Source: https://ar.b-ok.org/book/5221290/0c3c49
Timestamp: 2019-10-16 03:08:04
Document Index: 697686832

Matched Legal Cases: ['ART-2', 'ART-2', 'ART-2', 'ART-2', 'ART-2', 'ART-2', 'ART-2', 'ART-3']

﻿ Intellectual Property: A power Tool For Economic Growth | Kamil Idris | download
الرئيسية Intellectual Property: A power Tool For Economic Growth
الناشر: WIPO-World Intellectual Property Organization
ISBN 10: 9280511130
ISBN 13: 9789280511130
تحميل (pdf, 14.41 MB) اقرأ الكتاب مباشرة
A Commentary on Livy, Books VI-X: Volume IV, Book X
นพ. เอกชัย โควาวิสารัช
INTELLECTIJAL
Kamil ldris
Nrellrcrual
PnoprRrv
ORcaNrzRrroN
I NTE LLECTUAL PROPERTY
NTELLECTUAL PROPE RTY:
BASIC PREMISES AND HISTORICAL CONTEXT
INTE LLECTUAL PROPERTY, KNOWLEDG
AND WEALTH CREMION
PATENTS, RESEARCH
TRADEMARKS AN D GEOGRAPH ICAL I N DICATIONS
COPYRIGHT AND THE CULTURAL
ACQUIS ITION AND MAINTENANCE
A Power Tool for Economic GroMh
Intellectual property - or lP - is a term increasingly in use today, but still
little understood. To many people it remains a mystery - some obscure
legal concept of little relevance to every-day life. Using carefully chosen
cases and facts and figures this book seeks to demystify lP, settlng out to
explain the "why" and the "how" of the subject, unlike many previous
books that concentrate on the "what".
This publication is not a legaltreatise, it is a practical guide to lP as a tool
for economic groMh and wealth creation aimed at interested nonspecialists, including policy-makers in both the government and business sectors.
Readers will discover that lP is often one of the most important assets of
large corporations, that it generates more than 100 billion dollars a year
in revenues from patent licensing alone, and that a good patent portfolio can dramatically increase the valuation of an enterprise. They will also
realize that disparitles in lP assets are as great between the developed
and developing world as are disparities in other forms of wealth.
Lack of awareness about lP is understandable because, in the past, it was
an esoteric field of law, the preserve of technical specialists and corpo-
rate lawyers. However, times have changed: the information technology
revolution, and the increasing pace, impact, and importance of invention
and innovation, linked to rapid globalization, have brought lP onto center stage. From being a backwater issue, it is now a key factor in government policy-making and in corporate strategic planning.
This publication iswritten from a definite perspective-that lP is good. lt
is based on the belief that lP is a "power tool" for economic development that is not yet being used to optimal effect in all countries, particularly in the developing world. lt offers the possibility of gromh and eco-
nomic development in a way that is not a "zero sum game", where if
some win, others will lose. On the contrary international acceptance and
utilization of lP tools means that there will be more innovation and there-
fore more creative change and cultural and economic growth.
The mission of the World lntellectual Property Organization (WIPO) is to
promote the protection of lP rights worldwide, and to help extend the
reach of the benefits of the international lP system to all its Member
States. These goals are complementary for without lP protection and
enforcement, the lP system will not work; and without broad appreciation
of the system, and participation in its benefits, it will not be accepted and
supported. I am privileged to work with the excellent staff of WIPO
towards achieving these twin goals.
I wish to thank the colleagues who contributed to this book, as well as
the many professionals who assisted by reviewing drafts and contributing ideas, along with helpful criticism. I hope the following chapters will
generate a better understanding of the enormous potential of the international lP system and its role in creating a better future for us all.
KAMIL IDzuS
World lntellectual Property Organization
NTE LLECTUAL P ROPE RTY:
BASIC PREMISES AND
E I NTE LLECTUAL PROPERTY
"lmagination is more important than knowledge"
Alb e rt Ei nstei n, Scientist (1 87 9 - 1 I 55)
Einstein's preference for imagination over knowledge is a start-
ing point for this book because intellectual property is based on the
power of imagination. Although not belittling knowledge, Einstein
understood that it is the ability to stand on an existing foundation of
accepted knowledge, and yet see beyond to the next frontier of discovery that is the source of personal, cultural and economic advancement.
