[Ip-health] Latin Business Chronicle: Intellectual Property & Development

[Malini Aisola]

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Intellectual Property & Development

April 28, 2008
BY JOHN MURPHY

http://www.latinbusinesschronicle.com/app/article.aspx?id=2328

Brazil should follow the lead from countries like Mexico and Singapore
when it comes to intellectual property rights.

In the global economy of the 21st century, we are increasingly finding
that innovation depends on the protection of intellectual property.  The
World Intellectual Property Organization defines intellectual property
as the creations of the mind:  inventions, literary and artistic works,
and the symbols, names, and designs used in commerce.  If there is a
road that leads from innovation to development, it surely passes through
intellectual property.

In a sense, the peoples of the developing world are like farmers praying
for rain.  The ideas that drive development float above them like
clouds.  We know clouds are made of water, but water vapor never
irrigated a field.  Only when the clouds open, and the rains of spring
fall down, can the farmer harvest his crop.  And only when innovations
can be crystallized and made tangible in intellectual property can
economies grow and develop.

LIKE RAIN FROM HEAVEN

Around the globe, the innovative industries are at the core of our
economic progress --- creating high-paying jobs, enhancing our
competitiveness. In the United States, economists trace 30-40 percent of
all gains in productivity and growth over the course of the 20th century
to economic innovation in its various forms.

Today, approximately two-thirds of the value of America's large
businesses can be traced to the intangible assets that we call
intellectual property.  These are among the findings of a recent study
entitled "Economic Effects of Intellectual Property-Intensive
Manufacturing in the United States," by Robert Shapiro and Nam Pham.

According to this study, manufacturing sectors that depend on
intellectual property --- such as communications equipment,
pharmaceuticals, and semiconductors --- generated almost twice as much
value-added per employee as other manufacturing sectors in recent
years.  Wages in these sectors are also much higher than the national
average.

In U.S. manufacturing, the number of science and engineering jobs has
grown in the first years of this decade much faster in the innovative
industries --- up nearly 86 percent in pharmaceuticals and 88 percent in
computer manufacturing.  As Microsoft Chairman Bill Gates testified
before the U.S. Congress in March, "Innovation is the engine of job
growth; if we discourage innovation here at home, economic growth will
decline, resulting in fewer jobs for American workers."

AN ENGINE OF INNOVATION

However, protecting intellectual property is probably even more
important in developing countries than it is in the developed world.
Consider the perspectives of two very different industries that both
depend on intellectual property.  First, in Brazil, the toy industry has
found that protecting intellectual property plays a key role in
successful business strategies as well as the country's economic
development.

For several years, the U.S. Chamber of Commerce, the Brazil-U.S.
Business Council, and Brazil's National Association for Intellectual
Property Protection have conducted an annual survey of consumers'
purchases of counterfeit goods and their attitudes toward knock-offs.
The findings in the market for toys are fascinating.  Executives at
Mattel, one of the world's largest toy makers, were amazed to discover
that the Brazilian market for counterfeit toys was three times as large
as the legal market.

The survey also revealed that in Northern and West Central Brazil, where
Mattel had no distribution network at all, counterfeit toys were
completely dominant.  What was most interesting was to find that the
prices of these counterfeit toys were higher than the prices for their
legitimate originals elsewhere in Brazil.

What does this mean for Brazil's long-term prospects for development?
Some activists claim that counterfeits are good for the poor because
they offer access to goods at a lower price.  However, these findings
demolish the idea that failing to protect intellectual property is
somehow pro-development.

Where counterfeit goods dominate, everyone is a loser except the
pirates.  First, the legitimate firm is losing business.  Second, the
consumer is paying more for the counterfeit goods than he would for the
legitimate product.  And third, the government is earning no tax revenue.

These findings led Mattel to develop a successful three-pronged strategy
that led to drastically improved operating results:

    * First, work with the authorities to expand enforcement and
training activities with customs to stem the tide of illegal imported
competition.
    * Second, introduce a popularly priced product to compete with the
fakes.
    * And third, expand distribution networks in areas where
counterfeiters have dominated the market.

PATENTS BENEFIT INVESTORS AND SOCIETY

For a second case study, consider the ways a patent benefits not just an
inventor, but society.

When an inventor obtains a patent, he is given a temporary, exclusive
right to exploit his inventions and thus recoup his investment.
However, inventors are not the only ones benefiting from patents.  When
applying for a patent, an innovator is obliged to disclose all the
information needed to reproduce his or her invention.

Consequently, when a patent expires, all of the business-sensitive
information on the patent application documents becomes public, thus
allowing other companies to leverage past innovations in the development
of new ones.

Lack of patent protection is a serious disincentive to innovators.
Consider such life-saving innovations as the new vaccine against Human
Papilloma Virus.  HPV is a precursor to cervical cancer which in turn is
the second leading cause of death among female cancer patients.

