intellectual property rights, construct
borders for the diffusion of technological knowledge abroad.

Some of the Central and Eastern European Countries (CEECs) had introduced
international industrial property protection even before the Second WorId War6 •
During the socialist era all COMECON countries, apart from Hungary/ switched
towards an award system, under which inventors received an inventors
certification that granted a certain percentage of inventions' cost. savings up to a
maximum amount8• All socialist organisations were entitled to make use of
inventions,9 which is one reason why the interest of engineers and technical staff
to innovate was relatively low 10 during that time. With the fall of the iron curtain
Central and Eastern European countries returned slowly to the international
industrial property right system. The orientation of those countries with its
harmonisation process is first of all one in the direction towards the European
Union.

The development of intellectual property rights systems in Central and Eastern

European Countries is subject of the macroeconomic case study in chapter seven
of this book. Within the analysis the theory of "technological accumulation"ll and

4
Barro, Sala-i-Martin [1994], Barro, Sala-i-Martin [1995] Rivera-Batiz, Xie [1992J.
Grossman, Helpman [1993], Helpman [1993].
This is true for Bulgaria, Poland, Romania and Hungary in the case of patent
protection. See also table 2.
7
See Ivanyi [1992] page 155.
Compare Kaufer [1988] page 47.
9
See e.g. the description ofthe situation in the former Czechoslovakia in Jakl [1992].
10
Kotarba [1992] outlines the deleterious effects on Polish workers' mentality. See also
Jakl [1992].
11
Pavitt [1988].
4

the "technology gap" model 12 are of particular interest. The theory of

technological accumulation implies that technological change takes place in so
called trajectories, which basically depend on the formerly accumulated amount of
knowledge. ThUl>, innovation is not coincidental but it depends on past experience
and is more likely there where past accumulated knowledge and experience is
already relatively high. Following the technology gap theory, international trade is
basically driven via the technological differences of countries. Innovative
countries have the opportunity to extend their technological superiority by
continuous innovation. The subject here is the influence ofIPR upon such gaps, in
how far they help to close them or rather help to establish them. The
macroeconomic influences of IPR mainly depend on the conduct of international
companies, their investment decisions and their decision for the allocation of
innovation. For these firms it is important that intellectual property right
protection gives them a return of investment on their inventions. The cost of
international protection is hold against the expected value of a right in a country.

This book starts with a profound look at the philosophical and economic
justification of intellectual property rights (chapter 2). The role of intellectual
property rights within the innovation process is issued and the general dimension
of intellectual property rights within the understanding of knowledge, information
and especially technological knowledge is elaborated, followed by an in-depth
philosophical analysis of knowledge and its growth. Chapter three provides an
overview of the microeconomic theory of IPR with a particular focus on the
incentive to innovate under different market structures. The next section (chapter
4) explains the state of the art ofIPR in inter-country studies regarding especially
the influence of IPR on foreign direct investment and trade. Concrete political
issues, the political understanding of IPR and the latest initiatives of
harmonisation of intellectual property right systems are presented in chapter five.
Chapters six and seven comprise the two case studies one on patent protection for
biotechnological inventions within the European Union and one on the recent
development of patent protection in Central and Eastern European Countries.

12
Posner [1961].
2 Intellectual Property Rights, Innovation and
Technological Knowledge

The aim of this chapter is to discuss the fundamental relationship between science,
technology and wealth and to relate it to the protection of intellecttial property.
The key features of technological knowledge, how it appears and develops and its
dependency on science are essential for the understanding and for the further
analysis of intellectual property rights (IPR).

Generally it is assumed that technological advance depends on the development of

science. Causation is usually understood to lead from the growth of knowledge in
science over technological growth to economic growth. What is it, however, that
changes when we say that knowledge is growing? What are the sources and
processes of the growth of knowledge and what does such a process of growth
look like? An examination of the relationship between technological knowledge,
scientific knowledge and intellectual property right protection requires a strong
familiarity with the used terminology of "knowledge", "information",
"innovation" and "technology". Clear definitions are required. Finally,
implementations from the analysis of the growth of knowledge for the protection
of both scientific and technological knowledge are taken.

At the beginning of this chapter the understanding of science and technology,

underlying the European political initiatives in research and development is
worked out. This chapter gives an outline of what scientific and technological
knowledge is and it investigates the growth of scientific knowledge by a wide
excursion into philosophy and epistemology. Finally, the general, philosophical
and economic ways of justifying intellectual property are represented in a brief
way.

One major aim is to provide a more interdisciplinary perspective of the innovation

process and its components, and to highlight a certain awareness of the
problematic nature of the investigated problem that is frequently hidden behind
the political discussion around innovation.

2.1 Justifying Intellectual Property Rights

One justification for intellectual property rights is that people should be entitled to
the fruits of their labour as a natural right. This justification is going back to John
Lock who writes in chapter 5 of the Second Treatise of Government that any
person is the owner of herlhis own body and hence also of the products made by
the operation of this body and its labour. There are two arguments against this
6

classical justification of intellectual property rights. "Intellectual activity is not

creation ex nihilo" 13 , meaning that intellectual products build on other already
existing intellectual work. Strictly interpreted, the Lockian argument allows only
for the ownership of the. added value but not total ownership. But it is of course
too difficult a task to identifY and separate the previous and the added value. The
second reason against the ownership of "fruits from labor as a natural right" is that
intellectual property should not provide ownership at the full market value via
intellectual property rights. This value depends on too many different factors
(product marketing, patent conditions, market constitution etc.) which are not
related to the direct creation of the intellectual product. Hettinger therefore
concludes, "The 'right' to receive what the market will bear is a: socially created
privilege, and not a natural right at all"14. Similar problems as with a natural right
justification arise with that of property in intellectual products based on the fruits
of one's labour.

The most common justification for intellectual property rights is based on a

utilitarian argumentation. Intellectual property rights are a necessary provision for
science and technology to progress. With a lack of IPR there would be no
incentive to spend high amounts on research and development. In their absence
others could freely copy intellectual property. The outcome would be that no
original development would be undertaken, a result with disastrous consequences
for the general development of science and technology.

Market failure in technological knowledge is due to three factors ls . The first one is
the indivisibility of research expenditures and the burden of a huge fixed cost for
any investor. The second one is the general investment risk that goes along with
the technological uncertainty and investment for research and development. The
third reason is the public good feature of technological knowledge. Producers of
knowledge cannot prevent others from using it (non-excludability). Intellectual
property can be used and enjoyed jointly by as many as care to make use of it
without hindering the others (non-rivalry). In economic terms, marginal costs of
providing intellectual objects to an additional user are nil. Under free market
conditions the public good features result in an overuse of intellectual property
and a loss of incentive for investment in activities which provide intellectual
property (R&D investments). This is the usual argument why government
intervention in the form of intellectual property rights is required. Nevertheless,
the impact of intellectual property rights on the free flow of ideas and knowledge
in general is a twofold, if not contradictory one. They restrict the current
availability and use of intellectual products and at the same time their future
production and availability.

\3
Hettinger [1989] page 38.
14 Hettinger [1989] page 40.
IS
For further details see e.g. Geroski [1995] page 91.
 7

" ... by slowing down the diffusion of technological progress it ensures that there
will be more progress to diffuse.,,16

This becomes clearer by distinguishing two effects of intellectual property rights

on the free flow of ideas and knowledge: the innovation and the diffusion effects.

1. The innovation effect: Innovators are going to expect higher profits from
IPR than under free market conditions. Their willingness to expend money
and effort to investigate and to develop new products is rising. The individual
risk of investment is falling and the rate of innovation is increasing. Hence,
the innovation effect is raising the general flow of ideas and knowledge.

2. The diffusion effect: The impact of intellectual property rights on the

diffusion of ideas and knowledge is a twofold one. In the first instance
intellectual property rights restrict access to and the free use of knowledge by
making others pay for this use (negative distribution effect). By publication of
these rights, e.g. in the case of patents, technological knowledge is also
accessible to a wider public (positive distribution effect). The positive
distribution effect is restricted in so far as patent information tends to be
insider information, used by those who can afford and have the facilities to
make use of it.

Hence, the question of optimal intellectual property right protection is one of

fmding the correct equilibrium between the innovation spurring and knowledge-
deterring effects in the performance of IPR. This consideration also makes clear
that intellectual property rights are, by their nature, second best solutions. Practical
solutions are a matter of fmding the right balance. They should be based on
empirical evidence.

There are also good arguments against state intervention in the form of intellectual
property rights in knowledge markets. One is that innovation provides the
innovator with a sufficient first mover advantage that allows the conquering of
huge market shares, which provides temporary advantages and allows the
establishment of market entry barriers against competitors.

A second reason is that property rights, in general, offer their owners a variety of
strategic uses in the market place that are no longer conforming with the original
idea of IPR as a remedy against market failure. "Intellectual property rights have a
dangerous inner logic .... [R]ational actors might use them to plan against the
market" 17. These secondary purposes of IPR dominate and take away from the
original idea of supplying inventiveness and creativity. Nevertheless, they
stimulate the innovator's interest in the property rights themselves and in the

16 Hettinger [1989] page 48.

17
Drahos [1995] page 136.
8

related pay-otIs. "Property rights in abstract objects push the invisible hand away;
self-interest is released in ways that threaten the negative liberties of others"IS.
This danger is naturally higher in the hands of actors that possess stronger market
power.

Another reason against state intervention is the second mover advantage. It is

correlated with the non-excludability feature of technological knowledge, i.e. the
free availability of scientific and technological knowledge. The second mover
advantage implies that firms following the innovator are frequently more efficient
in making use of innovations than the original innovator, ,e.g. by developing a
more market appropriate product version. In this way the second mover can save
huge research and development costs ,which is again, according to standard
economic theoryl9 an argument for state subsidies and legal protection of
scientific and technological knowledge. However, the argument builds on the
assumption that scientific and technological knowledge is available free for
second movers, but second moving is far from being free20, instead it requires
huge investments in research and development. Technological knowledge (e.g.
patents) is not the kind of easily transferable good mainstream economic theory
would imply. In order to understand technological and scientific knowledge a
good educational background is necessary. Firms have to hire experts in order to
be able to make use of second user advantages21 • Therefore, the understanding of
technological knowledge requires a very high standard of education which
automatically builds up barriers to access to technological knowledge. The higher
the costs for second, moving are, the lower the need is for intellectual property
right protection. '

18
Drahos [1995] page 139.
19
E.g. Arrow [1975] and Romer [1990].
20
"The myth in science" Kealey [1996] page 228.
21
Scientists and technologists, however, have different goals and drives: Scientists have
a higher interest in first mover research and in scientific liberty than in second mover
research. Therefore firms' have to make a compromise between hiring experts and
providing them their desired first mover research conditions and having the required
human capital and skills for exploiting second mover advantages. Consequently firms
would have to hire scientists and provide themselves with basic research facilities in
order to be present in markets of innovation, both by first and second mover activity.
Compare Stephan [1996] and Dasgupta and David [1994].
 9

2.2 The Political Understanding

2.2.1 Innovation

According to Article 130 f EC, it is one of the European Union's central aims to
favour the development of Europe's international "competitiveness,,22. This
position was reinforced within the White Paper Growth, Competitiveness,
Empioymenr3 where the establishment of European firms' competitiveness in free
world markets is supposed to be a necessity for the beneficial future development
of the Union. The rise of the innovation rate in Europe is considered to be one of
the main drivers of Europe's "competitiveness". Therefore, usually as a political
consequence, more state promotion of research and development activities is
demanded24 • Using the same argumentation, the European Commission claims in
the 1995 Green Paper on Innovation the discovery of positive and negative factors
of influence on innovation in Europe and the fonnulation of measures for the
improvement of innovative capacity within the Union25 . One of the main measures
is considered to be the adjustment of the legal framework and in this respect in
particular the advancement of intellectual property rights in Europe26 . Innovation
is supposed to have positive economic growth effects. Consequently, governments
are looking for economic tools for rising innovation. The usual governmental
instrwnents include subsidies, taxes and intellectual property rights.

On the one hand, the patent system provides incentives to innovate both finns and
private innovators. On. the other hand, it should distribute the benefits of
technological knowledge to a larger number of users. However, by looking at
patent statistics as a measure of innovative outpuf7 it is often found that European
numbers are below those of the other two members of the "Triad", the United
States and Japan. Hence, Europe shows a large deficit in tenns of numbers of
patent applications28 and, assuming patents to be an indicator of innovation, it also
shows a deficit in innovative activity.

This describes part of what politicians and scientists call the "European Paradox",
meaning that "one of Europe's major weaknesses lies in its inferiority to transfonn

22
The international competitiveness of an economy is a rather vague concept and not at
all clear. For further investigation of this concept and a more critical examination see
e.g.: Gries and Hentschel [1994] and Straubhaar [1994].
23
European Commission [1994] pp. 14.
24
Ibid chapter 4.
2S
Green Paper on Innovation KOM(95) 688, page 1.
26 Green Paper on Innovation KOM(95) 688 route of actions 8 and 10.
27
On the difficulty of patents as an economic indicator, see e.g. Griliches [1990].
28
E.g. the number of patent applications per 1 million inhabitants for 1993: Europe:
245, USA: 388, Japan: 2665. For a more sophisticated study of the use of patent
protection in Europe see the EPO script Nr. 3. European Patent Office [1994].
10

results of technological research and skills into innovation and competitive

advantages·.29. The Economist is most succinct in this respect: "In America science
is a business. In Europe it is still seen as a cuiture,,30.

2.2.2 Intellectual Property Rights

Following the argumentation of the Green Paper on Innovation, an adequate

protection of intellectual property in Europe contributes in a positive way, as part
of the legal framework, to Europe's "competitiveness". However, the whole
political argumentation is only valid if the so-called linear model (see in the
following chapter 2.3.2) of a positive input-output relationship between science,
innovation, technology and economic growth is correct. According to economic
theory, intellectual property rights are assumed to fulfil their important role as a
stimulus to innovation.

Current political initiatives with intellectual property rights in Europe mainly

concern the task of the establishment of a uniform system of rights, i.e.
harmonisation of intellectual property rights. The current situation is that the
national patent systems and the European one exist side by side.

In order to overcome the current wretched situation of patent protection in Europe

the Commission recently published a Green Paper on the Community patent and
the patent system in Europe. The aim of this initiative is to take a further step
towards real and final harmonisation of European patent law, to find solutions to
related problems like procedural questions in respect of infringement, the
extraordinarily high translation costs, differences in interpretation of European
patent law between countries and fees for the national and the European Patent
Office.

In addition, the whole discussion around the geographical breadth of intellectual

property rights in Europe is finally based on believing that these rights function in
the presumed economic way. The recent Green Paper on patent protection
expresses this as follows:

" ...Europe seems less well placed than its main competitors. It has an excellent
scientific base but is less successful than other regions of the world at converting
its skills into new products and market share, especially in high-technology
sectors. ... [I]t is vital to protect the fruits of innovation ... [and] that companies
have a competitive advantage when it comes to maintaining or expanding their
market, share. ,,31

29
European Commission COM(95) 688, 11.2 page 5.
30
The Economist 911193, Europe's technology policy.
31
European Commission COM(97) 314 final, 24.6.97 page 1.
 11

2.3 The Innovation Process

2.3.1 History

Francis Bacon (1561-1626) was one of the first who investigated in his work The
advancement of learning, (1605) the issue whether the government should fund
science. He distinguished between pure science and applied science, that is
technology. In his understanding it is pure or academic science that underpins
applied science which then creates wealth:

...
Ip_ur_e_s_c_ie_n_ce_ _--' ---+~ ...a_pp_I_ie_d_sc_i_en_c_e/_te_c_hn_o_lo_gy_-", ---~~ Iwealth I
Figure 1: The innovation process according to Francis Bacon

Consequently Francis Bacon demands government funded academic research in

the form of subsidies, state owned institutions and protection of science and
technolog 2 •

"Historically science and technology have been relatively independent

enterprises. ,,33

This observation of Thomas Kuhn has been true for ancient technology, where
greatest technological achievements have been developed before 700 BC whereas
the scientific pinnacle was in the following centuries. Within the scientifically
flourishing period of Hellenism major technological advances of ancient Greek
society have already been concluded. Aristotle himself as a philosopher of that
time regarded science in society only to appear where people have leisure time.

"When all inventions had been discovered, the sciences which are not concerned
with the pleasures and necessities of life were developed first in the lands where
man began to have leisure. ,,34

Also in the time of the renaissance technological advances appeared before

scientific discoveries. The same is true for the Industrial Revolution where it was
first of all new technology invented by engineers or workman by the use of their
practical experience, like the steam engine, the flying shuttle and the spinning

32
With his conception of science Bacon is still tied to the ancient and transfiguring
picture of scientists or philosophers as leading parts in society which is obviously in
the tradition of Plato's philosopher kings.
33
Siegel [1975] p. 452.
34
Aristotle, Metaphysics, I 1.981b.
12

jenny that rose economic growth35 . Thus a rather loose causal relationship
between science and technology was characteristic for the period of time before
1860. At that time with the appearance of the electronic battery and organic
chemistry the whole pattern between science and technology changed36 . Industries
now needed industrial research laboratories of large scale. With the emergence of
a more science based industrial research the importance of the· employed
innovator-engineer with a good scientific training background rose more and
more.

Adam Smith developed in his work The Wealth olNations [1776J an already quite
different comprehension of the interrelationship between science, technology and
economic growth. In contrast to Francis Bacon he emphasised much more the
importance of technology than of science for the advance of innovation.
Essentially, he was one of the first who gave prominence to the very significance
of technological improvements37 . The most important source of improvements in
technology arises in his opinion from within industry itself and not from academic
science.

"All the improvements in machinery, however, have by no means been the

invention of those who had occasion to use the machinery ... A great part of the
machines made use in manufactures ... were originally the inventions of common
workman,,38.

Most important, however, for spurring up the causal chain towards wealth is still
pre-existing technology. Furthermore it is not only science that provides
technology but also technology that influences science.

2.3.2 The Linear Model

The standard framework for understanding the innovation process is the linear
model. It assumes that science spurs innovation, technology and economic growth.
The model describes a linear input-output relationship between various factors.
Some are depicted in figure 2.

35 Kealey makes this clear for the case of the steam engine. "It will be seen, therefore
that the development of the steam engine the one artefact that more than any other
embodies the Industrial Revolution, owed nothing to science; it emerged from pre-
existing technology, and it was created by uneducated, often isolated, men who·
applied practical common sense and intuition to address the mechanical problems that
beset them, and whose solutions would yield obvious economic reward. Kealey
[1996] p. 68. .
36 See again Siegel (1975] page 454.
37 Adam Smith (1976] book II ,chapter ii.
38 Adam Smith [1976] book I ,chapter i.
 13

PUBLICLY
FUNDED
• COMMERCIALLY
FUNDED

COMMERCIAL
BASIC SCIENCE APPLIED SCIENCE MARKET
DEVELOPMENT
& TECHNOLOGY & PRODUCTION DEMAND

PUBLIC
KNOWLEDGE • PROPRIETARY
KNOWLEDGE

Figure 2: The linear model of production and innovation39

Intellectual property rights should provide incentives to invest in the linear process
at the beginning, in basic science. Investors can then appropriate the benefits of
research and development from sales. Intellectual property rights influence the
linear model at various and important stages, but they are essentially in the interest
of downstream participants in the process.

Figure 2 comprises a number of theoretical reflections on the innovation process.

The described basic form of the linear model covers only the scientific-
technological conditions for innovation, but it does not include the draw-backs
from the market and the demand side onto innovation. Market conditions, the
relevant prices, market demand, but also the market structure are predominating
factors for innovation. Hence the model gives a good explanatory ground for the
"science-push" hypothesis, but it does not consider the "demand pull"
hypothesis40 •

The "science push" hypothesis assumes that the accumulated level of available
scientific and technological knowledge within an economy is decisive for future
innovative output. The approach argues that scientific knowledge is the main
source of technological advance. Hence it is suitable to explain innovative
advancement on both, a micro- and macro- economic level. The approach shows
why innovation and new technology appear with an overwhelming proportion in
technologically and scientifically already advanced countries. Enterprises with
larger research and development facilities and with greater past technological
experiences have also higher future innovative expectations. Innovation probably
depends on both, market forces (relative prices) and the progress at the
technological and scientific frontier and therefore a complete picture of the
innovation process should include both, technical performance and market
conditions.

39
European Commission [1999] page 6.
40
This includes the whole dispute on the relationship between market structure and
innovation. See again Baldwin and Scott [1987] and Kamien and Schwartz [1982].
14

2.3.3 Interactive Model of Knowledge and Innovation Systems

Kline and Rosenberg [1986] criticised the linear model vehemently because it
does not include any feedback paths of the development process. A more modem
understanding of science would cover also "the creation, discovery, verification,
collation, reorganisation and dissemination of knowledge about physical
biological and social nature"41. They emphasise that technical success is only a
necessary but not a sufficient condition for establishing economic usefulness.
There are e.g. ''more patents never used on a commercial base in number than
unrealised market advantages due to the lack of missing technical infrastructure" 42
Therefore a more interactive model is proposed.

Results Prototypes, Products

specifications

APPLIED SCIENCE COMMERCIAL MARKET

BASIC SCIENCE & TECHNOLOGY DEVELOPMENT DEMAND
& PRODUCTION

Targeted Technical Market

funding requirements needs

Figure 3: Interactive model of knowledge and innovation systems43

Its characteristics are feedback loops within the chains, including both, links from
basic science to applied science and technology and the other way round, but also
the numerous feedbacks that link and co-ordinate science, the development and
the market. Like this, the model comprises both, the "science push" and "demand
pull" hypothesis. Nevertheless, the innovation process is unlikely to be described
comprehensively by one single model. Some additional key features have to be
underlined:

• Innovation is inherently uncertain.

41 Kline, Rosenberg [1986] page 287.

42 Kline, Rosenberg [1986] page 276. Examples like the development of the Concorde:
it crosses the Atlantic in half of the time required by a Boing 747 but at fuel costs per
passenger more than 15 times as much.
43 European Commission [1999] page 8.
 15

• From an economic point of view, innovation is also a cost of staying in the

marketplace.

• Science is most frequently not a direct causal link with innovation but it enters
primarily through knowledge already in the heads of the people in the
innovative organisation and to a lesser degree through information. quickly
accessible to them.

• Much essential support of science itself from the products of innovative

activities, i.e. through tools and instruments (feedback loops).

Intellectual property rights are important at several points of the model both as
input and output of the innovation process. On the one hand they constitute part of
the relevant market conditions, as they tend to monopolise the market. On the
other side they are output factors of innovation as legally institutionalised
measures.

2.4 Technological Knowledge and Its Determinants

2.4.1 Knowledge

Classical ways to differentiate knowledge are:

A posteriori knowledge ....~t---II.~ A priori knowledge (Kant)44

A posteriori knowledge is knowledge deriving from experience, whereas a priori

knowledge is attained independently of experience.

Knowledge by acquaintance ...~

...- ...~ Knowledge by description (Russellt5

Knowledge by acquaintance is knowledge of objects by means of direct awareness

of them in the immediate environment (knowing things). This concept refers more
to the process by which knowledge is transmitted (knowledge by having
information). Whereas knowledge by description is the indirect knowledge of
objects (knowing about things) that were previously accumulated in the knower's
mind46 •

44
Kant's main concern was to defend the existence of a priori knowledge. He realised
that all factors to operate a priori knowledge are limited to materials from world
experience. Nowadays in philosophy the concept of a priori knowledge is a very
controversial one.
4S
For a short introduction see e.g. Audi [1995] page 409.
46
See also Machlup [1980] page 8.
 16

Tacit knowledge ... • Explicit (codifiable) knowledge (polanyit7

Tacit knowledge is non-explicit knowledge that is acquired via the informal take-
up of leamed· behaviour and procedures. It is included in skills of persons and
techniques but also encompasses organisational leaming48 • Tacit knowledge
differs from person to person and is therefore difficult to transfer, except in a
combined transfer together with its physical bodies, like the hiring away of skilled
staff from one firm to another. Codified knowledge, however, is much easier to
transfer as it can be transmitted in a symbolic form.

Lundvall and Johnson [1994t 9 differentiate knowledge in the following way:

Know-what covers the knowledge about facts like "When was the battle of
Waterloo fought?". It is close to information. A main feature is that it can be
broken down into bits.

Know-why is the scientific part of knowledge. It includes the principles and laws
of motion in nature, scientific knowledge about human mind and about society.

Know-how is the skills and capabilities to do something. Typically these skills are
developed and maintained within an individual firm. Here, again the
differentiation between tacit lind codified knowledge is relevant, as some parts of
know-how are reproducible and explicit, whereas other parts are tacit and hence
more difficult or impossible to transfer.

Know-who is the part of knowledge showing who knows what and who knows
how to do what. Frequently it is more important for economic success to know
key persons than to know basic scientific principles.

Information society is often characterised by increasing codification of some

elements of knowledge. However, the question is, whether "The digital revolution
has intensified the move towards knowledge codification and altered the balance
of codified and tacit knowledge in the knowledge stock of the economy,,50. It is
not clear, weather this shift really happened in the described way, since also
within a world where more and more knowledge is going to be codified, know-
who and know-how are getting more and more important, or in the worlds of
Lundvall and Johnson:

47
Polanyi [1967].
48
See Dasgupta, David [1994] p. 493.
49
Ibid page 27, 28.
50 OEeD [1997] page 232.
 17

"KnowIng how to do things in isolation is not the decisive type of knowledge any
more (know what, know-why). Knowing how to communicate and co-operate
becomes much more important than before (know-who, know-hOW),,51.

The transfer of codified knowledge is cheaper than transmitting tacit knowledge,

know-who or know-how. This is important with respect to the protection of
knowledge by intellectual property rights, because protection is only substantial
for knowledge, where transfer is eas~2. Markets of tacit knowledge follow very
different rules than those of explicit knowledge. Tacit knowledge builds up
inherent barriers to access of new knowledge (market entry barriers). Remedial
measures like subsidies or intellectual property rights are consequently not
required. The patent system e.g. is criticised that it considers knowledge only as an
entity, but it omits its tacit dimension53 .

Knowledge by description and explicit knowledge are easier to transfer and hence
are more subject of intellectual property right protection. Whereas knowledge by
acquaintance and tacit knowledge are rather difficult to transfer and thus are
inherently less the subject of protection via intellectual property rights. One very
interesting question with relationship to the different ways of differentiating
knowledge would be to observe empirically, to which dimension knowledge is
shifting in the so called "information society" and to deduce consequences, also in
respect to the protection of knowledge.

2.4.2 Information

Information is usually understood as codified knowledge. Following this narrow

understanding of information all "information" is "knowledge". The broader
understanding of knowledge is overlapping with the formerly mentioned concepts
of knowledge. Buckland [1991] e.g. distinguishes three principal uses of the word
information, information-as-process, information-as-knowledge and information
as~thing. Information-as-process is the action of informing respectively the
process of becoming informed. Whereas information-as-knowledge is the part of
knowledge imparted in the process of being informed. However, the information
provider and the acceptant may have different knowledge as the codification of
knowledge. Having the same information does not mean understanding it in the

51 Lundvall and Johnson [1994] page 27,28.

S2
"... there are considerable problems in establishing defensible property rights in
knowledge unless the knowledge can be tied to specific artefacts." Georghiou and
Metcalfe [1990] page 41.
S3
"The patent system has no room-indeed can have no room- for tacit knowledge"
Kingston [1997] page 3.
18

same way54. The third concept of infonnation-as-thing means the change of

intangible knowledge into knowledge represented in a physical way, like statistical
data and text documents.

In the following infonnation will be understood in the defined narrow sense as

infonnation-as-thing. Infonnation in this understanding can be transferred, stored
and its reproduction is relatively cheap and it carries all features of a public good
(non-excludability and non-rivalry). However, the transfer from codifiable
knowledge to infonnation is not easy and cheap at a1l 55 .

2.4.3 Technological Knowledge

For industrial property rights it is important to distinguish scientific and

technological knowledge. Following the linear model approach (see again
paragraph 2.3) scientific knowledge is an input source for the growth of
technological knowledge. Usually technology is understood as ''the application of
scientific knowledge for practical purposes..56 .

Dasgupta and David [1994] point out that science and technology follow very
different reward systems. Academic scientists have different goals than engineers.
For them it is mainly the rule of priority combined with a "winner takes it all"
principle which conducts their behaviour. Discovering a novelty for the second
time is not rewarded in science and the discovery of the same invention a second
or a third time 57 does also not create any additional social value. Science is guided
by the rule of early disclosure 58. In industry novelties of technological knowledge
have to be protected against competitors and thus secrecy or protection via
intellectual property rights is a means for the maintenance of market shares.

Protection is only meaningful as a kind of compensation for such knowledge

where transfer is "too easy". This means again that the evaluation of intellectual
property protection for technology is essential there, where the relative proportion
of explicit knowledge, or infonnation, compared to the non-explicit (tacit) part of
the knowledge is dominating.

54
"According to most epistomologists, knowledge entails belief, so that I cannot know
that such and such is the case unless I believe that such and such is the case" Dancy
and Sosa [1992] page 234.
55
See e.g. Dasgupta, David [1994] page 493.
56
Morris [1992].
57 This is one reason, why scientists are paid by a fixed salary, which compensates them
in a way for not being the first in the race of discovering novelties, plus bonuses,
which apart of the inherent incentive of getting famous provides pecuniary incentives
to go ahead with new discoveries.
58 "hastening discoveries and hastening their disclosure" Dasgupta and David [1994]
page 499.
 19

Table I: Knowledge classificationS9

Codified Tacit

Public e.g. Publications Generic,

e.g. Skills

Proprietary e.g. Patents Finn-specific

skills e.g. Know-
how

In table 1 each field corresponds to different knowledge-generating institutions

and different mechanisms for the accumulation of knowledge. Public and codified
knowledge is a domain of universities and public research laboratories where
knowledge is accumulated in an open and unstructured way. Whereas private
companies practice a mixture of legal protection (e.g. patents) and secrecy to
protect their property. Public technological tacit knowledge is very much tied to
universities whereas firm specific skills are incorporated in the companies' staff.
Hence, accumulation of this kind of knowledge takes place throughout the
recruiting process.

For new and high-tech technologies it is often argued that the proportion of
codified knowledge is diminishing against tacit knowledge and that this is mainly
due to an ongoing increase in complexity of those technologies that require
relatively more skills and trained staff than machines and raw materials. If this is
true it would also signify a decrease of the importance of industrial property
rights60 •

2.5 An Excursion into Epistomology and Its Implications for

Intellectual Property

2.5.1 Karl Popper's Understanding of the Growth of Scientific Knowledge

Most economic theories, like neo-classics, new growth theory and evolutionary
theory consider innovation as one, if not the main source, of economic growth.
Technological growth in practice is often considered as a problem solving
procedure, where a concrete practical problem requires certain scientific
knowledge plus an element of discovery and creativity for solution. The creative

S9
Taken from Georghiou and Metcalfe [1990] page 43.
60
E.g. computer programs include codified knowledge in ideal form in the first instance
in the way that each step should be comprehensible throughout the programmed code.
But size, the complexity and individual liberty in the way of programming make
single programs often incomprehensible even for experts.
20

elements themselves however, are not accessible to a systematic approach.

Obvious is that the problem solving capacity somehow depends on information
from past experience and on the general scientific stock of knowledge in society.
According to the linear model, technological growth depends on the growth of
scientific knowledge. In the preface of The Logic of Scientific Discovery Karl
Popper claims that one of the main problems of epistemology is the problem of the
growth of knowledge which in his opinion is also best studied by studying the
growth of scientific knowledge. This chapter presents the understanding of the
growth of scientific knowledge of Karl Popper and Thomas Kuhn. The intention
of such a presentation is to learn more about the essential features of scientific
knowledge from another perspective with the hope to be able to draw
implementations and conclusions from philosophy towards technology and
economics.

2.5.1.1 Science

Popper criticises the great deficits of inductive scientific methodology and he is

refuting the branch of epistemology in the 20th century that regards epistemology
as a problem of ordinary language and the structure of logical paradoxes61 • For
Popper the central problem of epistemology is the growth of our knowledge and
one of his main matter of concerns is to reintroduce epistemology in the tradition
of Kant, Mill and Russell in order to propagate the existence of metaphysical
concepts. Popper realises that there is no definite and absolute truth in
epistemology observable. With his positive theory of corroboration (confirmation)
and throughout the criterion of falsifiability he claims that at least an
approximation to "truth" is feasible. Popper distinguishes three worlds62 :
world 1: objective world of material things
world 2: subjective world of minds
world 3: products of minds of living creatures, creation of emergence through
the interaction of world 1 with world 2.

Knowledge of world 2 is subjective knowledge, whereas knowledge of world 3 is

objective knowledge, i.e. scientific knowledge theories problems etc., like e.g.
published in journals and books. The differentiation of subjective and objective
knowledge and the interaction of the different worlds are essential for Popper's
understanding of the growth of knowledge.

61
Ludwig Wittgenstein is a main representative of this school. In his view knowledge is
limited by the framework of language and the corresponding cultural background.
Knowledge is nothing but a reflection of society in the mind. Ways of speaking about
the world cannot contain more than can be expressed by the linguistic manner in
which words and things are related. "Wovon man nicht sprechen kann, dariiber muB
man schweigen." Compare Wittgenstein [1989] page 7.
62
Compare e.g. Munz [1985] pp 225.
 21

According to Popper scientific natural laws (objective knowledge of world 3) have

the form of "all-statements". An all-statement is a universal statement with a
specific universality like e.g. the sentence "All Ravens are black". Negatively
spoken, all-statements claim the non-existence of things contradicting with the all-
statement. Therefore, the empirical evidence of any of the excluded entities
falsifies an all-statement. Popper understands scientific discovery as the
formulation of all-statements and their systematic testing and falsification. The
underlying logical concept of falsification is the logical form of "modus tollens".

"Modus tollens" allows the falsification of a system of statements when a

concluding statement is observed to be false.
[(t~p).p] ~ t
p concluding statement
t system of statements (Theory, natural law)
t~p t implies p
p non p, p is falsified

Thus if there is only one false conclusion from a universal statement the universal
state is false. Modus tollens is the only logical concept that allows a conclusion in
the direction from a singular statements to a universal statement. Popper strictly
refutes all kind of formulation of universal statements deriving from singular
statements (inductive scientific methods). The problem of the inductive method
and positivism is that there is no principle for induction, either the justification of
induction runs into the problem of an infinite regress or it is set as an apriorism63 •
In the understanding of positivism science is a system of statements that can be led
back to elementary empirical propositions. Poppers criticism of positivism is
mainly that it sets natural science and metaphysical science equal and that it leaves
no space for metaphysics64 • Against positivism he sets the deductive methodology
of falsification. Nevertheless, also a deductive scientific methodology needs a
criterion of demarcation between phoney knowledge and genuine knowledge.
Popper sets falsifiablility as criterion of demarcation. All universal statements
(theories and scientific systems) have to be potentially falsifiable by experience.
Falsifiability as criterion of demarcation has in Popper's opinion the advantages of
being logically correct and of giving up the requirement of verification. The main
feature of any scientific statement is its potential falsification in future. Another
advantage of the criterion of falsification is that it is a pure logical relationship
between a theory and basic (singular) statements. Scientific theories are never
absolutely true but can in Popperian terms only reach a certain degree of
corroboration (confirmation). Corroboration can change from today to tomorrow
whereas truth has a permanent state. Therefore in Poppers words: "It is not the

63
This is what Kant did. Compare Popper [1982] page 5.
64
In his tenninology this means the independence of world 1 and world 3.
22

possession of knowledge of irrefutable truth, that makes the man of science, but
his persistent and recklessly critical quest for truth6S".

2.5.1.2 The Problem Solving Procedure

In order to describe growth and progress of scientific knowledge Popper develops

the following scheme66 of a scientific problem-solving process:

The process starts with a first problem PI at hand. As preliminary solution a

tentative theory IT is proposed. The setting of this first scientific theory happens
throughout unjustified anticipation, "by guesses, by tentative solutions to our
problems, by conjectures,,67. The next step is the error elimination EE of the first
tentative theory. The result is going to be another further developed problem P2
that, however, is different from the first one. The difference is that the context of
the situation has changed by error elimination. Throughout falsification more
knowledge about reality has been observed and the process of error elimination
increases knowledge in general terms. This process continues in a never-ending
procedure of progressive error elimination. Knowledge is growing via the setting
of general conjectures, throughout deductions from them and will restart at a
higher level of knowledge with the refutation of the former theory and the
confrontation to a new situation and the formulation of a new theory.

"Criticism of our conjectures is of decisive importance: by bringing out our

mistakes it makes us understand the difficulties of the problem which we are
trying to solve. This is how we become better acquainted with our problem, and
able to propose more mature solutions: the very refutation of a theory -that is, of
any serious tentative solution to our problem- is always a step forward that takes
us nearer to the truth. And this is how we can learn from our mistakes. ,,68

Either former knowledge is corroborated, or smoothly alternated, or the former

knowledge is rejected that is falsified. In both cases it is an approximation of
reality (world 1). Popper rejects a tabula rasa approach theory. On the contrary he
assumes that the process of growth of knowledge always depends on the existence
of previous knowledge. Hence, Popper understands the growth of knowledge as an
accumulating process69.

