Few people understand that intellectual property rights (IPRs) underpinned the industrial revolution in Europe and play a fundamental role in economic growth. IPRs will be an essential stimulus to creating the new clean energy revolution: the catalyst for the investments, innovation, diffusion and deployment of the low-carbon technologies we need to limit and reduce greenhouse-gas emissions. Strong IPRs will provide the incentive for innovation. Any arguments that IPRs are “a barrier to technology transfer” are, quite simply, wrong. Policy interventions are required to price in the externalities so that the price signals will drive the market.
IPRs provide the incentive to innovate; to make risky investments in developing, marketing and installing new technologies. History shows that most such investments fail. But companies will still invest in risky projects with large potential markets if there is a predictable business climate without the risk of appropriation of the upside (through copying by competitors or compulsory licensing) if the investment is successful.
The fastest and most effective route to delivering new low-carbon products will be through the marketplace. Strong IPRs are necessary for this, with policy interventions required to price in the externalities so that the price signals will drive the market. Any market failures need to be addressed in the context of generally maintaining strong IPRs.
The start of the industrial revolution in Britain is a vivid reminder of what we owe to the patent system and its influence on investment in high-risk, new technologies. The development of the steam engine by James Watt was possible only because the patent system enabled him to raise large sums of money to continue the development of his engine over a long period, despite initial failures and the bankruptcy of his first backer. The Victorian industrialists, using the patent system to its full effect, then went on to transform the economic welfare of the west over the next 250 years.
In short, IPRs provide: the incentive for business to invest in risky projects aimed at meeting market needs; legal clarity and certainty for technology transfer transactions to take place; the choice to the IPR holder how their inventions will be used – owning IPRs is separate from the decision of how much, or whether, to charge for them; and the ability to prevent others from blocking the use of a technology through subsequent invention and associated IPRs. Let’s look at these points in more detail:
An incentive to invest
The volume of technology development necessary to make a real difference in low-carbon technology competitiveness is likely to be very high. In order to develop new low-carbon technologies, businesses will need to invest in their development. In order to attract sufficient resources, those investments need the incentive of generating attractive and sustained returns if they successfully create new products. IPRs, particularly patents, provide that incentive. They provide clarity and certainty about the ability to capture the revenue streams which are created when investment is successful. Businesses will invest in risky projects if they have reasonable certainty, provided by IPRs, that they will be able to benefit from success – even if the probability of success is low.
Developing innovative low-carbon technologies in short timescales will need massive investment in many technologies and products. Most investors will lose their bets, but a few will get very rich – a small price to pay for technology that we need to change the world. Strong and predictable IPR regimes create the environment for generating these big rewards.
An example is the biotechnology and genetic research industry. Most biotech companies fail, but the combination of relatively modest government funding and the subsequent investment of many hundreds of billions of dollars in the companies is now beginning to generate therapies that benefit patients. A rational analysis suggests that biotech investors, cumulatively, will not have seen a good return on their investments. Nonetheless, the investments have been made in the hope that they will bring a return and some companies, such as Amgen and Genentech have clearly been very successful. In this sector, strong IPRs have been fundamental to progress.
Compulsory licensing and market failures
A quick way to deter technology development in the private sector would be to reduce the potential returns to the technology developer through the threat of compulsory licensing. This happened de facto on a large scale in the United States in the 1960s and 1970s through consent decrees with about 100 companies with a subsequent depressing effect on their research-and-development and new product development. If we are to stimulate the development of the many new technologies needed to address climate change, then we must create the policy environment for one of the most profound waves of investment in history. That is not likely to happen by interventions that reduce the return on technology development, such as the specific or potential threat that any new technology may be subject to compulsory licensing. Threats to strong IPRs, such as easily-obtained compulsory licensing, are likely to be a strong disincentive to invest. The problem with leaving the market to solve this problem is that most low-carbon technologies are not yet cost competitive at current prices. In the near term, current low-carbon technologies are unlikely to be market competitive compared with fossil fuels, without appropriate price signals or pressures such as cap-and-trade/carbon-credit programmes and emissions cap mandates like those embedded in the Kyoto Protocol or in the California Air Resource Board standards. The primary issue for policy makers is to solve these market-failure pricing problems. Any theoretical “IP constraints” are very minor when compared with the failure to address the carbon pricing externalities.
