Developing World Antitrust

By Monika Hasbún*

It is generally acknowledged that patent rights, in an economic sense, work as an incentive to promote innovation. Nevertheless, it must also be acknowledged that this incentive can also generate inefficiencies. For this reason it is necessary to question and evaluate the scenarios in which patent rights do not necessarily promote innovation but can actually be detrimental to it.

The World Intellectual Property Organization defines a patent as “…an exclusive right granted for an invention, which is a product or a process that provides, in general, a new way of doing something, or offers a new technical solution to a problem”. The protection is granted for a limited period, generally 20 years from the filing date of the application. Any product or procedure that receives this protection, cannot be commercially made, used, distributed, imported or sold by others without the patent owner’s consent.

The main argument to justify patents is the necessity to stimulate invention. Innovation is based on the idea of producing knowledge. Knowledge, considered as a public asset, has two attributes: First, the amount of available knowledge does not diminish when others use it (“non-rivalrous good”). Besides, once it has been produced, others can benefit from it (“non-excludable good”). These aspects produce a market failure so that not sufficient incentives are available that encourage economic agents to innovate.

To solve this dilemma, the patent system establishes two mechanisms that permit inventors to maximize their externalities: (i) The granting of a temporary monopoly on the invention, which works as a protecting mechanism that allows the right owner to obtain a retribution because of his dominant position, for a determined period of time and geographic area; and, (ii) The requirement to publish the invention. The right owner has to disclose and publish the details of its innovation. This way a patent right offers, in principle, an incentive for the study of new technologies by allowing the right owner to exclude competitors from the market and requiring the publication of the innovation details. Nevertheless, there are some cases in which patent rights do not necessarily act as an incentive to innovation.

The first aspect to be addressed is the quality of the patent right that is granted. The basic idea is the following: If everything is patentable, there is no innovation. If products or services that are not novel or innovative are patentable, those that truly are, might not obtain the required protection. This strategic use of the patent system of doubtful quality impedes third parties to innovate and compete in the creation of products that are truly innovative. For example, regarding pharmaceutical products it is extensively discussed whether simple chemical or formula changes should be considered as an authentic innovation. In this case, patent applications should be thoughtfully and carefully analyzed, so as to guarantee that the proposed innovative product presented in the patent application deserves to be recognized with a monopoly right.

It should also be considered, that depending on the sector where innovation needs to be promoted, patent rights may result unnecessary. For example, according to conducted research, patents do not seem to be essential to promote innovation in the service sector. In Japan, for example, the percentages of firms holding patents are 39.2% for manufacturing firms and 9.8% for service firms, a large and statistically significant difference.[1] This suggests that appropriation mechanisms other than patent filing, such as secrecy and lead-time, play an important role in this matter. The benefits provided by the advantages of arriving first to the market, complementary assets and network externalities result, at times, sufficient so that inventors in service companies recover their research and development investment costs and decide to innovate. It is even acknowledged that a patent right may result unnecessary as long as an invention can be maintained in secret without further ado.

In a similar manner, innovation in SMEs is commonly conducted by more “informal” means. This sector usually deals with incremental improvements or minor modifications to existing products which respond to concrete demands of the market. For small enterprises it is difficult to destine resources to obtain a patent right, since doing this would imply that less resources are destined to their innovation activities per se. For this reason they prefer to use alternative strategies of protection, such as the launching time in the market, investing in complementary assets, among others.

Finally, a country’s development level is also a key factor when analyzing the efficiency of patent systems. The existing asymmetry in the innovation capacities among developed and developing countries has an impact in the way agents in these countries respond to the patent protection system. In the case of developing countries, different from developed countries, companies demand and consume more technology than that which is internally produced, so that they become “technology importers”. Their investment in research and development is extremely limited, so that the granting of patent rights is practically non-existing. Companies in such countries tend to limit to the imitation and adaptation of technologies, so that patent rights result unnecessary and can even act as a barrier to the import of different technologies. Besides, developing countries do not generally have patent protection systems that are sufficiently mature so as to act as an actual incentive to innovation.

Patent rights and competition are closely connected. On the one hand, patent legislation seeks to promote innovation by awarding an exclusive right that prevents the patented invention from being commercially exploited by third parties. On the other side, competition legislation seeks to impede the abuse that such right owners could perform.

Considering that patent rights could act as a legal instrument that obstructs competition, it should be evaluated, according to the previously exposed ideas, that its justification is not always legitimate. It is not always the case that patent rights promote innovation. In determined cases patent rights may result unnecessary and even harmful to attain it. For this reason, so as to achieve an adequate patent system and the rewards it offers, without excessively restricting competition, the context in which the patent right is being granted should be carefully evaluated so as to determine its efficiency.

*The author is a lawyer and notary public in El Salvador, holds a bachelor of laws degree from the Universidad Dr. José Matías Delgado and has postgraduate degrees in public policy management and in law, economics, and business. She is currently a senior legal counsel in the Salvadoran competition authority.

[1] Morikawa, Masuyaki. (2014) “Protection of intellectual property to foster innovation in the service sector”. Available at: http://voxeu.org/article/intellectual-property-and-service-sector-innovation