6S
Popper [1982].
66
Popper [1974] page 121.
67
Popper [1989] preface.
68
Popper [1989] preface.
69
"Knowledge never begins from nothing, but always from some background
knowledge ..." Popper [1974] page 71.
 23

2.5.1.3 Popper and Evolutionary Epistemology

The later Popper70 had a more evolutionary understanding of the growth of

knowledge. Evolutionary epistemology respects the development of human
knowledge as a natural kind of selection process similar to evolution in biology..
Selection of parts of the knowledge takes place either through variation, selection
or retention of certain theories or parts of theories7 ). Theories like organisms in
evolution have to be compatible with the environment.. Different theories are
competing against each other for the better compatibility with reality. Only the
most compatible one will survive. Just as between organisms this competition
leads to a selection of the "fittest" theory. According to evolutionary epistemology
the common denominator of evolution and falsification is the process of error
commitment.

Popper claims that theories that badly adjust to the environment will never
survive. However, in correspondence to the process of falsification past survival
of theories never guaranties future survival. Thus science remains a permanently
changing process. Popper claims in a figurative way, that there is only a small step
from the amoeba to Einstein as both work with a method of progressive error
elimination. Organisms like the amoeba store their knowledge in their genes,
theories embody encoded knowledge. However, the amoeba and other
unconsciousness organisms take ages after physical elimination to benefit
throughout mutations from their errors, whereas a consciousness human being can
use trial and error as a process for testing theories. The use of human reason and
the consciousness of actions are going along with an enormous saving in time
energy and risk72 and can thus result in a fast turnover ofknowledge73 • According
to Popper both the evolution and epistemology make use of the same kind of
failure method and in both fields testing occurs throughout a test of compatibility
with reality. •

2.5.1.4 Criticism

The quite strict procedure of scientific development in the framework of setting

conjectural theories, their deduction, testing and falsification and the new settings
of different or more advanced theories gave reason for the criticism that such a
kind of very narrow procedure doesn't leave the necessary freedom and inventive
space to science. Such quite strict rules would be more likely to hinder the whole
procedure than to promote scientific progress74 • Sometimes theories simply need a

70
E.g. Popper [1974] and Popper [1990].
7I
Dancy and Sosa [1992] page 122.
72
Munz [1985] page 295.
73
Compare Munz [1985] p. 295.
74
Paul Feyerabend criticises Popper therefore vehemently. In his opJruon critical
rationalism will create a monster and will "turn mart into a miserable unfriendly, self
24

certain period of time for their full development. Falsification at an early state
could even be a reason to block the further development of a theory7S.

Popper himself recognises the problem of auxiliary theories and hypothesis. Any
falsification can be circumvented by the formulation of some auxiliary theory or
hypothesis that regards the peculiarities of special conditions of a particular
falsification. Theoretical systems are usually too complex to be described by only
one singular hypothesis. So there is always a way of changing. Thus, in the end it
has to be left open, when a falsification is conclusive and when not. But, how
many falsifications are needed in order to nullify a theory? Obviously such a
methodology is not different from verification and induction that was attacked so
much by Popper76. In any case the proposed methodology shows serious lacks as a
workable methodology for practical science. Scientific practice works more with
verification than with falsification, which is in particular true for economics77.
Usually knowledge is observed on the fundament of the observation of singular
events and probabilistic conclusions and therefore follows more an inductive
methodology.

The main problem that many philosophers have with the approach of evolutionary
epistemology is that they regard it to be a disanalogy to draw conclusions from
random mutations in biology towards the development of consciousness and rarely
random scientific decisions78 . The approach would ignore the reason of man and
the difference of mankind from other biological organisms, as well as it would
disregards the possibility of conscious acting of human beings.

2.5.2 The Growth of Scientific Knowledge Following Kuhn's "The

Structure of Scientific Revolutions"

Thomas Kuhn uses in his opera The Structure of Scientific Revolutions79 an

inductive methodology and develops his theory from historical examples. He
distinguishes two main parts of scientific development, periods of "normal
science" and extraordinary science of scientific revolutions that is "changes of
paradigms".

righteous mechanism without charm and humour" Feyerabend [1979] page 177.
Feyerabend propagates an anarchistic epistemology with space for unreasonable
elements. Feyerabend [1979] page 180.
75
See e.g. Keynes' General Theory as an example for a theory with a long period of
incubation. Pheby [1988] page 30.
76 Degrees of corroboration and verisimilitude have an inductive nature. See Pheby
[1988] p. 3l.
77
Pheby [1988] page 34.
78 Audi [1995] page 253.
79 Kuhn [1970].
 25

2.5.2.1 Normal Science

Normal science is science that is based on a generally accepted paradigm.

Paradigms are fundamental theories that form the process of science for a certain
period of time. They are shared and commonly accepted by all researchers
working within normal science. Scientists working within the framework of such a
common theory "are committed to the same rules and standards for scientific
practice"so. The paradigm allows scientists to go much into detail with their
research, without remodelling the assumptions of the general scientific level. In
other words, normal research is a "puzzle-solving procedure", a kind of
"mopping-up worksl " solving the problems left to solve by the paradigm.
According to Kuhn normal science is what most scientists are dedicated to.
Scientists working in normal science are usually adverse against changes.

2.5.2.2 The Change a/Paradigms

Changes happen in a first step by the awareness of an anomaly within the

established paradigm. The nature has somehow "violated" the paradigm S2.
Normal science is then undergoing a process of extraordinary science and ends
with a change of the paradigm. However, a change of the paradigm is only
possible if the observation of an anomaly in scientific theory is going along with a
new tentative theory at hands3 .

In comparison to Popper the approach of Thomas Kuhn describes in a better way

practical science. It gives plausible reasons, when to give up old theories and
when to begin with a new one (degree of corroboration/falsification versus change
of paradigm). Most scientific work has little to do with the corroboration or
falsification of important theories whereas it is more a work of routine s4 .

Kuhn considers only periods of normal science as periods of a cumulative

scientific process, scientific revolutions are non-cumulative episodes of
development. They could rather be described by a jump than by a permanently
increasing process. Kuhn's inductive methodology of paradigms is broader, in the
sense that it considers scientific, social and political aspects.

SO
Kuhn [1970] page 11.
81
Kuhn [1970] page 24.
82
Compare Kuhn [1970] page 56.
83
Nevertheless, it also very much depends on the cultural and social conditions, like e.g.
the "Max Planck principle": "New scientific truth does not triumph by convincing its
opponents and making them see the light but rather because its opponents eventually
die and a new generations grows up that is familiar with it" Compare Stephan [1996]
page 1218.
84
Pheby [1988] page 36.
26

2.5.2.3 Technological Paradigms

Giovanni Dosi takes up the idea of scientific development from Thomas Kuhn and
elaborates a concept of so-called "tec!mological paradigms" In technology like in
science, appear certain very important innovations which lead to a technological
breakthrough and a fundamental change .in the technological development. Such
changes go along with a change of the pattern of technological problem solving
procedures.

Dosi defines a technological paradigm as a "pattern of solution for selected

techno-economic problems based on highly selected principles derived from
natural science,,85. Within a technological paradigm technological trajectories
develop that is activities of technological process along the economic and
technological trade-offs defined by a paradigm86. Important for the growth of
technological knowledge is the accumulative process of technology within the
firm, since technological innovation happens mainly on the firm level. New
paradigms are mostly the result of research and development of scientific
institutions, whereas normal technological progress is an accumulative process
within firms.

Different industries develop different technological trajectories. In science based

industrial sectors innovation is directly linked to new technological paradigms that
are deriving from scientific research. Examples for such industries are the
electronic industry, organic chemical industries, drugs and bioengineering87 .

Dosi [1988] points out three main sources driving technological innovation,
exogenous determinants of innovation, that is scientific background of the society
(universities etc.), endogenous skills of firms (human capital and capital) and the
endogenous process of competition between firms 88 .

2.5.2.4 Competition and the Creation o/Knowledge

Nelson and Winter [1982] understand technological development as a result of a

variation-selection procedure between different production techniques. Like this
the process of competition carries inherently its incentives, since the discovery of
new superior production techniques rewards with first mover gains, whereas using
overcome techniques is automatically sanctioned by putting entrepreneurs into a
disadvantageous position. Competition itself is the process providing novelties and
inventions .. There are two different schools that understand competition as an
evolutionary process creating new knowledge. The first school (Hayek [1968])

85 Dosi [1988] page 1127.

86 See again Dosi [1988] page 1127.
87 See again Dosi [1988] page 1149.
88 Compare Dosi [1988] page 1142.
 27

criticises neo-classical economics for its assumption of full information. In this

understanding full infoIlIli!tion (knowledge about market and production
conditions) can only be the result from competition. Von Hayek emphasises the
importance of the institutional framework for the workability of the market as a
spontaneous process. He also emphasises that liberty is fundamental in order to
leave space for unforeseen and unpredictable events, essential for the process of
innovation in order to spur creativity and individualism.

"There is a positive correlation between individualism and innovative potential.

The greater the freedom of the individual to explore his world of experience and to
organise its elements in accordance with his private interpretation of his sensitive
impressions the greater the likelihood of new ideas coming into being.,,89

The other school with Joseph Schumpeter90 as main representative puts the
entrepreneur as an innovator in the centre of the innovation process. His potential
and creativity is the motor of competition, innovation and the distribution of
knowledge. In particular the expectation of extraordinary market gains provides
him with the incentives to spend enormous efforts91 .

2.5.3 Summary

The described procedures of the development of scientific and technological

knowledge are essential for the understanding of the main features of knowledge,
how it is created, how it develops and here central if and how it can be maintained.
Technological inventions build on the availability of a certain stock of scientific
knowledge as an input-factor and on an additional not definable element of
creativity. The creative element is difficult to be a matter of a systematic approach
of analysis. The development of knowledge, however, has always been a subject
of analysis in epistemology. Different ways of how the growth of knowledge can
be understood were presented here.

Popper understands the development of scientific knowledge as a problem solving

procedure, where falsification is the criterion of demarcation. Important in his
theory is the continuous error elimination that guaranties that the development of
knowledge is proceeding. For Kuhn the break with an old paradigm is essential for
moving on the development of science. Both theories _build on cumulative
episodes of the development of scientific knowledge and on the unrestrained
criticism of existing scientific knowledge and theories. The evolutionary
perspective introduces the same element by putting competition into the core of
the knowledge creating process. The question here is not in how far one of the

89
Hayek [1971] page 37.
90
E.g. Schumpeter [1964].
91
Compare Kerber [1997] page 14.
28

given theories is better than another or whether one has a stronger explanative
power than another, but the task is to show that all the different approaches have
elements in common. First, the continuous change by falsification, by a new
paradigm or by competition is the motor of knowledge growth. Second,
accumulation of knowledge is essential in order to provide the necessary stock of
knowledge. Finally and most important, the wide distribution of knowledge and
the unlimited access to it provides best possible growth opportunities.

2.6 Conclusion
" ... [T]o a large extent the creation of wealth is synonymous with the introduction
of new technology" 92. This conclusion follows in a straightforward way from the
linear model, however only within an appropriate legal framework and for
partially free market conditions93 . According to Arrow, technological advance
derives less from "breakthrough" inventions than from small step advances of
"learning by doing" and inventing around major technologies94 . If this were true, it
would mean, that it is primarily the accumulation of small advances in technology
that provides technological leadership, and less the development of major
inventions. Following this argumentation a continuous Popperian process of error
elimination fits better into the understanding of the innovation process, to the
introduction of new technology and to the creation of wealth than Kuhnian
paradigmatic changes.

The link between academic science and technology is less clear. According to a
survey by Mansfield [1991] it is only eleven per cent of the investigated products
that would not have been developed without substantial delay in the absence of
academic research. "Ninety per cent of new technology arises from the industrial
development of pre-existing technology, not from academic science.,,95. Adam
Smith is right in so far as it is not only science that influences technology but also
technology that breeds scientific research and growth (cross fertilisation). He is
also right in so far as a common pool of both scientific and technological
knowledge are responsible for the creation of innovation.

Science and technology are cumulative processes that depend on the existence of a
stock of pre-existing knowledge. The optimal distribution of this stock of
knowledge is an essential precondition for the rise of new technologies.

92 Kealey [1996] page 214.

93 Compare Kealey [1996] page 205.
94 Arrow [1962].
95 Kealey [1996] page 216.
 29

Popper argued that there is no systematic approach to the creative element in the
process of the development of new knowledge and he refuted any possibility of a
scientific inquiry into such an element in his theory:

"The question how it happens that a new idea occurs to a man - whether it is a
musical theme"a dramatic conflict, or a scientific tbeory- may be of great interest
to empirical psychology; but it is irrelevant to the logical analysis of scientific
knowledge. ,,96

Hence, favourable conditions for inventive steps are no object of theoretical

consideration and only the process of error elimination can be a matter for
scientific analysis. The question here is what does the Popperian process of error
elimination imply for the protection of scientific knowledge? In this respect Munz
develops further the ideas of Popper and concludes that the whole course of the
error elimination process is interrupted once knowledge is artificially excluded
from criticism97 . He argues that this is more likely under social conditions where
the relevant knowledge constitutes part of an object of corporate identity for
society. In such a situation the knowledge can be used as a social bond and can be
excluded from criticism. Social bondage means the dogmatic protection of
knowledge against criticism within a society and against the use by other
societies98 .

Human creativity and the creation of alternatives depend on the availability of

knowledge. Often creativity is just an act that combines parts of already existing
knowledge in a new waY9. This kind of creativity, in particular, depends strongly
on the availability of an existing knowledge stock. Therefore, invention is more
likely with loose social bondageIOo. Even though, there is no element of
prescription for inventions and creation in Popper's theory, social conditions have
to be in favour of inventiveness and have to allow the proces~ of knowledge
accumulation. The social environment has to provide the free availability of
knowledge and conditions for the critical treatment of knowledge, i.e. for
falsification in science and the possibilities of criticism in society.

Thomas Kuhn comes to a similar conclusion in chapter VI of The Structure of

Scientific Revolutions, where he describes the process by which new theories are
developed. He distinguishes between discoveries and inventions. Inventions are
novelties in theory, discoveries are the pure new facts that go along with the
formulation of new theories. Inventions start with the awareness of an anomaly

96 Popper [1982].
97 See Munz [1985] page 221.
98 Compare Munz [1985] page 222.
99 ,,Reassembling the bits in a new way" Munz [1985] page 221.
100 According to Popper, loose social bonding is more likely in what he calls an "open
society". See Popper [1980].
30

within the old theory. With the observation of a discovery a tentative theory has to
be already at hand to structure experimental results for the establishment of a new
paradigm and in order to observe anomalies. This means that a profound scientific
background from "normal science" has already to have been established. Novelty
would not occur without the "special apparatus" of normal science as "anomaly
appears only against the background provided by the paradigm"IOI. Thus, just like
Popper's process of error elimination, Kuhn's periods of "normal science" build
on the free availability of knowledge.

From both theories it follows that any limitations to the free availability of
knowledge should be excluded. For intellectual property rights the question again
is: what is the overall result from the positive innovation effect and the negative
distribution effect on the free flow of ideas and knowledge? The sum effect can be
different for different industries and a general rule cannot be deduced.
Nevertheless, the principle of greatest access to available knowledge should be
taken seriously.

It was demonstrated that politicians understand the innovation process as a linear

input-output relationship. Expenditures in research and development together with
a certain pool of available technological and scientific knowledge result in
innovation that finally increases wealth. State remedies such as subsidies and
intellectual property rights should give private investors further incentives to
invest in research and development in order to keep the linear process continuing.

Important to remember is that intellectual property rights only cover the codifiable
dimension of knowledge. This make IPR especially important if with the
information society and computer science, the balance between economically
useful tacit knowledge and codified information is shifting in favour of the
latter102 • Such a shift automatically raises the importance of intellectual property
rights. In any case knowledge is becoming more and more the essential resource in
what is called the "learning society", where learning is the most important process
and this rise is certainly also putting intellectual property rights more at the centre
of the public debate.

Aside from the codifiability of knowledge, the role of intellectual property rights
greatly depends on the costs of second moving (compare chapter 2.1). For certain
industries the costs of second moving may construct such high inherent barriers to
the access and use of scientific and technological knowledge that intellectual
property rights are unnecessary.

101 Kuhn [1970] page 65.

102 OECD [1996] page 90.
3 Microeconomic Theory of Intellectual
Property Rights

3.1 The General Theory

The basic reasoning for intellectual property rights is that the public good
character of technological knowledge requires artificial incentives for innovators
in the fonn of temporary monopoly rights on innovations (compare chapter 2.1).
According to economic theory IPR increase expected profits for the innovator and
make himlher to invest more in research and development (R&D) in order to raise
the innovation rate (innovation effect). Intellectual property rights influence
markets throughout the innovation and diffusion effect, while taking into
consideration that the diffusion effect is a twofold one and that it can be split into
a positive and a negative distribution effect (see again chapter 2.1)103.

The classical welfare analysis of intellectual property rights refers to monopoly

theory and takes the general negative welfare effect (dead weight loss) due to
monopolistic pricing into consideration. The intellectual property right holder sells
less quantity of the innovative good for a higher price, implementing a dead
weight loss compared to the competitive market situation.

According to Tirole [1988], Kaufer [1988] and Klodt [1994] innovation reduces
the marginal cost curve of production in figure 4 from C 1 to C2 within an already
existing market, i.e. the case of a process innovation104• Arrow distinguishes
between drastic and non-drastic innovations 105. A drastic innovation is an
innovation that decreases the post-invention price under the pre-invention cost
level C h whereas a non-drastic innovation sets the new price for the invention
above the old cost level C 1• In the case of a "drastic innovation" the monopolist
would have an incentive to reduce the product price on the market.

103 Product patents have an additional positive distribution effect as they change the
location decision of potential market entrants and hence increase and optimise the
segmentation of the market. Waterson [1990].
104 A different but also possible interpretation would be to regard the demand curve D as
an entire new one. This is the case ofa product innovation. E.g. Scherer [1990].
lOS Arrow [1975] page 620.
32

..•..•...•..........

p ............. .. :t............... .. .
ml ....

pm2 .. ...... ............ ::.,.: ..•..••..• ;.......... a

....•. ~

" ............l d
Cl ~~--------~,F~~~------~~

, •••.•••••••••• c
Cl ~ __________ ~ __ ~~ ______-+______ ~~ b

I ~R. ..
I···············... D

Figure 4: Welfare effects of monopolistic pricing ofa single invention.

In a competitive market situation quantities QJ respectively Q2 would be

produced. In case e.g. the invention is protected by a patent he/she is going to set
monopolistic prices Pmi at a higher level (P mi > Ci) where the production costs Ci
are equal to his marginal revenue MR. The additional surplus (area I and II) are
the monopoly profit and stand for the monopolist's incentive to innovate.
However, monopolistic profits are only possible by reducing the production level
in comparison to the competitive situation (Qmi < Qi). This results in a dead weight
loss compared to the socially optimal surplus in the competitive situation (the
triangle abc for price level Pm2)' According to Schumpeter monopoly power is
conductive to innovation lO6 , and thus welfare losses are the price that has to be
paid for innovative activity. This also shows that intellectual property rights are
only a second best solution lO7 •

From figure 4 follows that an already established monopolist has a lower

additional profit from innovating than its competitor who is a newcomer on the
market. Competitors still gain the entire new monopoly profit (area I and II) from

106
Schumpeter [1942] especially chapter 8.
107
"[P]atents fail to foster all worthwhile inventions", Deardorff [1992] p. 38.
 33

innovation, whereas the monopolist "only replaces himself" (he gains only an
additional profit: area I and II minus the rectangle CldePml ). The incentive to
innovate of an already established innovator is therefore lower (See also chapter
3.3).

But, what would happen without intellectual property rights? Scherer [1990]
assumes that without the additional barriers constituted by IPR against competitors
and their achievement of the innovators technological knowledge the scenario
illustrated in figure 5 would occur:
P

R&D
expenditures

PI
P2
p)

c
C =p I=======---.......

q) q2 q I qC q
Figure 5: New product pricing without patent protection lO8

Competitors would freely enter the market and corne up with an own production,
which would take away some demand from the original innovator. New
competitors don't bear the costs of research and achieve supra-normal profits. This
will attract further potential imitators to enter the market. Any additional supplier
squeezes down the original demand curve of the innovator from DI to Do.
Correspondingly the innovator's profit decreases, illustrated by the decreasing
shadowed areas, and fmally total profit's quantity is lower than the research and
development costs. Taking this reasoning into consideration the innovator decides
not to invest in R&D and the total benefit from innovation is lost for society.
Without entry-barriers entrepreneurs enter theoretically as long into the market as

108
Scherer [1990] p. 623.
34

the profits are not zero 109 • Therefore intellectual property rights describe a trade-
off between the time limited acceptance of a dead-weight loss (and a socially sub-
optimal level of innovation) and the dynamic deleterious effects on innovation by
piracy.

Nordhaus [1969] developed a model for an optimal policy with patents in which
the optimised parameter is patent lifetime. A maximum incentive to innovate
requires a long duration of patent protection, whereas the shorter patent live is, the
smaller are the corresponding dead-weight losses. To reach an optimal patent life
time Nordhaus maximises the benefits for producers and consumers minus the
research cost subject to the constraint that the inventor behaves in a profit
maximising way, that is that shelhe maximises possible royalty rates from
innovation. The optimum is then reached, where the discounted welfare rises due
to additional R&D investment are equal to the discounted welfare losses from the
monopoly situation. Nordhaus concludes that an optimal patent life-time is always
limited in time. Patent lifetime is the longer:

• The lower the price elasticity of demand is. That is when the innovator even
with a high cost reduction by innovation gains a relatively small profit. To
compensate this disincentive the relative optimal patent time has to be longer.

• The lower the required R&D effort is to achieve a specific innovation, the
more are incentives against the expected high degree of competition needed.

However, the model is relatively useless for political purposes since it requires the
evaluation of all relevant market parameters for every single product market. Such
a policy fails in praxis due to its enormous information costs. Differentiation is
needed in order to satisfY the diverging needs of industries. E.g. electronic
industry needs more speed and short-term protection, whereas pharmaceutical
industries require long term protection hence most of its money is earned after a
long period of testing to prove a drug's effectiveness and in the absence of adverse
effectsllo.

Recent criticism of intellectual property rights point out that protection tools like
patents were introduced for the protection of new mechanical devices, whereas
brainpower industries of today pose challenges that are far more complex. A
bunch of general arguments are hold up against IPR. Often they are urmecessary

109
This problem is also known as the "common pool" problem. In a parable anglers can
freely exploit common fishing grounds. A problem of appropriability, similar to the
one with technological knowledge arises and over-fishing is the consequence. In
addition competition requires more and more investment in fishing facilities in order
to anticipate competitors with earlier success. Similar to patent races, costs of fishing
are rising until they will exhaust the profits. Compare Klodt [1994] p. 26.
llO
See again Thurow [1997] page 103.
 35

or secrecy is considered to be a more reliable instrument to protect intellectual

propertylll. Long lasting administrative procedures provide difficulties and pure
market incentives, such as the prospect of a strong first mover advantage, a strong
advantage in reputation and the expectation of supra-normal profit rates, can be
stronger incentives for innovation l12 . Last but not least, intellectual property rights
are no perfect guarantee for protection. They leave possibilities to invent around
the patented invention. Moreover, enforcement procedures are incomplete and the
use of protection differs greatly between industrial sectors ll3 •

3.2 Market Structure and Innovation

One essential question, being worthwhile to analyse more in detail, is the
relationship of market structure and innovation:

"Is the incentive to innovate greater under perfect competition or under a

monopolistic market structure?"114

The question is here important to look at for two reasons. First, it is essential to
know about the general innovation providing market conditions. Second, the
question is also highly related to the matter of interest here, intellectual property
rights. According to the above considerations, intellectual property rights grant
monopolistic rights for a specific market and provide an economic incentive to
carry out innovative endeavours that would not happen under normal market
conditions. This is why IPR are so important as a policy instrument. However, IPR
would even be more desirable, if their monopolistic structure themselves would
provide further ground for innovation. Like this intellectual property rights would
have a double economically beneficial effect, as an impetus to innovate at the first
stage and as a further innovation-providing tool later on. The latter is only true if
there exists a positive relationship between an innovator's market power (market
structure) and herlhis innovative output. This is the famous assumption of
Schumpeter:

"The large scale establishment or unit of control ... has come to be the most
powerful engine of ... progress and in particular of the long-run expansion of total

111
E.g. in the survey of Sirilli [1987] for Italian industries two-thirds of inventions would
have achieved even in the absence of a patent system.
112
In addition the structure of the market itself could provide protection as in the aircraft
and semiconductor industry. There, protection is either provided through system
complexity or via quick market penetration. See Levin [1986] p.199.
113
The pharmaceutical, chemical and biotechnological industry make heavily use of
patents whereas in other industries they are of marginal importance. See Levin [1986].
114 Kamien and Schwartz [1982] page 36.
36

output ... In this respect, perfect competition is ... inferior, and has no title to being
set up as a model of ideal efficiency,,115.

Schumpeter's hypothesis covers two elements. First, there is a positive causal link
between a firm's size and innovation. Second, there also exists a positive
correlation between a firm's market power (e.g. monopoly) and innovation. The
latter is the matter of concern here. Following the ideas of Schumpeter
competition from new commodities and the discovery of new product markets is
more important for economic growth than traditional price competition on existing
markets. Innovations change production functions, i.e. they result in a radical
change on the product market that would never occur from ordinary price
competition 116. Price competition leads to equilibrium on existing markets (neo-
classical theory) whereas innovations actually destroy the market equilibrium, but
thus contribute to spur economic growth. This process is what Schumpeter calls
"creative destruction". Creative destruction contributes in an extraordinary way to
economic growth according to Schumpeter.

Intellectual property rights are a trade off between an inefficiency of current price.
competition and beneficial future contributions from likely future innovations 117.
The causal relationships (in both directions!) between innovation and market
structure is a pre-condition for such an argument. Does market structure optimally
guide investment in new prOducts?118

3.3 The Incentive to Innovate

The following model of Deardorff [1992] with the simplified assumptions of a
linear demand and a horizontal cost curve explains the different incentives to
innovate of the society, competitors and monopolists. The measure for the
incentive to innovate is the expected surplus from innovation. In figure 6 the letter
c indicates the competitive situation and m the monopolistic one.

115 Schumpeter[1942] page 106.

116 "Add as many mail-coaches as you please, you will never get a railroad by so doing"
Schumpeter [1947] page 152.
117 This is what Kamienand Schwartz [1982] (page 15) call the crux of the problem and
that it is impossible to achieve pareto efficiency with intellectual property rights.
118 Baldwin.and Scott [1987] page 8.
 37

R cost of research to the inventor

C constant marginal production cost
n number of identical consumers
p=a-(b/n)q linear demand function
S surplus
II profit

Figure 6: The incentive to innovate

In the case of competitive production, i.e. without patent production, in the market
solution (c) the competitive market price is equal the marginal cost curve:

c (a-c)
q =n--
b
The consumer surplus is the whole area above pC=c, that is:

qC

SO = ~[a -(b/n)q -c]dq = n (a - C)2

. 2 b
o

In the case of a horizontal cosy curve, there doesn't exist a producer surplus,
hence inventors will lose their research cost R entirely. The joint consumer and
producer welfare So is maximal in this situation.

The monopolist is a price setter and he does this for a level where marginal costs
of production c are equal the marginal revenue. His profits are:
38

With the special assumptions of the linear demand and horizontal cost curve the
monopolist is selling only half of the qUantity qm in respect to the competitive
situation at the higher price pm. Hence his profit is one half of the optimal surplus:

In this situation the monopolistic consumer surplus is limited to Sm which is only

one-quarter of the competitive So :

Sm = n
qm

o
1, 1 (a-c)2 =_So
a-(b/n)q-pm pq =-n
8 b
1
4

Therefore, in comparison to the competitive situation only three-quarter of the

relative optimal surplus So have been achieved accompanied by a pure dead-
weight loss of one-quarter of So•

This simplified welfare analysis makes clear that the incentive to innovate is
higher for the entire society (consumers) than for a monopolist. Competitors'
surplus from innovation is in between the social and the monopolistic one 1l9 :
Consequently

Inm< Inc < Ins with: -incentive to innovate of the monopolist

-incentive to innovate of the competitor
-incentive to innovate of society

Society as a whole has the relatively highest interest in innovation. Competitors

still gain the additional monopoly profit if they are becoming a monopolist,
whereas the monopolist "only replaces himself,,120 and hence, has the lowest
incentive to innovate. As a consequence an incumbent monopolist in the market
spends less in research and development than a competing newcomer. The
cautious monopolist certainly has a strong incentive to keep its dominating market
position of extraordinary profits and might keep it by inventing at an earlier time
than competitors (pre-emptive patenting). He is also more likely to innovate due to
his better facilities and he can also provide easier than newcomers the large
quantities that are required for research and development.

The incentive to innovate is driven by the surplus gained from innovation. In the
case of a product innovation rather seldom entirely new markets are opened. Most

119 A similar point is maid by Tirol [1988].

120 Ibid. page 392.
 39

innovations are improvements around an already existing product. Therefore, it is

important to remark that the surplus gained by the competitor is not necessarily a
social surplus. A great part of surplus from innovation is a reallocation of existing
surplus 121 • This shifted surplus constitutes also a high incentive for the innovator,
but, from a social point of view it is a pure redistribution of surplus known as
"cannibalised surplus"122. This effect is more likely where the new product is a
close substitute to the old one. As a consequence, the private incentive to innovate
can be higher than it would socially be desirable and innovative rents can be
exhausted by research and development expenditures. Innovation could even be
socially undesirable if the R&D expenditures are not overcome by the additional
surplus from innovation for both consumers and producers.

Also the degree of competition in the market is important for the incentive to
innovate. A high degree of competition in the post-innovative market might slow
down the incentive to innovate, whereas too much competition in the pre-
innovative market could inspire firms' investment beyond the socially desirable
point i23 •

According to Schumpeter competition for innovation is much more important than

price competition in general equilibrium markets of neo-classical economic
theory. One assumption ofneo-classical models is that economic actors behave all
in the same, rational and foreseeable way, whereas for Schumpeter it is the
extraordinary and different action of single individuals that is most important for
the economic and technological progress. He emphasises the very importance of
this kind of competition by inventions, new goods, new production methods etc.
The underlying dynamic (the motor) of the whole process is the above-discussed
different incentive structure of the incumbent monopolist and newcomers on the
market l24 . Essential for the process of creative destruction is the role of the
entrepreneur. However, the entrepreneur himself is not involved in the invention
process. His function is to combine production factors I25 • In Schumpeter's view
invention itself is more and more going to be a routinous process done by
specialised teams for research and development within big firms l26 •

3.4 IPR (Patents) as an Economic Indicator

Empirical analyses often make use of patent application and grant data as an
output measure of innovation. For patent information, three different data sources

121
Compare Klodt [1994] page 26.
122
Baldwin and Scott [1987] page 11. The term "business stealing effect" is also
common in industrial economics.
123
See again Baldwin and Scott [1987] page 61.
124
Flemmig [1990] e.g. argues in this way.
125
Schumpeter [1980] page 215.
126
Ibid.
40

are relevant, national data (applications and grants through national patent
offices), world wide data of Paris Convention Treaty (PCT) applications (granted
through the World Intellectual Property Organisation (WIPO», and finally
regional cross country data like the European patent granted at the European
Patent Office (EPO).

The use of patents as an economic indicator for industrial studies is common and
dates back to the work of Schmookler [1966]. One mayor advantage of using
patents as data source is their high degree of availability. However, what would be
the alternative for measuring such a vague concept as innovation? Patent data are
available for relatively long periods of time and they provide very detailed
information such as company data and industrial sector data.

Nevertheless, the use of patent applications or grants as an indicator of economic

activity inherently carries several difficulties: not all inventions are patented or
patentable, nor are they going to be innovations, i.e. goods with an economic use.
Four general remarks when using patents as an economic indicator should to be
kept in mind.

I. What is the percentage of economically important technological inventions

covered by patents?

2. The use of patents varies in between industries. Patents are extensively used
in pharmaceutical and drug industries but less, e.g. in computer science. and
therefore cross industry comparisons are likely to be distorted.

3. Different application procedures and grant habits of countries can be a reason

for further distortion.

4. The comparison of patent data over time cannot be guaranteed unless there is
consistency in the legal framework.

Figure 7 illustrates the essence of remark I(the size of sets are arbitrary).
However, this does not disturb the general interpretation of the relationship
between inventions, innovation and patents. The illustration demonstrates that it is
only a small percentage of all inventions, which are covered by patent data:
empirical estimates range from 50 percent 127 to 85-90 percent 128 •

127 Schmookler [1966].

128 Greif [1982].
 41

inventions in use

inventions not in
use

patented inventions '---+- patented

not in use inventions in use

Figure 7: A generalised picture of the relationship between inventions, innovation and

patents l29

Not all inventions of economic usefulness are patented or not even patenable 130
and some companies frequently consider secrecy as a more appropriate tool for
protection, especially where product life cycles are relatively short as in computer
industries l3l . Not all patents are used merely to protect inventions, but are
frequently used in strategic ways e.g. in order to hinder competitors from
accessing markets or to mislead them 132. Furthermore inventions protected by
patents differ in their economic value, with very few real breakthrough
inventions 133 •

The time element with respect to the changes in national grant procedures is
another distorting factor. This is in particular relevant in the case of Central and
Eastern European Countries (compare chapter 7). There, excessive numbers of
patents were granted by socialist authorities before 1989 and numbers reduced
dramatically with the fall of the iron curtain and the accession to international
conventions. A further difficulty on an international level is posed by the fact that

129
Basberg [1987] p. 133.
130
E.g. software products in Germany are not protected under patent law but only under
copyright law.
13l
Secrecy allows them to make full use of this temporary first mover advantage.
Granting a patent usually takes three to four years until full protection is awarded, a
period of time which can be shorter than product lifetime in some industries.
132
See e.g. Tirol [1988] p. 394 and Kaufer [1988] p.35 and compare chapter 6.3.6 for
issues of strategic patenting in biotechnology.
133
Compare Griliches [1990] p. 1699.
42

granting quotes differ a lot between national offices 134 • Therefore, US-patent data,
PCT applications and European Patent Office data are commonly used to achieve
higher quality of data for international studies of comparison. National grants bear
the risk of distortion, when national authorities discriminate between foreign and
local applications, whereas foreign applications usually indicate a higher market
value from the point of view of the applicant who is willing to tolerate higher
costs and more extensive administrational procedures.

It has been demonstrated that patents are not sufficient as an economic indicator
for innovation. However, until a better measure is found, patents remain the most
comprehensive data source for such a vague concept. In the words of Griliches:
"In the desert of data, patent statistics loom up as a mirage of wonderful plenitude
and objectivity',135.

3.5 Conclusion
In the above analysis it became clear that from a welfare point of view IPR are
only a second best solution. They provide a sub-optimal production level,
monopolistic market prices and in addition the social incentive to innovate is
higher than the incentive to innovate provided by IPR. However, it became also
clear that there is a need for this second best solution and that a certain dead
weight loss is the price that has to be paid for innovative activity. IPR build
artificial market barriers for competitors and thus prohibit that profits are driven
down to zero like e.g. in the "common pool" scenario.

Competition has not only deleterious effects but it is also important as a guaranty
for the continuation of the innovation process in the sense of a "process of creative
destruction". It spurs economic growth by prohibiting that innovators establish in
the long term as monopolists and it guaranties that innovation will always be
overcome by relatively newer innovation. Hence, Schumpeter is probably right
that competition within a process of creative destruction is more important than
price competition, at least in respect to the innovation process!

Monopolistic industries are better equipped for innovation than competitive ones
in so far as they can better prevent imitation and thereby can capture more profit
for innovation. A monopolist is also better able to finance high research and
development costs136 : Hence, it has to be doubted that monopolies are really
natural breeding grounds for R&D 137 and that there actually exists a causation

134
According to Griliches, the granting rate is around 65 percent in the U.S.,.over 90
percent in France, about 80 percent in the U.K. and only 35 per cent in Germany.
Griliches [1990] page 1663.
135
Ibid page 1661.
136 So Kamien and Schwartz [1982] page 47.
137 Tirol [1988] page 390 and Schumpeter [1942] mainly chapter 8.
 43

from a strong market position towards innovation. The theoretical investigations

from above lead more to the contrary conclusions. The main dilemma of the
monopolist is that he/she basically has the lower incentive to innovate in terms of
expected surplus from innovation. Again: the monopolist only replaces himself by
innovating, whereas the market newcomer can still expect total monopolistic
profits from innovation. This also fits with the above Schumpterian argument that
a process of creative destruction with a permanent change of the market
constitution probably provides the best ground for sustainable innovation. This
argumentation is obviously not conclusive for the amount of surplus from creative
destruction that is pure redistributed (cannibalised) surplus.

Nevertheless, it has to be remarked that the relationship between market structure

and innovation is not a one-dimensional correlation. There are also long-run
feedback effects from innovation onto market structure according to some
studies\38. Consequently, industrial structure itself should be considered as an
endogenous variable. IPR (patents) as an economic indicator can provide very
useful information but one has to be very much aware about what their real
explanatory power in an individual case is.

