Expectations for Discussions at the Strategic Council on Intellectual Property

Fellow, RIETI

Amidst the current climate of calling for national "strategies" for any public policy, the Strategic Council on Intellectual Property was launched on 20 March, 2002. The objective in convening this conference was to elucidate the necessary Intellectual Property (IP) strategies with a view of "enhancing the international competitiveness of Japanese industries and revitalizing the economy."

It is unprecedented that IP policies are being discussed in a forum headed by the Prime Minister himself. Moreover, these discussions are expected to have a significant influence on future IP policy. In this paper I will briefly explain the points that I believe the Strategic Council on Intellectual Property should take up for discussion.

Background to the Establishment of the Strategic Council on Intellectual Property

As mentioned above, the Council hoped that IP will help Japanese industries restore their competitive edge. There is little dispute that knowledge creation and management will be important as the knowledge-based economy evolves. Yet there are also a number of people who consider that by strengthening the legal protection of IP rights, the government should enhance industrial competitiveness. The presupposition behind this is that the United States, which directly faced a decline in the competitiveness of its manufacturing sector at the end of the 1970s, pursued Pro-patent policies in the 1980s, and provides a perfect example of the recovered competitiveness that it achieved in the 1990s. Some people have suggested that by following this precedent, Japan should actively pursue a Pro-patent policy. It is true that around 1980, the United States began to strengthen IP rights, the so-called Pro-patent policy (through such measures as the establishment of the Court of Appeals for the Federal Circuit, the expansion of patentable subject matter in software and bio-technology, the enactment of the Bayh-Dole Act, and trade policies to force other countries to enhance IP protection). In the 1990s, the productivity of the U.S. economy increased, many competitive firms emerged in the IT and bio industries, technology was successfully transferred from universities and start-ups from universities also were born.

The Effect of Strengthening Intellectual Property Rights: Does It Strengthen Industrial Competitiveness? - Still Unclear

The issue at hand is whether or not there is any relationship between Pro-patent policy and industrial competitiveness. It is extremely difficult to provide an empirical explanation on this point and although it may be beyond the capabilities of this writer, I would like to mention briefly the points of issue.

It is considered that a Pro-patent policy could have an effect on industrial competitiveness in three ways: (1) to stimulate the creation of IP itself; (2) the legal protection of IP will contribute to a competitive edge; and (3) to encourage the practical application of the results of university research by protecting them as intellectual property rights. Concerning the first point, it is certainly the case that with the 1980s as a turning point, the number of patent applications in the United States suddenly and dramatically rose. However, according to a study by S. Kortum and J. Lerner of the United States, in which they statistically analyzed various application data, rather that the increase being brought about as a result of the institutional change of Pro-patent policy, they suggested that this could be a result of placing emphasis on more applied research in R&D (however, it should be noted that the "applied research" hypothesis was made by an elimination method, and a positive correlation was not tested, in addition to the fact that the data that they used was the number of patent applications, and qualitative aspects were not reflected).

So what about the second point? Although the data is somewhat out of date, according to the results of a survey (see the table below) carried out on Japanese and U.S. firms in 1994, as a means to secure appropriability (the degree of benefits that can be enjoyed by innovators out of the benefit for society as a whole from their innovations), most companies from both Japan and the United States responded that early entry into the market was their most effective tool, and when compared to other methods, it was found that patents were not so effective. What was most interesting was that in the United States where it should be expected that Pro-patent policies were being dynamically pursued, it was found that the effectiveness of patents was actually relatively lower than in Japan. (Of course the objects of this survey were the companies as they existed in 1994, and accordingly it does not reflect the opinions of newcomers and venture companies that emerged in the latter half of the 1990s, and it should be noted also that the survey does not demonstrate the diachronic changes before and after Pro-patent policy).

Effectiveness of Methods to Ensure Appropriability for Product Innovations
JapanUnited States
1Early entry into the market Early entry into the market
2Protection through patentsConcealment of technology information
3Control of manufacturing facilities and know-how Control of manufacturing facilities and know-how
4Control of sales and services networks Control of sales and services networks
5Concealment of technology information Complexity of production and product design
6Complexity of production and product design Protection through patents
7Other legal protection Other legal protection

(Compiled from Akira Goto and Akiya Nagata, "Appropriability of Innovation and Technical Opportunities," National Institute of Science and Technology Policy (1997), p.18)

Next, what about the third point? Participants from the United States in the RIETI Policy Symposium "System Design of University-Industry Co-operation" that was held in December 2001 (Professor Richard Nelson of Columbia University, Professor David Hodges, University of California, Berkeley) both stated that with the exception of the bio-medical sectors, it was their understanding that the role of intellectual property rights in university-industry cooperation in the United States had been marginal.

Concerning the effect of Pro-patent policies, although it is certainly the case that more empirical research is required, at this point at the very least it is unclear what effect strengthening intellectual property rights has had in the competitiveness of U.S. industries. Even if patents were effective for venture businesses with no other assets, too much expectation should not be placed on intellectual property rights as a means to restore competitiveness or productivity of existing companies across industries.