Had Einstein been content to simply learn the rules of physics as they
were passed down to him as knowledge, he might have been a more
successful student, but he might never have developed the theory of relativity, which became the foundation for modern physics as it exists and
The history of the human race is a history of the application of imagination, or innovation and creativity, to an existing base of knowledge in
order to solve problems. From early writing in Mesopotamia, the
Chinese abacus, the Syrian astrolabe, the ancient observatories of lndia,
the Gutenberg printing press, the internal combustion engine, penicillin,
plant medicines and cures in Southern Africa, the transistor, semiconductor nanotechnology, recombinant DNA drugs, and countless other
discoveries and innovations, it has been the imagination of the worlds
creators that has enabled humanity to advance to todays levels of technological progress.
lmagination feeds progress in the arts as well as science. Music, painting,
sculpture, architecture, novels and other works of art, are created by individuals who are not content with the old, and instead see and express
ideas and emotions in new ways.
lntellectual property (lP) is the term that describes the ideas, inventions, technologies, artworks, music and literature, that are intangible
when first created, but become valuable in tangible form as products.
The end of this Chapter provides short definitions and an explanation
of the classic forms of lP - patents, copyright, trademarks, and other
evolving forms. However, for purposes of this introduction, suffice it to
say that lP is the commercial application of imaginative thought to
solving a technical or artistic challenge. lt is not the product itself, but the
special idea behind it, the way the idea is expressed, and the distinctive
way it is named and described.
The word "property" is used to describe this value, because the term
applies only to inventions, works and names for which a person or group
of persons claims ownership. Ownership is important because experience has shown that potential economic gain provides a powerful incentive to innovate.
It is also important to note that lP results from innovation based on existing knowledge. lt is the result of creative improvements on what has
worked well in the past, or of creative new expressions of old ideas and
The term "intellectual property" has recently become topical and, at
times, controversial. lt is easy to find articles describing recent events
related to lP. Some critics attack it as a negative force or as irrelevant to
developing countries; some others in developing countries maintain that
it stymies creativity. These beliefs have become popular myths and have
acquired a cultural momentum. This book addresses why these myths
are false and why lP is particularly important today to both developing
We must acknowledge at the outset that, for most people, lP is either an
unknown, misunderstood, or mysterious term. Technology and creative
arts pervade modern society, yet few actually realize that their daily lives
are surrounded by lP creations' from which legal rights of all sorts, including their own, arise. Building public awareness of the role of lP is key to
fostering a broad understanding of, and respect for, it and the system
that promotes and protects it. To truly convince the public, including civil
society activist groups, it is essential to engage them in such a way that
they allsee themselves as stakeholders in a healthy and robust lP system.
To do so, they must be included in an ongoing dialogue and feel
empowered by the system.
The World lntellectual Property Organization (WIPO) has proclaimed
the universal value of lP,'?and has shown that lP is native to all peoples,
lOI I NTELLECTUAL PROPERTY
Easic Premises and Historical Context
relevant in all times and cultures, and that it has marked the world's evo-
lution and historically contributed
lntellectual property is the heritage of us all.
The great African-American chemist and inventor; George Washington
Carver, is famous for teaching that invention is available to all peoples,
regardless of their economic condition, race, or nationality. Carver
invented, and obtained patents3 on crop-rotation methods for conserving nutrients in soil and discovered hundreds of new uses for crops such
as the peanut, which created new markets for farmers in the United States
of America. His relevance today is greater than ever, as we grapple with
the increasing technological divide between rich and poor countries.