It is not possible to come up with new recommendations in respect to the use and
not-use of intellectual property rights here. The old argumentation is still valid: the
innovator needs a strong market position in order to appropriate his R&D
expenditures. Hence the granting of intellectual property rights is a prerequisite for
the establishment of an innovative culture. On the other hand according to the
above fmdings granting monopolistic rights in form of intellectual property rights
is not a first best solution. They do not achieve the socially optimal amount of
invention and thus fail as a political instrument in fostering the optimal amount of
invention. For practical purposes a certain consciousness of the second-best
character is required. In certain industries IPR might work perfectly as a policy
instrument to foster innovation, whereas for others better aims could exist.

138
Baldwin and Scott [1987] page 112, Kamien and Schwartz [1982] page 218.
Mansfield [1983] fmds in his survey that for certain industries there is a remarkable
influence of new processes on the minimum efficient scale of plant and for chemicals
and petroleum also on the four-firm concentration ratio.
4 Macroeconomic Theory of Intellectual
Property Rights

The aim of this chapter is to provide more evidence on the welfare and innovative
effects of expanding the geographic breadth of intellectual property rights. The
issue has been of particular interest on a global level for the resolution on trade
related aspects of intellectual property rights (TRIPs) during the GATT Uruguay
round (1986-93). There, it was the conflict of interests between industrialised first
world and developing third world countries that gave impetus for an extensive
worldwide debate. Economic theory has dealt with this difficulty by studying two
country models and reducing it to a North-South conflict. However, the issue is a
more general one and also arises when studying harmonisation of intellectual
property rights within the European Union and for the transition process in Central
and Eastern European Countries.

Section 4.1 provides a "state of the art" presentation of economic studies on the
regional breadth of intellectual property rights. Models of static and dynamic
welfare analysis are distinguished and basic empirical evidence on the
relationships between intellectual property rights and trade and foreign direct
investment is presented. The section will conclude with a summary of the most
important arguments for the assessment of international intellectual property right
protection. Chapter 4.4 provides a general assessment of international intellectual
property right protection and its pros and cons in contrast to national intellectual
property right systems.

The complexity of international intellectual property rights, should be considered

within a dynamic model that includes trade effects, the role of foreign direct
investment, the allocation of R&D and catching-up possibilities. Therefore, the
models of Helpman [1993] and Curie, Levine et al. [1996] seem to be a good basis
for further theoretical research. However, also more empirical studies on
international intellectual property rights are necessary139. Econometric
investigations on trade aspects of intellectual property rights within the
Community and with respect to CEECs such as Maslrus [1995] and firm surveys
such as Mansfield [1994] on the role of foreign direct investment between
European countries could make the importance of international intellectual
property rights in Europe clearer. Studies on the dependence of less innovative
countries on technologically leading technology such as Coe, .Helpman, and
Hoffinaister [1995] are useful.

139 Cottier [1992] finds the whole discussion on harmonisation of intellectual property
rights heavily dominated by ideology and requires thus more empirical research.
 45

4.1 Static Welfare Analysis of International Intellectual

Property Rights
In most economic models the analysis of international intellectual property rights
is done within the framework of a two-country model. A rich and innovative
country is confronted with a poor and technologically dependent country. The
basic situation between the two countries shows similarities with the constellation
of innovators and imitators on a firm level. As a result of imitation, innovators, if
they are exporters of technology, can lose their market shares in the imitating
countries. Innovators have to face their increasing price-elasticity of demand and a
reduction in their monopolistic prices down to the market level. Consumers in
both the innovating. and imitating country gain due to lower product prices, but
innovators lose their producer surplus and thus the incentive to invest in R&D.

Deardorff [1992] developed a model of geographic expansion of intellectual

property rights. He uses a two-country multi-invention model in which country A
is the innovative one, while country B is not capable of innovation but might
produce by imitating technology. The model distinguishes two different situations:
1. Restricted patent protection. that is protection is only guaranteed in
country A whereas not in country B.
2. Extended patent protection, that is protection of country A's
innovations is also guaranteed in country B.

In the case of restricted patent protection innovators attain monopolistic profits for
the market in country A. Country B carries no research costs, consumers there
benefit from low, not monopolistic prices on all innovations from country A and
thus get a full free ride on country A's innovation.

However, in the case of extended patent protection, country A's monopolists

achieve in addition the monopoly profits from country B's innovation markets.
Higher profits allow the monopolist to cover higher research costs and
consequently more innovation will take place. Consumers in countries A and B
receive higher consumer surplus from the additional innovation that is provided,
but country B's consumers have to bear higher monopolistic prices. The main part
of the additional monopoly profit in A is a pure welfare shift from country B's
consumers. Thus, the net welfare effect depends on the additional consumer loss
in B due to higher prices in relation to the benefits from new innovation in both
countries.

Following the assumptions of Deardorff on the constitution of the markets in the

model, the net effect depends on the relative market sizes in country A and B.
Deardorff demonstrates that when the population size of the protected area is
sufficiently large an expansion of protection will result in a net loss. In connection
46

with the TRIPs resolution and its debate on the incorporation of developing
countries he concludes that "patent protection is almost certain to redistribute
welfare away from developing countries"140. Hence rich countries gain at the poor
countries' expense. However, probably as a consequence of this debate, TRIPs
allows developing countries and countries in transition to delay the enforcement of
the agreement for some years 14l.

Feinberg and Rousslang [1990] have done some empirical research based on a
survey of US funis, about how infringements in international intellectual property
rights affect net welfare. In their data the estimated gains of imitators plus the rise
of consumer surplus due to imitation outweigh the losses of imitation for
producers. This finding together with the conclusion of Deardorff's model might
be an indicator that the extension of intellectual property right protection need not
necessarily lead to a welfare gain.

Chin and Grossman [1988] were among the first to examine the problem of
intellectual property rights in a North-South framework. In their static welfare
analysis they reach the conclusion that poor, non-innovative countries (the South)
in most cases achieve higher national welfare when they neglect to protect patents.
An exception is the case in which R&D is highly productive, so that poorer
countries would gain automatically from innovation. Innovative countries (the
North) on the other hand, as in the Deardorff model, always benefit from having
their intellectual property protected. Whenever innovation leads to rather modest
potential advances, world welfare is higher when the South is not enforcing
intellectual property right protection. Therefore Chin and Grossman emphasise the
importance of efficient bargaining between both types of countries. Even in its
own interest the North should compensate the South for certain welfare losses due
to intellectual property right protection.

Diwan and Rodrik: [1991] also use the framework ofa North-South model with an
innovating and an imitating country. They make clear that free riding by less
innovative countries is only beneficial as long as the small-country effece 42 holds.
:However, they emphasise that North and South have different technological needs
and tastes and that the South has a strong interest in getting its own technological
needs from the North. At the same time the North can spread its fixed costs over a
larger base if it sells its products in Southern markets. Thus, independent of
intellectual property protection the North has a strong incentive to market its
products in the South. Diwan and Rodrik assume that stronger protection in the
North expands the range of discovered technology. Consequently, Southern

140 Deardorff [1990] p. 507.

141 Article 65 of the TRIPs agreement allows developing countries and countries in
transition a period of four years delay in enforcement.
142 That is as long as there is no detrimental effect of imitation in a relatively "small"
country on innovative activity. See e.g. Subramanian [1991] p. 951.
 47

protection encourages innovation for Southern needs in the North. Therefore,

Southern protection can skew preferences away from North to South, despite the
temptation to free ride, a motive to protect foreign technology is giving to the
South.

Another interesting issue investigated by Diwan and Rodrik is the difference in

Northern and Southern utility functions. The optimal level of protection under a
strict utilitarian welfare function would be the same in both regions. In contrast
under an egalitarian approach, which values the South's welfare more highly than
that of the North, different levels of protection would be optimal. However, due to
the strong interest in satisfying local preferences, even with an egalitarian welfare
approach the optimal protection level could be higher in the South. The South thus
has to weigh its free-riding incentives against the potential welfare losses due to
the development of less technology of its own preference. Following Diwan and
Rodrik, the bargaining process between different countries over international
standards of intellectual property right protection should be easier where
technological tastes are different.

4.2 Criticism of the Static Welfare Approach

The major disadvantage ofthe static models presented above is that they disregard
the detrimental effects of imitating on the innovation rate. Static and dynamic
efficiency criteria can lead to completely different results. For example, the
monopolistic pricing resulting from protection of intellectual property rights under
static welfare criteria is unambiguously suboptimal. With dynamic criteria it can
well be optimal, since it may describe the optimal eqUilibrium between an
accepted temporary dead weight loss and the right amount of innovation. A
complete welfare analysis would describe a dynamic equilibrium between the rise
in global consumer surplus, the rise of producer surplus of imitators, the decrease
of producer surplus in innovating countries and the changes in the rate of
innovation. Besides, the very nature of the process of innovation is dynamic and
hence a dynamic welfare analysis seems to be more suitable for the analysis of the
impact of intellectual property rights on the innovation process. Thus the essential
question for further study is how strong the detrimental effect of imitation on
innovation really is.

4.3 Dynamic Welfare Analysis of International Intellectual

Property Rights
This section will present some dynamic models of innovation and imitation within
a North-South framework and work out their policy implications for international
intellectual property right protection.
48

The Model developed by Krugman [1979] was one of the first endogenous growth
models that dealt with innovation and imitation within a North-South framework.
The new assumption in this type of model is that the rate of innovation is taken as
an endogenous variable. Old goods are common property and can be produced in
North and South, whereas new goods are only produced in the North. The current
rate of new goods depends on the already existing stock of technology (the more
you know, the more you can learn). Imitation is described as a natural means of
dissemination, a kind of "radioactive decay" process, that is, new products are
automatically going to be old ones after a certain period of time 143 •

n total number of products available in North and South (n=nN+nS)

1
time before South learns how to manufacture a new product
t

The growth rate of Northem products UN depends on the total number of products
n, the innovation rate i and on the proportion tnN that is copied by the South.

Notice that equations 1 and 2 are dynamically determining the number of available
products in both regions and that both regions depend positively on the rate of
innovation i. Innovation moves the terms of trade in favour of the North, when
UN rises. When Us rises the terms of trade shift towards the South. Both
equations also make clear that a high rate of innovation is in the interest of both
the North and the South. Krugman does not refer to intellectual property rights as
suitable measures for promoting innovation. He only makes clear that promotion
is in the interests of all parties and that an appropriate incentive structure is
required. The question of the suitability of intellectual property rights to provide
this structure leads back to their suitability at the firm level, an issue discussed in
section three.

According t6 Romer [1990] human capital, the most important factor of

production in his model, can be used in production and\or in research. Research
creates new ideas which Romer calls "new designs". They constitute market
power to the owner and provide temporary monopoly rights to individuals or
firms. As in the Krugman model the rate of new designs depends on the already
existing stock of designs and knowledge. Following Romer's argumentation it is
the proportion of human capital that is spent in the research sector, which is

143
The model does not consider the possibility of Southern learning, catching-up and
leapfrogging are excluded.
 49

essential in determining innovation rates. He therefore also assumes a positive

relationship between market size and innovative activity, but the important point is
that it is primarily the amount of human capital for innovation that is essential for
growth and not the granting of intellectual property rights. New designs
automatically provide a monopolistic position in the market and thus inherently
contain the incentive to innovate. According to this argumentation one can
seriously doubt about additional incentive structures like intellectual property
rights are required.

Grossman and Helpman [1991] consider innovation and imitation as conscious

decisions of farsighted entrepreneurs. Both actions require the same sort of
resources, such as managerial talent, scientists and technicians. Essential for an
understanding of their model is the distinction between a narrow-gap case and a
wide-gap case. In the narrow-gap case Southern producers enjoy a relatively small
cost advantage over Northern rivals and the latter can compete to lower prices of
the South. In the wide-gap case, the manufacturing costs of North and South differ
greatly, so that Northern firms cannot hope to rival the Southern price level.

In this framework Grossman and Helpman investigate the consequences of a

relaxation of patent protection of foreign intellectual property in the South and its
suitability as a means for Southern governments to ease and encourage imitation
in the South. For the narrow-gap case the model indicates no influence on
technological activity in either country, but relative wages will rise in the South
and decrease in the North. In the wide-gap case both imitation and innovation rises
due to a positive relationship between innovation and imitation.

It is evident that Southern imitation will reduce the expected duration of Northern
monopolies. But whilst considering imitation as a means of international
dissemination of technology, Grossman and Helpman discover that by reducing
Northern product shares and enhancing competition between Northern firms
imitation will force some Northern ftrms out of the market. This in tum will leave
better local factor market conditions and thus higher expected proftt rates for the
remaining firms. Therefore imitation increases the expected ex ante proftt values
for new Northern product varieties and provides stronger incentives to innovate.
This result only holds up to a certain degree of imitation, as the model describes a
dynamic equilibrium between optimal incentive structures for innovation and
optimal competitive conditions in the market. Remarkable however, is the positive
relationship between imitation and innovation and the result that a dynamic
equilibrium contains also an optimal amount of imitation. Thus imitation is not
only a means of technological diffusion, but also a way of speeding up the
Schumpeterian process of creative distruction. Market conditions will be better for
the surviving ftttest.

Barro and Sala-i-Martin [1995] also look at imitation as a natural means of

dissemination and furthermore as the source of convergence between innovating
50

and imitating regions. For the South it is simply cheaper to imitate than to
innovate. However, imitation gets more expensive when the number of <;oJ?iable
products decreases, as greater effort to identify and to copy the few uncopied
products becomes necessary. Thus the rate of copying decreases over time and
growth rates in both countries converge in the long run towards a steady state. The
key feature in this model is the structure of the cost of imitation V2:

V2 =v2(NsINN)

The cost of imitation depends on the number of goods that have been discovered
so far, while imitation rate can at maximum be equal to the rate of innovation. The
number of available goods in the South Ns is then equal to the number of goods in
the North NN. Imitation costs reach their maximum, because it is no longer
possible to find an uncopied good in the North. But does imitation leave enough
incentives for innovation? Barro and Sala-i-Martin find that the incentive to
innovate is not strong enough to internalise the well being of copying countries. In
their opinion intellectual property rights might be a suitable measure to
compensate this lack of incentive. This argument represents to a degree the
position of industrialised countries in the Uruguay round but maybe
underestimates the importance of dissemination of technology towards less
innovative countries.

Taylor [1994] investigates the influence of intellectual property rights on the

ability of firms to transfer technology and to go ,,multinational". In his model
national growth is a function of technology, the factor endowment and intellectual
property rights. Cases of symmetric and asymmetric protection between foreign
and domestic innovations are considered. Technology transfer improves the
allocation of the world's technological resources and is therefore an essential
influencing factor on growth rates. According to Taylor the existence of an
international system of intellectual property rights gives higher expected returns
on investment to international firms. Thus he brings up the essential question of
the relationship between intellectual property rights and foreign direct investment.
He points out the danger of strategic "beggar thy neighbour" trade policies which
arise from asymmetric protection of intellectual property rights and their
deleterious influence on trading patterns l44 •

The endogenous growth model of Rivera-Batiz and Xie [1992] is based on

Grossman and Helpman [1991] and investigates the general relationship between
international trade and growth in the context of the GAIT Uruguay round. The
authors assume that no inter-country technology diffusion happens without patent
protection and that secrecy will then be the sole tool for technology protection. An

144 For the use of intellectual property rights as an instrument of a strategic trade policy,
see Subramanian [1991].
 51

internationally enforced patent system a la GATT however would provide full

technology diffusion. They analyse the growth rates of different regions and
conclude that the fastest growing regions are the ones with such an internationally
enforced intellectual property right system. Their argument is that. wuP0ut such a
system, secrecy would be used to protect intellectual property, which would
obstruct international knowledge diffusion. Hence in their opinion an international
intellectual property right system is the guarantee of full knowledge diffusion and
free trade in ideas. The result, however, relies heavily on the assumption that
intellectual property rights diffuse knowledge (a strong and rather ambiguous
assumption) whereas secrecy does not.

Currie, Levine et al. [1996] further develop Grossman and Helpman's model and
expand it from a two-state mod~l of innovation and imitation to one of three
phases that describes an ongoing process. The Southern state develops from a
purely imitating country, through a state in which both innovation and imitation
are possible to a country that, like the original North, bases its technological
progress only on innovation. The essential new element in this model is that it
describes the conditions under which technological development from a country
that depends on foreign technology to a technologically advanced country takes
place. The model also contains the possibility of a switchover of technological
leadership (leapfrogging).

Into which of the three categories a country falls, depends mainly on two
parameters in the model: the rate at which Northern innovations are assimilated
into Southern knowledge capital and the rate of efficiency of innovation compared
to imitation in the follower country. Like Grossman and Helpman, Currie, Levine
et al. also distinguish a narrow-gap- and a wide-gap case. Furthermore they retain
the idea that new blueprints are added to society's stock of knowledge capital,
which allows the essential existence of spillover-effects. They assume knowledge
capital to be proportional to the density of varieties within the population, which is
a better proxy than the pure number of varieties themselves.

An obvious result is that an increase in the relative costs of copying increases

innovation in the South, whereas copying itself gradually vanishes. In general the
model implies that the more North and South assimilate the higher growth rates
are in both countries. Another interesting fmding is the influence of subsidising on
innovation in both regions, especially in the South. In addition, decreasing the rate
of copying in the South raises the growth rate in both regions. Hence subsidising
Southern innovation is also in the North's interest and a money transfer from
North to South in order to speed up Southern innovation would pay dividends
even for the North. Currie, Levine et al. conclude that in order to agree on such
transfers co-ordination at an international level would be necessary.

With respect to international intellectual property rights they argue that intellectual
property rights increase the knowledge transfer between countries and thus
52

accelerate the development of less innovative countries through the three phases.
Intellectual property rights provide higher incentives to innovate than to copy,
which is another argument for. the acceleration of the process. There are serious
doubts about the efficiency of subsidies as a tool to enhance innovative activity in
a country, but intellectual property rights might be an alternative to provide the
right incentives. However, there are also serious doubts about using international
intellectual property right standards to speed up domestic innovation in the South.
They provide incentives to innovate, but so to a greater degree in the North, where
innovation is already established. In the South, where knowledge capital stock is
much lower and consequently barriers to innovation are higher the same incentive
is proportionally less efficient.

Helpman [1993] has developed one of the most advanced dynamic endogenous
growth models dealing with intellectual property right protection. Based on the
prior work of Grossman and Helpman [1991], the research is much more detailed,
as in addition to innovation and imitation it includes terms of trade effects, the
interregional allocation of resources, product availability and foreign direct
investment in the analysis.

Helpman starts by modelling the case of a constant rate of innovation in order to

isolate the effects of intellectual property rights on interregional allocation of
manufacturing and on the terms of trade. He shows that if the rate of imitation is
fixed at a low level, both regions can lose from tighter intellectual property rights.
Instead of an efficient allocation, intellectual property rights shift production and
terms of trade from low labour wage countries (the South) towards innovative
countries (the North). The South loses entirely, whereas Northern welfare depends
on whether consumer losses from the inefficient allocation are higher than gains
from improved terms of trade or the other way round. In contrast in the case of a
high rate of imitation Helpman shows that beneficial effects to the North clearly
dominate adverse allocation effects. The North is then a pure winner from
strengthening intellectual property rights. Thus the first step of investigation
shows that only in the case of a strong rate of imitation there exists an evident
conflict of interests between the two regions.

In the next step of the analysis Helpman examines the dynamic relationship
between the rate of innovation and changes in intellectual property right
enforcement, distinguishing between short run and long run influences. His
finding is that strengthening intellectual property rights in the long run increases
the share of uncopied products in the North whereas it decreases the long run
innovation rate. The stimulating effect of intellectual property rights on the rate of
innovation turns out to be of a short run nature. As seen previously, stronger
intellectual property rights shift terms of trade against the South and in addition
lead to a deteriorating in the interregional allocation of production. As a result
both regions sustain losses in the long run from firmer intellectual property rights.
The short run increase can be explained by the higher expectation of the
 53

monopolist of staying in the market and by the higher profitability of R&D

investment.

After the analysis of the relationship between innovation and imitation Helpman
inspects the role of foreign direct investment. Multinational Northern firms in
general have strong incentives to invest in South, due to lower wages, lower tax
rates, institutional advantages or further advantageous investment conditions.
Nevertheless, the lack of an appropriate intellectual property right system that
protects the transferred technology might be a strong disincentive for investment.
Therefore, the model distinguishes sharply between the existence and non-
existence of foreign direct investment· from North to South. Intellectual property
right enforcement gives a higher guarantee of returns on investment and is
consequently a possible instrument used by the South to attract foreign direct
investment. However, firmer intellectual property rights also shift the terms of
trade away from the South. Hence the general equilibrium is one between the
benefits of foreign direct investment, the terms of trade effects and the beneficial
and deleterious effects of innovation and imitation. Without foreign direct
investment stronger intellectual property rights move terms of trade against the
South in favour of higher priced Northern products. The North has an incentive to
innovate but the South does not participate in the benefits. Thus, without foreign
direct investment and with a low rate of imitation both regions benefit from a
relaxatio~ in intellectual property rights, while a high rate of imitation would
create a general conflict between North and South. But even with foreign direct
investment the South loses. Even though investments from Northern
multinationals improve Southern terms of trade, the effect is dominated by the loss
of consumer surplus the South suffers as a result of higher prices for a larger
fraction of products. The North however is a pure winner. Foreign direct
investment might overcome the positive terms of trade effect. Helpman shows that
Northern welfare rises anyway due to a higher income from the expansion. of
multinational companies. This effect is also large enough to offset the negative
consumer surplus effect resulting from higher priced products.

The inquiry demonstrates that the overall welfare effect of international

intellectual property rights strongly depends on the degree of imitative activity,
trade relations with respect to the affected goods and the presence of foreign direct
investment. A general result of the model is that the South never gains from
tighter intellectual property rights, while the North loses only under special
assumptions. An interesting remark on the results is the congruence of interests
between big firms who want to keep their monopoly power over products, and less
qualified employees, who do not want to lose their jobs.

In a succeeding paper, Coe, Helpman and Hoffinaister [1995] give some empirical
evidence on the importance of international spillovers from innovative countries to
developing countries. The authors present econometric evidence to suggest that
total factor productivity in developing countries is positively and significantly
54

dependent on the R&D expenditures of their industrialised trade partners. Hence

this suggests that developing countries derive essential benefits from research
carried out by industrial countries. However, empirical evidence on the welfare
effects of imitation and of intellectual property rights is still missing.

4.4 Summary of Arguments

This paragraph provides a short summary of the arguments from formerly
investigated models. The distinction of the Deardorff model between restricted
and extended protection is used to present the models' findings in form of
advantages and disadvantages of an international standardised intellectual property
right protection:

A. Arguments in tavour ofrestricted intellectual property right protection:

basic economic situation: - Consumers in the unprotected regions get a

full free ride on innovation (assuming
complete diffusion).
Innovators loose profits (producer surplus).
Less incentive to innovate? (detrimental
effect on the innovation rate?)

• The "small country effect" holds. Imitative activity is comparatively small and
does not affect the innovative activity in leading economic countries (Diwan
and Rodrik [1991] Subramanian [1991]).

• Innovative countries have strong market incentives to market their products in

less innovative regions, independently from intellectual property right
protection (Diwan and Rodrik [1991]).

• It is the amount of human capital spent in R&D that is essential for economic
growth and not the provision of intellectual property right protection (Romer
[1990]).

• Imitation is just a natural way of technological dissemination (Krugman [1979]

Grossman and Helpman [1991] Barro and Sala-i-Martin [1995]).

• When the imitating region has a relatively high cost advantage compared to
innovative regions a relaxation of protection would rise both innovation and
imitation (Grossman and Helpman [1991]). This reduces Northern product
shares and enhances competition between Northern firms. Some are forced of
the market, but leave better factor market conditions for remaining ones. The
increase of ex ante profit values of Northern varieties will also increase the
innovation rate.

• An extension of protection would shift terms of trade from less innovative

regions to innovative ones (Helpman [1993]).
 55

• The stimulating effect of intellectual property right protection on innovation is

only ofa short run appearance (Helpman [1993]).
• With and without foreign direct investment the less innovative region is a pure
looser from protection, as the deleterious effect of high product prices
dominates (Helpman [1993]).
• For a comparatively low market size of the extended area an extension would
be a net loss (Deardorff [1992]).
B. Arguments in favour ofextended intellectual property right protection:

basic economic situation: - Consumers in formerly unprotected regions

have to bear higher product prices (loss in
consumer surplus).
Innovators achieve higher (monopolistic)
profits.
- Increasing innovative activity?
• For industries with highly productive R&D both regions automatically gain
from innovation. Then its provision is also in both' interest (Chin and
Grossman [1988]).
• Less innovative regions get their technological needs provided by innovative
ones. By the provision of protection they can shift preferences in favour of
their own needs. Thus both regions have an interest in protection (Diwan and
Rodrik [1991]).
• If the imitating region has a relatively low cost advantage compared to the
innovating one a relaxation of protection has a detrimental influence on
technological activity (Grossman and Helpman [1991]).
• Protection guarantees higher profits for multinational firms. Foreign direct
investment requires an investment incentive (Taylor [1994] Helpman [1993]).
• Protection is a prerequisite for full technology diffusion (Rivera-Batiz and Xie
[1992] Currie, Levine et al. [1996]).

• Protection is necessary for the catching-up process of less innovative countries.

It is also fundamental for building up an own innovation process in those
countries. (Currie, Levine et al. [1996]).

• Different levels of protection could lead to strategic trade policies and

additional welfare losses.
56

4.5 Empirical Evidence on International Intellectual Property

Rights
Following the theoretical fmdings of Taylor [1994], Currie, Levine et al. [1996]
and Helpman [1993] international intellectual property rights appear to be deeply
related to foreign direct investment and trade. However, these macroeconomic
relationships are hard to distinguish from the question of adequate incentive
structures at a microeconomic level. Firms are still the economic actors, who
decide whether investment conditions are favourable or not somewhere abroad.
Various factors, such as different levels of labour skills and different technological
capabilities, can override the influence of intellectual property rights on foreign
direct investment l45 • Due to this difficulty and due to the strong relationship
between intellectual property rights and the micro economic incentive structure
(see chapter 3) it is hard to identifY any clear macroeconomic impact on trade and
foreign direct investment. The issue however has been extremely relevant during
the GATT Uruguay round.

4.6 Foreign Direct Investment and Intellectual Property

Rights
Mansfield [1994] found in a US firm survey that the strength of a country's
intellectual property right protection has a substantial influence on the decision of
US firms to invest there. According to the survey, this fmding is particularly
relevant for high technology industries and for countries like Mexico, Taiwan, the
Republic of Korea and China. There, legal changes in intellectual property right
enforcement within recent years have induced US firms to increase investment. A
good example is Mexico, where a change in the law took place in 1991. Some 30
percent of finns were willing to invest after the change l46 The evidence is stronger
for those industries where intellectual property right protection has classically
played a mayor role, such as in the chemical and drug industry.

However, a United Nations [1993] study emphasises the different interests of

developing and industrialised countries. Industrialised countries focus on the trade
relationship of intellectual property rights in order to save domestic revenues and
jobs, and hence use intellectual property rights more as an instrument to protect
exports. Standardised protection in developing countries has often been abused, as
in the case of Nigeria. There adequate protection was provided, but due to a poor
industrial and technological base protection did not stimulate any domestic

145
On the difficulty of distinguishing the various factors of influence, see Correa [1995]
page 191.
146
Mansfield [1994] page 20.
 57

innovative activity and was therefore more a tool to limit the power of potential
domestic competitors 147.

Another interesting finding of Mansfield's survey is, that 80% of the interviewed
firms regarded intellectual property right protection to be important for R&D,
whereas only 20% regarded it essential for sales and distribution. This empirical
finding corresponds with the argument of Diwan and Rodrik [1991] that firms
have, independently from intellectual property rights, sufficient incentives to
market their products. Furthermore, the theoretical argument of Currie et al.
[1996] was that in the long run it is in the interest of all countries to build up their
own innovative processes. Bringing this argument together with the finding of
Mansfield about the importance of intellectual property rights for foreign direct
investment in R&D, the implication is that protection of intellectual property in
less innovative countries finally helps to built up domestic innovative industries
and increases world wide welfare.

In contrast, the United Nation study suggests, that, as in the case of Nigeria,
intellectual property right protection might be provided not due to economic
reasoning, but due to constitutional competition and pressure 148 • Less innovative
countries depend on foreign direct investment and foreign technology from
innovative countries. Thus, if they do not want to be bypassed by international
technological and economic developments and if they want to hold out against
competing countries in the race for foreign direct investment they have to make
their markets attractive, which among other things means a standardised
intellectual property right protection. For the description of a somewhat similar
tendency in Eastern European countries compare session 7.

In sum, and despite the empirical evidence from Mansfield [1994], the actual
interaction of intellectual property rights and foreign direct investment is still
ambiguous 149. Further empirical evidence, especially for European firms' foreign
direct investment, is required.

4.7 Trade and Intellectual Property Rights

Trade requires a certain guarantee for the proprietary of traded goods. Thus the
performance of trade depends, at least partly, on property rights, which also
include systems of national intellectual property rights lsO • Here intellectual

147 Compare Correa [1995] page 191.

148 United Nations [1993] page 25.
149 Correa [1995] page 197 and United Nations [1993] page 34.
150 According to Maskus, Penubarti [1995] intellectual property rights influence national
growth rates more throughout their positive influence on trade performance than by
stimulating R&D investments.
58

property rights fulfil a double function, they stimulate domestic innovation on the
one hand and attract multinational companies on the other.

"Differences in the way countries approach the protection of intellectual property

rights can in certain cases distort the flow of international trade and investment.
They can, intentionally or not, have the effect of protecting nationals against
foreign competition or tilting the balance of advantages in favour of these
nationals. Such discrepancies are akin to non-tariff or technical barriers to trade.
They may also engender risks that dissuade foreign investors."l5l

The close relationship between trade and foreign direct investment makes it
difficult to distinguish their individual dependency on intellectual property
rights 152. Thus with reference to the TRIPs agreement Maskus and Penubarti ask:
,,How trade-related are intellectual property rights?" The natural assumption
would be that trade is a positive function arising out of the intellectual property
right system. Maskus and Penubarti specify an empirical model in which they
correlate bilateral imports with income, trade barriers and patent laws. Results
show that there is a positive and significant correlation for all sectors and
countries between a strengthening of an effective patenting system and an increase
in bilateral imports153. It is interesting however, that this is especially true for
larger developing countries, which were initially opposed to the TRIPs agreement,
like Mexico, Korea, Brazil and Argentina. However, the authors finished by
noting " ...that we cannot conclude that this fmding means that stronger and more
harmonised global levels of patents would generate more innovation without
considering also determinants of profits and international technology diiIusion.,,154

4.8 Conclusion
A key feature of the economic analysis of international intellectual property right
protection is the difficulty of distinguishing the macro- and microeconomic levels.
Firms are the economic actors and innovation takes place on the frrm level,
whereas the constitutional framework of intellectual property right systems is set
by national govemments I55 .. Neither the relationship between intellectual property
rights and innovation on a firm level, nor their influence on national innovation
rates, terms of trade and foreign direct investment on a macroeconomic level is a
clear one. Nevertheless, the incentive to innovate, the real detrimental influence of

151 OEeD [1989] page 8.

152 With weak patent protection, companies could e.g. shift from exports to foreign direct
investment in order to retain control over technological information.
153 "Stronger patent laws attract greater bilateral trade across all nations ... intellectual
property rights are "indeed" trade related". Maskus Penubarti [1995] page 241.
154 Ibid page 244.
ISS
See again Siebert [1991] p. 810.
 59

imitation and the attractiveness for foreign direct investment are fundamental for
an economic analysis of international intellectual property rights.

Differences between innovating and imitating countries are obvious. The

theoretical analysis suggests, that country differences and the role of imitation
depend strongly on the amount of available knowledge capital stock, human
capital and investments in R&D. Innovative regions hold higher knowledge
capital stocks and investments in R&D. Therefore, the relative influence of
intellectual property rights on the incentive to innovate is stronger in
technologically advanced countries, whereas barriers to innovation are higher in
less innovative regions. The first impression is, that intellectual property rights are
an instrument to maintain innovation there, where it already exists, and to preserve
existing technological gaps.

What is the role of imitation for macroeconomic performance? Is for certain

country constellations the assumption of a small country effect tenable? Economic
models assume imitation to be a natural way of dissemination. The general
dynamic equilibrium includes various elements like innovation rates, terms of
trade, foreign direct investment, but also an optimal amount of imitation! Imitation
up to a certain degree is an expression of competition and spurs on the process of
creative destruction and innovation.

Innovating and imitating countries have different needs, preferences and interests.
Less innovative regions benefit first of all more from weak protection, but also
depend on foreign technology and have to provide certain protection if they want
to satisfy certain domestic preferences. Even more desirable is to start with own
innovation processes, which, however, rarely is possible without foreign direct
investment. Innovators on the other side have strong market incentives to retail
their products in new markets, but might hesitate with inadequate protection. Thus
there is the strong need for efficient bargaining in order to bring different interests
together and to avoid national strategic trade policies.

The most interesting finding, however, is that building up local innovation

processes in less innovative regions is in the long run interest of global welfare. It
establishes a broader worldwide stock of knowledge capital and thus the ground
for long run economic growth. Compensation payments for welfare losses due to
higher product prices from intellectual property rights to less innovative countries
payoff even for innovative regions. Local R&D investments in less innovative
regions are first of all a question of foreign direct investment. The role of
intellectual property rights for local innovation is an ambiguous one. It impedes
the free flow of technological knowledge but attracts foreign investors.

In any way, the findings from theoretical studies demonstrate, that intellectual
property rights influence various economic variables, including innovative and
imitative activity, foreign direct investment, terms of trade, R&D expenditures and
60

product availability but their influence also depends on relative market sizes and
local differences in tastes and preferences. Further theoretical economic research
should respect all these different factors of influence. A good starting point would
be the models of Helpman [1993] and Currie, Levine et al. [1996]. Further
empirical country studies on the relationship of intellectual property rights, trade,
the allocation of R&D and foreign direct investment are necessary for a final
assessment of international intellectual property rights.
5 Harmonisation versus Differentiation

The harmonisation of intellectual property right protection on an international

level used to be a matter of discussion between innovative and less innovative
economies. A list of the most common pros and cons for and against a system of
standardised intellectual property right protection is included in the following
table:
Table 2: Pros and cons of international intellectual property right protection

Disadvantajles Advantages

• Administration and enforcement • Positive influence on R&D and

costs innovation

• Higher prices, fees for foreign • Avoidance of double research

technology
• Global technological dynamics
• Restraint on competition
• Foreign direct investment to less
• Market entry barriers innovative countries

• Opportunity costs for R&D • Less trade barriers between

countries
• Dead-weight loss due to
monopolistic structures • Less costs for international firms

• Higher product prices (reduced • Centralised administration of

consumer rent) protected rights

• Restraint of technology diffusion • Uniform fees

• Restraint of product availability • Uniform protection, independent

• The consequences of the
decision of single judges are
likely to exceed their
competence
from national differences
• Avoiding .forum shopping" for
best court of jurisdiction

Hoekman and Kostecki 156 have elaborated general criteria for the assessment of
harmonisation (see table 3). The criteria make clear, that the question of
harmonisation cannot be answered without considering national· differences.
According to Frischtak [1995] there are few arguments for the standardisation of
national systems. Rather single countries should constitute their intellectual

156
Hoekman and Kostecki [1995] page 249 and 250.
62

property laws according to their economic needs, product and research capabilities
and their institutional and financial restraints 157 .

Table 3: Criteria for harmonisation

Pro harmonisation Contra harmonisation

• Uniform consumer preferences • Vehement general national

• Desired transparency and ease
of import-export formalities
• Special issues that require a
uniform solution
differences
• Less willingness to pay for
certain standards
• Different consumer habits

• Different production methods

• Different per capita income

Following the concept of national systems of innovation 158 "technology is not

easily transferable across countries but, on the contrary, it is country-specific and
rooted in skills, capabilities and knowledge accumulated over time. Nations differ
not only in the quantity of innovation introduced, but also in the methods by
which these innovations are adopted and in their industrial composition,,159.
National systems of innovation include intellectual property rights in the public
sector and national systems of innovation are still the domain of economic and
political analysis160. The strong political interests and the stark national differences
involved in the question of harmonising intellectual property rights in Europe pose
additional difficulties.

The complexity of international intellectual property rights, should be considered

within a dynamic model (see chapter 4.3) that includes trade effects, the role of
foreign direct investment, the allocation of R&D and catching-up possibilities
(compare session 4). More empirical studies on international intellectual property
rights are necessaryl61, as well as econometric investigations on trade aspects of
intellectual property rights and firm surveys like Mansfield [1994] on the role of
foreign direct investment.