Spill Over Effect and Incentives for High-risk Research Activities

The above is not intended to suggest, however, that this writer is simply supporting the anti-patent view that patents are not favorable because they are monopolistic. When compared to secrecy, patents do have spill-over effects. Moreover, in the above-mentioned questionnaire survey, it was found that on an all industry basis, the effectiveness of patents was not so high, whereas it was quite high in the pharmaceutical industry. As is often said, R&D in that industry is uncertain and highly risky because a few substances out of thousands of target substances are chosen for clinical trials and only one substance is to be approved as a medical drug. If reward for successful cases were not too high then incentives for R&D would be lost. In regard to this point, F.M. Scherer of Harvard University has developed a theory he has dubbed "Innovation Lottery." Scherer, having examined the results of each individual innovative activity and its economic value, found that while on the one hand only a very small number of innovations bore enormous profits, a great number of innovations resulted in hardly any economic value, leading him to explain innovation as being analogous to a lottery. Given the limits of this paper, although I will omit some of the details, the main point is that just as it is the high cash prize you earn when you win the lottery that motivates the purchase of lottery tickets despite an extremely low probability of winning, it is the high reward to successful innovators that provides incentives for uncertain and high-risk R&D. Here, one of the important implications is that when successful innovators use patents and enjoy their benefits, patent protection cannot be weakened simply because the profits are too large.

Strengthening Patent Protection for Outstanding Inventions, While Preventing the Abuse of Rights

The Innovation Lottery theory suggests that high returns on truly outstanding inventions are good and that it is justified to strengthen patent protection. However, the issue is that the current patent system is said to be a "one size fits all" system, with all patents acquiring the same rights, regardless of the invention's technical importance or value. This assumption is based on the way of thinking that the value of technology should be decided not by government, but be left to the market, an argument which itself carries a certain rationality. This of course implies that patents are actually provided to inventions with almost no value in order to provide patents to those very few inventions that may prove to be of high value. This is all very well if it is merely that the great majority of these inventions hold no value, but what happens if they include rights with questionable validity and these rights begin exercising their exclusive power? The abuse of rights can be avoided by not granting the rights at the examination stage. This accordingly implies the importance of high quality patent examination. However, in reality, examination is not perfect. In order to ensure that the Pro-patents do not lead to the abuse of rights, it should be discussed how to deal with validity issues in infringement courts.

How to Utilize Intellectual Property Effectively - Importance of Competition Policy

Another point that cannot be overlooked is that while encouraging the creation of intellectual property, at the same time what should be done to fully utilize IP? The issue of the trade-off between the protection of intellectual property and its utilization is not new, but should be reconsidered in today's context. Even though on first glance it seems that monopolies have been created through the existence of intellectual property rights, it may not cause a problem in circumstances in which competition in the R&D market exists with the rapid innovation and constant creation of next-generation innovations. On the other hand, there are many issues that need to be reviewed, such as the hold-up issue accompanying the formation of technology standards, and also the issue of the underuse of inventions in cumulative innovation due to the proliferation of IP in upstream or first generation inventions. (Concerning this point, refer to an earlier column entitled, "The Tragedy of Anti-commons - the Light and Shadow of Privatization of Knowledge"). In such a situation, what will be of real importance is the role of competition policy in its broad meaning (not only limiting measures provided in anti-monopoly laws, but including mechanisms that are embodied in the intellectual property rights system, such as compulsory licensing). The United States, a Pro-patent country, is also a strong proponent of competition policy. It has been pointed out by many scholars that when US initiated a Pro-patent policy in 1980s, there was a great influence by the Chicago School in favor of the relaxation of anti-trust laws. Apart from the issue of whether the Microsoft case is good or bad, this case illustrates that in the United States, the presence of competition authorities such as the Department of Justice (DOJ) and the Federal Trade Commission (FTC) looms very large. At the beginning of this year, the DOJ and the FTC entered into public hearings once again concerning the relation between intellectual property rights and competition policy and it is thought that these hearings will have a not inconsiderable effect on IP policy in the United States in the future. In Japan too, the Fair Trade Commission of Japan (JFTC) is set to convene a "Research Committee Concerning Patents and Competition Policy in New Areas," but it has no fixed relationship with the Strategic Council on Intellectual Properties. In the Strategic Council too, I expect that discussion will be undertaken based on the importance of such competition policy.

Balanced Discussion Towards Sustainable Innovation

In order to promote innovative activities, it is a good idea to provide incentives through patent protection (ex ante competition). At the same time, it is a good idea that once knowledge and technology are created, they be widely used (ex post competition). If one or both of these forms of competition were to stagnate, innovation would not be sustainable. Putting aside the question of whether strengthening intellectual property rights has a positive effect on industrial competitiveness, the intellectual property system that supports sustainable innovation is a challenge that requires careful review, now that innovation is a source for future economic growth. I expect the Strategic Council on Intellectual Properties to engage in balanced discussion towards the realization of sustainable innovation.

April 15, 2002

April 15, 2002

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