Intellect & Investment

IP protection systems vary wildly between countries, leaving investors unsure of how safe their trade secrets are, write Roland Mallinson and Professor Michael Mainelli.

FDI is intimately linked with intellectual property (IP). Indeed, the protection of IP is a strategic issue for investment locations. Who wants to take advantage of foreign comparative advantage only to lose their competitive advantage?

Edwin Mansfield, in a 1991 survey of 94 US businesses, concluded: “The strength or weakness of a country’s system of IP protection seems to have a substantial effect, particularly in high-tech industries, on the kinds of technology transferred by many US firms to that country.”

Many policymakers believe that this survey and similar studies prove the need for strong patent systems. However, Mr Mansfield and his peers only asked about IP systems in general; they did not analyse patents, copyright, trademark or trade secrets specifically. The World Intellectual Property Organisation, the OECD and other inter-governmental bodies publish patent, trademark and anti-counterfeiting statistics, but there has been no single and up-to-date point of reference by which the IP regimes of different jurisdictions can be readily assessed against each other over time.

The principal forms of IP protection are patents, trademarks, copyrights and trade secrets. Modern patent, trademark and copyright conventions are rooted in the establishment of the US Patent Office in 1790 and the UK Patent Office in 1852. From the beginning, patents have been widespread and recognised as a deal between the state and the holder of the letters patent, ie, an open letter issued by a monarch or government granting an office, right, monopoly, title or status to somebody or an entity, but typically in return for a service or funds. Trade secrets are frequently ignored but what greater protection can one have than total secrecy?

Clear link

Today, FDI and trade disputes are inextricably linked with IP. The US and the UK are the only two nations that consistently receive net balance of payment benefits from IP, so unsurprisingly they are among the chief supporters of IP systems. The US believes that more than 50% of its exports depend on IP. Western economies try to export a different model of IP from the one that built their economies; the UK Patent Office was only set up after the Great Exhibition of 1851 due to concerns about theft from emerging nations. The Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement of 1994, negotiated under the World Trade Organization, is trying to harmonise IP laws.

As US patents soar, the success rate of applications is fairly stable – about 50% during the past century – but the number of overseas applicants is up from 10% to 50%. The EU has seen similar growth in absolute and foreign applications as patents go global in a limited number of dominant jurisdictions.

Benchmarking system

Taylor Wessing and Z/Yen Group created and launched the Taylor Wessing Global Intellectual Property Index (GIPI) in 2007. GIPI is a resource for people affected by IP systems – owners, governments, patent offices, counsels, legal firms and policymakers in FDI, technology and trade. GIPI breaks analysis into obtaining, exploiting, enforcing and attacking trademarks, patents and copyright in 22 countries. GIPI provides a global perspective – is there anyone whose experience of IP is limited to their own jurisdiction?

GIPI 1 (GIPI 2 is under way) combines objective factors and subjective jurisdiction assessments from more than 350 company CEOs, IP managers, in-house lawyers and attorneys and senior private practice IP lawyers from around the world.

Respondents rate obtaining, enforcing, licensing and attacking for patents, trademarks and copyright in countries where they have experience. Guidance is given on the factors, such as speed, cost of proceedings, availability of specialist advisers, certainty, fairness and the preponderance of ‘red tape’.

Respondents have provided more than 9000 jurisdiction assessments, from which further assessments are statistically extrapolated. Home country assessments and results from those with experience in less than three jurisdictions are discounted. A statistical algorithm weights jurisdiction assessments taking account of 43 country- specific, instrumental factors, such as the number of patents and trademarks filed or granted, independence and robustness of the judiciary, the length and costs of IP trials, average IP royalty figures, national tax rates and R&D expenditure.

Jurisdiction ratings have a theoretical maximum of 1000 points with differences of less than 25 points of low statistical significance.

Rating the jurisdictions

• GIPI is intended to inform debate about the state of IP. Among the results:
• Tier one jurisdictions, the UK, US and Germany, perform strongly in all three areas of IP. The UK heads up both the trademark and patents index, and is second in the copyright index. The US leads the copyright index but is in sixth place for trademarks. Germany is in the top three in all three indices. The UK, Germany and the Netherlands are the only jurisdictions to appear in the top five positions in all indices.
• Seven of the nine jurisdictions in tiers one and two of the index have legal systems based on common law.
• The highest Asian jurisdiction, in tier two, is Singapore, another common-law country rated significantly higher than the other Asian jurisdictions. Japan, in tier three, follows 50 points behind Singapore. China is in tier five and more than 300 points below the tier one jurisdictions.
• All jurisdictions are party to each of the Berne and Paris Conventions, TRIPS and the Patent Co-operation Treaty. Most of the countries and regions are party to the Madrid System of international trademark applications although one-third are not (Brazil, Canada, Dubai, India, Israel, Mexico, New Zealand and South Africa). Despite intended harmonisation of laws based on these conventions/treaties, and EU law in particular, jurisdiction ratings vary widely within the EU. The UK and Germany are tier one jurisdictions, whereas Poland and Italy are in tier four.
• Brazil, Russia, India and China (the so-called ‘BRIC’ developing countries) are at the bottom of the list in all four indices and by a significant margin. China is at the bottom of each index, although several respondents and analysis query whether current perceptions fully reflect the latest developments and improvements made to its IP protection systems and enforcement, so China’s position ought to improve going forward. The BRICs are fast coming in line with OECD practice, but it will be interesting to see if BRIC doubts about OECD norms creating a credit crunch affect BRIC enthusiasm for OECD norms on IP.
• The size of a jurisdiction (measured by GDP) seems to have little effect on the ranking of its IP regime. Both large and small jurisdictions do well if they are generally places where the rule of law is highly regarded.
• Cost does not seem to be a major factor in rankings – jurisdictions where costs of obtaining and enforcing IP are high are generally placed towards the top of the rankings.
• IP competitiveness is not a zero-sum game where one jurisdiction’s gain is another’s loss. Jurisdictions that provide good IP regimes are seen as mutually supportive and encourage better IP regimes globally.

Complex interaction

FDI and IP systems interact in complex ways, but policymakers require simple decisions. Jeremy Bentham, an 18th-century English philosopher, believed that the patent system “produces an infinite effect and costs nothing”. Some academics now believe that Mr Bentham’s argument is unproven, while public belief in the benefit of property rights strengthens, based on a narrative that correlates the strengthening of IP rights with progress.

GIPI recognises that patents, trademarks and copyright are not just about abstract science or economics; people’s perceptions matter. Ideas and their exploitation are part of society. Ideas are created and developed by people in social organisations. Therefore, GIPI’s frame of analysis combines social perception and objective facts.

Changes over time

We expect future reports to analyse changes over time as debate and actions alter the practical protection and enforcement of IP rights. GIPI is not another stick with which to beat perceived IP-defaulting countries (for that, see the latest Special 301 Report issued by the Office of the US Trade Representative, in particular those placed on its Priority Watch List). GIPI rankings should alter as IP regimes alter. Ranking movements should be more interesting than seeing who comes top and bottom at any one time.

GIPI has already revealed some interesting results, providing substance where previously conjecture and prejudice guided those making important IP decisions.

More information:

View the ratings here.

[An edited version of this article first appeared as "Intellect And Investment", Foreign Direct Investment, Financial Times Limited (February/March 2009), pages 76-77.]