157 See Frischtak: [1995] page 210.

158 Lundvall (1992).
159 Archibugi and Michie (1995) page 3.
160 Freeman (1995)] page 21.
161 Cottier [1992] finds the whole discussion on harmonisation of intellectual property
rights heavily dominated by ideology and requires thus more empirical research.
 63

5.1 Global Aspects

5.1.1 Trade Related Aspects of Intellectual Property Rights (TRIPS)

With the Uruguay round (1986-93) intellectual property rights were for the first
time considered within the GAIT negotiations. Despite the substantial resistance
at the beginning, especially from the side of developing countries, it came to a
successful termination of the negotiations on trade related aspects of intellectual
property rights (TRIPS). At January 1st 1996, one year after the foundation of the
World Trade Organisation (WTO), the agreement came into force. TRIPS
constitutes together with the agreements on goods and services one of the three
columns of the new world trade order. It is unique in so far as it was for the first
time within the GATT-negotiations that homogeneous politics l62 were
successfully prescribed to the involved governments. Different national systems of
intellectual property rights, different levels of protection and enforcement can
constitute non-tariff trade barriers. Therefore, one of the main concerns of TRIPS
is the harmonisation of different national systems of intellectual property rights I 63 .
Efforts to harmonise the international industrial property right systems already
have a long tradition and go back to several major international agreements at the
end of the last centuryl64

One main reason for the inclusion of intellectual property rights into the GAIT
negotiations was the strong increase of immaterial components in the exchange of
goods' and services l65 . Especially with the new information technologies a
fundamental change in the character of the exchange of goods happened. The
exchange of goods against goods is replaced by a qualified trade of technologies
and by an exchange of technology incorporating goodS l66 .

The TRIPS negotiations were characterised by a conflict between on the one hand
innovative economies showing naturally an interest in protecting their
technologies, and between those economies, that are net-importers of technology
and consequently had more interest in free access to technology. This contrast was
in particular sharp between industrialised and developing countries, namely
between the USA and developing countries. At the beginning, the initiative to
include the strengthening of IPR as an issue into the GATT negotiations was an
initiative of the US-American high-tech-industries, and in particular the US
pharmaceutical industry. They claimed a trade distortion in favour of technology-

162 Hoekman, Kostecki [1995] page 144.

163 Fisch, Speyer [1995] page 66.
164 Paris Convention 1891, Bern Convention 1886, Madrid agreement 189l.
165 In 1947 about 10 % of the US-exports covered immaterial parts, in 1986 it were some
27 %. Cottier [1992] page 88.
166 Compare Ullrich [1995] page 631.
64

imitating countries to the burden of innovative countries. Developing countries

feared a withholding of technology and know how and the limited access to
technology justified by the GAIT.

5.1.2 The North-South Conflict Within the TRIPS Negotiations

The interest of industrialised countries is to safeguard their technology and to

create local incentives for innovation. They also want to protect their innovators
from piracy and prevent them of loosing major market shares by an increase of
trade with copied brand products like e.g. Cartier watches, Sony walkman and
Vuitton handbags.

Developing countries, however, took those considerations as an expression of

,,neoprotectionism" of the economic interests of industrialised countdes l67 • In their
opinion, non-protection in developing countries only has a negligible influence on
innovation and production in industrialised countries (small country effect).
Developing countries feared in particular that high international standards of IPR
would strengthen the position of international firms, whereas prices for goods of
basic needs like medicine or food in developing countries would rise. Some
people l68 also argue that developing countries have to go through a period of
national protectionism in order to follow up the industrialised development just
like industrialised countries did before. Periods of protectionism and plll"e national
interest building could also be necessary periods of transition for the development
of single economies. According to this approach piracy with technology and
technology loaded goods is appropriate. An international trade system that
includes intellectual property rights would maintain existing comparative
advantages of the world-wide leading trading partners and would also exclude the
possibility of dynamic competition and of a "catching-up" process for less
developed economies. Especially the restraint to access to technological
knowledge would mean that few countries have an exclusive right to exploit
technologies. An additional. reason for the aversion of developing countries
against the TRIPS agreement was that the agreement was considered to be just
another example for the paternalistic approach of industrialised countries.

One central issue in the discussions around the GATT Uruguay round was that
iritellectual property rights per se are a barrier against the free flow of information
and that as such they are contradicting with the idea of free trade. Accepting IPR
as a means of state intervention is already one step away from the idea of the
spontaneous order of economic acting l69 • Industrial property rights are considered
to be necessary against free riding on technological knowledge as well as in order

167
See e.g. Fisch, Speyer, [1995] page 66.
168
So e.g. Almeida [1995] page 217.
169 This idea is in particular essential in the work ofvon Hayek, e.g. von Hayek [1968].
 65

to provide incentives for innovators. However, a confidential proof of the

innovation spurring effect of IPR is difficult and has probably never been done.
Therefore, it could be allowed to hypothesise if a process of free competition of
innovation would reveal more facts about possibilities of innovation and its
allocation 170.

Industrialised countries criticise that TRIPS does not constitute an international

system of protection, but leaves the implementation of rights to the member
countries. In addition, TRIPS only establishes minimum standards of protection
(ART 1, 1). TRIPS are based on the bilateral opening of national markets.
Consequently, the country with the biggest local market has an advantageous
position for two reasons. The principal of territoriality (the restriction of national
rules to national territoryl7l) shows a bigger effect in a bigger market as well as
the bigger market has a heavier weight in trade political negotiations. Starting
from such conditions benefits of innovation are distributed according to the
principle of accumulation. Countries with better starting conditions can take more
advantage out of trade negotiations. Such a result is contradicting with the
principal of fair competition and instead of the establishment of worldwide
intellectual property local markets are persisting. TRIPS is in so far the result of
the introduction of intellectual property in international politics and the result of
the fight for power with trade political instruments, where industrial countries can
define the conditions of competition amongst themselves according to their
political power. Hence, developing countries look at TRIPS as an instrument of
industrialised countries to rest on their already wilting laurels for some more
years172.

Industrialised countries argue that because of the dynamic effect of IPR also
developing countries should show an interest in stronger protection (''no imitation
without innovation,,173). However, it is very difficult to evaluate the dynamic
effect between IPR and national rates of innovation l74 . Von Hayek argues in a
similar way, when he says that even the small relative wealth of poor countries is
based on former inequality175. The wealth and economic growth of industrialised
countries contributes as well to a proportional extent to the relative growth of

170 This is the idea of von Hayek's "Der Wettbewerb als Entdeckungsverfahren", von
Hayek [1968].
171 The TRIPS Agreement counterbalance this with the most-favoured-nation treatment
which forbids discrimination between the nationals of other members.
172
Fisch, Speyer [1995] page 68.
173 Ibid.
174 Only indirect measurement is possible, via numbers and origin of patent applications,
trade development and the rise of foreign direct investment. The same is true for the
deleterious effect and the damages of product and technology piracy. Feinberg and
Rousslang found in a survey with 144 US firms, these firms lost in 1986 1,8 % of
their world wide trade due to piracy! Feinberg, Rousslang [1990].
175 Von Hayek [1971] pp. 55.
66

poorer regions in the world. Consequently, poorer countries can pass a process of
economic development within a shorter period of time than industrialised
countries did formerly.

5.2 European Aspects

In Europe the protection of industrial property is based on three different levels of
norms, the international agreements, the community level and national systems of
rights. The relationship between the three levels is not finally clear and poses
several problems for the community176.

From a legal point of view intellectual property rights while providing with a
monopolistic position in a market bear inherently two problems for the European
market:

1. The exclusivity of intellectual property rights from competition can

conflict with competition norms (Art. 85-86 E.C.)

2. The principle of territoriality of national intellectual property rights

conflict with the principle of free movement of goods within a
common market (Article 30 E.C.)

The principle of exclusivity of IPR tries to compensate for the public good
character of technological knowledge. It enables the owner of intellectual property
rights to prohibit certain acts of third parties, such as producing or distributing the
protected good. This automatically excludes third parties from free market access
and also affects the competitive structure of the market. The relationship of
intellectual property rights and competition norms (Articles 85-86 E.C.) is not
explicitly regulated in any European legal norm, but basic principles of how to
treat this relationship are established case by case by the European Court of
Justice 177.

Although a huge effort has been made to harmonise intellectual property rights in
Europe, most rights are still based on nationallaws 178 • According to the principle
of territoriality the scope of protection begins and ends at national borders. This
could affect the free movement of goods between member states e.g. by using
national intellectual property to prevent importation of certain goods to national
markets. In addition the principle of territoriality enables cheaper imitation
imports and carries the danger of parallel and re-imports from different European

176
E.g. the European Patent Office is an independent international institution, not falling
under the rules of the European Union.
177
For a good overview of these decisions see also Govaere (1996) chapter 5.
178
Art 36 E.C. Treaty excludes the protection of industrial and commercial property
from the elimination of quantitative restrictions between member states.
 67

countries. This phenomenon is made more likely by the divergent manufacturing

conditions and different national price regulations within the European Union179
so that non-standardised intellectual property rights can lead to an isolation of
national markets within the common market.

For international agreements 180 member states are still the signatory parties. The
European Commission tried to gain competence on the base of Art. 113 E.C., but
the European Court of Justice decided that the TRIPs agreement is by nature a
mixed agreement to be concluded jointly by both the European Commission and
its member states l81 • However, the main problem between national systems and
community law remains that intellectual property rights are still considered to be
national tasks. Art 2. of the E.C. Treaty requires a harmonious and balanced
development of economic activities between member states. Thus from a legal
point of view a nationally-oriented approach to intellectual property rights might
be seen as incompatible with Article 2. E.C .. The creation of a common market
would stand in contrast to the view that intellectual property rights should remain
within the national competence in order to stimulate national industrial and
technological progress and economic growth182.

S.2.1 Harmonisation Efforts in the European Union

The legal framework for patent protection in Europe is still far from being
coherent. National, European (European Patent Convention, EPC) and
international (patent Convention Treaty, PCT) patent rights exist in parallel. The
use of the European patent has risen tremendously during the last decade and has
largely eclipsed the number of national patent applications.

A first draft for a European Patent Convention was proposed as early as 1975.
This proposal has still not entered into force and still lacks the ratification of
several national parliaments. The existing European patent system is based on the
1973 Munich Convention on the European Patent and grants a bundle of national
rights. Its major progress has been more in promoting administrative ease than in
approving material patent law. The reluctance of member states to ratify has two
causes. First, the high cost of translations into all the official EU languages
postponed the prospect of a final ratification significantly. Second, member states
still consider the granting of patents as. a matter for national sovereignty. Action is
urgently required and thus within a recent pUblication (European Commission
(1999) II, page 12) the European Commission demands already in 1989 a draft
regulation based on Article 235 of the EC Treaty aimed at creating a Community

179 This problem is extremely relevant for the drug industry.

180 Like the Paris, Bern and Rome Convention and the GAIT TRIPs agreement.
181 Court of Justice, Opinion 1\94 of November 15, 1994, E.C.R. 1-5267.
182 See Govaere [1996] page 41 and again Art. 36 E.C ..
68

patentlS3 • An essential legill difficulty with the adoption of the regulation under
Art 235 E.C. is that it requires unanimity. The simplified message, however, is
that the new patent system should be "simple, rapid, legillly certain, accessible and
it should not involve excessive expenditure" (European Commission [1999] II,
page 8).

In the case of trademarks, harmonisation efforts have been successful, with the
regulation on the Community trademark and the constitution of the Community
TradeMark office in Alicante.

In 1991 the European Commission published a Green Paper on the legill

protection of industriill designs. A current proposill for regulation and a directive
on approximation of nationill design law are currently waiting for approvill. As in
the case of trademarks the· object is to achieve a uniform community system.
Relatively new matters for which a solution had not been elaborated formerly in
nationill law have had more success in harmonisation. Examples include the
directives on semi-conductors and on computer programs. Another recent task is
the harmonisation of utility models within the Community. The Commission
published a green paper on this issue in order to stimulate further efforts. The
relatively large number of languages in the Union and the corresponding high cost
of translation poses an additional problem in the case of patent protection.

The major obstacle which the hannonisation task faces, however, is still the
politicill reluctance to accept community interests above nationill interests. The
creation of a common market stands in contrast to the view that intellectual
property rights should remain within the nationill competence in order to stimulate
national industrial and technological progress and economic growtb lS4 • In
addition, harmonisation does not automaticillly safeguard the free movement of
goods. Finally, only the replacement of national intellectuill property rights with
unified Community-wide intellectuill property rights extends the principle of
territoriality to the whole community and eliminates the obstacles posed to intra-
community trade. Only then could one speak of a single market in so far as
intellectuill property protected goods are concemedlss . With the continuing
relu,ptance of member states this aim is even more unlikely than that of
harmonisation, since after illl no nationill authority has an interest in giving up its
own powerlS6 •

183 For a good summary on all community patent related issues see: Straus (1997).
184 See Govaere (1996) page 41 and again Art. 36 E.C ..
ISS See Govaere (1996) page 300.
186 See: Handelsblatt (27.7.1995) "Gemeinschaftspatent schafft Rechtssicherheit".
 69

5.2.2 The Directive on the Legal Protection of Biotechnological Inventions

The existing European Patent Convention is still not a system that provides a
harmonised legal framework for patent rights in Europe. The proposal for a
community patent made in 1989 has still not been adopted and one of the main
problems for European legal patent protection - apart from the high application
and maintenance costs - is the possibility of different interpretations by national
laws and national courts. Thus the need for a coherent legal framework is evident
and the recent directive on "legal protection of biotechnological inventions"
(98/44IEEC) is very much along these lines.

Already the adoption of the new biotechnology directive is very controversial,

though this is not surprising given the fact that it took nearly a decade to get it
through the legislative process. The date for transposition into the national law of
the Member States was July 2000. Nevertheless, it continues to be debated just as
fiercely as before its adoption, as shown by the nullity suit of the Dutch
government (October 1998) against the directive, for reasons of non-compliance.
with the principle of subsidiarity, violation of fundamental human rights and
contradiction with international treaties. Press reaction to the directive ranges from
vehement rejectio!l to enthusiastic support. Clearly, the doubts concerning the
directive are still very much alive and many people have yet to be convinced of its
benefits. Despite the length of time the directive has been under discussion the
debate surrounding it is still continuing.

Obviously there is a need for a coherent European legal framework for the
protection of biotechnological inventions. Different legal regulations in different
European countries may lead to trade problems within the European internal
market and industries might hesitate to invest in R&D or shift their research base
in biotechnology to the USA and Japan. In biotechnology, in contrast to other
industries, patents are effective as an incentive to research and developmene 87 and
frequently they are also a prerequisite to obtain venture capital l88 • Industry has
therefore welcomed the new directive since an appropriate intellectual property
structure is a crucial factor influencing a company's decision to invest in, and to
use, biotechnology. Experience from the USA demonstrates how important the
patenting environment is for the development of the biotechnology industry. The
real future effectiveness of the new directive and whether it might foster
competitive advantage for Europe depends very much on its practical
implementation by the member states.

187 See e.g. Mazzoleni, Nelson (1998).

188 Ballantine et al. (1997) p. 48.
70

5.3 The Harmonisation Process in Central and Eastern

European Countries
The idea of national systems of innovation (compare session 5) gives European
Union member states it good argument for their political reluctance against the
harmonisation of intellectual property rights within the Community. Differences
between the national innovation processes are still large. This is even more true
for Central and Eastern European Countries. The rapid assimilation of countries in
transition is even more astonishing. However, it seems here that political
reasoning, like the rapid achievement of the membership of the European Union
and the strong interest to attract foreign investors are dominating the assimilation
process l89 •

Most of the CEEC had introduced international industrial property protection even
before the Second World War I90 • However, in the communist era all COMECON
countries, apart from Hungary, switched to an award system, under which
inventors received an inventors certificate which granted a percentage of the cost
savings achieved by the invention up to a maximum amount l91 • All communist
organisations were entitled to make use of the inventions as the inventors' rights
were transferred to the state,192 and hence, engineers and technical staffs' interest
in innovation to innovate was comparatively IOW I93 •

Countries of Central and Eastern Europe now face a double process of alignment
of their intellectual property right systems. First, they have to establish the
conditions for international agreements like TRIPs and the Paris Convention.
Second, they are trying to assimilate their countries to the system and standards of
the European Union in order to open the doors to membership of the Union in the
near future.

With respect to international agreements, it is important to recognise that all

countries are already members of the Patent Co-operation Treaty (PCT) and the
relative rapidity with which assimilation into the international agreements, which
has taken place since the fall of the "iron curtain", is remarkable l94 •

189
However, according to Ullrich countries with a large market such as CEECs should
have a stronger bargaining position. Ullrich [1995].
190
This is true for Bulgaria, Poland, Romania and Hungary in the case of patent
protection. See table 1.
191
Compare E. Kaufer, [1988] page 47.
192
See e.g. the description of the situation in the former Czechoslovakia in Jakl [199] p
145.
193
Kotarba outlines the deleterious effects on Polish workers' mentality. Kotarba [1992]
p.165.
194
For an overview see appendix V and VI.
 71

Furthermore, the European Commission has attempted to bring the systems of

intellectual property rights in these countries closer to EU standards. At the
European level the Commission founded the initiative for a ,,Regional Industrial
Property Programme (RIPP),', which is part of the PHARE Agreement. The basic
assumption of this initiative is that an adequate system of intellectual property
rights is a fundamental prerequisite for the establishment of a modern, free-market
economy. Major matters of concern of the RIPP initiative are:

• The improvement of patent and trade mark protection, as a method to

improve the process of industrialisation, innovation and economic growth.

• Harmonisation of all kinds of intellectual property rights (patents, trade

marks, design protection and utility models) to an international standard,
but especially to the standards of the Western European system, in order to
prepare CEEC for accession to the European Patent Convention and other
international agreements.

• Modernisation and improvement of the efficiency of national authorities

responsible for the protection of intellectual property rights.

• Promotion of regional collaboration in the field of intellectual property

rights.

The final objective of this programme is to prepare the countries ofCEEC to apply
for membership of the European Union. Accession to the European Patent
Convention is considered to be essential for full membership 195. However, the
initiative has to come from the European Patent Organisation (EPO). The
Administrative Council of the European Patent Organisation laid down the
following criteria in order to prove the concordance of political, economic and
legal standards with those of Western Europe:

• Harmonisation of national Patent law to the European Patent Convention

to the greatest possible extent.

• Ratification of the most important international agreements, especially the

Patent Co-operation Treaty.

• National patent offices have to give up their competence to act as an

international office of investigation and examination under the PCT.

• Guarantee of efficient enforcement of rights throughout national courts.

195 In this respect the constitution of the Eurasian Patent Convention in 1996 by Russia
could be interpreted as a kind of counter-movement of former COMECON countries.
See WIPO [1995] page 113.
72

• The national patent office has to be an operating administration office.

The past experience of EFTA countries demonstrated the practicality of accession

to the European Patent Convention before attaining membership of the European
Union.

In general there is a correlation between the accession of the EPO and admission
to the EU in that the closer a country is to admission for membership of the Union,
the higher the expectation is of membership in the EPO. All countries
participating in the RIPP program have officially harmonised their patent system
with the European Patent Convention (PCT), namely the Czech Republic and
Poland have entered the legislative procedures to fully harmonise. To date, the
Czech Republic, Poland, Hungary, Slovakia, Slovenia, Estonia, Romania, and
Bulgaria have filed applications to accede to the European Patent Convention.

The Europe Agreements also emphasise the importance of intellectual property

rights. Usually these contracts include an agreement that, five years after the
completion of the contract, an application for accession to the Munich Convention
will be made. The Europe Agreements commit all countries to respect the Paris
Convention, the Madrid Convention and the PCT196 •

In general, one gets the impression that the inherent problems of intellectual
property rights, their negative economic effects on markets and the suitability of
Western European standards for economies of transition, are questions, which are
neglected in the process of transition. The major incentive for assimilation appears
to be the rapid achievement of full membership of the European Union, rather than
real economic needs and preferences.

196
An overview at protection provided in different countries in transition is given in
appendix V and VI.
6 Patent Protection for Biotechnological
Inventions

6.1 Introduction
Biotechnology is besides computer and information technology a key-technology
for the economic development of the new millennium. This is revealed with
particular clarity by the sector's growth rates in figure 9 (normalised to 1995).

1995-100
300
275
250
225
_ R&D expenditure
200 (1995=1035 Mio Euros)
Number of companies
175 (1995=485)
150 --.- Employees (1995=16100)

125
100
75
1995 1996 1997 1998 1999

Figure 8: Development of Europe's Biotech Industry, normalised to 1995, absolute

numbers see appendix I

The remunerative aspects of intellectual property rights have particular

significance for biotechnology as research and development costs are high but
copying marketed products is relatively easy. This is highlighted, for instance, by
the fact that it still takes around 12 years to bring a new medicine onto the market
and average research and development costs are over $300 million. Industry will,
of course, only make this kind of investment if its return is protected, and
intellectual property rights protection, mainly in the form of patents, is the type of
protection most frequently sought.

Protection of intellectual property is essential for biotechnology firms and the

debate on what, how and when biotechnological inventions can be protected by
legal means is continuing. Recent European legislation tried to clarifY these issues.
74

How this legislation will be implemented and how ftnns will react to the new legal
framework, however, remains to be seen.

There is considerable public debate on the scope of what is really patentable so far
as biotechnological inventions are concerned. The new European directive on the
legal protection of biotechnological inventions (COM 98/44IEEC) tries to lay
down the guidelines for the whole debate. Nevertheless, already within nonnal
patent law the requirements for patentability of biotechnological items is clearly
defined. Article 52.1 of the European Patent Convention Treaty states that patents
may be granted for inventions which are novel, based on an inventive step and are
capable of industrial application. Excluded from patentability, according to Article
53 are inventions that are contrary to morality or the "public order". However, a
decision on this point is a value judgement that is based on principles outside
patent law itself. Article 53 b also speciftes that animals, plant varieties and
breeding methodologies are excluded from patentability. The new interpretation
given by the new directive to the patentability criteria (invention, novelty,
inventive step and industrial application) may supersede this exclusion.

6.1.1 Invention

Inventions have to be distinguished from mere discoveries. Frequently it is

perceived that the natural existence of a substance, especially in the case of genes,
means that the item can be discovered but not invented. Thus a protein or a gene
sequence are discovered rather than invented. However, legal practice in patenting
takes industrial applicability into account in order to "distinguish between
discoveries and inventions. In the case of genes, a patenting practice had already
been established -and this was reaffinned by the new directive- whereby a patent
can be granted when the gene is isolated and made available for practical
industrial purposes. Thus the defmition of what an invention is, as contrasted with
a mere discovery, depends ftrst of all on whether it is technologically applicable.
Genetic engineering, for example, is regarded as a sophisticated fonn of technical
invention.

6.1.2 Novelty

An invention is novel as long as it does not belong to the "state of the art" in the
fteld. This is tested by the previous availability to the public (European Patent
Convention (EPC) Art 54(2». Novelty is distorted by "everything made available
to the public by means of a written or oral description, by use, or in any other way,
before the ftling date of the European patent application" (Article 54(2) EPC). In
the view of the European Patent Office (EPO) the mere pre-existence of a
 75

substance is insufficient to contradict the novelty criterion 197 • Consequently also

the pre-existence of genes does not destroy novelty.

6.1.3 Inventive Step

The test for the necessary inventive step is based on the idea of the invention's not
being immediately obvious to an expert familiar with the state of the art in the
field. Thus it is more a question of ingenuity in the individual case of an invention.
With respect to the isolation of genes the answer to this question is left to a case-
by-case decision by the patent authority.

6.1.4 Industrial Applicability

Article 57 EPC defines industrial applicability for inventions. This could, of

course, be a problem; especially in the case of the identification of the gene
sequence, where many sequences are identified without the knowledge of the
exact function and therapeutic value of the coded protein.

6.2 Current Issues in Protection of Biotechnological

Intellectual Property

6.2.1 The Directive on Legal Protection of Biotechnological Inventions

It is now more than ten years since the first draft of the directive for the protection
of biotechnological inventions (Com 98/44IEEC, see chapter 5.2.2) was rejected
by the European· Parliament. The European Parliament at that time had strong
concerns about the patentability of nucleotide sequences derived from human
genetic research, but also voiced general ethical concerns. Finally, on 12 May
1998, the European Parliament accepted the Commission's latest proposal with
432 votes in favour and 78 against (mainly the green party) and 24 abstentions.

6.2.2 Basic Principles of the New Legislation

Article 3 of the directive extends the general prerequisites of patentability to

biological material (defmed in Article 2) and claims that such material is in
general patentable even if it previously occurred in nature, providing, the
industrial application is clearly specified in the application. Article 4 tries to
ensure consistency with Article 53 b EPC by excluding plant and animal varieties
and essential biological procedures for the breeding of plants and animals from

197 See e.g. the Alpha-interferon case, BIOGEN/Alpha interferons EPO Appeal Board
Decision T301l87, EPO Official Journal OJ EPO 1990/8,335.
76

patentability. Exceptions however, and this is important, are possible for cases that
are not technically confmed to a particular plant or animal variety.

Article 5, 1 also establishes the principle of non-patentability for the human body
and parts of it. Whereas in part two of the same Article exceptions are defined for
isolated elements of the human body that are produced "by means of a technical
process", and explicitly including sequences of genes. The article also gives a
clearer position on what parts of the human body can be regarded as a patentable
inventions and not mere discoveries. Just as in existing patent law, ethical and
public policy objections are grounds for exclusion. In particular these criteria
mean the following are excluded:

• procedures for human reproductive cloning

• processes for modifYing the germ line genetic identity of human

beings

• methods in which human embryos are used

• processes for modifYing the genetic identity of animals which are

likely to cause them suffering without any substantial medical
benefit to man or animal and also animals resulting from such
processes

Article 11 provides farmers with the privilege of utilising offspring from

transgenic stocks without paying any royalties (the so-called farmers' privilege).

The debate surrounding the patenting of biological material is far from over. As
the directive passes into law at Member State level, it remains to be seen to what
extent it will achieve all its goals, including providing the biotech industry the
framework it needs in which to grow.

6.2.3 Are Patents Still an Adequate Protection Tool?

Serious concern now exists as to how far the patent system remains an adequate
tool for protecting intellectual property. Indeed, the dramatic changes in the
structure of the industry during recent decades may also mean that a dramatic
change in the intellectual property rights system is needed. The original intention
of rewarding invention so as to provide an incentive through guaranteeing
economic benefits for research and development has become simplistic and does
not match the requirements of new industries like biotechnology or those related
to the information society. "The intellectual property rights system was developed
for an industrial era, while now complex issues of a post-industrial period are at
 77

stake ... the time is ripe for a wholesale reassessment of traditional approaches to
the definition and protection of intellectual property" 198. Today's brainpower
industries and their complexity pose new challenges to the intellectual property
rights system. Furthermore, nowadays it is less and less the case that innovations
are driven by breakthroughs than by the routine exploitation of existing
technologies. This gives rise to the possibility of innovations consisting of the
concentration of all known characteristics plus one new one. This kind of
"recombination model,,199 of invention clearly means that the availability and the
access to information are gaining in relative importance. An intellectual property
right system is also a political tool as it establishes a balance between individual
rights and responsibility to society "Society isn't going to let someone have a
monopoly on the cure for cancer,,200. Political value judgements of this type,
however, differ a lot between countries according to their degree of economic
development. Developing countries tend to emphasise responsibility to the public
over individual rights of creators, whereas in industrialised countries it is usually
the other way round.

6.2.4 "Patenting Life"

An issue which has always been problematic is whether genetic material or

information taken from human beings and plant and animal varieties can be
patented. According to the new directive for the first time elements isolated from
the human body by means of technical process are patentable. Opponents fear that
human beings, plants and animals might be reduced to a mere genetic resource.

Since 1977 over 7500 patent applications on human genes, from plants and
animals have been submitted to the European Patent Office. The new directive is
therefore only formalising what has been legal practice for a long time anyway.
The new directive explicitly excludes procedures for cloning human beings or
human germ line interventions and also the use of human embryos for industrial
purposes. Scientists fear royalties will be an obstacle to science. There are also
fears are that farmers might become more dependent on large firms which hold the
gene patents on genetically altered plants or animals.

The industry's reaction to the directive, however, has generally been positive
given that the patenability of biological material has been confirmed by Article 6.
Nevertheless the issue of plant variety and transgenic plants is unresolved and the
expansion of ethical issues and the farmer's privilege is disturbing biotechnology
firms. From the industry's point of view, any weakening of the draft would put
Europe at a further disadvantage and shift the focus of research in biotechnology

198 Pirages [1996] page 273.

199 Foray [1992] page 9.
200 Thurow [1997] page 98.
78

further towards the USA and Japan. The harmonisation of existing national laws
on biotechnological patents by the directive is encouraging the invention of new
medicines, which could improve life and health of millions of patients by
increasing investment in research and development.

6.2.5 Ethical Concerns

According to the legal criteria for patentability there are generally speaking no
restrictions to the patentability of biotechnological inventions. Nevertheless, there
are some major ethical concerns on this subject. The main ethical criticism is
based on worries that somehow 'life' itself is being patented in conjunction with a
moral view that living animals should never be reduced to the status of an object
of invention. A famous case is the decision of the European Patent Office on the
so-called Onco Mouse, where a patent was claimed for a genetically altered
mouse by Harvard University. In this decision a patent was granted for a
transgenic animal. The fact that the mouse in question does not occur in nature
made possible the application for patent protection. The underlying argument
against patent protection of living beings, however, is that animals should not be
used as mere tools for human ends and, in particular, that they should not be
caused to suffer. The Examination division of the European Patent Office
justified the granting of a patent on the basis of its judgement that the likely
benefits for cancer research outweighed the ethical concerns. This decision set the
precedent for a utilitarian approach in which possible negative consequences are
justified by the invention's usefulness to mankind.

Advocates of the new legislation counter ethical concerns by pointing out that
''patenting life" per se is a meaningless notion, as patent law does not allow the
patenting of abstractions. Normal application of patent law already excludes the
following:

• human beings

• body organs, limbs, body fluids, and any other known part of the human body

• nucleotide sequences elucidated by .human genetic research and other

molecules identified by such research in the human body in the their natural
state

A patent cannot be granted on the ownership of "life". Living organisms can only
be patented if they differ significantly from naturally occurring ones. Moreover,
patenting material originating from living organisms should not be confused with
the emotive idea of patenting life. DNA is not life, as human beings cannot be
reconstructed from the sum of human genes. For the evaluation of patenting from
an ethical point of view, it makes a big difference whether genetic alterations are
 79

allowed for freedom of science or whether they are part of an economic premium
system, as in the case of the patent system.

6.2.6 Biodiversity and Global Justice

Most research is done in the Northern Hemisphere, but broadest species variety is
found in the Southern Hemisphere, which has a greater concentration of poorer
countries. Western world economies gain huge benefit from owning plants in
impoverished southern countries201 by establishing a sort of bio-piracy of the
genetic resources of the Southern hemisphere. An example of this is Madagascar's
rose periwinkle plant which was used to develop anticancer drugs, and other
medicines with a great worldwide market success, but which never returned any
financial benefit to Madagascar2°2 •

This and other examples show that at least a minimum level of responsibility
towards developing countries is required of the actors involved. Patenting of genes
could mean the beginning of an unequal distribution of genetic resources between
underdeveloped countries and industrial nations, amounting to a kind of new
colonialism by biotech firms. In addition, countries in the South might be forced
to uphold patents obtained by foreign companies on their own biodiversity and on
the associated knowledge of their indigenous peoples and local communities,
perhaps even endangering biodiversity. On the other hand, biotechnology research
can also contribute to providing the world as a whole with a stable food supply.
Against this backdrop value judgements seem unavoidable.

6.3 Management of Patenting in European Biotechnology

Further research has to investigate how far the new directive will affect the
behaviour of firms in order to evaluate the relevance of the new legal framework
as a factor of European competitiveness and how firms will make use of the
legislation in practice. One specific line of investigation should look at the
management practices of IPR in Europe and also compare them with those of its
main competitors, the United States and Japan.

The aim of this chapter is to observe a "real world picture" of how European
biotechnology firms manage their inventions and in particular how they make use
of patent protection. The intention is to compare the behaviour and the
requirements of the biotechnology industry with the existing legal framework in

201
See for example, Goodman, Walsh [1997] and the story oftaxol or "The European
Patent Directive: License to plunder"
http://www.grain.org/publications/reports/plunder.htm.
202 The World Bank 1998 p. 35.
80

Europe, to detennineindustrial needs and to identify insufficiencies in the

institutional settings.

The empirical results derive from a survey carried out with 103 biotechnology
finDs in several European countries (22 Dutch, 28 Gennan, 20 British, 19 Spanish,
10 Italian and 4 others). Suplimentary information was acquired by telephone
interviews with 22 participants in the sample. This part of the work is used in
order to identify the most urgent issues and concerns of practitioners in the field as
well as to derive empirical support for theoretical findings.

First of all, the position of the European biotechnology industry in comparison

with other countries and its overall performance with respect to patenting activity
is discussed. Later on, specifications regarding means of applications are
presented, along with some aspects of strategic behaviour in the sector and in
particular, insufficiencies of the legal framework and the institutional settings in
Europe.

6.3.1 Methodology of the Survey

6.3.1.1 Data Construction

For the survey a large number of biotechnological firms were contacted. Their
selection and identification were prepared in several ways. Actively patenting
firms in the field of biotechnology were identified throughout the US on-line
patent database (htU>:llwww.uspto.gov/patftlindex.html) and the EPa CD-ROM
ESPACE bulletin by selecting out firms patenting in the PCT (patent Co-operation
Treaty) class C12N, genetic engineering. In this way a lot of the relevant actively
patenting firms were already identified, most of them from the United Kingdom
and Gennany. Further addresses were taken from the Internet, where many
biotechnology related associations are represented (EuropaBio:
htU>:llwww.europa-bio.be/members/index.html-ssi. Bioindustry Association UK:
htU>:llwww.bioindustry.org/, and Dechema Germany htU>://www.dechema.de/,
htU>:llwww.informatik.uni-rostock.delHUM-MOLGENlbiotech/companiesi.)

About 70 per cent of companies and institutes from the target group were first
contacted by telephone in order to identify the persons responsible for intellectual
property right protection. Thus, 299 members in Germany, the United Kingdom,
Spain and Italy were identified and contacted by post. The questionnaires were
included in an envelope together with a letter of introduction, as well as a return
envelope where the experts could include the completed questionnaire and send it
back. The persons contacted had approximately six weeks to answer the inquiry
and those who had not answered by then were remembered to do so by a letter.
Finally, 103 questionnaires were returned, equivalent to a rate of return of 34 per
cent. In addition 22 of the interviewed institutions took part in in-depth telephone
interviews.
 81

The questionnaire used three kinds of questions203 • First, open questions where the
interviewees had to give their opinion in writing or provide discrete data, such as:

"How many patent applications have been filed by your company/ institute in
1998?"
Second, questions with ''yes'' or ''no'' responses, where unambiguous answers
could be provided. One example would be:
"Did your company face an infringement for a patent? YIN"
The third kind of question uses an ordinal measurement scale for the answers,
where the person answering is confronted with five options and where he/she
expressed herlhis opinion according to the following scale: 204

1 not important
1 2 3 4 5 2 slightly important
D D D D D 3 moderately important
4 very important
5 extremely important

Figure 9: Answering scale of the survey

This kind of representation is used in order to express the degree of importance, of

satisfaction, of agreement etc. as with the following question:
"To what extent does your company / institute make use of patenting as a
means of protection for inventions?" (not at all ... to a great extent)

6.3.1.2 The Sample Constitution

By nature, conclusions from a sample of 103 firms are restricted and

generalisations have to be done with care. Some formulations in the text might
suggest a generalisation, however this was not in the intention of the author.
Nevertheless, most fmdings are of a qualitative nature and were also confirmed by
the telephone interviews.

203
Find the complete questionnaire in appendix III.
204
The answering structure in the original questionnaire was actually a reverse one, so
that "1" indicated the highest degree and "5" the lowest one. In the graphical
representation of the answering scales this provides with the difficulty that smallest
bars express the highest value, whereas largest bars represent the lowest one. This is
against human intuition, which is why the data representation of a 1-2-3-4-5 scale was
transformed into a 5-4-3-2-1 scale.
82

The size of the companies is defmed by number of employees: Small fIrms having
a maximum number of 50 employees, medium sized industrial concerns a
maximum number of250 employees and large fIrms more than 250 employees.

In fIgure 10 the structure of the entire European entrepreneurial life science

industry is illustrated by country according to company size. The United Kingdom
and Germany are clearly the countries with most life science companies in
Europe, whereas countries like Spain only show a relatively low number of life
sciences companies (arrows in the graph indicate the countries involved in the
survey).

-+ -+ UK
r - - r r

Germany
France I
-+ Sweden
Netherlands
Finland
I
Large
Denmark
Belgium
• Medium

I
o Small
-+
S w itzerl nd
Italy
Irel nd

-+ Norvvay c:::::::::CJ
IJ!::DJ
I
I
Spain
IDIIJ
Portugal
-
o 50 100 150 200 250

-+ Countries included in the survey

Figure 10: European entrepreneurial life science industry by country and company size
(number of companies), source: Ernst & Young 1998

The underlying sample of 103 fIrms was basically structured by fIrms' nationality
and fIrm size. In addition, differences between private companies and public
research institutes or universities are taken into consideration (88 private fIrms and
15 public research institutes). There were fewer returned questionnaires from Italy
(only 10), which has to be kept in mind meanwhile comparing Italian results with
those from the other countries. Beside the main countries represented, the sample
also includes two samples from France, one from Denmark and one from
Switzerland. The underlying sample of 103 questionnaires is represented with its
complete structure in the following fIgure 11.
 83

Send off Returned Institutes Small Medium Large

Netherlands 45 22 (49%) 6 6 3 7
Germany 78 28 (36%) 3 15 2 8
United Kingdom 58 20(34%) 2 5 8 5
Spain 58 19 (33%) 3 5 7 4
Italy 50 10 (20%) I 4 I 4
Others IO 4 (40%) 0 I 0 3
Total 299 103 (34%) 15 36 21 31

103 questionnaires

Italy others
Germany
10% 4%
28%
Netherlands
21%

United
Kingdom
19%

Uniled Kingdom

Germany
o Institutes
Netherlands
II Small

Italy
o Medium
o Large
Spain

Others

o 5 10 15 20 25 30

Definition: Small finnsS 50 employees, Medium sized finns 50 - 250

employees, Large finns 2: 250 employees (Definition according to the
European Commission)

Figure 11: The sample constitution

84

The return rate of34% was a remarkably positive result. From Italy the return was
rather poor, but especially Dutch and German questionnaires were send back with
a high rate of success.