Any market failures should be addressed in ways that avoid damaging the benefits brought by the IPR system.
Legal clarity for technology transfer
Whether you wish to give away a technology free of charge or to license it, you cannot do so unless you can identify what it is that you want to transfer. You are not entitled to give away something that you do not own. IPRs provide that legal clarity and certainty. Whether that IPR bears a price is a subsequent decision. IPRs provide the framework around which legal agreements for technology transfer can be structured. Without IPRs, agreements cannot be properly defined.
IPRs enable enforceable global and compatible standards to be established with their associated patent pools.
Freedom of choice
The creation and ownership of IPRs are quite separate from the decision of how those IPRs are to be used. Without IPRs, there is no choice: there is nothing to give, nor can you transfer (or sell, or license) rights so that others can invest in its further development.
With clarity of ownership comes freedom to choose how that ownership right will be exercised. An example is open source software: copyright is an essential IPR underpinning open source. Without it you can neither specify what you are putting into open source nor demonstrate that it is not owned by someone else. Open source is a good example of both confusion in IPR terminology and misunderstandings about the role of IPR. The correct definition of open source is that the source code is open and anyone is free to develop it. Yet many people think it means “free software without IPRs”: open source only works if there are IPRs, because the IPRs define what is being placed in the public domain and that no one else can lay claim to it. The consumer has to pay for much open source software because it is up to the developer of such software whether they charge for it or not. Open source is a different business model for software, but based wholly on the pre-existence of IPRs, predominantly copyrights.
The ownership and use of IPRs should be agreed before any collaboration starts. A good example is BP’s clean energy programme at the Dalian Institute of Chemical Physics in China. This is the fourth such technology research centre to be funded by BP and one of the largest international collaboration projects for the Chinese Academy of Sciences. It took two years to discuss, negotiate and agree how the IPRs were to be handled (including background, sideground and foreground IPRs and new IPRs). Both sides are pleased with the structure. It is clear, fair and balanced, providing the incentive to both parties to collaborate, invest and work effectively together.
Patents require the publication of the technology. This is a valuable tool for those doing research because it is an easily accessible resource, although often underused. Companies have the alternative of keeping their ideas secret for as long as possible, which reduces the ability of others to build upon them. The patent publication requirement forces early dissemination, promoting diffusion of the technology.
Preventing blocking patents
Not patenting can lead to a technology being blocked or constrained in its use. In the 1930s, penicillin was invented in the United Kingdom. At the time it was not possible to patent medical inventions, as this was thought to be immoral. The technology was passed to the US government in the early 1940s for further development and production. The US companies who produced it patented the production technology. When the UK wanted to produce penicillin in the mid-‘40s, UK companies had to pay large royalties to the US companies for the right to use their patented production technology. If they had chosen to, the US companies could have refused to license and blocked the UK companies entirely from the market. Had the UK patented penicillin itself, it would have controlled what happened to penicillin. Even if they had not charged the US companies for the right to manufacture and sell penicillin (which a patent would have entitled them to), the UK could have negotiated a royalty-free license to produce it.
Important technologies, even when funded initially by the public sector, should still be patented. The patent owner has ownership of the rights and can then decide and control how they are to be used.
This article is the second part of a series about intellectual property. Read the other parts here:
Technology and IP: problems and solutions
IPR and low-carbon technologies
Ian Harvey is chairman of the Intellectual Property Institute. This article includes work undertaken for Tony Blair’s “Breaking the Climate Deadlock” initiative and the Climate Group.
© Ian Harvey, October 2008
Homepage photo by Lori Spindler