Merck's new vaccine against HPV is a stunning example of the kinds of
life-saving medicines the research-based pharmaceutical industry can
develop.  Studies have found the vaccine to be almost 100 percent
effective in preventing diseases such as cervical cancer that are
usually caused by the HPV virus.

Where did this vaccine come from?  To combat the relentless assault on
human health by bacteria and viruses, the pharmaceutical industry incurs
some of the highest research and development costs of any industry in
the world.  To create a new pharmaceutical product requires an
investment of about $800 million dollars.

It also takes more than a decade of research and testing to ensure the
product's safety and efficacy.  More than 90 percent of the industry's
prospective medicines fail in clinical testing, and only a small
minority of those that succeed manage to pay back even the cost of their
own research.  Without the temporary protection granted by patents,
copiers cheaply replicate these life-saving medicines immediately after
their release.

In light of these difficulties, what possible incentive do researchers
and entrepreneurs have to assume the vast risks, high costs, and long
time horizons of the pharmaceutical industry?  In a word, it's patents.
The absence of effective patent protections in some countries
effectively shuts down the ability of researchers to recoup their costs
and reinvest part of it in other research projects.

When a government seizes a firm's intellectual property --- as Brazil
did last year by issuing a compulsory license for an HIV/AIDS drug ---
the signal to the market is clear:  intellectual property can be
confiscated at will.

THE ROAD TO DEVELOPMENT

Protecting intellectual property doesn't just bring benefits to
innovators.  It's part of any effective strategy for developing
countries to attract foreign direct investment and technology transfer.
A strong intellectual property regime reassures potential investors that
their capital and their technologies will not fall prey to piracy and
counterfeiting.

Consider the broad social benefits that defending intellectual property
can bring to a small country, such as Singapore, with few natural
resources but the ingenuity of its population.  Singapore has
experienced tremendous growth that is directly linked to its strong
protections for intellectual property, which is considered to be among
the best in Asia.

Though Singapore is a tiny country compared to India, it has managed to
attract four times as much direct investment from around the globe ---
about $200 billion --- much of it in high-wage sectors that are reliant
on intellectual property.  Consider these examples:

    * Lucasfilm Animation, owned by George Lucas, the creator of the
Star Wars films, opened its only digital animation studio outside the
United States in Singapore in 2005.
    * BMW recently set up its first design studio outside Germany or the
United States --- in Singapore.
    * Pfizer recently opened a $600 million manufacturing facility in
Singapore.

None of this would have happened if Singapore lacked a strong
intellectual property regime.  Contrast this with Brazil, which in 2007
lost the opportunity to become the home of a huge new facility for
Novartis.  Switzerland-based Novartis identified the absence of strong
IP protections in Brazil as one of the chief reasons it chose to invest
in Singapore.
*
*The Novartis Institute for Tropical Diseases (NITD) in Singapore.
Brazil lost the opportunity to become the home of the new facility
because of the absence of strong IP protections, the author points out. **
**
THE MEXICAN EXAMPLE

In the Americas, Mexico offers an excellent example of how a country can
obtain significant benefits by protecting intellectual property.  Mexico
approved new intellectual property protections in 1991 as part of a
series of reforms that led to the North American Free Trade Agreement
(NAFTA).  Within five years, R&D investment in Mexico by the
research-based pharmaceutical industry tripled.

A World Bank study found a significant shift in the views of U.S. firms,
which in 1991 had been unwilling to transfer their newest technologies
--- even to wholly owned subsidiaries in Mexico.  Within a few years,
all of this had changed.

The country has attracted hundreds of millions of dollars in investment;
and these investments created thousands of jobs.  Today, Mexico has
become one of just a few countries in the world where pharmaceutical
firms first roll out their new life-saving medicines.

And contrary to the charges of some activists, Mexico has not seen
prices rise for pharmaceutical products.  In fact, these prices have
fallen.  At the same time, generics have become more widely available.

CLIMBING THE VALUE CHAIN

In the end, it's impossible for countries to attain sustainable
development without climbing the value chain.

South America has enjoyed a five-year period marked by some of its best
economic times in history.  Growth has been impressive, and it has been
sustained by high international prices for key export commodities such
as basic grains and metals.

However, the region has struggled to climb the value chain.  Its mixed
record on protecting intellectual property is one reason why.  Producing
agricultural commodities, minerals and metals, and light manufactures is
a recipe for low margins.  Patenting an invention or creating a brand
allows companies to propel themselves up the value chain to higher
margins, and thus higher wages and employment.

In some industries, copiers win a share of the market because they reap
profits from others' innovations, but they are just picking up the
crumbs dropped by the innovators.  They are trading a high-margin
business for a low-margin business dependant on others for its life blood.