Expertise profile

lotal
-
.,stiutes
smallr ....
I
med ... ml~ ....

large lir ....

laly
I
I
Germany
Spall
Nether nds
I
lk1rted Kingdom

2 3 4 5

Figure 12: The expertise profile

Participants were asked to provide an own evaluation of their expertise on the

topics for which they have been answering questions. The mean value of the
expertise profile with a score of 3.7 confirmed a high expertise among the
contributors. Larger firms naturally showed a higher expertise than SMEs (Small
and Medium sized Enterprises). They can afford to contract own patent specialists
or even possess an own patenting/lPR-department. Smaller corporations simply
cannot come up with such facilities. A high expertise in the UK corresponds with
the highest use of patenting in the sample there (see figure 17). Italian participants
and those from small firms show the lowest expertise in the sample.

According to a recent European Commission repOlfo 5 more managers up to the

top level of chief executive officers should be involved in IP issues and decisions.
In the underlying sample, this has not been a problem. Out of 103 questionnaires
in 15 cases the responding person was the chief executive officer (CEO) of the
company and in 30 cases a directorlhead of department in the corporation.

205
European Commission [1999] page 49.
 85

6.3.2 The European Biotechnology Industry and Patenting

Most Innovative Technical Fields

as Reflected in European Patent Applications 1991·1997
Pcr::r.n1rige d
8pp1~:!I0II5 11 IS~(
~ ~----------------,-----------------~

I = Merucalltchnology
2 m CommunicalloosltcMology
3· Electrical elemtnls
4 • 0 rgallic che JIlI$\ry
5 • Measuring lechnology
6 - Computers, computing ItcMology
7 - Macromolecuw compounds
8 - Conveymg. packaging Itchnology
9 • VehIcles III general
lO-Blochemistry. gentlic engllleering

20%

I~

Figure 13: Most innovative technical fields, source: European Patent Office

The numbers of European patents for genetic engineering (number lOin figure 13)
show that about 45% of applications are of European origin, 35% from the United
States and about 10% from Japan. European biotechnology patenting in numbers
of European patent applications increased with a 4% rate from 1991-1997,
whereas the numbers for Japanese and the US-American applications of European
patents decreased during the same period. Can this be a reason to believe that the
European biotechnological industry is growing stronger than their competitors in
Japan and the USA?
86

The development of national priority applications in genetic engineering206 (IPC-

class C12N) for Germany, Holland, Italy and Spain shown in figure 14 describes a
different situation. Usually national priority files precede a European application
in European countries (compare table 4) and in most cases a national priority file
represents a file of a local (national) assignee in the country207. The dominating
patenting position of the UK amongst the European countries gets clear, followed
by Germany. Nevertheless, the UK and German numbers are only a fraction
(about one tenth) of the priority applications in the United States and Japan.
Important is the tremendous increase in the United States over the last decade,
where in Europe only the UK shows a similar development. In the Netherlands,
Italy and Spain there is no change of the numbers of applications over time to
observe. German numbers even decreased in 1991 and then recovered up to a new
top level in 1996, before decreasing again in 1997. An interpretation of Figure 13
and 14 could be the following: European applications increased, whereas the
national applications files did not. This means that priority files shifted from the
national way of filing to the European (In Germany e.g. there were already 374
European priority applications over the. regarded period of time). This would then
explain the 4 % rise (figure 13) of European applications.

National priority files are a good indicator for innovative performance. One reason
for the moderate development of European patent applications could be that
Europe does not proyide adequate protection tools, whereas the USA provide a
better institutional framework for patenting in biotechnology. There has been a lot
of discussion on such issues over the last years in Europe. The micro-performance
of individual biotechnologyfiims and several of the explained insufficiencies of
the legal framework -conditions in Europe are addressed in the following.

206
C12N: Micro-organisms or enzymes; Compositions thereof; Propagating, preserving,
or maintaining mirco-organisms; mutation or genetic engineering; culture media. This
covers of course only one part of biotechnology. Other biotechnological fields would
be covered by the IPC classes C07G; C12M; P; Q; Rand S. However, about 90 % of
all patents in biotechnology are filed in class C12N.
207 In special situations it is also worthwhile to apply for separate priority files, for
European assignees first of all the USA. Compare section 6.3.4.5.
 87

8000
7000
6000
5000
USA
4000
• JP
3000
2000
1000

1~ r-----------------------~--------~
900
800
__ DE
700
_____ UK
600
500 ......-IT

. ..
400 • -ES
300 ____ NL
~
200 ~ - -
100
O~~~~~~*=~~~~~H
85 86 87 88 89 90 91 92 93 94 95 96 97

Figure 14: Priority patent applications in genetic engineering (pCT-class = CI2N),

source: Derwent World Patents Index, own search

The OEeD defines the rate of technological dependency (dependency ratio) as the
ratio of the number of non-resident patent applications divided by the number of
resident patent applications. The ratio is used as an indicator for the relationship of
local technological inventiveness against foreign-transferred technology. The
interpretation however, is not straightforward. A high dependency ratio can indeed
indicate a high technological dependency from abroad, but it also stands for the
attractiveness of the local market for foreign investors. E.g. the Netherlands show
a very high ratio of dependency in figure IS, which is probably due to the high
attractiveness of the local market where a lot of foreigners search for protection.
For the sample countries, only in the case of Japan, the ratio is below one,
meaning there are more local applications than foreign ones. For all other
countries the numbers of foreign applications are higher than those of domestic
ones.
88

30

25
____ USA

20 ~ JP
___ DE
__ UK
15
-+-ES
-+- NL
10
~IT

5 lIE lI! -i(

lIE
~ ~
0
85 86 87 88 89 90 91 92 93 94

Figure 15: Dependency ratio: ratio no-resident/resident patent applications, all

industries. Source: OECD

6.3.3 Performance of Patenting in the Sample

6.3.3.1 The Firm Presentation

The patenting activity of the interviewed sample members208, distinguished by the

kind of entity and by the country of residence of the assignee are described in
figure 16. The results demonstrate the strong difference in absolute numbers' of
patent applications between small and large firms. Patenting density (number of
priority files per 100 employees), however, provides a different picture. It shows
that large firms with a density of only one patent per 100 employees perform
poorly in comparison to the small firms who apply on average 48 patents per 100
employee.

208
Appendix II covers a list of the top 20 patenting active finns for genetic engineering
in Gennany, the Netherlands, Spain and Italy.
 89

palents per 100 ell1llOyees

total ~=]--~-l
large cOl'l'pOWlies f=====~=::=J
ilsllutes
ne:lUntim;
srral tim;

t.L I==::::::;::::==:::J
lJ(~:::::;::::=::J
ce
ES
IT

o 50 100 150 200 0 20 40 60

Figure 16: Priority patent applications of the sample in 1998

6.3.3.2 Use o/Patenting

Another survey for BioEuropa revealed that intellectual property protection is the
second most important external factor, among several other factors, which
influence companies' decision to invest and use biotechnolowo9 • In the
underlying sample, companies use patenting in general a lot. Participants were
asked about the extent to which they make use of patenting as a means of
protection for inventions. The result was a mean score of 42 on the answering
scale of 1-5 (1= not at all, 5=to a great extent). This is proof that patenting indeed
matters a lot for the biotechnological industry. Astonishingly German firms have
indicated that they make less use of patenting, whereas firms from the United
Kingdom use patenting extensively (value of 4.9). Less remarkable is that large
firms in general, make more use of patenting than small firms . However, as
previously seen, the patent density (patents per employee) of small firms is much
higher than that of large firms. Participants were also asked, about their
satisfaction by patents and their provided means of protection showing that Italian
firms and small firms in the sample tend to be less satisfied by patents as a
protection tool.

209
After the general market conditions, but before the regulatory framework, pressure
from competitors, consumer acceptance, availability of skilled staff, technology
transfer mechansisms, availability of equity capital, scale & quality of public R&D,
access to innovative suppliers, see Ballantine, Thomas, [1997] page 47.
90

... r-
j
....
....

-....
- I
!

-
IoIy
I

5pM

not at all
very much not satisfied vel)' satisfied

Figure 17: Use of patenting and satisfaction by patents

The sample participants were also asked in how far in their opinion the patent
system provides an adequate level and scope for the protection of biotechnological
inventions. 63% of the interviewed confIrmed that the patent system provides
them with an adequate level and scope for the protection of biotechnological
inventions. Large fIrms believe this even with 79%, small fIrms only with 56%.
The confIdence in patenting is the highest in Germany, in the United Kingdom
followed by the Netherlands with 70%, whereas only 50% of the Italian fIrms trust
in patenting. The trust in patenting was questioned also in a negative way, asking
fIrms in how far they agree upon the statement that, "patent protection is an
overcome relict from the industrial era" 210 for biotechnological inventions. The
question was intended to be provocative and indeed, the reaction was clear and the
statement received only a mean value of2.3 (1-5 scale).

Safeguarding of the developed technology and its commercialisation, the

competitive advantage and the provision of better negotiation positions for
licensing agreements are the main reasons to apply for patent protection.
Participants in the survey also confIrm that the patent system is important for
biotechnological entities as an incentive system for research and development
investments (confIrmation with a mean value of 4.6 out of 5). Patents are clearly
related to pure economic considerations: "We want to make money with our
patents". The degree of patenting depends very much on the degree of competition
in the market. With a high degree of competition participants make clear that they

210
Thurow [1997).
 91

"rather go for patenting, since we have to make our own position sure against the
one of the competitors". Large firms more than small and medium sized
enterprises and institutes, confirm that patents, aside from being a tool to defend
one's own technology, are also used as a means to attack and to injure
competitors211. Those firms in the sample that are involved in genetics are facing
markets packed with patents. In genetics products are often only produced if and
because they have been patented before. Consequently, patents have a key role
there.

Some firms contested that there is only a very low number of filed patents (about
one fourth) which will be of an economic interest later on. Therefore, there is only
a low direct return from patenting, however they confirmed that the overall
patenting portfolio is important for trading, licensing and the general
establishment of a stronger negotiation position against competitors but also
universities! The larger number of the interviewed sample members include
patents already at a very early stage into the project planing process, which is also
demanded by their marketing department. Also at Universities -however, there not
always- future market and patenting potential of a research project have to be
indicated before the start up. This includes a careful prior search of the
technological field and in how far it is already extensively patented. Especially for
pharmaceuticals and genetic products the market potential and patenting potential
are very important.

The questionnaire asked also in how far participants consider an adequate patent
protection important in regard to their foreign direct investment, the trading of
deliverables and e.g. the foundation ofa company.

211
According to another survey 89 % of respondents (out of 360) cite protection of
intellectual property as the key reason for filing patents and 10% blocking a
competitor's product development. Derwent [1998] finding 6.
92

Haly
total
Nethel1ands
institutes
Uniled Kingdom '!
large firms
Spain
medilJ'll firms
Gennany

lolal small firms

2 3 4 5 2 3 4 5

o Foundation of a company _ trading of deti-.erables 0 FDI

Figure 18: FDI, foundation of a company, trading and patents

For all three economic activities, the foundation of a company, the trading of
deliverables and for investment abroad patent protection is important, which is
expressed by score average values of over 4. The positive correlation is slightly
stronger in the UK and in Germany, whereas for the Spanish participants, the
foundation of a company is not so much related with patent protection than
elsewhere. Highest importance is attributed from UK firms. The size of the firms
does not seem to be relevant for the evaluation of the three factors and their
relation to patenting.

6.3.3.3 Patenting versus Secrecy

Survey participants were asked which percentage of their patentable inventions

they would prefer to keep secret than to patent. The results are included in figure
19, with secrecy rates, ranging from 6,1 % for institutes up to 30 % for SMEs, 15
% for the United Kingdom and 22 % for Italy_So, small firms seem to keep more
secret than large ones and Italian participants more than those from other nations.
The low secrecy rate of research institutes could be an expression of their inferior
economic incentive in management of intellectual property. A low average
secrecy rate of 18 % confirmed the strong use of patenting in the biotechnology
industry.
 93

35 u
30 -
25 .- 1-
20 r-
.~
r-
15 ,- _ r- _

10
5
o D.

Figure 19: Secrecy in % of patentable inventions

For process inventions secrecy is usually higher than for product inventions. Some
inventions are by nature rather technical and can easily be copied or circumvented.
The long period between filing and the real patent protection, one weakness of the
patent system, is also one reason to keep it secret. In particular SMEs often find it
hard to cope with costs of applying for patent protection.

6.3.3.4 Infringement

Participants were also asked, if they faced already an infringement with patents.
Some 41 % of the interviewed confirmed this. Large firms with 68% are much
more involved in infringement situations than small ones (19%), the same is true
for institutes with 20%. In the UK (45%) and in the Netherlands (50%)
participants are more involved in infringement situations than in other countries.

6.3.3.5 Research Collaboration and Patenting

The general degree of research collaboration in the sample with 86% is very high.
Large firms (98%) collaborate more than small firms (75%) and the UK with 95%
co-operating firms is leading in the cross-country comparison. Most participants
indicate that they do not face any specific difficulties with the intellectual property
from their collaborative research. Nevertheless, the general recommendation is:
First contract, than patent! Contracting is usually already carried out by standard
agreements. Some firms indicate that the laws relating to joint ownership would
still vary to a too great extent between countries (e.g. in the USA co-authorship
does not require the permission of the other party for licensing, whereas in the UK
the approval is needed). In general firms prefer that ownership resides in a single
part.
94

The interviewed fInns showed no severe diffIculties with the common intellectual
property coming from joint research, apart of cases where contracts were
incomplete. The establishment of a patent flle can be diffIcult in the way that it has
to be clarifIed, who contributed in which way and to which amount to the
invention, especially with inventions that came up unexpected. Inventions
inherently are not to foresee and thus results of research keep an element of
insecurity. Finns often found it diffIcult to co-operate with Universities and public
research institutes. In general the public institutions lack of fInancial resources and
personal, especially when it comes to the exploitation of inventions, whereas
private fInns' prior interest is the exploitation of the inventions.

6.3.4 Route of Application

Participants in the survey were asked about how many patent applications they
flled with their national offIce, the European office, the PCT way or direct other
applications at different national offices than their local national one during the
last year. The result is given in fIgure 20.

total €~~~~~~=~§~~~~

large firms

medium firms

smail firms
o national way
• European way
Italy
OPCTway
Netherlands
• other national way
United Kingdom

spain~~~~~~l
Germany ~
0% 20% 40% 60% 80% 100%

Figure 20: Way ofappiication

The mentioned routines are not exact alternatives since PCT and the present
European way of application both end up in national patents. Therefore,
interpretations have to be done with care. However, the matter here is to see the
preferences with the way of application and the desired scope of protection offered
by the different routines. The great part of priority applications is flled via the
corresponding national offices (see also point 6.3.4.3 below). Gennany Italy and
Spain show the highest percentage of direct national applications and in general
small fInns (51 %) and institutes (47%) use the national system, more than large
fInns. Those make more use of the international ways of application, i.e. the
 95

European but especially the PCT way. UK and Dutch firms on the contrary make
a lot use of the PCT system as well as research institutes. Figure 20 shows also
that naturally, for economic reasons, especially larger firms opt for direct
applications at other national offices.

6.3.4.1 International Patent Protection

Usually international patent application is reached via a national priority file

followed after one year of priority by a (Euro)-PCT application. The patent system
itself provides two different alternatives to apply for international patent
application. The first alternative is to file specific national applications abroad.
According to the Paris Convention, after twelve months of national priority, filing
further applications have to be handed in at the other offices, meaning that by this
time the corresponding translations have to be available. Following this route of
application, already after one year, the application costs, patent attorney fees and
national application fees have to be faced. Such expenses can reach 50.000 EURO
by that time (with a rule of thumb of2.500 EURO per country).

The second alternative is to file a PCT application after twelve months of priority
time. The PCT-route is divided into three main phases:

1. In phase 1 (1 sl_20th month) the applicant uses the priority period of one year.
The PCT file is then handed in at one national office or via the European
office. At the time when the PCT file is done, no translation is necessary.
Application fees are about 2.500 EURO. At the office, where the application
was filed a first examination will be done, including a literature search and a
first classification. This examination can already provide very interesting
information. Normally 18 months after the priority date the file is published.

2. In phase 2 (examination phase 20 th_30th months) after 20 months one has to

decide for a preliminary international examination report (ca. 1.000 EURO).
It provides an opinion on the patentability and already includes interesting
insights on the protection possibilities.

3. Then with the 30th month from filing, phase 3, the national phase, starts. By
then the application has to be transformed into the national rights. At this
time, all national application costs, translation costs and patent attorney fees
have to be paid.

6.3.4.2 Assessment ofthe Different Routes

Two ways to apply for international patent protection differ essentially with
respect to the time, when costs appear. With the first alternative, entire costs must
already be covered after 12 months whereas with alternative two, the essential part
of the expenses come after 30 months. One principal of the PCT system is
96

consequently, paying money for getting time of consideration212 • In addition, it

saves money. Assuming that one would have to pay approximately 50.000 EURO
(pharmaceutical product protected in 40-60 countries) after one year with direct
applications, alternative two would mean an interest rate saving for 18 months for
this amount. So, one has to decide between an extra fee of ca. 5.000 EURO for the
PCT application and the interest rate savings via PCT. Crucial with the PCT file is
the additional time of consideration, which gives time for product development
and for market search opportunities. In addition, direct applications after one year
carry the risk of filing for an application that does not have priority against another
yet unknown file, since publication is done after 18 months. This means that with
alternative one the entire amount of filing fees after one year (up to 50.000
EURO), might have been spent useless, if somebody else is keeping the priority
on a similar file. This cannot happen with PCT since prior files are disclosed at the
latest point of time after 18 months when no national fees have been paid yet.
Naturally SMEs are more reluctant to make use of the more expensive PCT file
but they should also take risk considerations into account.

6.3.4.3 Priority Applications

Priority applications are preferably filed via the national priority filing system.
The main reason are low national fees (e.g. in Germany: only 250 EURO for a
first file including the examination). In many countries e.g. in Italy, the UK, the
USA and France, national priority files are required by national law if the
invention was made on national territory. These rules also force foreigners to file
there when any local inventor is involved in the invention. Due to public safety
and defence reasons an authorisation for different filing has to be ask for. The
authorisation is usually to attain without great delay of time. These national
regulations are one reason for national priority files in addition to the familiarity
of locals with the national system. In several EPC countries, including Belgium,
Luxembourg, Italy, Switzerland and even the Netherlands the priority file does not
include an effective examination. It is worthwhile to think about, in how far in the
absence of the national requirements, priority filing couldn't be distributed in a
more efficient way, considering only, the national application fees, the availability
of a search report within the priority year and the language of filing.

Priority can also be obtained at zero costs for example with the European patent
application, if the application is filed without payment of the application and
search fees. This way, the application is considered to be withdrawn, but
maintains a valid priority date according to the Paris Convention. The same

212
Additional time of consideration and proving is crucial, for example with
pharmaceuticals. There pre-clinical (in vivo) tests need time and might come up with
unexpected results! Therefore it is important to pay the greater part of costs as late as
possible.
 97

procedure works at some national offices (the Danish patent office e.g.). Firms
achieve in the described way priority files at zero costs before taking international
protection into consideration after one year.

Priority application numbers in genetic engineering in the different offices in

Germany, Holland, Italy and Spain can be seen in table 4 (An example on how to
interpret the table is: out of3142 priority files in Germany, 78 have also been filed
as a priority application in Japan. The table does not tell the origin of the patent
assignee, so that the 78 files can either be German priority files in Japan or
Japanese priority files in Germany). It gives lin idea, in which country national
priority applications are considered to be in addition important or relevant.
Throughout the whole sample Japan, the USA the European office, Great Britain,
France and Germany priority providing peT files are important. Dutch applicants
often use the Belgian office or vice versa. In general, most participants of the
survey (Spanish, in particular the British and also the German ones) confirm that
they use their national patent system to a great extent for priority applications
(compare the bold numbers in table 4).

Table 4: Direct priority files in genetic engineering (pCT=CI2N) at other offices during
1985-1998. Source: Derwent World Patents Index, own search (country codes: see
appendix IV).

Priority iDE JP pS EP GB FR WO CA NL AU iBE ~ ZA SU ES ~ T

offices

Germany 3142 78 70 56 42 32 23 14 1" 8 8 S , 5 3 2

Holland 13 14 5 11 10 4 272 1 5 1 3 2

taly I 3 6 3 _2 2 '1 '1 1 '1 382

Spain 3 Ie 16 S 8 5 5 4 2 1 2 9 22'1

6.3.4.4 Direct Files at the United States Patent and Trademark Office

For biotechnological products the USA are the most important market and major
partners and clients of firms are to find there (compare figure 13). This is one
reason why some firms prefer to file for priority in the United States. Especially
for genetic patent applications, patentability requirements are still favourable in
the United States and several biotechnological inventions are not patentable in
Europe but in the USA. Normal US filing is expensive with $790 (in 1998), but
the special prior art rules (Art 102 (b)-(e» provide firms with a good system of
provisional applications at only $1 SO, which has to be replaced by a normal filing
within 12 months. The expertise in genetic engineering is excellent at the USPTO
and according to the interviewed firms, officers are more service oriented, flexible
98

and easier to approach (''we get English corrections, we can discuss details at the
telephone" attitude of the examiners: "It is my job to get you a patent"). In order
to avoid difficulties between the fIrst to invent and fIrst to fIle system European
fIrms that choose for a US priority application frequently combine it with a
priority application in a European country.

6.3.4.5 Direct Files in Other Countries

Some countries are not member of the Patent Co-operation Treaty, like Argentina,
India (since Dec. 1998 PCT member), Thailand, Taiwan, Pakistan, Malaysia,
Chile, Peru, Columbia and Venezuela. In these countries direct applications are
necessary. A product market limited to very few countries (e.g. fIshery industry,
fIlm production industry, for companies producing seed potatoes) is another
reason for direct fIles abroad. Countries frequently mentioned in the survey for
direct fIles are: Canada, Brazil, India, China and Indonesia. Remarkable in this
respect is that developing countries are usually not important for such
considerations.

Selecting countries by the relevant market, or the location of main competitors

fIrms build· up standard lists of countries where they seek protection for
inventions. Large fIrms set up an internal committee, consisting of expert from the
research, sales, marketing and patent departments. This committee decides within
the fIrst priority year on the expansion and further international scope of a priority
application. Each fIle costs a considerable amount of money213, which is why
decisions are basically drawn on the basis of pure economic terms.

International research is mainly worked out and written down in English. This can
also be a reason to apply for priority at an office, where no translation is necessary
instead of the local national office. In doing this, translation costs for the priority
fIle are saved. Especially the European office is predestined for such fIles, since
applications can there be fIled in one of the three official languages, English,
German or French.

213
Compare Grupp [1999] page 81.
 99

6.3.4.6 Patent Family Development

Table 5: Development of patent families (pCT=CI2N) in Gennany, Holland, Italy,

and Spain during 1985-1998. Source: Derwent World Patents Index, own
search (country codes: see appendix IV).
Germany· Holland Italy Spain
(3142) (272) (382) (227)
DE 2788 70 108 29
EP 2052 175 232 76
JP 1661 143 174 47
US 999 88 128 35
WO 893 82 99 61
AU 597 59 95 35
ZA 378 32 41 20
CA 372 19 45 15
FI 212 12 10 6
HU 174 14 16 6
NO 172 10 13 6
NZ 98 8 II
ES 94 II 14 210
KR 83 8 6
GD 82 14 20 7
SU 72 7
DR 71 13 8
CN 70 14
IE 67 3
FR 58 9 20 10
DK 44 6
NL 193 5
IT 251 7

Most of the priority files are going to be transferred into European patents, as well
as into Japanese and US-files. European patents cover the European countries,
which is why for example there are rarely direct patent files from Germany in the
Netherlands. Table 5 shows how patent families emerge from priority files. The
table describes the further development of priority files, where, to which country
priority files are expanded after one year, where relevant markets are and where
competitors are located. The high numbers for Australia (AU), South Africa (ZA),
Canada (CA) and Hungary (HU) are remarkable.
100

6.3.5 Expenditures Related to Patenting

" ... the lifetime cost of maintaining world-wide coverage for a single patent ... is
in the region of $250.000.,,214

The survey confirmed the expectation that the relevance of patenting related costs
decreases with the firm size. Firms were asked to what extent administrational
costs related to patenting (procedural costs patent attorney etc, annual renewal fees
etc, litigation costs) were relevant in making their decision to apply for patent
protection. Costs are, in general, of highest importance for smaller firms, whereas
larger firms naturally care less about these factors. In the sample, Italian firms pay
more attention to the costs of patenting, in particular to litigation costs, whereas in
the United Kingdom costs are obviously of minor importance when making the
decision to apply for a patent. The interviewed firms informed that they spend
between 0,03 and 0,3 % of their total annual turnover on patent protection.

10111

I
..
-
IIIr
Inslilules

'orge
complnfes
u.otvom
medium
firms -.
Imoll firms Qmwy

1 2 3 4 5
,
not relevant very relevant

Figure 21 : Patenting related costs and their relevance for filing patents

In general, all the administrational costs are secondary in comparison to the high
amount that is spent for patent attorneys and for translations215. National priority
application fees, including examination, range in Europe between 250 EURO in
Germany and about 3.000 EURO in the Netherlands. These costs can already be
too high for SMEs but in general, fees are no obstacles to apply for patents, at
least not for the national priority file 216 .Litigation costs can be very high,
especially in the United States. Costs for litigation cannot be considered at the
time of the decision to patent. European firms usually assume that they will not

214
Derwent [1999] page 65.
215
According' to an evaluation of Straus, average cost of a European Patent with 8
designations cover 22% external patent attorney costs and 33% translation costs.
Straus [1997] page 33.
216
With a file for only DEM 100 a priority claim is established at the German Office.
 101

get into infringement and in praxis indeed those cases are rare in comparison to
the United States.

Costs for international applications, especially when a patent gets into the national
phase of the PCT routine are tremendous. Hence firms tend to find ways in order
to reduce these costs, like in the following described:

After 18 years the patent claim is withdrawn by simply not paying the Iljk
yearly fee. The patent office sends off a reminder letter after a period of 6
months with an additional fee of 10%. Until the status of expiry is in the
databases, 19,75 years will have passed Thus the public (including
competitors!) become aware ofthe dropped patent more or less after the full
length patent protection period of 20 years. The firm however, saves the
expensive patent fee (Eurol,OOO per country for maybe 10 countries). In the
case of large firms with many patents per year strategies such as this can
save a huge amount ofmoney overall.

6.3.6 Strategic Reasons for Patenting

"Even within the domain of patenting, there are almost infinite variations of patent
strategy: what to protect and when, where to file, how to improve competitive
position, etc.,,217

Most firms in the sample confirmed that strategic patenting considerations are part
of their patent portfolio management. This is not limited only to large firms.
Biotechnology SMEs, which are more restrained by their economic resources, also
use strategic patenting in order to achieve competitive advantages without
expending too many of their own resources. In a way, small companies depend
even more on patenting than larger ones, since often their patent portfolio is the
only economic asset they have. In this way patents are much more important to
them than to large companies, even though of course they are more restrained by
economic scarcity to file patents. The firms and institutes contacted were asked
about their coherent patenting strategy and if they practice ways of patenting that
are more aimed at hindering competitors than protecting their own inventions.
Universities and research institutes refused to practice strategic ways of patenting.
Companies, however, are not reluctant even though some are in general not very
convinced by patenting as a means of protection.

The outcome of another survey was that 89 per cent of the survey respondents
agree that monitoring the patents of competitors is an effective way of obtaining

217 European Commission [1999] page 20.

102

competitive intelligence218 • The first prerequisite of strategic patenting is the

active observation of competitors' patenting portfolios, which is already necessary
in order to identifY market niches and to place products in the right place in the
market. Patents can be divided into three different categories:

1. Patents to make money: These patents are for licensing and the aim is to
exploit them as far as possible for economic reasons. These positive value
patents include, for example, gene patents when they are associated with the
cure of a disease.

2. Negative patents: These are purely defensive patents. They intend to hinder
competitors entering the market or to block competitors' technology. An
example would be technology patents, in the case where the business of the
company is not technology, but the assignee wants to make sure that he/she
can have this technology freely at on his own disposal.

3. Swap patents: With these patents the assignee moves into a better negotiating
position against competitors. E.g. EST (expressed sequence tags) patents.

The flrst kind of patent aims mainly to protect ones own inventions, whereas the
second and third categories are patents that protect the associated technological
area. Safeguarding the associated area can be done by patenting all possible
varieties of one original invention. Examples are patents on all possible mixtures
of highly efficient chemical substances. Another example from the survey was a
fum working in the fleld of colour-modifled flowers. For them it is very important
to patent the entire production process, so the flrm attempts to acquire as many
patents as possible for one product. As a result, competitors have to approach this
flrm and request licensing whenever they want to produce something in this area.
Another similar strategy followed by large pharmaceutical companies is to patent
in general as much as possible in one technological fleld. The intention is to
occupy an entire technological fleld, even though single patents may not be of
interest ("blocking scenario") 219. Such behaviour makes the technological fleld
unattractive for any potential market entrant. In fact, this is strongly recommended
by experts, since otherwise flrms will be locked out of future technological
development by their competitors22o • Indeed there are serious concerns about over-
patenting and its negative effects in particular on the biotechnology industry.
Heller and Eisenberg are warning of too much biotechnological patenting, its

218 Derwent, [1998] finding 10.

219 In an DECD study this is called a "blocking scenario", where the assignee has no
interest in working in the area covered by these patents. Compare DECD [1997] page
30.
220 Abraham [1998] page 204.
 103

deterrent effect of high transaction costs and the resulting "under-use" of patented
biotechnological information221 •

If an inventor does not also protect the associated area of an invention this is done
by any competitors who takes the initiative and places a patent into the
technological niche. Hence, for an inventor protection becomes an economic need.
This also explains the difference between defensive and offensive patenting
strategies. The first inventor acts in a defensive way when he tries to safeguard his
own technology. The second, intervening competitor is actively attacking the
original inventor's independent position, even though at the beginning his
behavior does not provide him with an economic benefit. In the above example of
a chemical substance, the substance could be elaborated further by a competitor by
mixing it with other substances. An expert in the field will observe economically
useful mixtures and will file a patent on such a mixture. If this is done by a
competitor and not the original inventor, the inventor will depend on a secondary
patent. Conditions for cross licensing would be established and, even though the
competitor could not make any direct use of his patent, it would at least disturb the
original inventor and place the competitor in a favorable negotiating position. The
latter behavior is a kind of "gap management", which assumes the active control
by the patenting portfolio of the competitor and looks for niches in which to place
a patent (a "desk patent" put somewhere in the neighborhood of a first "inventive"
patent). Against such practices, firms list all compounds and possible mixtures in
the patent specifications annexed to their patent application in order to block them
against third parties222 • This establishes also dependency between competitors,
provides the firm with a better negotiation position and gives reason for cross-
licensing. An example would be a combination therapy for AIDS. In this case, the
virus cannot be combated in an efficient way with single therapies, but, with the
right combination of therapies. Hence, a patent application on a therapy would
designate all the competitor's inventions (therapies).

The case where a basic technology is already patented and a competitor intends to
obtain as many patents as possible on secondary applications of this technology,
so that the first patent owner finds himlherself in a dependent position is an
example for a more aggressive way of swap patenting. Another example from the
survey is the case where a firm invented a new drug for treating cancer and a
competitor patented any combination of anti-cancer compounds, useful and non-
useful ones, independently of whether there is a synergistic effect or not. This
competitor could build up a large patent portfolio without any evidence to support

221
In reference to the classic economic metaphor of the ''tragedy of the commons",
Heller and Eisenberg call the deterrent effect of too much patenting and the following
under-use of scarce resources ''the tragedy of the anticommons" Heller, Eisenberg
[1998].
222
One difficulty in such kind of patenting activities is the late disclosure after 18
months.
104

the development of any of his proposed inventions into a marketable product. This
is especially true since patenting itself does not necessarily mean to bring a
product successfully into the market.

6.3.7 Harmonisation Issues

The interviewed intellectual property experts from the industry were asked their
opinion about the importance of a stronger and/or more harmonized patent
protection in Europe and on a world-wide level. Both, stronger protection and a
more harmonized patent system in Europe- and worldwide are very much
welcomed. Firms emphasise that the harmonisation between the US and the
European legal system, to overcome the differences between the first to file and
the US first to invent system, is one urgent task for further harmonisation on a
world-wide level. Only in the very far future, one could think about "world patent
rights", "[f]or the foreseeable future, however, we will have the present system of
national rights, with some "regional" systems,,223.

-
_11m.
...
ICUI

'-go ....
ICUI

iIoltl.(.

1oIVo ....
.-.. ....

-- -"""
--
0I1III limo

bIy bIy

lhIodKrpn UMed~

S,*, 51*'
Gonn.Iy Gonn.Iy

3
• 5 2 3
•
atlormonoo_E_. _ _
not Imponant very Important

Figure 22: International protection and harmonisation

Certainly, also a coherent legal patenting framework for Europe in the form of a
community patent would be welcomed very much224. Worries about a European
patent mostly refer to the translation into all community languages and the related ·
high costs for such a community wide form of protection. A reasonable price for a
community patent would be the maximum price of two to three national
applications. Firms argue that the three procedural languages of the European

223
European Commission, (1999) page 37.
224
For a comprising overview on the discussion around the community patent see:
European Commission (1997).
 105

patent office, English, French and German were sufficient; "Why should there be
a translation into Greek?".

6.3. 7.1 The Role a/National Patent Offices

National patents supply an element of choice, they maintain competition and

enhance the offered service. Limited national markets are still important, in
particular for the smaller fmns. For biotechnological fmns, however, the market is
first of all an international one. International patent protection is needed and with
the ongoing harmonisation process, the role of national European offices has to be
redefined.

%
60
50
40
30
20
10

ii
0
j ! B f
I I
oS;
I
j ~ !
Ii.. !2
.! t
Figure 23: Answers from the industry survey to the question: "Do you see any reason for
maintaining the present ditTerentiated patent system in Europe?" Answer:
yes; ditTerentiation by type of firms/institutes and origin of firms

Only 31 % of the interviewed corporations believe that there is a reason to

maintain the present differentiated European patent system (national, European,
peT) in the long run225 • In contrast, large fmns and especially firms from the UK
support the differentiated system with around SO % (figure 23). Reasons to
maintain the national offices are mentioned to be the following:

Firstly, national offices are indispensable for small and medium sized enterprises
that are happy with the geographic scope of protection for one national market.
The second reason is the quick, cheap and high quality examination provided by
some national offices like the German one. This service could even be improved

225
Of course also national offices are concerned about their future, especially with
respect to the employment of their statT and their adequate technical performance. See
European Commission [1999], II page 23.
106

over the last years due to the shift of workload from the national offices to the
European office. This is especially striking - mentioned by many participating
firms- in comparison with the excellent service provided by the USPTO. Probably,
in the long run national offices will become IPR centres of the European Patent
office. These centres will have the advantages of locality, of the national language
and their ability to carry out tasks in appropriate ways to their local circumstances.
Such of course assumes that there will be a good working community patent at a
reasonable price available. The ideal would be, to have a good and cheap
community patent in one language which could be filed on a provisional base at
one of the national offices in the national language.

6.3.7.2 Parallel Importation

Parallel importation posed the question, in how far EU member states can prevent
on the basis of an industrial property right the importation of goods from a second
member state. This was especially a problem with pharmaceuticals, where even
for small price differences it is worthwhile to transport goods from one country to
another. In a couple of European court decisions226 the principle of free movement
of goods was put higher than national patent rights and the possibility of restrain
on the basis of patent rights was refused. This was in particular a problem with
Spain and with Portugal, where at the time of their EU accession no chemical
compounds could be patented per se and therefore other member countries could
for a period of four years until October 1996 stop parallel imports by national
patent rights.

6.3.7.3 European Patent Court

In Europe financial losses due to inadequate patent protection are rare, but used to
be a problem until recently when pharmaceuticals were not prosecutable under
patent law in Spain (until 1996) in Greece (until 1995), in Portugal (until 1995)
and in Italy (until 1987). Nowadays, this is not a problem any more, but the court
procedures are still not harmonised and difficulties with patents in Europe arise
more on the side of their enforcement. Often, national regional judges lack
competence in patenting (In one example in the survey the patent infringement
before a Greek court was one case amongst 40 other cases for a regional judge in
one morning). Less experienced regional courts find it difficult to deal with the
essentially technical matters of patent infringement cases and court procedures
taking too much time are criticised (in Italy the judgement can last up to several
years). A possibility to select the court system in Europe is considered to be a
bonus. However, with respect to further harmonisation it would be better to have a
unique European litigation and enforcement system, meaning the establishment of

226
E.g. case 15/74 Centrafarm v. Sterling Drug (1974) 1 and case 187/80 Merck v.
Stephar (198) 3 CMLR 463 ( European Court of Justice).
 107

a European patenting court. The phenomena of "not-invented-here", the different

treatment of local and foreign patents by national authorities is hard to avoid as
long as there are no responsible international bodies, like a European patent court
of first instance. Such a pan-European court of appeal should certainly be
independent of the patent offices.