"lt is not the style of clothes one wears, neither the kind of automobile one drives, nor the amount of money one has in the bank,
that counts. These mean nothing. lt is simply service that measures
SUCCESS.,,,
His message was that the power of imagination applied to solving practical problems, is not the exclusive province of any nation or people, but
is an empowering force that can advance individuals and
lntellectual property is relevant to agriculture as well as to analog signals,
as well as to microbiology, to folk music as well as to
to medicinal roots
This book is about the economically empowering force of lP. lt is an
exploration of the concepts behind the different forms of lP, and how
they operate in real life, rather than a technical legal treatise. lt is practical in approach, and the successes of lP empowerment are illustrated
throughout the book in boxed articles showing real life stories of businesses throughout the world and how they have used lP. For readers who
are not familiar with intellectual property, some history is useful to put it
THE HISTORY OF INVENTIONS AND
Few will disagree that today's science, technology, and creative arts
shape our day-to-day lives. Early technological breakthroughs catapulted the human race out of feudal systems of society (see Table - 1.'1). ln
the last'l0O years or so, technological leadership has become a determining factor in wealth creation and has fueled the growth of nations.'
TABrE-1.1 MAIOR TNVENTTONS THAT HAVE CHANGED
Pnnting press
Around 1440, Gutenberg
developed the {irst movable
type" Metal pieces made
separately for each letter
could be used over and over
to print copies of various
Telegraph & Morse
Around '1560, Gesner came
up with the idea of enclosing
a piece of graphite (from the
Greek word graphein,
meaning to write) with wood
as a writing tool.
ln 1728, Jai Singh, a scholar
(he read the works of Ptolemy,
Euclid and Persian astronomers
as well as Arab mathematicians),
built five astronomical
observatories in Delhi, Jaipur,
Varanasi, Ujjain and Mathura.
The instruments at these
observatories, which are still
functional, measure precisely
time and the position of the
Morse developed the
telegraph as well as an
electronic alphabet. ln 1840,
he submitted a patent
application for his invention.
ln 1863, Nobel developed
his first important invention,
dynamite, which enabled the
delonation of nitroglycerin
using a strong shock.
NTE LLECTUAL I' ROPE RTY
WuA*!;
,nr.n.ion
.,.lim
ln 1876, Bell received a patent
{or his "method and apparatus
which transmits vocal or other
sounds telegraphically by
causing electrical undulations."
Bell's inventiveness was
rewarded with 1B patents
granted in his name and
another 12, which he shared
with his collaborators.
The invention consisted of a
device which enabled
electromagnetic waves to
travel through the air while
preservlng their features. ln
1886, Marconi applied for a
patent for his invention.
ln 1903, the Wright brothers
invented their first flying
machine in Kitty Hawk,
ln 1929,Zworykin invented the
cathode-ray tube needed for
ln 1938, Biro received a patent
for a pen with a tiny ball
bearing at its tip. As the pen
moved along the paper, the
ball rotated, picked up the ink
from the cartridge and left it
Zuse is considered the
inventor of a modern
(electromechanical binary)
computer for his 21 model
lmmune System
Gertrude Elion, the daughter
Drugs to Fight
Cancer and AlDs
of Lituanian and Polish
immigrants, was a chemist who
studied the human immune
system and, in her work at
Glaxo-Wellcome in 1956,
developed "target specific"
drugs to block the replication
of cancerous cells. ln 1998,
she received the Nobel Prize
ln 1965, Russell developed
system that recorded, stored,
and replayed music using
light (and laser technology)
rather than touch. Russell
received 22 patents for his
From the earliest rituals, through the beginning of music and dance, burial
rites, cave paintings, the written word, and theatrical representation, to the
use of modern technologies such as the phonogram, celluloid film, wireless
broadcast, software, and digital recording, humankind has identified and
defined itself through cultural creativity and expressions in the form of artistic creations and performances. Much of this creativity survives and thrives
today in folklore or other forms of traditional knowledge. Todays music,
films, books, art, and other forms of creations or expressions are indicators
of social progress and the quality of life. As the private property of their original creators, they are prized by society for many reasons (including their
economic, political and cultural role) but their particular value is that the
legacies of human endeavor live in their expression.
lntellectual property is an old concept. The Venetian Law of 1474 is often
limited the public interest for the first time. Sixteenth-century Tudor
England already had a patent system, and the Statute of Monopolies in
1624 was the first written law which provided for the grant of a monopoly for an invention for a limited period of time.