THE PRICE OF PIRACY

The price of failing to protect intellectual property must also be
considered.  Too often, people claim that the theft of intellectual
property is a victimless crime.  Just as the gains from protecting
intellectual property can be measured in real money and real jobs,
failing to protect intellectual property has real costs as well.

Globally, the losses are approximately $650 billion annually.  In the
United States, losses from the criminal theft of intangible property
cost U.S. citizens 15 times as much as crimes such as theft and burglary
that relate to tangible property!

In Latin America, the losses are staggering.  The previously mentioned
study of counterfeiting and piracy in Brazil shows that the failure to
protect intellectual property undermines public finances in a
devastating way.

Looking at the losses due to counterfeiting and piracy of sports
footwear, apparel, and toys --- only three sectors in the economy ---
the study found the Brazilian treasury lost out on approximately 20
billion reais in tax revenues.  A similar study by the Recording
Industry Association estimates that piracy of recorded music robs
Brazil's treasury of another 30 billion reais in lost tax revenues.

Brazil's music industry illustrates how failure to protect intellectual
property undermines development.  Brazilian artists record about
three-quarters of all the music sold in the country, but 40 percent of
all music sold in Brazil is pirated.  The losers aren't faceless
multinational corporations, but Brazilian artists.

What's true in giant Brazil is also true in Latin America's smaller
economies.  A study the U.S. Chamber and AmCham El Salvador released
last December found that the sale of counterfeit and pirated consumer
goods in the San Salvador metropolitan area caused the loss of at least
$80 million in tax revenues last year.

Nor are these losses limited to large, foreign multinationals.  In 2005,
El Salvador-based manufacturer Gamma Laboratorios reported that
counterfeit medicines caused economic losses of around $40 million for
the country's pharmaceutical industry.

A THREAT TO HEALTH AND SAFETY

To these economic losses, we must add the health and safety threat posed
by counterfeiting.  According to the World Health Organization,
approximate 25 percent of the medicines sold in developing countries are
counterfeits of dubious medical value.

Even worse, these fake medicines can be deadly.  In 2006, 365 people
died in Panama after taking a cold medicine that was later determined to
be counterfeit.  Cell phone batteries that explode, infant formula that
provides little or no nutritional value, electrical extension cords that
start fires, and brake pads that don't brake --- these are also among
the health and safety hazards posed by counterfeit goods.

Interpol reports that counterfeiting and piracy are among the preferred
methods of funding for a number of terrorist groups.  One example is the
1993 bombing of the World Trade Center in New York, which was financed
by sales of the most mundane product --- counterfeit T-shirts.

The main attraction for terrorists is simple: Trafficking in counterfeit
goods brings high profits and low risks.  Interpol estimates that
counterfeiting and piracy can be far more profitable than
drug-trafficking.  Criminal gangs like it because, even if you get
caught, the punishment is generally light.  But these are not victimless
crimes.

THE U.S. CHAMBER'S PLANS

The ability to protect knowledge-based intellectual property is
essential to the development plans of countries around the world.
However, the intellectual property of innovative industries is
increasingly under assault around the globe.  Some governments and NGOs
are aggressively seeking to erode patent, trademark and copyright
protections and to undermine innovation- and research-based industries.

Opponents of intellectual property are also waging a battle for public
opinion.  They attack the very concept of intellectual property,
defining it as an outdated notion and a barrier to access to life-saving
medicine and critical technologies.  They insist that businesses,
innovators, and engineers should give away their hard work so it can be
made available free of charge to others.

A growing disregard for intellectual property may lead us down a
dangerous path.  If it doesn't stop, we could face a future where the
incentives for research and development have been wiped out.

In response, the U.S. Chamber of Commerce is working with friends and
allies in business, government, and civil society to fight back.  Last
year we launched the Global Intellectual Property Center.  Its mission
is to champion intellectual property as a vital engine of global
development, growth, and human progress.

Our goal is in part educational.  We must educate the public and
policymakers about the value and importance of intellectual property.
Internationally, the center will join with like-minded allies to advance
our cause in countries and global forums where intellectual property is
under attack.

Entrepreneurs in every country pour money, time, sweat, and their whole
hearts into creating the next innovative breakthrough.  In return,
policymakers must make sure that these innovators have the comfort of
knowing that their ideas will be protected.  The road to development
begins with innovation, and intellectual property is the engine that
will get us there.


John Murphy is Vice President for International Affairs at the U.S.
Chamber of Commerce and Executive Vice President of the Association of
American Chambers of Commerce in Latin America (AACCLA). This article is
based on an address he delivered at the Americas Innovation Forum in
Punta del Este, Uruguay, on March 31, 2008.


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Malini Aisola

Knowledge Ecology International

1621 Connecticut Ave., NW, Washington, DC 20009 USA

Tel.:  +1.202.332.2670 Fax: +1.202.332.2673