6.3.7.4 Grace Period

According to the first to invent system in the United States novelty requires that an
invention must not have been in public use or on sale, or patented or described in a
printed publication anywhere more than one year before the US filing date (35
USC 102 (b». This provides the assignee with a period of grace of one year. A
grace period gives time to find out market possibilities. At Universities, e.g., it is
often a problem that inventions loose novelty due to prior publication. Therefore,
universities, research institutes and firms collaborating with public institutes
demand the introduction of a general grace period in Europe similar to the one in
the United States. One reason for the difficulties at universities is that within
research, publications are more important for· the academic career than filed patent
applications and frequently university staff is under pressure to publish at the
earliest possible time. Often academics are uninformed about how to apply for
patent protection and they are unaware about the degree of the economic
consequences of their behaviour, or they consider publishing to be a more
important marketing tool.

The introduction of a general grace period receives a lot of criticism from

industry. The reasons are often bad experiences with the grace period in the
United States. The introduction of a grace period would shift the European first to
file system towards the US first to invent system. The proof of prior invention is
very cumbersome, produces .high legal uncertainties227 and leads to more
interference procedures. Laboratory notebooks are a necessity with a grace period,
meaning an additional administrative burden. Industry confirms that certainty is
very important for their business and that with a grace period, one is never sure
about novelty. An additional difficulty is that with a grace period publications
would be less accepted as "state of the art" for technology, as not yet disclosed
underlying patent files could destroy novelty.

The pressure on universities to publish is actually not so drastic, since publications

in scientific journals usually take several months, which provides with plenty of
time to file a patent. The difficulty of universities seems to be more an internal
educational problem, of how to introduce an adequate intellectual property
awareness at publicly funded corporations.

227
See e.g. Grupp (1999) page 65.
108

6.3.7.5 Provisional Applications and Other Improvements

Provisional applications in the United States allow applicants to file for $150
without the necessity of a claim. The provisional application has to be replaced by
a nonnal filing within 12 months. It provides similar advantages like a general
grace period but avoid its difficulties. Provisional applications proved to be very
effective in the United States and they could also be a great asset in a European
patent system. A provisional patent application would enable to deposit a
scientific paper containing an invention without setting the wording of a claim.
The file is not going to be examined but can be transfonned within one year into a
regular patent application. This is a very cheap way to establish priority. Often
people do not like it, because the applicant has to be a professional in order to now
what the anticipated patent will be and to claim the file in the right way.

Another possible improvement of the European patent system, worth thinking

about, is the introduction of the small entity status, where small enterprises with
less than 500 people would pay e.g. half of the filing fees. Also, the introduction
of a litigation-insurance for patent infringement suits could be a further
improvemene28 •

One specific problem of PCT applications is a tax for each page in excess of 30
pages for PCT files. Genomic patents can go up to 3.000 pages or more for
sequence listing. Thus, these costs can reach an amount where they prevent finns
from patenting. It would be much better to provide all infonnationin an electronic
fonn improving thereby also the general search possibilities.

6.3.7.6 The New Directive on Legal Protection o/Biotechnological Inventions

Single Market Commissioner Mario Monti introduced the directive on legal

protection of biotechnological inventions (98/44IEC) before the European
Parliament229 in the following way:

"The Competitiveness of Community industry is at stake, as

biotechnology is increasingly important and can give rise to major
employment opportunities ... We found the right balance between
economic requirements and sensitivity to ethical issues".

The survey for this study confinned that the European biotechnology directive on
the legal protection of biotechnological inventions is welcomed very much from
private companies and public institutes. However, the participants evaluate the
overall economic influence of the new directive on European biotechnology's
global position, especially in comparison with the United States and Japan,

228 European Commission (1999) page 46.

229 http://europa.eu.intlcommJdgI5/eniintprop/654.htm
 109

moderately. Large firms are in this respect more optimistic than smaller ones.
However, 74% of the interviewed corporations perceive that there is a further need
for harmonisation of the different ways to apply for patent protection in Europe.
According to the participants the simple guiding rule for further harmonisation
should be: "cheaper-faster-simpler".

In order to scrutinise criticism, the interviewed firms were asked, in how far they
support the nullity suit of the Dutch government against the new directive for
reasons of non-compliance with the principle of subsidiarity, the violation of
fundamental human rights and the contradiction with international treaties. A high
percentage of the participants (22%) did not answer this question. Another 69%
disagree with the initiative of the Dutch Government and only 9% are in favour of
it. Many participants make clear that in their opinion, the patent system is not the
right forum for raising issues of human rights. These and other political
considerations should only be debated and acted separately from any discussion
on regulation rules related to patents. A negative effect of such debate would e.g.
be the creation of further uncertainty about the protection of biotechnological
inventions in Europe. Survey participants were asked in how far they were in
favour of special innovations for the protection of biotechnological inventions
estbalished by the new directive:

• Article 2: The general patentability of biotechnological material (material

containing genetic information that could also have been existing in nature
before).

• Article 4,2: Patenting of plant and animal varieties and essential

biotechnological procedures for the breeding of plants and animals.

• Article 5,2: Patenting of isolated parts of the human body, if the isolated
elements of the human body are produced by means of a technical process.

• Article 11: The "farmers privilege" of Article 11 -farmers may use the
offsprings of transgenic stocks without paying any royalties.

• Article 2 and 5 establish the patentability of nucleotide sequences that are

derived from genetic research and isolated from the human body.
110

Artielo 2 and
5
--
Artielo "
• to4al

ons-I!ii!i:;
Artielo 5.2 OIar""lir"..
• rredtum I~"..
[J ..... lIir"..
AI1IC1042

AI1ICIo 2

5 3 5

nOI in favour much in favour

Figure 24: Special regulations by Dir (98/44/EC)

The different regulations of the directive received diverse feedback from the
industry. Most regulations find in general support, where Article 2 (the general
patentability of biotechnological material, that is material containing genetic
infonnation which could also have been existing in nature before) receives support
from larger finns. Smaller finns are more restraint against Article 4.2 (patenting of
plant and animal varieties and essential biotechnological procedures for the
breeding of plants and animals), but large finns and UK finns support this
regulation. Especially Gennan finns support the patentability of nucleotide
sequences regulated in Article 2 and 5. The patentability of isolated parts of the
human body, if the isolated elements of the human body are produced by means of
a technical process in Article 5.2 is vaguely supported if not opposed e.g. by the
participants from Italy.

6.3.7.7 Article 11: The Farmers' Privilege

The farmers' privilege in article 11 of the biotechnology directive (98/44/EC)

allows farmers to use offsprings of transgenic stocks without paying royalties.
Most participants in the survey oppose to a more or less stronger degree (in
particular the UK participants in the survey) this privilege. They argue that it
would result in a serious disadvantage for European farmers themselves, if plant
breeders loose their interest in making plants more resistant against diseases etc.
The farmer's privilege would also ignore today's farming reality, where the small
farmers disappear more and more and the agricultural food market is dominated
by large industry-like farms.
 111

6.3.8 Patentability

Some 55 percent of the survey participants believe that there are still specific
disadvantages of the existing patent system for biotechnological inventions. UK
and Dutch firms criticised the system, whereas Spanish and German firms showed
less concerned about this topic. Firms worry in particular, about too many
exclusions from patentability under patent right, especially for ethical reasons.

6.3.8.1 The Exclusions by Art 53 b EPC

In the United States any "life form is patentable provided that human technical
intervention is required in its production,,23o. The only exception are human
beings. According to Art. 53 b EPC plant and aniinal varieties are not patentable
in countries belonging to the European patent convention. Most interviewed
would like to see those exceptions in Art 53 b in the European Patent Convention
to vanish. The general criteria of what is patentable should be applied and
decisions have to be drawn on a case by case basis.

6.3.8.2 Animal Varieties

In the United States the first transgenic animal patent was issued in 1988 with the
"onco-mouse", a genetically manipulated mouse, being highly sensible for cancer.
The same patent application lead to controversy at the European Patent Office.
The Examining Division weighted here in reference to Art 53 (a) EPC the possible
suffering of animals against the possible benefit to humanity. A fmal decision is
outset for the time being and probably waiting for the implementation of the
Biotechnology Patenting Directive (Dir 98/44/EC). Participants in the survey
argue that in difference to plant breeders rights the creation of transgenic animals
is a repeatable technical procedure. They make clear, that especially inventions
with animal varieties are easily to circumvent, which is one reason why they
search at least for protection in the United States. Special regional regulations are
increasing the difficulties firms have to face with the creation of transgenic
animals, like in the Bask country where the purchase of transgenic products/foods
is forbidden by the regional government. The new European biotechnology
directive would overcome the general exclusion of animal varieties from
patentability, but one has to wait for its final implementation until July 2000 and
for accompanying judgement.

6.3.8.3 Plant Varieties

In the history of the European patent office several objections were made against
the patentability of plant varieties. Until 1995 Article 35 (b) was not applied to

230 Grupp (1999) page 252.

112

plants which did not meet the profile of a variety and belonged to a classification
unit taxonomically higher than that of a variety. In 1995, the board of appeal of
the European Patent Office decided on the Plant Genetic Systems (pGSi31 case
that plants per se were no longer considered to be patentable. In the Novartis
decision 232(1998), the court of appeal reaffirmed this decision. However, the
definite legal position is complicated to overview and gives reason for confusion:
"We claimed for protection in Europe, but here probably due to the Novartis case,
they are all stored and we are still waiting for the answers from the EPO". From
countries with special plant breeder rights participants did not claim particular
difficulties with the protection of their plant varieties, but were in general, in
favour of patentability as an additional bonus. The new directive for
biotechnological inventions comes somehow back to the old jurisprudence by the
EPO when it says that plant and animal varieties are patentable if ''the application
of the invention is not technically confined to a particular plant or animal variety".
Nevertheless, advocates from both industry and academia, continue demanding
the abolishment of Article 53 (b) EPC233 •

6.3.8.4 Nucleotide Sequences

Are nucleotide sequences an invention or a discovery? This issue is no longer a

matter of discussion, neither by the US patent office, nor by the European office,
since patents on gene sequences are common practice. The single cases underlie,
of course, the general examination on patentability by the offices. For a layman it
is not easy to understand why a gene sequence that already existed in nature
before is patentable and thus not considered to be a discovery. Patenting experts
from the sample that are not explicitly working in the field of genetic engineering
also showed their doubts about the patentability of gene sequences. Two concerns
come up. Firstly, the pre-existence in nature of gene sequences: "Isn't identifying
gene sequences just like reading a book?" Secondly, the question of what exactly
is the inventive step here, especially taking into consideration that there are
already machines doing the work of identifying gene sequences. The first
objection has been regulated for chemical substances in a positive way for a long
time. The latter could be a future motive to rethink patentability of gene
sequences, when the effort of identification might be very reduced by improved
sequencing machines.

Gene sequences are treated by the patent offices in a similar way as naturally
occurring substances. If those are present as components of complex mixtures of
natural origin they are in principle patentable once they are isolated, identified and
made practically available together with a process to develop them and the

231 Technical Board of Appeal, 1995, (T 356/93).

232 T 1054/96 (OJ 1997,551) Novartis.
233 E~g. Van Overwalle (1999).
 113

implication of a useful purpose234 . Thus, the official position is, that a gene in
nature is not patentable, but when the gene is isolated and made available for a
practical industrial or other purpose, then it is patentabel. Hence, the invention lies
in its use. Patentability of gene sequences is also justified by the tremendous effort
spent in its identification: "Identifying genes is never a routine". The full sequence
is present in nature, but it has never been in the public domain before. The
interviewed practitioners explain that scientists have to work very hard in order to
isolate sequences and to link the full sequence to a utility. It is hard to exclude
gene sequences in general from patentability. This would be an unjustified
exception within patent law. Decisions may be taken case by case, applying the
general criteria of patentability. On the one side, a better public promotion of legal
reasoning is required in order to avoid misinterpretations. On the other side,
should patent offices take the significance and the heavy loaded future
responsibility ofthe topic into consideration for their decisions.

6.3.8.5 Expressed Sequence Tags (ESTs)

ESTs (expressed sequence tags, mixture of fragments of DNA), are patentable at

the US patent office. Frequently, this is possible without the clear indication of the
usefulness of the partial gene sequence. The European patent office is reluctant to
patent ESTs. Most participants in the survey agree, that ESTs should not be
patentable, since they do not meet the criteria of patentability, in particular not the
industrial applicability criterion. Companies could isolate 10 to 20 ESTs every day
and patent them. This would result in an abuse of the patent system. Of course
there are some ESTs that are highly applicable, where it would be justified to
grant patents according to what is the technical defmition of a patent. Also the
relationship between ESTs and a full sequence gene could cause difficulties. What
if a full length gene depends on a formerly filed EST patent? Complicated
licensing issues arise and there are some indications that the USPTO already has
to face such kinds of difficulties with the correlation of full sequence genes and
patents on fractional parts on them. At the USPTO up to 10.000 ESTs are put in
one file, but only some of them are searched and examined. This establishes
"submarine patents,,235, patents only waiting for the appearance of an
economically relevant counterpart, where licensing could be established. Europe
would do good to avoid these kinds of difficulties for the future and continue to
exclude ESTs from patentability.

Nevertheless, industry complains that in Europe positions of principal are

frequently taken too early and they make it clear that they would prefer the more
pragmatic approach of the United States. Such would greatly prevent the delays

234 Crespi (1998) page 4.

235 This is a USA specific issue, since there patents can be kept pending almost
indefinitely without publication.
114

that come up in Europe in respect to patentability. Consequently, the general

exclusion of ESTs from patentability also has to be avoided, the normal rules of
patentability should be applied and decisions should be taken on a case by case
basis.

6.3.9 Remove aU Ethical Issues from Patentability?

Respondents were asked to what extent they were in favour of the general
exclusions from patentability due to ethical and moral assessments in Article 6 of
the directive.

total

institutes

la rge firm;; • human beings

medium firm;;
o genetic identity
small firm;;
o human el'l'bryos
I
• germ line
II
NL.
o human reproductive
UK cloning

ES

DE

2 3 4 5
not in favour much in favour
Figure 25: Exclusions from patentability according to Dir (98/44IEC)

The exclusions from patentability due to ethical and moral assessments in Article
6 of the directive are on average greatly welcomed by all participants in the
survey. Nevertheless, many participants expressed objections against the
regulation of ethical issues within patent law. The general exception of patents
which are contrary to public morality ("ordre public") according to Art 53 a EPC,
the special regulations in Art 53 b EPC and the explicit exceptions of patentability
in the new European directive 98/44IEC in Article 6, were criticised.

Patents only provide a right to exclude from commercial use; they do not grant
positive rights of exploitation. This point was emphasised by the biotechnology
firms. It is not meaningful to obtain a patent on things that cannot be produced and
 115

purchased. Therefore, prohibition for ethical reasons should not be regulated

within patent law, but manifested somewhere else. Patents themselves do not
provide the right to use the invention; this is another question. Participants from
industry demand the restriction of the patent granting procedure to the technical
questions of novelty, inventive step and industrial applicability. It is not only that
ethical issues make the patent granting procedure more complicated, but also that
these are questions that should not be dealt with by patent administrations. It
would put too tremendous a strain on the patent examiners236 to handle ethical
questions within the examination. In addition, unjustified ethical exceptions would
put a further burden on local producers and place them in a less advantageous
position in comparison to their US competitors, who already flood the European
market with their genetically modified products.

It was suggested to place all the ethical questions and related value judgements in
the hands of national courts, or other responsible authorities in the individual
countries. Another idea would be to establish different monitoring systems outside
the patent law, meaning that patents conflicting with public morality could well be
granted according to patent law, but would not be enforced. Such controls could
be in the hands of an ethics committee or state agency responsible for product
control or the initiative could be left to any challenger. The legal grounds could
either be the constitution or special rights, such as animal rights, but always in the
hands of national courts or the establishment of a responsible European patent
court.

6.3.10 Major Findings ofthe Inquiry

6.3.10.1 By Country

Germany

Germany is the country with the highest number of returned questionnaires (28).
78% of the German members are SMEs. This could be the reason why the average
absolute number of patent applications is not so high in comparison to other
countries. Nevertheless, the German density of patenting is with 25 patents per
100 employees the highest. Germans in the sample use patenting moderately
(score: 3.1) and they are moderately satisfied by patenting (score: 3.6) but show a
high rate of secrecy for patentable inventions (22%). In the same way like the
other participants Germans indicate that patenting is very important for
biotechnology and they do not believe that patenting is an overcome relict from
the industrial era. Germans file their priority applications mostly at the national
German office. They do not have any special perception about the protection, nor

236 "Are EPO examiners to have courses in moral philosophy or theology? And if so, of
what variety?" Grupp [1999] page 258.
116

the harmonisation issues, but they welcome the new Europe-wide legislation.
They are on the one hand in particular in favour of the general patentability of
biotechnological material and of nucleotide sequences and on the other side
support very much the exclusion of patents for modifying the genetic identity of
animals.

Spain

The total number of Spanish patent applications (mean: 8) and their density of
patenting with 4 patents per 100 employees are very low in comparison to the
other sample countries. The Spanish corporations make use of patenting, they are
to some extent satisfied by the provided means of protection, but still show an
average secrecy rate of 20%. The Spanish members are the only ones that evaluate
the importance of patenting for biotechnology with a slightly lower score than the
overall mean value. Spanish participants are slightly indifferent about whether
patent protection is an overcome relict from a past industrial era. Spanish use the
national way of filing to a predominant degree in comparison to the international
ways of application. Nevertheless, only 20% of the Spanish participants are in
favour of the maintenance of the diversified legal system for patenting. Spanish
demand stronger patent protection in Europe and together with the other countries'
participants support the new European legislation on biotechnological patents.
They are somehow indifferent in their opinion against the patenting of isolated
parts of the human body and with the establishment of patentability of nucleotide
sequences. The Spanish sample opposes the farmers privilege in Article 11 and
they very much supported the exclusion from patenting of processes modifying
the germ line genetic identity of human beings by Article 6.

United Kingdom

The 20 British participants in the survey show an above average number of patent
applications and the lowest secrecy rate of 15% of the sample. They give the
clearest statement that they make use of patenting to a very high extent (4.9), with
even a score of 5 by British SMEs. Consequently UK participants are against the
statement that patenting would be an overcome relict of the industrial era.
Litigation, maintenance and application costs are not considered with high
importance for the decision to patent in the United Kingdom. For biotechnologica1
inventions UK participants give the highest score (5) for patents as an important
incentive system for research and development investments. The UK firms also
show the highest degree of collaboration with other firms (95%). British
corporations use the national patent system for priority filing and make less use of
direct European applications, but go to a great extent for international PCT
applications (40%). The modest use of European applications is accompanied by a
relatively small demand for further harmonisation and many responds (50%) in
favour of maintenance of the diversified legal system. British firms find that
patenting in average is very important for the foundation of a company, the trading
 117

of deliverables and for foreign direct investment (score: over 4). The issues of
stronger protection in Europe and European harmonisation is welcomed, but
dedicated a below average sore in comparison to the other countries. However, 75
% of the UK participants perceive that there are specific disadvantages of the
existing system for biotechnological inventions. British firms support the new
legislation, especially the general patentability of biotechnological material, the
patenting of plant and animal varieties and essential biotechnological procedures
for the breeding of plants and animals. However, they vehemently oppose the
farmers' privilege in Article 11 and support to a lower degree the general
exclusions from patentability in Article 6 of the new directive.

The Netherlands

With the highest return rate (49%) Dutch participants were very helpful for the
survey. The Dutch sample consists of a huge proportion of large firms and
research institutes. This could explain why the Dutch average number of patent
applications with 113 is the highest per country in the sample and also why the
density of patenting is much lower, even the lowest among the participating
countries. The average expertise of the interviewed is with an av~rage of 3.9 the
highest in the sample and is corresponding with a high satisfaction by patents and
a low rate of secrecy (18%). Dutch firms show with 50% the highest proportion of
firms that already had an infringement with other parties on patenting issues,
which might be the reason, why they dedicate a great importance to litigation
costs. Astonishing is that in this sample the Dutch claim the lowest proportion of
patent applications at their national office with only 27%, but show the highest
proportions with peT and European applications (40% respectively 24%). This
could either be an expression of the high amount of large firms with an
international orientation in the Dutch sample or of an in general higher
international orientation by Dutch biotechnology frrms. Dutch firms welcome the
new directive very much. They are to a minor extent against the farmers' privilege
and against the establishment of patentablility of nucleotide sequences but support
all the exclusions foreseen by the new legislation.

Italy

Italy showed the lowest rate of return with only 10 questionnaires in the sample.
In the sample their absolute number of patent applications as well as the density of
patenting (10 patents per 100 employees) is low and these firms show the lowest
satisfaction by patents in the country comparison (score 2.9) and the highest
secrecy rate with 24 %. Patenting related costs (application, maintenance and
litigation costs) matter in comparison to the other countries very much and this is
especially true for litigation costs which received a score of 4.7. Also the trust in
patenting as a system that provides an adequate level and scope for the protection
of biotechnological inventions is with 50% the lowest in the sample. The Italian
frrms demand for stronger protection in Europe (4.4.) and further harmonisation in
 118

Europe (4.8) and worldwide (4.9). Italians in the sample are the only ones, that
welcome the farmers privilege and they also support strongly the exceptions from
patentability in Article 6.

6.3.10.2 By Corporation

Institutes

Institutes in the sample show a relatively low patenting activity as well by total
patent applications as by their density of patenting. They use patenting (3.9), but
less than the large fInns in the sample (4.6). Nevertheless, the interviewed persons
from the institutes are most satisfIed with patents. and indicate a low secrecy rate
with only 6%. Institutes pay less attention to application and litigation costs.
Probably due to their public character research institutes do not consider patenting
to be important for the foundation of a company, for trading of deliverables and
for foreign direct investment. In contrast to large and small frrms 66% of the
institutes also see specifIc disadvantages of the existing patent system for
biotechnological inventions. In contrast to small and large fInns the institutes also
favour the farmers' privilege in Article 11 of the directive. Apart of the regulation
on processes for modifying the genetic identity of .animals they welcome very
much all the other exclusions from patenting foreseen by the directive.

Private companies and universities or research institutes differ a lot in their way of
using patenting, especially, when it comes to the exploitation of the inventions.
Institutes treat patents in a similar way as publications: "How many patents do we
have with the name of the researcher and/or the institute on it?" Single counts of
patents are important for the reputation, whereas their economic value and their
licensing are secondary. Private companies make businesses with patents. It is in
their interest to license patents. They are much better equipped for exploitation,
for detecting infringements and for identifying licensees. Therefore companies
claim prior rights (licences) on the exploitation of inventions instead of co-
ownership in co-operation with universities. This observation is conftnned in a
way by public institutes that regret that they invest too much in the common
research if too many partners are involved in it and that other parties being nearer
to the market benefIt from their intellectual property.

Small firms and large firms

Small frrms on average apply for very few patents in absolute numbers, especially
in comparison to large fInns. However, small ftnns in the sample show
outstandingly the highest density of patenting with 48 patents per 100 employees.
The opposite is true for large fInns, they show on average more than 200 patent
applications per year and per fInn, but their patent density with 1.3 patents per 100
employees is the lowest in the sample. Small frrms indicate with a score of 3.6 a
moderate use of patenting, whereas large ftnns make use of patenting to a very
 119

large extent by indicating a score of 4.6. Interviewed people from large firms
show more expertise (score: 4, the highest in the sample). Accordingly the large
firms also indicate the highest satisfaction by patents whereas smaller firms are
only moderately satisfied by the provided means of protection by patents and
correspondingly show the highest secrecy rate with 30%. Large firms indicate that
they find in the patent system an adequate tool to protect their biotechnological
inventions. Application, maintenance and litigation costs are of much higher
importance to small firms than to large firms. Naturally large firms face more
infringements with patents and also their degree of collaboration with research
rises with the size of the firm. The answers to question 12 make clear that large
firms also make a lot use of the possibility of applying directly at another national
office. They consider patent protection being important for the foundation of a
company, as well as for the trading of deliverables abroad and for foreign direct
investment. By nature larger firms also face higher financial losses due to
"
inadequate patent protection abroad than smaller firms do. They emphasise their
special interest in stronger protection tools and further harmonisation on a
worldwide level. 46% of the small firms to the contrary express that there is a
need for a special - different from patent protection- legal means of protection for
biotechnological inventions. Both, small and large firms for biotechnological
inventions. Large firms are very much in favour of all the new key regulations by
the new directive, apart of the farmers' privilege in Article 11, which they oppose
vehemently.

6.3.10.3 Mayor Findings

• Patenting is used to a great extent as a means of protection for inventions

and the survey participants are satisfied by the means of protection provided
by patenting, especjally in the United Kingdom.

• Small firms and participants from Italy are less satisfied with the provided
means of protection from patents, whereas on average participants are
pleased, especially in the Netherlands.

• An average secrecy rate of 18% is low in comparison to other industries.

Small firms show the highest secrecy rate with 30%, whereas research
institutes and universities only a 5% secrecy rate.

• Small firms show a remarkable patenting performance. Their high patenting

density, (patenting per number of employees) is especially striking in
comparison to large firms.

• Litigation, maintenance and application costs are relevant to a moderate

degree for the decision to apply for patent protection. Litigation costs receive
the highest attention, especially from Italian participants. These factors are
more important for small firms.
120

• All biotechnology finns and in particular the UK participants, think that the
patent system is very important as an incentive system for research and
development investments.

• Some 41 % of the participants faced an infringement with patents, large finns

with 68% and also in the UK and in the Netherlands above average, but only
19 % 0 small finns.

• Most participants co-operate with their research with other companies.

There are relatively few problems with the joined IP ownership.

• There is no coherent way of applying in the sample. Obviously a lot of

strategic patenting, especially by large !inns happens.

• Most participants believe that the patent system provides an adequate level
and scope for the protection of biotechnological inventions. Believe in
patenting is the highest in Germany and the UK, but the lowest in Italy and
within small finns.

• The national route of application is the most important way to apply for
priority files. Dutch participants and those from the UK tend to use more the
international ways of applications, especially the PCT but also the European
way. Smaller finns, in Germany and Spain favour their own national route.
Only large firms use to a larger extent direct applications at other national
offices for priority files.

• The PCT system is very expensive and therefore not sufficiently used by
small firms. It shows many advantages, since it provides time for
consideration and the possibility of developing products and searching for
market opportunities.

• Some 74 % of the sample members perceive that there is a need for further
harmonisation of the different ways to apply for patent protection in Europe
(e.g. by a community patent).

• Half of the large finns and of the participants from the UK are in favour of
the present differentiated system of patenting. It provides with an element
of choice, competition and the natiOIial systems are an important instrument
in the hands of SMEs.

• Adequate patent protection is considered to be important for foreign direct

investment, for the trading of deliverables and the foundation of a company.
Sample members from the UK play more attention to these economic
activities in respect to patenting, research institutes less.
 121

• One third of the participants face financial losses due to inadequate patent
protection abroad, mainly in Asia and countries of the Southern Hemisphere
and with pharmaceutical products.

• Stronger protection and further harmonisation is very much welcomed by all

sample members.

• More than half of the sample thinks that there are specific disadvantages of
the existing patent system for biotechnological inventions. They mainly refer
to the still unclear practical legal situation for the patentability of plant and
animal varieties, transgenic animals and ofESTs.

• All sample members are uniformly in favour of the new biotechnology

directive (98/44/EC) on the legal protection of biotechnological inventions.

• The key regulations of the new legislation are moderately welcome.

Especially the patentability of nucleotide sequences finds great support
whereas the farmers privilege is somewhat combated by the sample members,
apart ofItalians.

• All exclusions from patentability due to ethical and moral assessments by

article 6 of the directive are very much favoured by the participants.
However, participants frequently made clear that all ethical issues should be
removed from patenting law and should be regulated somewhere else.

• The introduction of a general grace period in Europe is opposed by the

biotechnology industry.

• Patentability of plant and animal varieties should finally be clarified in

Europe.

• Firms show undecided about the overall influence of the new directive onto
the general European economic and competitive position.

6.4 Conclusion
The high return rate of 34 per cent of the inquiry in this chapter as well as the
expertise of the interviewed confirms the relevance of the posed questions.
Nevertheless, generalisations from a sample of 103 firms for a "real world picture"
have to be taken with care. The fmdings confirm that the patent-system is an
important incentive for investment in research and development for biotechnology
firms. Some 74 % of the members in the sample perceive that there is a need for
further harmonisation of the different ways to apply for patent protection in
Europe (e.g. by a community patent). Many participating firms (especially from
the United Kingdom) are in favour of the present differentiated system of
122

patenting. It provides them with an element of choice, enhances competition and is

an in particular important instrument in the hands of smaller enterprises.
Therefore, despite the further need of harmonisation, national offices should be
maintained also for the reason of their good service. In comparison to the excellent
service provided by the USPTO the service at patent offices in Europe could be
improved. The new Directive on the Protection of Biotechnological Inventions is
welcomed, but its influence on the "competitiveness" of Europe's biotechnology
industry is considered to be moderate.

In particular the still quite unclear legal situation for the patentability of plant and
animal varieties, transgenic animals and of ESTs is from the industry point of
view considered to be specific disadvantage of the existing patent system for
biotechnological inventions in Europe and more concrete solutions are urgently
required. Therefore, improvements, like the new European directive on the legal
protection of biotechnological inventions are appreciated very much. A lot
depends on how the directive is implemented at the level of the member states and
the subsequent interpretations given it by the courts. Scepticism is widely spread
about concepts like the farmers' privilege or the introduction of a general grace
period. But improvements definitely worth to think about are the introduction of
provisional applications and the small entity status as well as the establishment of
a European Patent Court.

Between 1991 and 1997 European patent applications increased by about 4 per
cent. Nevertheless, the absolute number of priority files, which are the important
files indicating inventions and their origin, perform poorly in comparison to the
USA. The absolute number of priority files in Europe is still about one tenth of
that in the USA and Japan except for UK files there is no real observable increase
in applications over the last decade. These numbers indicate indeed that Europe is
far behind in biotechnological innovative performance in comparison to the
United States and Japan; assuming that patent applications are a reliable indicator
for innovative activity.

The enormous future responsibility of many patenting related issues should not be
underestimated. The lesson to be drawn from the debate so far is that the
intermingling of economic factors and value judgements will make it hard to reach
definitive conclusions.

The analysis confirmed that patents are indeed an important incentive for research
and development in Europe's biotechnology industry. However, it also became
clear that, in addition to their initial purpose of protection, patents are used in
many different ways. The original idea of what patents are and should be, the
intention of protecting inventions and fostering their distribution, is becoming less
and less important in comparison to many secondary issues .of patents.
Administrative tricks procedural difficulties and strategic uses of patents
predominate over the idea of protection and distribution of knowledge. This
 123

becomes especially clear when looking at strategic patenting and one has to
wonder that there is already too much patenting. For this reason Heller and
Eisenberg [1998] warn of what they call "The tragedy of the anti-commons" and
of the negative consequences of too much patenting, in particular for the
biotechnology industry. All these considerations make clear that patents are
probably an indicator for a number of things, but less so for direct innovation.

It is hard to understand why the patent law is so overloaded with moral and ethical
issues, especially from an industrial point of view. Business would probably be
much easier without this burden, if patent granting were left to a technical decision
according to the criteria of patentability. So in one way a more pragmatic
approach is desirable for patent law. However, the topics discussed here carry a
huge future responsibility and probably include a number of problematic issues, of
which the future consequences cannot yet be foreseen. This is at least one reason
why careful treatment is required. Perhaps it is also the particular role. of
Europeans to be here more sensitive than the Americans. Therefore, certain
"ethical barriers" should be left in the patent law in favour of more plurality and
critical awareness.
7 Patent Protection in Central and Eastern
European Countries

The aim of this chapter is to investigate the general role of intellectual property
protection and in particular patent protection for the process of transition in
Central and Eastern European Countries (CEEC). Abramovitz' approach of
technological gaps is the theoretical background for the analysis of CEEC and the
role of intellectual property rights -systems for closing technological gaps. The
relationship between CEEC and the European Union is at the centre of the dispute.
The setting for this is the recent hannonisation efforts between the European
Union and CEEC. The analysis looks at intellectual property rights -systems in the
CEEC as a means of international diffusion of knowledge, its influence on
national innovation and its relationship with international trade. This chapter
provides the theoretical background for session 7.3.

7.1 Intellectual Property Rights, Technology and Trade

The differences in productivity and the size of the technological gap between
countries determine the "catching-up" process of less developed economies to
market leaders. This gap determines the velocity of the process of convergence.
The larger the. gap, the higher the speed of convergence. Thus, less developed
economies have a higher potential for rapid growth to catch_up237 and their
potential for growth decreases, as they converge on the leaders238 • Abramovitz
realises in a historical review that it is not only a gap of technological performance
between different countries which explains the differences in economic growth but
also an element which he calls "social capability". This includes the countries'
educational level as well as its existing institutional arrangements and its degree of
openness to competition. Convergence in growth between economies takes place
only where less developed economies are technologically backward but socially
advanced. Therefore it is both, the breadth of the technological gap and social
capabilities which determine "a country's potentiality for.productivity advance by
the way of catch-up239". Nevertheless, the real level of catching-up also strongly
depends on international channels of diffusion of knowledge, such as technical
communication, multinational corporations, the state of international trade and

237 The underlying hypothesis is that productivity growth rates are inversely related with
initial productivity levels. See Abramovitz [1986] p. 385.
238 The examples he gives are the change in technological leadership from Britain to the
USA at the beginning of this century but also the rapid growth of western European
economies in the post world war II decades.
239 Abramovitz [1986] page 390.
 125

direct foreign investment. Intellectual property rights have to be considered in this

respect both as part of the social capacity, because they, in turn, are part of
domestic national innovation systems and as such constitute the local
attractiveness for investment in innovation. But they are also an important means
of technological knowledge diffusion at an internationallevee4o .

The aim of this chapter is to study the role of intellectual property rights during
the transition process in Central and Eastern European Countries (abbreviated as
CEEC in the following). Intellectual property rights form an important part of the
social capacity of an economy, but also their function as part of an international
diffusion channel will be taken into consideration. The analysis combines the two
aspects by investigating the relationship between national intellectual property
rights, innovation and trade flows of some of these countries.

7.1.1 Technology Gaps and Catching-Up

According to Posner's model of technology gaps241 technological differences

between countries are one main source of international trade. With the discovery
of new products countries gain a temporary advantage over their trade partners.
More innovative economies benefit from both, opening new markets with entirely
new products and driving out former market leading countries with new product
versions. Imitators appear, but only after a learning period. Therefore, following
the technology gap model innovative countries always have the opportunity to
extend their technical superiority by continuing to innovate and to replace old
innovations with new ones. In this way they can always be one step ahead of their
competitors242 . The technology gap model demonstrates that production of new
commodities does not take place according to relative and absolute cost
advantages but according to relative technological advances of an economy.
Comparative and absolute cost advantages for production (arguments from
classical trade theory) are going to be important later, when the existing
knowledge of innovation is already spread more widely. Hence, it can be assumed
that technology-rich countries will specialise in technology-intensive products and
technologically less-developed countries in traditional products. The distribution
pf innovation is similar to a North-South model framework, where the richer and
more advanced North continuously produces innovations, which are then copied,

240 This point is not so straightforward as international intellectual property rights could
also build up obstacles against trade by limiting access to important technological
information.
241 Posner [1961]. .
242 It is important to keep in mind that companies are the economic actors who choose
countries with different legal frameworks. Therefore a certain awareness is necessary
about the concept of "competing nations", particularly against the background of
globalisation. Compare Straubhaar [1994].
126

licensed and exported to the non-innovative region of the South243 . The relative
cost advantages of lower labour and production costs in the South are only
relevant after a period of time, when "old" innovations are already replaced by
"new" ones in the North. The momentum of economic growth however, remains
for both, the North and the South, the initial innovation from the North. Within
such a theoretical framework innovation appears in the North where a high degree
of accumulated knowledge and experience already exists. Such specialisation in
innovation is consistent with Arrow's theory of "learning by doing,,244, according
to which knowledge and the discovery of new knowledge is a cumulative process
of learning. Such an accumulation of knowledge implies a specialisation and
consolidation of economic structures i.e. a division of labour within different
functions in the innovative process. The argument is particularly relevant for more
knowledge based industrial sectors, such as chemicals, pharmaceuticals and the
electronic industry.

The technology gap model is consistent in its implications for the allocation of
innovation and production with the product cycle theori45 • Like the technology
gap theory, the product cycle theory includes an element of path dependency
(success breeds success!). Within the technology gap model it is possible to have
access to innovation which decides the location of the production, whereas with
the product cycle theory, maturity of the product is decisive. Thus, both theories
maintain a dynamic element of continuous change and predict a change of product
location over time. Furthermore both theories assume that the most important
source of economic growth are existing stocks of knowledge and the rate of
innovation.

