Introduction

There is widespread consensus that patents have long benefited biomedical innovation. A forty-year empirical legacy suggests that patents are more effective, for example, in protecting the commercialization and licensing of innovation in the drug industry than in any other. Patents are also widely acknowledged as providing the basis for the surge in biotechnology startup activity witnessed over the past two decades. Heller and Eisenberg (1998) and the National Research Council (NRC) (1997) have suggested, however, that recent policies and practices associated with the granting, assertion, and licensing of patents on research tools may now be undercutting the stimulative effect of patents on drugs and related biomedical discoveries. In this chapter we report the results of seventy interviews with personnel at biotechnology and pharmaceutical firms and universities in considering the effects of research tool patents on industrial or academic biomedical research. We conceive of research tools broadly to include any tangible or informational input into the process of discovering a drug or any other medical therapy or method of diagnosing disease.

Heller and Eisenberg (1998) argue that biomedical innovation has become susceptible to what they call a “tragedy of the anticommons,” which can emerge when there are numerous property right claims to separate building blocks for some product or line of research. When these property rights are held by numerous claimants (especially if they are from different kinds of institutions), the negotiations necessary for their combination may fail, quashing the pursuit of otherwise promising lines of research or product development.

ABSTRACT

We argue that stricter enforcement of intellectual property rights can, under some conditions, enhance the international diffusion of technology by fostering markets for technology. Developing economies should be prepared to exploit the opportunities opened up by the presence of such markets, which can significantly expand prospects for inward technology transfer.

Introduction

For centuries, the creation of markets has been one of the main drivers of economic development. There is one activity, however, in which the formation of markets has not evolved as smoothly as in others. Technologies have normally been embodied in goods, services and people, and markets for technologies that are not embodied in those elements have developed less commonly. This is epitomized by the Schumpeterian legacy, which suggests that research and development (R&D) investment is most often the business of relatively large firms that integrate the search for innovation with their production and marketing assets. However, over the past ten to fifteen years, there has been a rapid growth in a variety of arrangements for the international exchange of technologies or technological services, ranging from R&D joint ventures and partnerships to licensing and cross-licensing agreements, through to contract R&D. Along with this trend, specialized technology suppliers have emerged in many industries.

This chapter draws upon a decade-long research program on the nature and functioning of markets for technology – markets for intermediate technological inputs – and their implications for business and public policy.

It is commonly believed that economies based on information technology (IT) are different from the “old” economies – different in cost structures and the role of human creativity, even in management styles, business models, and the role of entrepreneurial entrants. This chapter explores the implications of these differences for economic development models by studying the software industry in two follower countries, India and Ireland.

The dramatic growth of IT in the advanced industrial nations had two features that were of great importance for follower countries: the decoupling of hardware from software, and the pronounced human capital intensity of software. Together with the rapid improvements in data communications (and communications more generally) and the steady increase in globalization, these features opened a window of opportunity for countries well below the technology frontier but rich in human capital relative to the opportunities for that human capital. But all countries that fit the bill have not been able to seize the opportunity or have done so in ways that differ from each other in a number of important respects.

Although India and Ireland are different in many respects, especially in size and development stages, along with Israel they are the most prominent examples of countries that appear to have benefited from this window of opportunity. Both specialize in software and IT services and have benefited greatly from the increased international demand for software workers.

Introduction

A firm wishing to protect its intellectual property from imitation has different options, notably patents, first-mover advantage, lead time, and secrecy. Although patents are often thought to be less effective at enabling the inventor to benefit from the innovation than other alternatives (Levin et al. 1987; Cohen et al. 2000), they have an important socially valuable feature that the alternatives lack. Specifically, patents can be used to sell technology, typically through licensing contracts.

This is our point of departure beyond the traditional approach to patents that has mainly focused on patents as means to exclude others. By reducing transaction costs, patents can play a key role in facilitating the purchase and sale of technology, or in other words, the development and functioning of a market for technology. A market for technology helps diffuse existing technology more efficiently; it also enables firms to specialize in the generation of new technology. In turn, such specialization is likely to hasten the pace of technological change itself. The reason for focusing on the development and functioning of a market for technology is that it greatly reduces the transaction costs involved in buying and selling technology, implying that innovators have the option of appropriating the rents from their innovation by means of simple contracts, instead of having to exploit the technology in-house.

However, the development of a market for technology is not an automatic outcome. It depends not only on the efficacy of technology licensing contracts (and on the strength of patents that underpin these contracts), but also on the industry structure itself.

Introduction

The chemical industry is one the largest manufacturing industries in the world. In 1995, the sales of the U.S. chemical industry amounted to $372 billion, while those of Western Europe taken together amounted to $495 billion and the Japanese chemical industry, $252 billion. In terms of value added, chemicals and allied products account for about 10.4% of U.S. manufacturing output and 1.9% of the U.S. gross domestic product (GDP). Not only is the chemical industry very large, it is also very complex. In fact, the chemical processing industries (CPIs) group has been called the most miscellaneous of industries and the description is apt. The chemicals and allied products group (SIC 28) can be divided into three major subgroups: (1) basic chemicals such as acids, alkalis, salts, and organic chemicals; (2) intermediate chemical products such as synthetic fibers, plastic materials, and colors and pigments; (3) consumer chemical products such as drugs, cosmetics, soaps, as well as paint, fertilizers, and explosives. Even if one excludes closely related sectors such as refining, and paper and pulp, the CPI produce somewhere on the order of 50,000–70,000 products. Many of the products are new, the results of product innovation, but many older products survive, even if their relative importance has declined.

The most important class of chemicals are the organic compounds, which are much more pervasive and varied than the inorganic compounds, such as salt and minerals and products derived from them such as chlorine, bleach, caustic soda, and sulfuric acid.