Intellectual Property Rights and East Asian Renaissance

The Kyoto University Institute of Economic Research (KIER) has built an international reputation centered on research into economic theory, but in recent years the institute has sought to move beyond theoretical research and strengthen its capacity for applied research in order to examine empirical and policy-oriented issues. As part of these efforts it has teamed up with the Research Institute of Economy, Trade and Industry (RIETI) to conduct joint research focused on the international economy. This is the first international symposium to be held under the terms of the partnership agreement reached between KIER and RIETI in July 2007.

The invention and dissemination of new technologies is essential to today's global economic development, especially the remarkable expansion of trade and economic growth occurring in East Asia. Expansion of trade and economic growth are closely linked in East Asia, and for the region to achieve an even higher level of development, the protection of intellectual property increasingly needs to be considered from the standpoint of an international institution.

When it was still known as the Research Institute of International Trade and Industry, the Research Institute of Economy, Trade and Industry published a monograph (1990) concerning the current conditions and outlook for regional economic integration. This was also a time of considerable uncertainty surrounding the future of multilateral trade negotiations under GATT. The emergence of "fortress Europe" appeared threatening, and much concern was being expressed with the move toward FTAs by the United States and others. The views advocated at the time can be summarized as follows. First, regional integration must be consistent with GATT, and Japan should insist that regional integration in all parts of the world remain consistent and compatible with the GATT framework. Second, a very cautious stance must be taken on the question of whether Japan should promote policies for regional economic integration as an alternative to maintaining and strengthening the multilateral trade system. However, with the start of the 21st century, Japan was overwhelmed by the wave of FTAs and EPAs that were being established between countries and regions throughout the world. As a result, more recently, Japan has come to take an active position in promoting regional economic integration. Notwithstanding these initiatives, unless Japanese policies for regional economic integration succeed in overcoming a number of obstacles, there is a real possibility that Japan may become increasingly inward-looking. Should that happen, the question of "Quo Vadis the WTO?" would be replaced by cries of "Quo Vadis Japan?" reverberating around the world. In this symposium today, we will be addressing the issue of the future of the world in the context of the WTO and regional economic integration acting as the two wheels of the cart. We will also be considering future directions for Japan's trade policies. I look forward to active discussions on these topics.

This session featured four presentations based on awareness of the close link between globalization and protection of intellectual property rights (IPR). East Asia has developed into the world's factory on the back of the evolving global economy, and the first report cited examples from the European Renaissance to suggest that the region should promote its own intellectual renaissance and aim for further rapid progress. In the second report a U.S. expert reviewed economic aspects of current trends and prospects for global IPR protection issues. China has experienced remarkable growth in recent years, and the third presentation reported on the current situation and change in China's domestic IPR environment. In the final presentation, a Japanese expert drew on results of empirical economic analysis to report on the relationship between IPR protection and international trade.

RIETI President Masahisa Fujita began the presentation session with a report on "Globalization and East Asian Renaissance," which made the following points.

In common with the European Renaissance, the East Asian economic integration seen in recent years has featured rapid reduction of "transport costs" for people, goods, and money as a result of developments in transportation technology and information and communications technology (ICT).

East Asia is currently the world's factory, but to boost productivity it needs to become a world innovation center. For example, awareness of such issues has prompted China to emphasize innovation, as shown by its formulation of a National Plan for Scientific and Technology Development.

Diversity is a key factor in building a knowledge-creating society. In other words, we need to utilize the synergy generated by diverse brains working collectively. To generate intellectual synergy it is important to have a certain amount of common knowledge, as well as knowledge possessed by individuals. If polarized concentration of knowledge workers continues, the body of common knowledge swells and synergy decreases. Exchange of human resources in and among organizations, cities, and regions is essential to prevent this.

Looking at patent citations as an indicator of intellectual exchange, we see that there is lively exchange within Europe. Japan and the U.S. account for most patent citations in East Asia. However, the electronics industry conducts lively intellectual exchange within East Asia and it is important to promote such exchange in other industries too.

Approximately 80,000 Chinese students are currently studying in Japan, more than the number studying in the U.S. Ongoing promotion of human exchange is vital, and living in harmony with East Asia's diverse human resources will be important for both Japan and East Asia as a whole.

The question of how to consider the nature of IPR is becoming increasingly important in promoting this kind of East Asian intellectual renaissance. While measures to prevent counterfeit goods and other steps are required to address defensive issues, we need to design systems aimed at accelerating innovation from a long-term perspective.

In a presentation titled "Enforcing IPR: Recent Trends and Prospects for Global Collaboration," Professor Keith Maskus reported on economic aspects of stronger global IPR protection.

There is a trend toward increasing infringement of intellectual property rights. According to the copyright industry, dollar losses are rising in East Asia. Globally $32 billion worth of counterfeit medicines were produced in 2005; although one-third of these have medicinal effects, the remainder is not only ineffective, but also presents a public health risk. In addition to causing losses for patent and trademark holders, they put consumers at risk.

Infringement rates are greatly affected by economic development. Age structure, market size, industrial structure, and distribution channels also have an effect, as do cultural background, the extent of law enforcement and litigation costs. Thus infringement rates vary widely from one country to another, and for enterprises the costs of protecting their intellectual property also vary widely.