For CEEC one important question is, whether a remarkable technological gap
really exists between these countries and e.g. Western Europe? The situation is not
the same like between industrialised and developing countries, however, particular
similarities in economic dependency should not be overlooked. More detailed
investigations should therefore look at the role and importance of local innovation
in CEEC, on trade with technology and on technological dependency of CEEC
from Western European countries.

7.1.2 Technology and Trade

The regulation of international trade flows is mainly based on three pillars, the
commitment to free trade (the reduction of restrictions to international free
movement of goods in an international context) to agreements between countries

243 E.g. the following models Krugman [1979], Deardorff [1992], Diwan, Rodrik [1991]
Chin, Grossman [1988].
244
Arrow [1962].
245 Vernon [1966] pp. 190-207.
 127

in custom unions like the European Union and the NAFTA and via the regulation
of domestic competition policies, including grants of national intellectual property
rights.

Trade theory distinguishes two main approaches of international trade models,

either emphasising the relationship of different factors (Heckscher-Ohlin-models)
or emphasising international differences in technology (Ricardo-models). In
Ricardian trade models the cross-border technology transfer is one central
explanatory element. Krugman [1985] developed a special model in the tradition
of Ricardian trade models, in which he reduced international differences in factor
equipment to differences in labour productivity. According to such an
understanding of international trade CEEC should show a relatively good trade
performance. These countries possess skilled, yet inexpensive labour forces, but it
is evident that further factors are important for national high performance in trade
and technology and that it is not only labour productivity which guides production
and allocation of technology.

Common to all models in the Ricardian tradition, including models of new growth
theory, is that they regard innovation in either form, as a transferred entity from
abroad or locally as the most important growth factor. It is important to distinguish
between foreign and domestic innovation, as domestic innovation is essential for
local long-term economic growth246 • Thus, such a distinction is important in the
case of· CEEC, which demonstrate good prerequisites for domestic local
innovation, as they possess relatively high skilled human capital. However, a
second look shows that there are a number of different aspects to include in the
analysis, such as the institutional framework, market openness and, in the case of
former central planned economies, the path dependency from their socialist
history. The issue here is the adequacy of national intellectual property rights
systems in CEEC for spurring on national innovation as the major long term
economic growth factor and to show how far these rights attract the technology
transfer by foreign multinational companies.

Radosevic [1996] distinguishes three ways by which technology can be

transmitted to the CEEC247 :

• Via direct foreign investment. This channel still plays a relatively small role
with the exception of Hungary, Estonia and Poland. Radosevic remarks that
the main impediment for foreign direct investment is the uncertain legal
framework.

246 This is the major finding from Curie, Levine, Pearlman [1996]. They conclude that it
would pay northern regions to subsidise local innovation in the South.
247 Radosevic [1996] page 143.
128

• Via licensing. License trading however, has decreased throughout the CEEC,
in Hungary figures have halved since 1989.

• Via exports. Exports force the CEEC to raise the standards of certificates, and
regulations, etc. ("learning by exporting").

In any case, technological gaps cannot be closed by adapting relative factor prices
but only by spurring domestic research and development and innovative
performance, or, by imitating or transferring technology from developed countries.

Following the technology gap theory, technological performance of countries will

continue to be different in future. Accumulation of technology is the reason
behind the persistence for different technological advantages of individual
countries. However, the appearance of new technology creates a factor of
imbalance, independent of the pre-existence and accumulation of certain forms of
knowledge and technology. Innovation upsets market equilibrium and temporary
market leadership is overtaken by the innovator until competitors appear with new
innovations to replace the old ones248 • Technological leadership leads to a high
probability for future leadership, but in the end innovation produces an element of
uncertainty as to when, where and under what conditions it will arise.

The neo-Schumpeterian approach emphasises the company specific element of

innovation in contrast to inter-country relations of innovation as a country-related
issue. This means that the attraction of multinational companies and the related
technology transfer is at least as important as local innovation. Consequently
CEEC should follow a policy to attract foreign companies.

7.1.3 The Trade Performance in the CEEC

According to Hoekman and Djankov the value of trade for the CEEC in 1994 was
roughly the same as it has been in 1988. After 1990, a steep decline in exports per
capita occurred, but by 1994249 nearly all countries had recovered. However, the
structure of trade changed dramatically. Total exports to the European Union rose
on average by 16,6 per cent per year on average between 1989 and 1994 whereas
CEEC intra trade declined sharplr50. Specialist production shifted away from
production of machinery and equipment towards, more labour intensive goods
(footwear, travel goods, furniture). According to these findings direct foreign
investment flows are closely correlated with export performance and intra-
industry trade levels, even though direct foreign investment was quite limited until

248 Compare the more evolutionary approach ofDosi, Pavitt, Soete 1990.
249 Hoekman, Djankov, [1996] figure 2.
250 For the Czech and Slovak Republics growth rate of exports to the EU are the highest
and showing greatest re-orientation in their patterns of trade.
 129

1994. General trade perfonnance demonstrates a clear trade policy in favour of

western European investors.

7.1.4 Implications for Central and Eastern European Countries

Technological perfonnance was always considered to be relatively good in

socialist countries due to a good educational system for technicians and engineers.
A technological gap between East and West is therefore not that evident.
However, trade flows (in respect to the theory of the relationship of trade and
intellectual property rights compare chapter 4.7) in recent years show a clear
technological dependency on Western economies and in particular Western
Europe2SI . A similar picture is true for innovation. The origins of innovation are
now to be found abroad and no longer within the CEEC.

A point of interest here is the role played by the systems of intellectual property
rights as part of a national innovation system in the CEEC and the importance of
assimilating those systems to world-wide and Western-European standards.
Further investigation should observe the patterns between the perfonnance of
trade and the distribution of domestic and foreign innovations in selected
countries. This would demonstrate how it relates to the existence of adequate
incentive systems, i.e. national systems of intellectual property rights.

The original argument from the GATT (Uruguay round) can be raised again:
Whether technologically more advanced countries tend to retain technology on
their side2s2 . The question is how can industrialised countries justify higher prices
and limited distribution of technological knowledge to less advanced countries?
Maybe experiences from developing countries in the GATT negotiations can
advise on the build up ofIPR systems in the CEEC.

From a theoretical investigation on trade it might be interesting to examine the

possible existence of a correlation between intellectual property rights and trade in
the fonn of import-export directions. This would be a measure of technological
flow on the one side and an indicator of market interests and technological needs.
Industry specific investigations would clarify whether certain patterns in trade and
technology transfer appe~S3.

Therefore useful questions to guide further analysis might be:

251
Compare again Hoekman and Djankov [1996].
252 Fora broad overview of the political debate of TRIPs in the GATT Uruguay round
see Almeida: [1995].
253 A comprehensive study following this issue for DECD countries is done by G. Moot
[1996].
130

• What kind of innovation is appearing in the CEEC? Is it mainly of local (best

for long term growth) or offoreign origin?

• What is the role of local and national innovation for adequate incentive
systems within economies in transition? What is the current situation of such
a system?

• Do transaction costs of international technology transfer via international and

national intellectual property right protection fall?

• In which industries is technology transferred to the CEEC? Mobile

Schumpeterian industries (where research is pure laboratory work and strictly
separated from production, e.g. electronic industries and data processing) or
immobile Schumpeterian industries (intensive co-operation between
production and the research department, e.g. mechanical engineering,i54•

7.2 The Role of Intellectual Property Rights for Economic

Growth and for Closing Technological Gaps
On a microeconomic level intellectual property rights promise to fulfil a double
growth promoting function by providing the right incentive structure to innovate
on the one hand and by distributing technological knowledge across countries and
industries on the other. Already these fundamental functions of intellectual
property rights on a company level have never been entirely proved. Even less has
been done to prove the significance of intellectual property rights for
macroeconomic growth. Exporting companies seem to base their decision to
export on the existence of a system of intellectual property protection abroad, and
on the adequate strength of these rights and their enforcement. Intellectual
property rights create costs such as transaction costs for administrative procedures
(application costs, maintenance fees, patent lawyers fees, infringement costs,
royalties).

Trade performance between CEEC and the European Union has influenced the
development of intellectual property rights. The question therefore is: How is
trade performing between countries with relatively low standards of protection2SS
and a well-protected region like the EU, or again: ,,How trade related are
intellectual propertY rights". In analysing the trade-relation of intellectual property
rights two counteracting microeconomic effects are relevant, the ''market-power''

254
See Klodt [1990] p. 67.
255
The data for software piracy are quite illustrative for such low standards. The average
piracy rate for 1995 of software products in Eastern Europe was 83 percent in
comparison to an average of 49 percent in Western Europe. See
http://bsa.orglpiracy/piracy_study95/piracy95.htm.
 131

effect and the "market-expansion" effecf56 . Stronger protection of intellectual

property in CEEC' domestic markets can reduce the elasticity of demand facing
importer, by providing the company with a type of monopolistic market powe?57,
and thus induces companies' imports into the relevant market ("market-power"
effect). The "market-expansion" effect however, increases demand for the foreign
importer when he is conquering new markets, thus, it raises his sales as a
consequence. Both effects can be related to the size of the country. The market-
power effect is expected to be stronger for smaller countries whereas the market-
expansion effect is, by definition, stronger for larger countries.

Another important aspect for CEEC is the relationship between intellectual

property rights within these countries and the local demand for certain
technologies. What are the technological needs where are the technology gaps
within the CEEC and does the provision of intellectual property right protection
correspond adequately to technological needs. Companies from countries with less
effective protection (e.g. CEEC) may have a tendency themselves to search for
more protection abroad. One necessary investigation should therefore observe the
structure intellectual property rights of all sectors of industries in the CEEC and
within the ED.

7.2.1 The General Growth Influence of Intellectual Property Rights

Park and Ginarte have established a growth function, which considers the role of
intellectual property rights on different levels258 . The idea of their model is that
intellectual property rights play an important role in the general national growth
function of a country. Intellectual property rights directly influence growth in
addition to other important main economic drivers such as, the initial gross
national product; secondary school enrolment; research and development
expenditure; and, general market conditions. Intellectual property rights,
furthermore, influence investment behaviour in general capital investment,
investments in human capital and in research and development expenditure. All
three elements are somehow directed in a similar way by factors of political

256 Maskus and Penubarti [1995] analyse the trade relation of intellectual property rights
as a trade off between the market-power and the market expansion effect. Ibid page
229.
257 It is a great misconception of economic theory to perceive that intellectual property
rights provide pure monopolistic market power. According to Rapp and Rozek the
idea of monopoly power fails in practice. At least for pharmaceutical industries
intellectual property rights may not mean more than "foothold access to well-
populated, competitive markets which permit sellers to do no more than charge
competitive prices and earn competitive returns, including the returns to innovation".
Rapp, Rozek, [1990] p. 10l.
258 Find the detailed growth function and its components in Park, Ginarte [1997] page 55.
132

stabilitrS9• According to the observations of Park and Ginarte260 the protection of

intellectual property rights has the potential to improve economic growth.
However, in congruence with standard theory of intellectual property rights R&D
is the first branch of investment by which growth is spurred, the degree of which
still depends on the relative technological advance of countries. Technological
leaders will profit more in the way described from intellectual property rights than
less developed countries. Park and Ginarte conclude by emphasising that the
burden of establishing an intellectual property rights system is relatively stronger
for technological successors and consequently their interest in such a system is
lower.

Through regression analysis they also find 261 that there is a positive relationship
between national growth of GDP and patent protection. They argue that higher
GDP growth stems from higher levels of protection. However, from such an
analysis it is nor clear whether the nature of causation could also be the reverse.
The protection of intellectual property does not cause higher growth, but stronger
growing countries require a higher level of protection to safeguard their most
important source of growth, that is, their technological advantage. Another, more
interesting and convincing finding of Gould and Gruben is that intellectual
property rights are more important. in markets with greater competition. Such a
finding is in favour of the basic economic theory of intellectual property rights
which implies that intellectual property rights give incentives to innovate by
granting a higher, if not monopolistic, market share. Obviously such incentives
tend to be greater where the competition is stronger. This is also consistent with
the remarks made by Rapp and RozeI262 that intellectual property rights hardly
ever grant entirely monopolistic power to the owner but rather beget a small
competitive advantage until competitors themselves leapfrog with another higher
advanced technology. However, this temporary competitive advantage they
provide is sufficient to enhance the dynamic market competition and thus
contributes positively to the growth of the relevant market.

7.2.2 Peculiarities of Economies in Transition

Leninist-Soviet ideology believed, even more than western economies, in the

"science-push" (miss )-understanding of innovation as a linear process263 . Centrally
planned systems saw technology as an information-type commodity, which
emerged neatly and cleanly, from R&D264 . Therefore even more remarkable is the

259 Like e.g. revolutions within a country, the ratio of government consumption to gross
national product and the initial secondary school attainment.
260 Park, Ginarte [1997] page 60.
261 Gould, Gruben [1996].
262 Rapp, Rozek, [1990].
263 See Dyker, Perrin [1997] page 5.
264 Pavitt, [1997] p. 44.
 133

rapidity of the process by which countries of transition assimilated Western

standards of industrial property rights (see table 4 and 5). Some features of this
situation in CEEC are quite similar to those in developing countries, such as the
previous absence of intemational protection and enforcement and strong interest in
obtaining Western investments, products and technology. However, the most
significant difference is the abundance of highly educated personnel, including
graduates in general and engineers and scientists in particular. Due to the large
amount of human capital available in the CEEC Radosevic emphasises that the
comparative advantages of these countries lie in R&D and production capabilities.
Nevertheless, in an international field the specialisation of the CEEC according to
their comparative advantage has not yet taken place. Instead, what has happened is
that R&D investment and innovative activity have fallen. Before 1989,
overproportional amounts of GDP were devoted to R&D by centrally planned
economies265 • This resulted in relatively high rates of innovation, which were
mainly based on enormous physical investments and which did not prevent a
deterioration in general economic performance. After 1989, investment in R&D
began to decrease and consequently the rate of innovation slowed266• Kollai and
Traistaru267 concluded that in the case of Romania the process of transition can be
characterised as a period of low innovative output without diffusion but with
improving economic performance. Thus economic performance does not appear to
be based on domestic innovation. Radosevic [1996] detects a lasting imbalance
between physical investment and innovative output in CEEC. In his opinion the
reason for this phenomenon is the low level of investment in intangibles which
might be caused by an inadequate incentive environment. Therefore, a high
amount of technical human capital is not sufficient for economic growth, but an
adequate incentive environment to direct investment into the most economically
productive activity, is as important as social absorption capability.

What, however, is the contribution of intellectual property rights to such an

adequate incentive structure? For most developing countries (generally less
innovative) and for transitional countries of transition their relative attractiveness
for (Western) foreign direct investment, plays a central role. Nevertheless,
productivity and added value in industry will not emerge simply with the
acquisition of foreign technology, foreign direct investment, imports, exports,
licensing, but with a legal and institutional infrastructure. According to previous
findings of the theoretical analysis and empirical evidence, there is no conclusive
proof of a causal link between intellectual property rights, R&D investments and

265
Gross expenditures for R&D in per capita in CEEC were two times higher than the
expenditures of countries like Spain, Ireland and four times higher than those of
Greece and Portugal. See Radosevic [1996] page 188.
266 Dyker and Perrin however, find that the decline in innovative activity in CEEC,
actually happened before he fall of the "iron curtain". [1997] page 6.
267 E.g. Kallai and Traistaru characterise the situation in Romania before 1989 as a period
of innovative output creation, but with no diffusion. Kallai, Traistaru [1996].
134

growth rates, either in a closed or open economy. The role of intellectual property
rights in building institutional capabilities and in finding the right policy
equilibrium, between market and non-market incentives for CEEC is still
ambiguous.

7.3 The Performance in the Czech Republic, Hungary and

Poland
The intention of this chapter is to give an overview of the development of patent
protection for three representative Central and Eastern European Countries
(CEEC) over the last years, to look at their patenting structure, to interpret it and
to analyse in how far patent protection is a device for closing "technological gaps"
[Abramovitz 1986] in the process of transition.

A general problem of such a work is that data are limited and that time series are
shorf68. The analysis here restricts to patent application data. Patents are a
somehow indicator for the innovative development, but they also inherently
represent the development of the intellectual property right system itself.
Applications are preferred to grants, because data are more up to date, in so far as
the granting procedure usually takes three to four years. By using applications we
also exclude institutional distortions throughout the granting procedure, but bear
the risk of including less meaningful data on the other hand. In addition it is
looked at the development of utility models as an attractive alternative means of
protection for inventions.

7.3.1 Historical Background

Already in 1991 Poland and Hungary concluded Europe Agreements with the
European Union, former Czechoslovakia followed in 1993. One fixed aim in the
agreements is to secure the protection of intellectual, industrial and commercial
property at a similar level to the one of the European Union. Within the Annexes
of the Europe Agreements the Agreement on trade-related aspects of intellectual
property rights (TRIPS) is fixed269. The essence of the annexes is more or less, to

268 Limited in so far, as data before 1990 are either hard to get or are not reliable. For the
Czech Republic in particular it is important, that the foundation of the state in 1993
limits the data further. In order to overcome this insufficiency, data of previous years
from Czechoslovakia (until 1992) are taken into consideration. Data source for the
analysis is based on three pillars, the annual reports of the Czech Industrial Property
Office (1990-1996), of the Hungarian Patent Office (1991-1996), of the patent Office
of the Republic of Poland (1995-1996), the annual industrial property statistics of the
World Intellectual Property Organisation and the Derwent World Pat~nts Index
database.
269 For an overview on the membership in international treaties and the protection
provided in CEEC see appendix V and VI.
 135

harmonise national legislation with the regulations and the standards of the law
binding on the members of the European Union. Along these activities has to be
seen, that already eight of the Central and Eastern European states have applied to
join the ~uropean Patent Organisation, namely: Bulgaria, the Czech Republic,
Estonia, Hungary, Poland, Romania, Slovakia and Slovenia. Another option of
patent protection is the so called "extension system" with the European Patent
Office, applied by Albania, Latvia, Lithuania, Romania and Slovenia which results
in a patent application with a direct effect in the Country of extension so that the
patent holder has no need to go through a separate local application procedure.

Here, the Czech Republic, Poland and Hungary are chosen as representative
samples for those countries, mainly because of their advanced economic situation
amongst Central and Eastern European Countries and as such also as first
candidates to join the European Union. All three countries have a full examining
patent system and provide a 20-year patent protection.

7.3.2 Czech Republic

In the last century the Czech countries Bohemia, Moravia and Silesia belonged to
the Austria-Hungary monarchy, hence patent applications and grants were filed at
the Austrian patent office in Vienna. As a consequence with the constitution of the
Czechoslovakian state in 1918 the Austrian Patent Act (Act No 30 from the year
1897) was accepted. In the following year 1919 the Patent Office and Patent Court
with seat in Prague were established.

During the Second World War and German occupation the legal system changed
entirely. The Czechoslovakian Patent Office was suspended and from 1940 until
1945 protection could only be filed throughout the German office. During the
post-war period from 1945 until 1952 the old Patent Law No 30/1897 was still in
force with certain amendments. A change in the legal system came up in 1948
when step by step the principle of exclusive protection of industrial property items
was abandoned. Then in 1957 the Law 34/1957 provided the granting of the
invention to the state and the Act No 8411972 with the provision of so called
author's certificates completed the turn away from the old system of industrial
intellectual property protection.

With the political changes of the year 1989 a return to the classical system of
exclusive industrial legal protection was possible. Until the end of 1990 legal
protection of inventions could still be provided in the form of an author's
certificate or alternatively by a patent. With the Act No 52711990 industrial
property protection in Czechoslovakia was reconstructed from its foundation and a
new Czechoslovakian patent law was established. Orientation within the law was
already here towards the European patent system. The act also marks the
beginning of a gradual harmonisation of the legal regulations with the law of the
European Community.
136

In 1992 the protection of utility models was introduced (Law 478/1992). The new
Europe Agreement on Association of the Czech Republic to the European
Communities from 1993 particularly commits that the Czech Republic will
become member of the European Patent Convention (EPC)270. In 1996 the Czech
Republic filed request to be allowed to accede to the EPC. In October 1995 a new
trademark law came into force which was· a further step towards harmonisation
with the European Union.

7.3.3 Hungary

Also Hungary formerly had a system of certificates of authorship, but eliminated

this system already in 1957 and went back on the patent system in 1969. In 1996
Hungary applied for full membership of the European Patent Convention. Within
the same year the new Hungarian Patent Law 9 (Law XXXIII of 1996) entered
into force on January 1, 1996.

7.3.4 Poland

Also Poland applied for membership of the European Patent Organisation and in
the Annexes XIII Art 66 of the Europe Agreement it commits to continue to
develop the protection of intellectual, industrial and commercial property rights in
such a way as to achieve a similar level of protection to that in the European
Community, including comparable measures for the assertion of such rights.

7.3.5 The General Structure of Patent Applications in the Czech Republic,

Hungary and Poland

After the fall of the "iron curtain" Central and Eastern European countries became
more important as product markets for western multinationals than they used to be
formerly. Such was also accompanied by the need of protection of intellectual
property, which is incorporated in the traded goods. The building up of intellectual
property right systems and their harmonisation with western European standards is
probably on of the main consequences of this process.

Figure 26 illustrates the overall trend of rising patent application, especially in the
case of the Czech Republic, where patent applications rose tremendously by the
end of the 80ies and with the beginning of the 90ies. A similar development took
place in the case of Hungary. There however, due to the earlier economic

270 International treaties by which the Czech Republic is member or still obtains
membership from the pre-war period are pictured in annex VIII.
 137

openness of Hungary, increasing trade flows and also the accompanied IPR
protection turned up earlier, already with the beginning of the 80ies271 •

r---------~~----------------~ 5~
4500

3500

3~

2500 Hunpry
--.- CzKh R~publk
2~

1500

I~

500

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996

Figure 26: Number of patent applications for Hungary and the Czech Republic, data
source Derwent World Patents Index

A general view of the structure of patent applications in a country can be retrieved

by looking at national applications filed at the national office and dividing them
into resident and non-resident applications. Such a division provides with two
different kind of information. First, assuming that patent applications somehow
give information on where and when marketable inventions (innovations) show
up, these data can demonstrate whether a country is technologically depended
(technology transfer from abroad for a high proportion of non-resident
applications) or whether it tends to be self-sufficient (for a high proportion of
resident applications in respect to foreign ones). The second kind of information
which could be provided by such a differentiation is simply in how far the national
patent system or the international one is used by foreigners and nationals, meaning
the attractiveness of a national means of protection.

Data show again that for all the three observed countries overall patent
applications have been rising during the last couple of years. However, it can also
be observed by figure 27, that this is mainly due to an increase of the applications

271
Data of the year 1996, even if included in the figure here, at present still have to be
considered uncomplete within the Derwent World Patents Index. So e.g. the 1996
decline for Hungary cannot be interpreted in a meaningful way. Polish data are not
included at all in the Derwent World Patents Index.
138

by non-residents, whereas resident applications decline. In the case of the Czech

Republic, data are leading back to the year 1986, which makes the decline of
resident applications even more striking. For the Czech Republic the few
applications in 1991 might be an expression of the change of the national patent
system by the act number 527/1990. Data until 1990 still cover both the legal form
of author's certificates and patent applications according to the national way of
application. In 1990 there were 4874 resident applications filed, out of which 418
were patent applications whereas 4456 were still applications for an author's
certificate. On the other hand out of2197 non-resident applications in 1990 1858
were applications filing for a national patent, but only 9 author's certificates were
filed by foreigners. Hence the author's certificate was clearly favoured by
domestic applicants. Thus, the drop of the author's certificate in 1991 could be
another reason for the strong decline of resident numbers of applications
expressing an unfamiliarity with or a certain hesitating against the use of the new
patent system. The lowest number in 1993 is probably the result of the separation
of Czech Republic and Slovakia in 1992. The dominance of non-residents among
the patent applicants is also well explained by the table in appendix VII. There the
top 20 firms are ranked according their patenting activity in the Czech Republic,
respectively Hungary. Remarkable is, that among them there is no local firm,
neither in the Czech Republic nor in Hungary. In both countries the most actively
patenting local firm is placed at position 27 of the rank.
 139

Czech Republic

D tf.ldfnupplcodons
D nor>-tf. Idf n' • ppIc • don

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Poland Hungary

Z!IlCIl t - - - - - - - - - - - -..........
:IIlOCI) +------------i_4__'

'sm t - - - - - - - - r r - i - + - I

'am t - - - - - - f l - - I

11190 11191 1992 11190 1\l94 11195 19911

Figure 27: Structure of resident and non-resident patent applications for national Czech,
Hungarian and Polish patents (no PCT applications!). Data source: national
offices

A similar feature is expressed by the rate of technological dependency (figure 28).

The OECD defmes the rate of technological dependency (dependency rate) as the
ratio of the number of non-resident patent applications divided by the number of
resident patent applications.

Technological dependency rises for all of the three cOW1tries from 1990 on. Only
in Poland this trend is relatively moderate in comparison to the Czech Republic
and HW1gary, where in the considered range of time the technological dependency
rose more than by the factor 10. Total numbers went up to a level of 30 for the
Czech Republic and 33 respectively for HW1gary272. In the Czech Republic PCT

272
Some numbers of comparison for the dependency rate (OECD definition) for 1994:
Germany: 1,58; Netherlands: 14,17; Greece: 1463; Poland: 6; Portugal: 437; Spain: 26.
The divergence already demonstrates, that it is hard to compare different values of
140

applications where introduced in 1991, which is the reason, why they are not
included yet in figure 28. For the Czech Republic from 1992 on with the state
separation a steep rise of technological dependency appeared.
35

30

25

20 -+-0
__ HU

15 .....-Pl

10

0
1990 1991 1992 1993 1994 1995 1996

Figure 28: Dependency rate, Czech Republic, Hungary and Poland, data source: national
offices

Appendix VIII comprises a list of IPC classes for which in 1995 in Hungary and
the Czech Republic most patent applications where filed. According to the list
there is not a big difference between the two countries (first 6 classes are identical
for both countries). The structure illustrates also that the fields, where it is most
patented are all somehow related to the chemical and biochemical industrial sector
(not surprising however, since this is the classical domain, where patenting
matters, see chapter 6.3.2).

The "inventiveness" coefficient is defined by the OECD as the number of resident

patent applications divided by 10.000 population of a specific country.

countries for the dependency ratio. Peculiarities ofthe legal system would have to be
taken into consideration.
 141

j ~~--------------------------------~

2. 5

2
--cz
1.5 • HU
.......... PL

0.5

o ~--------~------~~----~--------~
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Figure 29: Inventiveness, resident patent applications per 10.000 population, data
sources: national offices

In general inventiveness weakens in accordance with the number of resident

patent applications. For Czechoslovakia with the separation of the Czech Republic
and Slovakia in 1992 inventiveness rose (the number of resident patent
applications is now divided by the lower number of inhabitants of the Czech
Republic, excluding Slovakian inhabitants). Probably the Czech Republic without
Slovakia is perfonning better according to this indicator than fonner
Czechoslovakia273 •

Another meaningful OECD indictor for general innovative perfonnance of a

country is the rate of diffusion, which is calculated by the ratio between all
external, i.e. applications at a foreign patent offices and domestic patent
applications. However, one insufficiency with this indicator is that domestic
applications are always unique counts, whereas applications abroad can lead to
several counts, depending on in how many countries one patent is applied for.
Usually for foreign patents protection is searched at several offices. Thus, the ratio
is not a pure indictor of how far external-patenting activity is superseding the
domestic one, but rather a measure of distribution abroad in comparison to
resident innovative activity.

273
An inventiveness of 0,05 for Slovakia in 1993 and 0,9 for the Czech Republic
supports this interpretation.
142

" .5
4
3.5

--Cl
2.5 HU

2 .....-PL

1.5

0.5
• -
0
1990 1991 1992 1993 1994 1995

Figure 30: Rate of diffusion, data source WIPO, own calculations

The ratio is rising over time for all three countries. Only in Poland it remains at a
relatively low level.274. For the case of the Czech Republic however, for an
interpretation of the positive increase one has also to consider that the trend is due
to a higher number of applications abroad.

7.3.6 The Different Ways to Reach Patent Protection

In general there are three ways how an applicant can reach patent protection in
Central and Eastern European countries, the national way at the national offices,
applications following the international Patent Convention Treaty (PCT) which
can be filed at any national patent office of PCT members or directly with the
WIPO in Geneva and applications with the European Patent Office in Munich.
With a PCT application applicants can achieve the grant of national patents for
designated PCT member-countries by only one international application. It is
relatively expensive compared to a single national application but it has the
advantage of providing cumulative protection in different countries. The same is
true for European applications. The current European patent system works in a
similar way for the members of the European Patent Agreement. With one
application at the European Patent Office several national rights can be achieved
according to the number of designated countries in the application file.

274
Rates of diffusion for comparison are: the average level ofthe EU 4,32 (1994, 3,23 in
1993) of the European Union, 3,9 (1994) and 4,26 (1994) for Ireland and 4,21 (1994)
for Portugal.
 143

Numbers for national and PCT applications by residents show that residents do not
use PCT applications to file national protection275 • On the other hand foreigners
prefer unambiguously PCT applications (e.g. 14 503 PCT against 2593 national
applications in 1994 for the Czech republic). Figure 31 illustrates the use of the
different application ways for Hungary and the Czech Republic in 1995.

~ r-----~------------------------------~
4S

40

35

30
o Cz~ch R.publc
2S
.ltIn,lry
20

15

______~~
10

: ~~~~~~~uu~_~~~~rn~~~~~
wo EP a tfJ DE u; GB AU SK AT FR K>

Figure 31: Ways of patent application in Hungary and the Czech Republic (in % of 1995
applications, data source: Derwent World Patents Index, data for Poland are
not available within the DWl)

It gets clear that for both, the Czech Republic and Hungary PCT applications
(WO) and European applications (EP) are the dominating ways of applications.
This is not astonishing since especially the European patent application way rose
tremendously in popularity over the last years. Astonishing however, is that the
German national way of application is used frequently, by Czech and Hungarian
fIrms.

7.3.7 The Structure of Origin of Non-Resident Applications

The fIgure in appendix X covers as a representative sample all foreign applications

for the Czech Republic (national and PCT) broken down according to the
countries of residence of the applicant. The fIgure clearly demonstrates, that the
large part of applications is coming from some very few countries, like the United
States, which are already filing 38 per cent of all foreign applications in 1994,

275
This finding is evident, as for domestic applicants the national way of application is
simply much cheaper.
144

Germany (13 per cent in 1994) and the United Kingdom (11 per cent in 1994)
followed by a bunch of countries, like Australia, Austria, Canada, Denmark,
France, the Netherlands and Sweden. Surprisingly against geographical reasoning
Australia and Canada filed together 7 per cent of foreign applications in the Czech
Republic in 1994. Interesting on the other hand is that the Russian Federation
shows from 1991 on only decreasing numbers of applications reaching finally a
minor level for the last years. Total numbers of applications are rising with the
introduction of the new patent system in 1990 with the possibility of PCT filing
from 1991 onwards. Countries with the strongest positions in absolute numbers of
applications show to have also the strongest rates of increase (from 1993 to 1994)
like the USA (70%), the Netherlands (73%), Switzerland (53%), the United
Kingdom (49%) and Germany (41%).

7.3.8 The Use of Utility Models

Utility models are a more moderate form of protection276 • But they show also
several advantages. First, they are registered quicker and easier. Due to the
missing examination for novelty and inventiveness they are usually granted
already after 6 months, whereas the granting period for national patents on
average takes 2,5 years. The lower level of inventiveness is a second reason for
the use of utility models. Third, lower costs for filing and the prolongation of
utility models make them to a preferred means of protection for small and medium
sized enterprises. E.g. since the introduction of utility models in the Czech
Republic in 1992 they gained a lot in popularity (see figure 32). In contrary to
patent applications utility models are predominately used by resident applicants.

276
The period of protection is only 4 years from the filing date and can be prolonged
twice for another 3 years in comparison to the maximum period of 20 years for patent
protection.
 145

XOO r-----------------------------------~

2500

--a
1500 - - Ill
-6-PL
1<XXl

500

1991 1992 1993 1994 1995 1996

Figure 32: Utility model applications. data source: World Intellectual Property
Organisation (WIPO) annual statistical reports

7.4 Correlation of Trade and Patenting?

The main matter of interest of this research is in how far intellectual property
rights as an institutional setting help to close technological gaps (Abramovitz
1986). The theoretical background for this is that intellectual property rights are
supposed to stimulate innovation and to give incentives to invest in R&D on the
domestic market. On the macroeconomic level they are a tool to make sure that
foreign investors get benefits also on foreign markets from technology for which
they invested tremendously in R&D. The same incentive argument is certainly
also valid for locals when they go abroad with their goods. However, there is no
direct measure to proof, whether IPR really perform in the described way. What
remains is only the possibility of an indirect measuring. There are two options of
measuring, the correlation of IPR with trade (see the whole TRIPs and GATT
Uruguay round debate) and with foreign direct investment. Here the emphasis lies
on trade and a first step will be a simple comparison of the structure of residence
of the applicant ofIPR (we use patents as best available kind ofIPR information)
and import and export composition for the three selected countries.

The basic idea is the assumption of a certain technological gap between industrial
countries and economies in transition. Imports of technical goods from industrial
countries carry inherently technology and a certain degree of know-how which the
importer would like to have protected in the importing country. The same
argumentation is valid for exports to industrial countries from the CEECs, For
them they are even more essential for the development of a new domestic
innovative culture within the transition economies. Hence both the development of
146

technology transfer in forms of trade and goods to CEECs and the diffusion of
technology from them abroad will be the matter of the structural analysis. Thus,
do IPR matter for trade and consequently are they an important institutional
setting in order to rise trade and thereby do they increase the exchange of
technology and help to close technological gaps? More sophisticated results could
show in which direction IPR matter more and for which countries.

7.4.1 Patent Applications and the Import Structure

The analysis is carried out with patent data (WIPO data) broken down according
to the country of residence and trade data from the IMP. We consider the structure
of international and national patent applications from abroad for CEECs,
representing the technological input diffusion and the order of imports of the
considered countries. In a first step the 16 most actively patenting countries for the
Czech Republic, Hungary and Poland are selected. Numbers of patent applications
are put together with the export volumes towards those countries, they are ranked
and the coefficient of rank correlation rsp of Spearman is calculated277 •

n
~ . 2
6L.,,(R i - Ri )
(1 )rsp =1- ---=-i=...:.l_ _ __
(n -1)n(n + 1)

Ri = order of rank for patenting activity of country X in CZ (HU, PL) (highest

number of filed patents gets rank 1)

R'i = order of rank for trade activity (imports or exports) from/to country X
(highest value gets rankl)

n= number of countries, here 16 for imports (18 for exports)

The Spearman coefficient is a normalised representation of order of ranks and thus

has the value range:

277
Such a comparison of ranks seems to make more sense here rather than looking at
absolute numbers of patenting and trade, like in the form of a regression analysis.
Those numbers show very different magnitudes and leaps would differ too much
between the two scales, so that distortions are to be expected (e.g. US patents rose e.g.
for the Czech Republic from 344(1992) to 915(1993), however imports from
204(1992) million U.S. dollars to 277(1993». Therefore the interest here is less on
absolute numbers but more on the relative position of one country in between the
others. Possible conclusions are softer in comparison to clear statements of correlation
between "trade and patent filing data. However, like this the analysis seems more
realistic, even though we might only prove a certain orientation as result
 147

The value -1 is representing a negative correlation of the two features, 0 is

standing for an uncorrelated relationship and +1 for a positive correlation of both
characteristics. The hypothesis here is that we fmd a positive correlation in the
form that countries that are more active in patenting within one country of CEEC
show also higher imports for the country. For such a situation intellectual property
rights (patents) do matter for import performance and consequently also for
transfer of technology and general performance of economic growth.

Results demonstrate, not surprisingly, that Germany, the USA and the United
Kingdom are always placed at first positions in patent filing over the whole range
of time. Germany is a main trade partner of the three regarded countries.
Remarkable is further, that Australia and Canada show a relative good
performance, both, in patenting and imports, and even improved them over time.
Figure 33 represents the results of the analysis for imports.

0.8

0.6

rsp (el)
rsp (HU)
rsp(PL)

0.2

.0.2

Figure 33: Speannan coefficient (rsp) of foreign patent applications and imports, data
source: WIPO, IMF Direction of Trade Statistics Yearbook

According to figure 33 only for the Czech Republic until 1990 a significant
correlation between imports and foreign patent activity existed. In the case of
Poland there seems to be a slight upward trend of the relationship to be noticed,
even though it is not a remarkable one. Thus, it remains astonishing that for the
most recent years of observation no trade-patenting orientation can be observed278.

218
A similar study for Western European Economies observed a clear positive
correlation for those Economies. See Inkmann, et. al. [1998] page 3.
148

A more detailed analysis reveals some interesting features. For all three countries
in years of lowest correlation it is Italy that disturbs most the relationship between
imports and patenting. So e.g. is Italy for Poland and for Hungary in 1991, where
rsp is very low, always a mayor importing country (at position 2 for Poland) but
one of the poorest applicants when it comes to patenting (position 12 out of 16 for
Poland in 1995). The same situation can be observed for Austria in the case of
Poland (1991) and the case of Hungary (1995).

One could wonder, whether the permanent decrease of correlation for the Czech
Republic and the low level of correlation for Hungary and Poland are something
characteristic for the process of transmission, meaning that trade relationships are
reorienting. The reorientation is evident for the trade between Central and Eastern
European Countries themselves, where the former trade emphasise is clearly
shifting towards Western economies. However, the question remains, whether a
decrease of correlation between trade and patenting activity is characteristic for
the process of transition? As total imports increase, obviously there have to be
other factors dominating the guidance of trade orientation.

7.4.2 Patent Applications and the Export Structure

The second part of the analysis is comparing the structure of Czech, Hungarian
and Polish patents filed abroad on the one side and export performance for the
same countries on the other side. The expectation is that more patents are filed for
those countries where the export performance is higher.
0.9
II
0.8

0.7

0.6
-+-np(CZ)
o.s np (CZ, w~IRl4 PL)
--rsp(!-l.O
0.4
-+-rsp(pL)

0.3

0.2

0.1

0
1990 1991 1992 1993 1994 1995

Figure 34: Spearman coefficient (rsp) of patent applications abroad and exports, data
source: WIPO, IMF Direction of Trade Statistics Yearbook
 149

For all countries the correlation of exports and foreign patenting is clearly
positive, which expresses that all countries, the Czech Republic, Hungary and
Poland care for patent protection when they go abroad with their products. For the
case of the Czech Republic the correlation is calculated twice, once with and once
without Poland and the Russian Federation as trading partners. Results show that
the Speannan coefficient is higher when these countries are excluded from the
analysis. This finding holds also for the other two countries and can be interpreted
by the fact, that CEEC's exports are still reorienting from a COMECON structure
towards an open world trading system.

A more careful look at the figures demonstrates again, that for the case of
Hungary, it is Italy that-disturbs most the relationship, Hungarian firms export a
lot to Italy but they are not caring about patent protection over there. The reason
for such however, could also be found in the weak and unfathomable Italian patent
system and less in a lack of need for protection. A similar constellation is obvious
for Poland where in 1995 the Netherlands received very high exports, but no
Polish firms did not seek for patent protection.

7.4.3 Conclusion

One result is that patenting activity in Central and Eastern Countries (CEEC) is
very much dominated by foreigners. In addition patents do matter somehow for
both, the import and export composition of CEECs. Data are much more
straightforward for exports than imports, which means that CEECs themselves
obviously face an advantage by getting protection. One could conclude, that
therefore they should also provide in-house adequate protection and IPR systems
for their trading partners. In how far the finding of a lack of correlation with
imports might be used as an argument for the establishment and the hannonisation
of IPR-systems in CEEC -there seems to be no doubt about the need of such-
however, has to be left open and should be the subject of further studies.
Nevertheless, it still remains very difficult to evaluate in how far intellectual
property right protection, here patent protection, really is a conditio sine qua non
for the transfer of technology with traded goods.

7.5 Summary
The general analysis of patenting performance in Central and Eastern European
Countries demonstrated that patenting activity is more and more getting into the
hands of foreigners. This is true both, evidently for the international ways of
application, but also for national patents. The activity of intellectual property right
performance is related to the establishment of a legal framework (e.g. the new
patent law in 1990 and the introduction of utility models in 1992 for the Czech
Republic). However, according to the pure numbers the interest in such seems to
be stronger for foreigners. Thus, if patenting numbers represent somehow
150

technological perfonnance, we observe an increasing technological dependency of

the Czech Republic, Hungary and Poland from main western world industrial
.countries. Therefore, one mayor conclusion from the analysis so far is that means
of protection from the new legal framework are predominantly used by foreigners,
with the exception of utility models. Hence intellectual property rights do matter
for foreigners and as we have demonstrated they also matter somehow for the
orientation of trade.

From the analysis follows also, that the new institutional settings, like new
legislation, regulations and harmonisation efforts do not spur on the national
innovative process in CEEC themselves so far, but they facilitate the transfer of
western technology there, even though according to this analysis it is not a
dominant influence factor for imports. In how far the institution of local
innovative systems or the transfer of foreign technology is more important for the
process of transition and for long tenn economic growth of economies in
transition cannot be answered here and has to be left to theoretical considerations
and future empirical studies. Independent of the answer to this question the
analysis however, shows that CEEC care for protecting their traded goods, when
they go abroad. At least in so far these countries profit directly from the
connection with and orientation towards the international intellectual property
right system.

It would be very valuable for future research to investigate in an empirical way,

the role of intellectual property rights as part of the social capacity to innovate in
countries of Central and Eastern Europe and to discover their specific contribution
to the process of transition. It would be interesting to assess in which countries
and for what industries, technological gaps exist. From the modelling point of
view it is to ask whether North-South models could be used to analyse the
situation between CEEC and the western world. The relationship between
intellectual property protection and trade has to be analysed carefully and, in
addition, the question has to be posed, whether, how and where companies of
countries with weaker lPR-systems would seek protection?

The structure of national patent applications in Central and Eastern European

countries should be investigated taking into account:

• The structure of national patents according to industries and the residence

of applicants.

• An evaluation of the strength ofnationallPR-systems in various countries

of Central and Eastern Europe.

• Particular attention to patent applications of CEEC abroad (like EPO,

PCT).
 151

• An analysis of the relationship between IPR, trade data and foreign direct
investment data.

From previous theoretical observations the following questions could establish

guidelines for the research in CEEC: Are intellectual property rights merely in the
interest of foreign multinational companies and, is national innovation more
important than transferred, foreign innovation for long term economic growth in
theCEEC?
8 Summary and Conclusion

The considerations in the theoretical part showed that the innovation process is a
complex course where a pure linear model is too simplified for a description and
where IPR influence the process at many stages. Scientific knowledge is one
important input factor to the innovation process, but the role of science for
innovation is not entirely clear: Science is an important element in the innovation
process, however, much innovation is purely technology driven. Different ways of
how to understand the growth of scientific knowledge have been presented.
Nevertheless, for a description of the momentum of invention, input-output
relationships are not an adequate way of description. Creativity itself is no matter
of a systematic scientific approach, even though much innovation is the result of
combining parts of already existing knowledge in a new way. It is likely that more
research and development results in more invention and innovation but there are
many· more factors to take into consideration in order to retrieve a complete
description of the process of i!IDovation.

The two presented ways of understanding science and its evolution, the Popperian
error elimination process as well as Munz's scientific revolutions suggest that
without artificial barriers to knowledge the evolution process is likely to grow
faster. Two elements from the theoretical considerations are important to keep in
mind for the protection of intellectual property. Innovation is an accumulative
process that depends strongly on the pre-existence of a stock of knowledge plus an
element of creativity. Conditions for inventiveness have to be such that the
existing stock of knowledge finds its widest possible distribution, since a large
stock of knowledge and its free availability are likely to promote innovation.
Social conditions should be in favour of this and thus support the critical treatment
of knowledge and promote its widespread distribution. Intellectual property rights
don't do much in favour of such conditions and are therefore from an
epistemological point of view to criticise.

IPR usually cover only the codifiable dimension of knowledge (see table 1,
chapter 2.4.3) and the rise of the "information society" is supposed to go along
with a rise of codification of knowledge. The exchange of goods against goods is
replaced by a qualified trade of technology and by an exchange of technology
incorporating goods. This is one reason, why the importance of IPR is rising and
why it attracts more the interest of the public debate. Nevertheless, it is not clear
what the proportion of codifiable knowledge especially in comparison with the
tacit dimension of knowledge is and consequently the conclusion about the rising
importance ofIPR in a knowledge-based society is not a straightforward one.
 153

Classical economic argumentation suggests that innovators need a strong market

position in order to appropriate their R&D expenditures. Generalisations are
difficult, since any recommendation always depends on the characteristics of a
specific i)1dustrial sector. For the biotechnological industry the theoretical
considerations and the findings from the survey here confirmed that patenting
indeed matters! Nevertheless, and this is important to keep in mind, IPR are from
a welfare point of view only a second best solution. They provide a sub-optimal
level of production, result in monopolistic market prices and in addition, the
incentive to innovate of an established monopolist is lower than the social
incentive to innovate. The general discussion on state intervention by IPR or free
competition for innovations cannot be concluded here. It was demonstrated,
however, that there are many arguments in favour of a "process of creative
destruction" where innovation is continuously overcome by relatively newer
innovation which guaranties a sustainable process of innovation.

In the case of biotechnology firms confirmed strongly that patenting is important

to them, expressed by a high level of use of patenting as well as by a low secrecy
rate279. Consequently at a first glance, the micro-economic justification is relevant
for biotechnological firms. Nevertheless, the survey also revealed that the
motivation for patenting is a widespread one, by far not limited to the economic
reasoning (protection and payoff of invested R&D). There are many secondary
reasons why the patent system is used and which are not directly related with the
original idea of patenting. Especially strategic issues are more and more
overwhelming the primary uses of patenting.

Smaller firms performed better with patenting than larger entities. It would
probably be too early to consider this finding as an argument against the
Schumpeterian hypothesis about market structure and innovation. Nevertheless,
the finding should be a reason for alertness. especially in order to receive more
attention for the needs of small and medium sized enterprises.

Throughout the evaluation it became clear that there is still a lot of confusion on
the issue of patentability of biotechnological inventions. A reassessment of
patenting as a protection tool should take into consideration that patenting is a
protection tool that derives from the mechanical era, developed while regarding
the special conditions of another century and its forms of inventions. By that time
it was not thought about life science inventions and its peculiarities, hence a new
protection tool or a patent system with different criteria of patentability might suit
better to life science inventions.

The general patentability of nucleotide sequences is nowadays widely accepted

and patents are provided by basically all patent offices word-wide. Nucleotide

279 Compare session 6.3.3.2 and 6.3.3.3.

154

sequences, however, give a good example of Europe's orientation towards the

United States (Certainly, always keeping in mind that there numbers of
applications are about ten times the numbers in the leading European countries).
Europe is trying to catch up with the from an industrial point of view very
favourable legal framework conditions in the United States. This movement in
Europe is a lot driven by the force of economic reasoning
(practicability/workability approach). Europe, however, poses a different situation
than the United States. It was observed that in Europe still national political
interests in maintaining national realms of intellectual property right protection are
quite strong, which is one reason for the difficulties with harmonisation in general
in Europe. Another argument against adopting the US-approach is that it
automatically implies and only allows an economic way of reasoning. It became
clear, however, that the legal protection of life science inventions is not only about
economic measures but includes many different aspects, such as public awareness
and acceptance, social and ethical criteria, but also political reasoning. On the one
hand the intermingling of economic factors and value judgements makes it hard to
reach concrete remedies. On the other hand Europe with its multifaceted cultures
and long lasting political and humanistic traditions would probably do good to
find own ways of treating the problem.

It is difficult to evaluate from this work the influence of the new Directive on the
Protection of Biotechnological Inventions, on Europe's "competitiveness",
however, a coherent legal framework is appreciated very much by the industry.
The questionnaire confirmed that a European regulation for biotechnological
inventions is required. In this context falls also the urgent task of the establishment
of unique jurisdiction, by e.g. a European Patent court. All the ethical issues and
the problemacy of global justice related to biotechnology will probably be present
in the public debate for a long time. This also demonstrates, that patenting cannot
be understood in an isolated way as an economic activity as such, but it has to be
seen in its social context, especially in a sensitive field like biotechnology. The
public discussion cannot stop in front of economic reasoning. Especially while
looking at the heavy future responsibility carrying on the whole sector of
biotechnology it becomes clear that certain ethical barriers can't and shouldn't be
moved away easily.

The twofold character (micro- and macro economic theory and the corresponding
case studies) of this book is due to the difficulty of international IPR to distinguish
the micro- and a macro-economic realm of influence in a sharp way. Patent rights
are basically national rights whereas firms, the economic performers, act
internationally. Different national systems of IPR, different levels of protection
and enforcement can constitute non-tariff trade barriers. This is the reason for
harmonisation in general. The GATT Uruguay round showed that by nature
countries with different levels of technological advance show different interests in
protection of intellectual property. For less technologically advanced regions IPR
 155

can be a means of restriction for innovation as well as an instrument to endure

technological gaps. In the case of Central and Eastern European countries, the
shift from applications of locals to foreigners since the beginning of the
international harmonisation process demonstrates that the assimilation process is
first of all in the interest of Western firms that want to protect the technology of
their traded goods. Naturally, the transfer of traded goods is equivalent to the
dissemination of knowledge and technology to Central and Eastern European
Countries. However, it cannot be said, in how far imitation would be the better
natural way of dissemination of knowledge, that more suites to close technological
gaps. Awareness about the ambiguous role of IPR, impeding on the one side the
free flow of technological knowledge and attracting foreign investors on the other
side, should be maintained.

In the long run, it is best to establish local innovation processes. This should be
taken serious with CEEC, especially while looking at their more and more by
foreigners dominated technology. This seems to have been forgotten, when one
looks at the pattern of patent applications and at the rapidity of the assimilation
process of IPR in CEEC. It is difficult to evaluate whether the establishment of
patent systems in CEEC is so far a direct benefit for locals, evidently it is for
multinational companies. In the long run it could, respectively should, spur the
local innovation process. Another matter is that the harmonisation process with
western standards is in the political interest of those countries searching
harmonisation with the standards of the European Union and that it is also in the
political interest of those countries to finally get the membership of the European
Union. This political incentive is likely to be a stronger incentive than the
technological one.

Much more difficult to evaluate is the so called dynamic effect of IPR, here the
positive influence of stronger IPR in CEEC on the innovation rate in Western
Economies, which also feeds back in a positive way on CEEC themselves. But
also for CEEC it is true: "no imitation without innovation". Lacking the possibility
of a direct measurement, the investigation here had to look on the indirect
influence of IPR in CEEC. Of the three channels likely to transmit technology to
CEEC -foreign direct investment, licensing and exports- it was here only possible
to look at the trade performance. The other analysis is difficult to carry out, mainly
due to a serious data restriction. Trade, patenting and its development in Poland,
the Czech Republic and Hungary are mainly orienting towards the European
Union. Patenting activity is getting more and more into the hands of foreigners. Is
this the expression of an increasing technological dependency of those countries
from western technology? In how far the observed development is an expression
of the period of transition and in how far it is the right approach to catch up has to
be unanswered here, but is in the same way possible like the long term persisting
technological dependency from the West. In any instance, long term economic
growth is crucial. In the long run foreign technology will probably help to close
156

technological gaps wherever they exist and thus should transferred technology
also help to build up local innovation.

Much work has to be left for future research, such as the evaluation of the market-
power effect and the market-expansion effect from stronger IPRs, the relationship
of IPR and foreign direct investment as well as "the analysis of the relationship
between IPR and technological needs in CEEC. CEEC have to find a way to make
use of their comparative advantages in R&D. The role of intellectual property
rights for the constitution of adeqUate incentive environments is essential. The
evaluation of the overall-benefits for CEEC from the establishment of IPR
systems and from the process of harmonisation still requires further investigation.
Appendix
Appendix I

Industrial Property Rights: Main hannonisation efforts in Europe.

Munich Convention on the European 1973

Patent
Convention for the European Patent for 1976, O.J. LI7/1, Green Paper on
the Common Market the Community patent and the
patent system in Europe.
COM(97} 314 final, 24.6.97
Community trade mark Council Regulation 40\94, OJ.
LIllI, 1994
Community design Council proposal for a
Regulating, O.J. C 29/20,1994
Council proposal for a directive
on approximation of national
design law, 0.J.C345115, 1993
Semi-conductors products Council Directive 87/54
Computer programs Council Directive 91/250
Utility models Green Paper on utility models
KOM(95)370
Biotechnological inventions Directive 98/44IEC, challenged
at the European Court of Justice
by the governments of the
Netherlands and Italy

Development of Europe's Biotech Industry, Source: Annual Ernst & Young

Reports on the European Biotechnology Industry, Euro in millions

.19:97 .. ,1998,;, :.;.1999

','
;),~.~Q:~.p~iiilr~,~QflQJ:(L 1.035 1.252 1.508 1910 2334

716 1.036 1178

.~; 16.100 17.200 27.500 39.045 45823

158

Appendix II
Top 20 priority patent assignees in genetic engineering during 1985-1997 (first
number gives the number of priority patent applications). All Universities and
public research institutes are marked with a shadowed field. Several of these firms
are included in the survey.

Rank Germany Holland Italy Spain

I 341 HOECHST 30 AKZO NV 40 CONSIGLIO 42 CONSEJO
AG NAZ DELLE SUPERIOR
RICERCHE INVESTlGACION
2 329 17 RIIKSUNIV 36 19 ANTIB1OT1COS
BOEHRINGER LEIDE ENlRICERCHE SA
MANNHEIM SPA
GMBH
3 192 16 NEDERLAND 30 ITAL MIN 10 UNIV
BEHR1NGWE ORGTNO UNlV RICERCA VALLADOLLD
RKEAG SCI &
TECNOLOGICA
4 158 BAYER 13 22 SCLAVO SPA 5 CYANAMID
AG NEDERLA DSE IBERICA A
ORG TOEGEPAST
5 117 10 DUPHAR INT 19 1ST 5 UNlV
BOEHRINGER RE BV RICERCHE COMPLUTENSE
INGELHEIM BIOL MADRID
MOLECOLARE
ANGELETTI
6 115 BASF AG 8 G1ST- 16 ANIC SPA 5 UNIV OVIEDO
BROCADESNV
7 115 MAX 8 STAMICARBON 12 FlDIA SPA 4 ERCROS SA
PLANCK GES BV
FOERDERUN
G
WISSE SCHA
FTEN
8 94 GBF GES 7 UNTLEVER NV 10 1ST 4 IND FARM &
BIOTECH SIEROTERAPEU ESPECIALIDADES
FORSCHUNG TICO & SA
GMBH VACCINOGENO
9 90 ROCHE 6 MOGEN INTNV 10 1ST NAZ 4 LAB HIPRA SA
DlAG 0 TIC STUDIO E
SGMBH CURA DEI
TUMORI
10 56 HENKEL 5 CENT 9 4 QUIDEL
KGAA DIERGENEE KUN NAMPROGETT
DIG INST I SPA
II 50 DEGUSSA 5 RIJKSUNIV 8 ENI ENTE 4 UNlV
AG GRONINGE NAZ AUTONOMA
IDROCARBURI MADRID
12 50 DEUT 5 RIJKSUNlV 8 INST 4 UNlV
KREBSFORSC UTRECHT UPERIORE DI SALAMANCA
HUNGSZENT ANITA
RUM
 159

13 45 GBF GES 5 STICHTING 6 BIOCINE SPA 3 CIA ESPAN

BIOTECH SCHErKUNDIG SINTESI
FOR CH ONDERZOEK IN
NEDER
14 44 5 STICHTING 6 ENICHEM SPA 3 IMMUNOLOGIA
FOR CHUNG TECH YGENET
ZE TRUM WETE CHAnE
JUELICH
GMBH
IS 44 SCHERING 4 CENT 5 DOMPESPA 3 INMUNOLOGIA
AG DlERGENEE KUN & GENETICA
D APLICADASA
16 36 MERCK 4 CLOVIS 5 1ST NAZ 3 INST
PATENT MATTONNV RICERCA SUL NACIONAL
GMBH CA CRO INVESTIGACION
& TECNOLOGIA
17 32 HOECHST- 4 LEUVEN RES & 5 PIERREL SPA 3 INST RlCERCA I
SCHERrNG DEVVZW TECNOLOGlA
AGREVO AGROALIMENT AI
GMBH R
18 32 4 NEDERLANDEN 4 BIOCINE 3 UNIV
KERNFORSCH MIN WELZIJN SCLAVO PA AUTONOMA
UNGSANLAG BARCELO A
EJUELICH
19 31 ROEHM 4 NIZO 4 ENEA ENTE 2AMGEN
GMBH STlCHTING NUOVE
EDERLANDS TECNOLOGIE
TN T ZUlVELOND ENERGIA

20 30 INST 4 SOLVAY &CIE 4 FARMlTALIA 2 BRITISH BIO-

GENBIOLOGI ERBA SRL TECHNOLOGY
CRE CARLO LTD
FORSCHUNG
160

Appendix ill - Questionnaire

1. To what extent does your company/institute make use of patenting as a

means of protection for inventions? (Please tick one of these boxes)
great not
extert at all
1 2 3 4 5
00000
2. How many patent applications have been filed by 'yOur company /
institute in 1998. (Please indicate the corresponding number)
D patert applications

3. Are 'yOu satisfied with the provided means of protection by patents?

very not
satisfied satisfied
1 2 3 4 5
o 0 0 0 0
4. Which percentage of your patentable inventions (approximately) do you
rather prefer to keep secretthan to patent?
D % of patertable invertions kept secret

5. Are the following costs relevantforyour decision 1D apply for patent

protection?
very not
relevart relevart
1 2 3 4 5
Application costs
(procedural costs, pate rt attorney etc.) ODD o 0
Maintenance costs (amual renewal fees etc.) DOD o 0
Liti gat ion costs (court, pate rt attorney etc.)
DOD o 0

6. Do you think that the patent system is important for biotechnological

firms as an incentwe system for research and development
investments?
very not
importart importart
1 2 3 4 5
DOD o 0
 161

7. Did your company face an infringement for a patent?

No 0
Yes 0 ... If yes
IAith an own patent 0
or IAith a foreign patent 0
8. Do you collaborate for your research with other companies?
No 0
Yes 0 => If yes, do you fa oe any" diffi culti es IAith the com mon
intelleclual plOper\t from this researdl? Which
difficulties? Please specify:

9. In which of the following ways do you apply for pro1ection?

Prote clin g eve IV si ngle step of the
invention
o
Protecling only the central part of the 0
invention

Protecling only core tedlnologies 0

=> Other ways (indicate):

10. Do you think that the patent system provides an adequa1e level and
scope for the protection of biotechnological inventions?
No 0
Yes 0
11. Would you agree upon the statement that "patent pro1ection is an
overcome relict from the industrial era" for bio1echnological inventions?
co mplete Iv completelv
agree
disagree
1 2 3 4 5
DOD o 0
162

12. How many patent applications did your companyAnstitute file with which
of the following application ways?

Your national way of application: ca. D applications

The BJropean way of application: ca. D applications

The intemational (Patent Convention

Treaty) way of application: ca. D applications

Direct applications at other national

offces than your local national one: ca. D applications

~ If you apply directly at other national offices than your local one, could you please
indicate, at which offices: and what the reasons therefore are:

13. Do you perceive any ne ed for further har monisation of the different
ways to apply for patent protection in Europe (e.g. by a community
patent)?
Yes D
No n
Please 'gro"e reasons 10ryour answer:

14. Do you see on the other side any reason for maintaining the present
differentiated patent system (national, European, peT) in Europe.
Yes 0
No n
::::> If Yes,Which arethe reasons to maintain the existing ~em?
 163

15. In how fa r do you consider an adequate patent protection for the

following economic activities to be important?
Very Not
important important
The foundation of a company a a slbsidiary 1 2 3 4 5
firm 0 0 0 0 0
The trading of delwerables abroad 0 D 0 0 0
Investments abroad (foreign direct illY'estment)
0 D 0 0 0
16. Does your company face any financial losses due to the lack of
adequate patent protection abroad?
Yes 0
No 0
:::> If Yes. could you explain V'Itlere End 'I'ki)I?

17. Do you think ~ is important to have a stronger and/or more harmonised

patent protection in Europe (world-wide)?
Very Not
important important
1 2 3 4 5
stronger ~otection in Europe: 0 DOD 0
stronger ~otection vvald-""';de: 0 0 0 0 0
Further harmonisation in Europe: ODD o 0
Further harmonisation vvald-""';de: ODD o 0
Comments:
164

18. Are there any specific disadvantages of the existing pate nt system for
biotechnological inventions?
No 0
Yes n
=0- If ~s. Wlitch disawantages? Please explain.

If ~s. do )IOu find. that there is any need for a special - different from
patent protection- legal means of protection for biotechnological
inventions Oike e.g. for plant breeders rights in some countries)?
No 0
Yes 0
::) \fbhy?

19. Are you in general in favour of the new Europe-wide legal protection
given by the new European biotechnology directive (98/44/EC) on the
legal protection of biotechnological inventions?
much in not in
favour favour
1 2 3 4 5
o 0 0 0 0
20. The Dutch government claimed a nullity suit against the new directive
on the legal protection of biotechnological inventions for reasons of
non-co mpliance with the pri nCiple of subsidiar ity I the vio lat ion of
fundamental human rights and the contradiction with international
treaties. Do you support th is nu lIity suit?
No 0
Yes n
::) \fbhy? 'ffi.ase explain.
 165

21. Are you in favour of the following innovations for patenting of

biotechnological inventions that are established by the new directive?
much in Notin
favour favour
Arti cl e 2: The ge ne ral pale nta bili1\t of
biolechnologioal male rial (material 1 2 3 4 5
co nta ini ng ge neti c info rmati on, th at coul d D 0 0 0 D
a Iso haw be en existin g in naru re b efo re).
Article 4,2: Patenting of plant and animal
va rieti es a nd esse ntial biote ell nol ogi cal
procedures for the breeding of plants and
D 0 0 0 D
animals.
Arti cl e 5,2: Patenti ng of iso lated pa rts of th e
human body, if the isolaled elements of the
human body are produced by means of a
D 0 0 0 D
te chn i cal pro oess.
Article 11: The ''farmelS privilege" of Artide 11 •
farmelS may use the offsprings of
tr a nsg e ni c sto cks: with 0 ut payi ng a ny
D 0 0 0 D
royalties.
Arti cl e 2 and 5 esta blish the pale nta bility of
nudeotide sequences, that are deriwd from
genetio research and isolaled from the
D 0 0 0 D
human body.

22. Are you in favour of the following general exclusions from patentability
due to ethical and moral assessments by Article 6 ofthe directive:
much in Notin
favour favour
1 2 3 4 5
Procedures for human reproduotiw doning D 0 0 0 D
Prooesses for modifying the germ line genetio
identity of human beings
D 0 0 0 D
Methods in which human embryos are used D 0 0 0 D
P ro oesse s for m 0 difyi ng th e g en eti 0 id entity of
animals which are likely !Xl cause them suffering
witho ut any su bstanti al m ed i cal be nefitto man D 0 0 0 D
or animal and also animals resulting from such
processes
Human beings and human body parts 0 0 0 0 D
23. To which degree do you think that the new European legislation on the
legal protection of biotechnological inventions improves the position of
European companies against foreign (US, Japanese) competitors?
very Not
much
1 2 3 4 5
D 0 0 0 D
166

24. Do you have any concrete further suggestions, how the protection of
biotechnological inventions could be improved?
 167

For statistical purpose would you please be so kind to give the following information
about your company/institut:

Country of residence:

Private company 0
or public research institute (University) 0
Number of employees in 1998: ca. I I
Total turnover in 1998: ca. I :====~
Iin Mio. EURO
ca. I Iin Mio. EURO
:====~
Foreign turnover in 1998:

Would you please give an own evaluation of your degree of e)(pertise on the topics
for which you have been answered questions.
Unfamiliar Casu a lIy Acqu ainted F a mil ia r Kn olllle dg ea bl e Expert
o o 0 o o
Your position in your company/institute:

In case offurther questions, misunderstandings would you please be so kind to

leave a contact address (person):
Name of the firm Postal address Person to contact TeI.lFa)(/E-mail

Ni1mla... 'Thwnm
Institu.W! filr Prospective Technologi.c:al Studies
=> please move back to: W. T. C. Isla de la Cartujas/n

410!l2 Sevilla.

Spain
168

Appendix IV

Country codes

Code: Country:
DE Germany
EP European Patent Office
JP Japan
US United States
WO PCT
AU Australia
ZA South AfriCa
CA Canada
FI Finland
HU Hungary
NO Norway
NZ New Zealand
ES Spain
KR South Korea
GB United Kingdom
SU Soviet Union
BR Brazil
CN China
IE Ireland
FR France
OK Denmark
NL Netherlands
IT Italy
 169

Appendix V

Membership of International Treaties. Source280 : WIPO's circular N0.423(E),

April 1996, Industrial Property and Copyright NO.4 of 1996.

Paris perZll Madrid Budapest WTO

Convention 2' 1 Agn:cmentW TreatY~

Albania 1995 1995 1995 - -

Bulgaria 1921 1984 1985 1980 -
Czech Republic 1993 1993 1993 1993 +

Estonia 1994 1994 - - -

Latvia 1994 1994 - - -
Lithuania 1993 1993 1995 1994 -
Poland 1919 1990 1991 1993 +

Romania 1920 1979 1920 - +

lovakia 1993 1993 1993 1993 +

loveOia 1991 1994 1991 - +

Hungary 1909 1980 1909 1980 +

280
For more detailed information on all treaties see: WIPO [1995].
281
Paris Convention for the Protection ofIndustrial Property.
282
Patent Cooperation Treaty.
283
Madrid Agreement Concerning the International Registration of Marks.
284
Budapest Treaty on the international recognition of the Deposit of Micro-organisms
for the Purposes of Patent Procedure.
 170

Appendix VI

Provided Industrial Pr0:E~rty Protection in CEEC. Source: Survey of the Polish

patent office, July 1996

Patents Utili!) Indu trial Arti tic Trade Integrated

Models Design Deign Marks Circuits

Albania + + + . + -
Bulgaria + + + - + -
Czech Rcpublic + + + - + -
Estonia + + - - + -

Latvia + - + - + -
Lithuania + - + + + -
Poland + - + + +

Romania + - + - + +

lovakia + + + - + +

510 'cnia + - + - + +

Hungary + + - + +

285
Taken from Kotarba [1997].
 171

Appendix VII

Most actively patenting finns in the Czech Republic and Hungary, ranked by
number of patent applications in 1995 (Derwent World Patents Index)

CZI.'Ch Republic Hungary

I PROCTER & GAMBLE CO LILLY & CO

2 HOECHSTAG BAYERAG
3 BAYERAG PROCTER & GAMBLE CO
4 L1LL Y & CO ELI NOVARTISAG
5 BASFAG JOHNSON & JOl-lNSON
6 CIBA GEIGY AG PFIZER INC

7 NOVARTIS AG AMERICAN CY ANAMI D CO

8 PFIZER INC CIBA GEIGY AG
9 SIEMENSAG HOECHST AG
10 MERCK PATENT GMBH BA~AG

II UNILEVER NV MERCK & CO INC

12 UNILEVER PLC MERCK PATENT GMBH

13 AMERICAN CYANAMJD CO JOHNSON & JOHNSON

14 ASTRA AB VISION PROD PIONEER III-BRED INT INC
15 ME~K&COINC MERRELL DOW PHARM INC
16 RI-IO~EPOULEN~RORERSA MERRELL PHARM INC
17 CIBA GEIGY CORP BRISTOL-MYERSS_QUIBB CO
18 ZENECA LTD AMERICAN HOME PROD CORP
19 SANDOZ LTD HOFFMANN LA ROCHE & CO AG F

20 BOSCH GMBH ROBERT L'OREAL SA

172

Appendixvm

R.a.nJcing of IPC classes with most patent applications in HWlagry and the Czech
Republic (1995), Derwent World Patents Index.

1995 Hungary IPC Classes 1995 Czech Republic IPC Classes

1 1339 A61K 1 1747 A61K

2 989 C07D 2 1256 C07D

3 502 C07C 3 627 C07C
4 321 C07K 4 280 C07K
5 224 C12N 5 269 C12N
6 213 AOIN 6 255 AOIN
7 186 AOlH 7 184 C08L
8 149 C07F 8 180 BOlJ
9 135 C12P 9 162 C07F
10 134 C07H 10 136 B32B

Classes Int!'l'Pretation
A61K Preparations for medical, dental, or toilet purposes
C07D Heterocyclic compounds
C07C Acyclic or carbocyclic compounds
C07K P~tides
C12N Micro-orgll11isms or enzymes; coml'ositions thereof
AOIN Preservation of bodies of humans or animals or plants or parts thereof; biocides,
e.g.as disinfectants, as pesticides as herbicides
AOIH New pants or processes for obtaining them; plant reproduction by tissue culture
techniques
C07F Acylcic, carbocyclic, or heterocyclic compounds containing elements other
than carbon, hydrgen, halogen, oxygen, nitrogen, sulfur, selenium, or telluri~
C12P Fermentation or enzyme-using processes to synthesise a desired chemical
compound or composition or to separate optical isomers from a racemic mixture
C07H Sugar derivates therof; nucleosides; nucleotides; nucleic acids
C08L Compositions of macromolecular compounds
BOlJ Mixing, e.g. dissolvin/t, emulsifyin/t, dispersing
B32B Layered products, e.e. products built-up of strata of flat or non-flat, e.g. cellular
or honeycomb, form
 173

Appendix IX

Czech Republic: membership in international treaties

Paris Convention for the Protection of Industrial Property 5.10.1919

Convention establishing the World Intellectual Property Organization 22.12.1970

Madrid Agreement for the Repression of false or Deceptive Indications of Source 30.9.1921
of Goods

Madrid Agreement concerning the international Registration of Marks 5.10.1919

Nice Agreement concerning the International Classification of Goods and 8.3.1961

Services for the Purposes of the Registration of Marks

Lisbon Agreement for the Protection of Appellations of Origins and their 25.9.1966
International Registration

Locarno Agreement Establishing an International Classification for Industrial 27.4.1991

Designs

Strasbourg Agreement concerning the International Patent Classification 3.8.1978

Budapest treaty on the International Recognition of the Deposit of Micro- 5.8.1989

organisms for the purposes of Patent Procedure
.
Patent Cooperation Treaty 20.6.1991
174

Appendix X

Foreign patent applications (national and PCT) at the Czech office

~ r-----------------------------------------------~------'

0000

•••
• ,"7
D'.

......-
JOOO
.....
D''"
D'iI'

D.tol

'000
List of Figures
Figure 1: The innovation process according to Francis Bacon .... ........ ........... 11
Figure 2: The linear model of production and innovation .............................. 13
Figure 3: Interactive model of knowledge and innovation systems ................ 14
Figure 4: Welfare effects of monopolistic pricing of a single invention........ 32
Figure 5: New product pricing without patent protection ............................... 33
Figure 6: The incentive to innovate ................................................................ 37
Figure 7: A generalised picture of the relationship between
inventions, innovation and patents .................................................. 41
Figure 8: Development of Europe's Biotech Industry, normalised to
1995 ................................................................................................. 73
Figure 9: Answering scale of the survey......................................................... 81
Figure 10: European entrepreneurial life science industry by country
and company size (number of companies), source:
Einst & Young 1998 ....................................................................... 82
Figure 11: The sample constitution .................................................................. 83
Figure 12: The expertise profile ....................................................................... 84
Figure 13: Most innovative technical fields, source: European Patent Office .. 85
Figure 14: Priority patent applications in genetic engineering
(pCT-class = CI2N), source: Derwent World Patents Index .......... 87
Figure 15: Dependency ratio: ratio no-resident/resident patent applications,
all industries. Source: OECD .......................................................... 88
Figure 16: Priority patent applications of the sample in 1998 .......................... 89
Figure 17: Use of patenting and satisfaction by patents ................................... 90
Figure 18: FDI, foundation of a company, trading and patents ........................ 92
Figure 19: Secrecy in % of patentable inventions ............................................ 93
Figure 20: Way of application .......................................................................... 94
Figure 21: Patenting related costs and their relevance for filing patents ......... 100
Figure 22: International protection and harmonisation .................................... l04
Figure 23: Answers from the industry survey to the question: "Do you see
any reason for maintaining the present differentiated patent
system in Europe?" Answer: yes; differentiation by
type of firms/institutes and origin of firms ..................................... 105
Figure 24: Special regulations by Dir (98/44/EC) ........................................... 110
Figure 25: Exclusions from patentability according to Dir (98/44/EC) ........... 114
Figure 26: Number of patent applications for Hungary and the Czech
Republic, data source Derwent World Patents Index ..................... 13 7
Figure 27: Structure of resident and non-resident patent applications for
national Czech, Hungarian and Polish patents
(no PCT applications!). Data source: national offices .................... 139
176

Figure 28: Dependency rate, Czech Republic, Hungary and Poland, data
source: national offices ................................................................... 140
Figure 29: Inventiveness, resident patent applications per 10.000
population, data sources: national offices ...................................... 141
Figure 30: Rate of diffusion, data source WIPO, own calculations ................. 142
Figure 31: Ways of patent application in Hungary and the Czech Republic
(in % of 1995 applications, data source: Derwent World
P'atents Index, data for Poland are not available within the DWI) .143
Figure 32: Utility model applications, data source: World Intellectual
Property Organisation (WIPO) annual statistical reports ............... 145
Figure 33: Spearman coefficient (rsp) of foreign patent applications
and imports, data source: WIPO, IMP Direction of Trade
Statistics yearbook ......................................................................... 147
Figure 34: Spearman coefficient (rsp) of patent applications abroad and
exports, data source: WIPO, IMF Direction of Trade
Statistics Y earbook ......................................................................... 148

List of Tables

Table 1: Knowledge classification ................................................................ 19

Table 2: Pros and cons of international intellectual property right
protection ........................................................................................ 61
Table 3: Criteria for harmonisation ............................................................... 62
Table 4: Direct priority files in genetic engineering (PCT=CI2N) at other
offices during 1985-1998. Source: Derwent World Patents
Index, own search ............................................................................ 97
Table 5: Development of patent families (PCT=CI2N) in Germany,
Holland, Italy, and Spain during 1985-1998. Source: Derwent
World Patents Index, own search .................................................... 99
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