To what extent does IPR protection affect international trade? This is an important question, but a difficult one to answer. It is particularly difficult to quantitatively measure the extent to which protection and enforcement activities are being conducted. According to quantitative economic empirical analysis conducted to date, middle-income developing countries have spurred technology transfer and innovation by strengthening IPR protection. Furthermore, data analysis from the U.S. shows that enterprises there increased the number of license contracts issued following overseas IPR reforms.

The TRIPS Agreement has the biggest influence on international enforcement, particularly given that it offers access to WTO dispute settlement mechanisms. The U.S. is calling for TRIPS-Plus standards that go beyond the agreement in fields such as pharmaceuticals, but recently there has been a trend toward exempting developing countries.

The existing IPR system lacks flexibility regarding legal enforcement. We need to think about how we can accelerate innovation while suppressing counterfeit goods and IPR infringements. One possibility is for enterprises to secure access to global technology and know-how through payment of a certain fine in cases with a great degree of innovation, even if they infringe IPR. There is room to consider pooled licensing as one example of an efficient licensing model. Given that excessive costs for legitimate access to IP goods are one factor causing infringements, price differentiation could be another solution. We also need to support enforcement activities in developing countries. Mutual recognition of patent examination procedures would alleviate the burden on rights-holders.

The third presentation, by DRC Enterprise Research Institute Director Xiaohong Chen, reported on "Innovation and Intellectual Property Environment at Chinese Enterprises: Current Situation and Change."

Chinese enterprises have been giving greater attention to innovation. The trend is for higher R&D expenditure, increased patent filings, and establishment of more R&D facilities. Some enterprises are trying to build international R&D networks. However, the nature of most innovation has been imitation, improvement, or integration, and there are few high-added-value products.

The innovation environment for Chinese enterprises is changing. Up to this point developments were considerably influenced by structural reforms and foreign firms, and corporate understanding of innovation has been weak. However, China's WTO entry had a major impact, and competition with foreign firms and other Chinese enterprises is becoming fiercer day by day.

Chinese enterprises are displaying a great deal of interest in collaborative efforts aimed at innovation. R&D tie-ups with government agencies are one such form of collaboration, and cooperative R&D activities with other enterprises are another, but companies are most interested in the former. As for the latter, we can see a trend toward major corporations playing key roles as they endeavor to expand their R&D alliances.

China's IPR system has been set up to meet international standards from the legislative perspective, but there are issues around enforcement of the law. At the enterprise level there are also issues related to awareness and administration of IPR.

A national intellectual property strategy needs to be formulated in order to spur innovation, and the following principles are particularly important: balanced benefits, linking innovation and fair competition, compliance with international rules such as TRIPS, leadership based on understanding of each sector's particular characteristics, and encouraging enterprises to improve intellectual property strategies and technology management. According to a recent corporate survey, few enterprises have intellectual property strategies.

Looking at specific regions or enterprises, we can see success stories. In places such as Shenzhen, local governments have drawn up IPR outlines to supplement national regulations, and training of IPR specialists is progressing. Some leading Chinese enterprises are establishing intellectual property strategies and strict technology management and achieving growth through active R&D efforts. While there are disparities between regions and between enterprises, such dynamic enterprises will play a central role in further expanding these kinds of initiatives.

Professor Ryuhei Wakasugi made the fourth presentation, on "Intellectual Property Rights and International Trade."

Major disparities exist among countries in terms of IPR protection. While various factors account for these international differences, there is a correlation between the level of IPR protection and GDP per capita.

International harmonization of IPR protection is not an easy task. Protection forms the basis for incentives to invent, and while granting exclusive rights to inventors assures they can reap the benefits of their inventions, it disadvantages consumers by pushing up prices of goods and services. When it comes to trade, there is a tendency for countries to seek stronger protection of their own intellectual property overseas while conversely easing protection at home in an attempt to secure benefits for consumers. In cases where countries' sizes or invention outputs differ, it is difficult to get levels of protection to match.

At first glance trade liberalization and IPR protection appear unrelated, but in fact they have a close relationship. If we refer to developed countries as "North" and developing countries as "South," we see that the North creates new technologies and transfers them to the South, where they are used to produce goods that are supplied to the world. Sound operation of this cycle can achieve economic development, driven by the twin engines of economic growth and technological innovation. Excessive protection hinders growth, and there is no theoretical consensus on how best to resolve this issue.

Empirical analysis regarding the impact of IPR protection on international trade shows that stronger overseas IPR protection generally has a positive effect on local production and export of Japanese multinational corporations, R&D activities, and intra-firm technology transfer.

Focusing on East Asia, it is important to consider that production processes are increasingly being conducted offshore. A survey of Japanese firms showed that more than three-quarters of firms have overseas procurement networks throughout East Asia.

When dividing production processes among countries through offshoring, it is vital to be able to use common technologies. Protecting IPR can create favorable conditions for technology transfer by increasing transparency and the potential for technology trade contracts. Stronger IPR protection will further boost the existing global trend toward offshoring centered on East Asia, and will be a crucial key to promoting growth throughout East Asia.

Turning to policy issues, it is necessary to simultaneously consider trade liberalization and support for enforcement of IPR protection. Multilateral agreement among not only developed countries but also emerging countries with large markets such as China is crucial for the effective enforcement of IPR.