The second half of the 1B'h century was a golden age of trade and industry for many countries, as well as a time of artistic creativity, scientific innovation, and political revolution. lt was during this Age of Enlightenment
that some countries established their first patent systems. For example, the
first patent law in France, which provided for the protection of inventors'
rights, was enacted in 1791, after the French Revolution and the
Declaration of the Rights of Man and of the Citizen. ln the United States
14I I NTE
LLECTUAL PROPE RTY
of America, in 1788, the Constitution specifically provided for patents and
the protection of inventions by granting exclusive rights to inventors.
ln the case of copyright, it was the spread of the printing press that provoked the need for a copyright law. Book production in the first millennium was a tedious, slow affair. Scribes wrote and copied books by hand,
some with more artistic skill than others. Written works were for the elite
only. Organized religion was a prime moving force in the preservation of
knowledge in books, as well as the proliferation of multiple copies of
books. The invention of movable type and the printing press by
Johannes Gutenberg around 1440, was one of the historical events that
contributed to the birth of the first copyright system in the world.6 As in
the protection of inventions, it was also Venice that granted John of
Speyel the first printer, the exclusive right to "print the letters" in 1469.'
With Gutenberg's invention available everywhere in western Europe by
the second half of the 15'n century the Roman Catholic Church began to
ban books written by reformers, and monopolies of the press emerged
in England and France. ln the'l 6'h century, monopolies by printers continued in order to protect publishers' profits and to permit control over
printing. ln 1710, the Statute of Anne was enacted by the British
Parliament, diminishing some of the control of publishers over printing
and also recognizing authors' rights, giving them or their heirs exclusive
powers to reprint a book for 14 years after it was first published.u Called
an "act for the encouragement of learning", the Statute of Anne was one
of the inspirations for the intellectual property protection in the United
States Constitution.e
Even at this early stage, the development of patent and copyright laws
reflected the fluctuations of the economy. Following the eclipse of
Venice after 1600, there was a shift of economic progress from southern
to northwestern Europe. Before '1800, though examples of industrial concentration can be identified in several European countries, manufacturing growth was still largely a matter of multiplication of small-scale
artisan production rather than of radical new methods and organizations.
However, between 1750 and 1870, Europe experienced major change
stemming from, among other things, growing cities, railway building, the
investment of capital, the growing transoceanic economy.'o Towards the
rTr-:
end of the 19'h century these factors led to large-scale industrialization,
supported by new ideals of industrialism, the emergence of stronger
centralized governments, and stronger nationalism. These developments led many countries to establish their first modern patent and
Howevel the development of the modern concept of lP laws was not
the 19'n century free trade movements that
called for abolishing the patent system received wide support." But the
strong wave of nationalism that characterized the period appears to have
played an important role in supporting the introduction and maintenance of modern industrial property laws.
always straightforward. ln
THE FIRST INTERNATIONAL IP TREATIES:
ln the second half of the 19'n century goods and workers crossing national borders brought a wave of globalization to industrial powers. Although
patent laws had been enacted in several countries, the demand for inter-
national protection of inventions began to be felt. ln fact, foreign
exhibitors refused to attend the lnternational Exhibition of lnventions in
Vienna in 1873 because they were afraid their ideas would be stolen and
exploited commercially in other countries. This incident resulted in the
birth of the Paris Convention for the Protection of lndustrial Property in
one country obtain protection in other countries for their intellectual creations. Such protection took the form of industrial property rights, in the
form of patents (invention), marks, and industrial designs.
ln the mid-1800s, renowned authors were finding their works illegally
reproduced and for sale in countries other than their own, and from
which they received no royalties. ln order to eliminate this practice, the
famed French author of Les Miserables and lhe Hunchback of Notre
Dame, Victor Hugo, organized a group of prominent authors into the
lnternational Literary Association, which later became known as the
lnternational Literary and Artistic Association, with the intention of
establishing some basic form of international protection for their works.
16 INTE LLECTUAL PROPE RTY
Basic Premises and Histarical Context
ln 1886, to provide the basis for mutual recognition of copyright between
different states, another major international lP treaty was enacted, the
The crux of both conventions was the principle of national treatment,
that is, equal protection between nationals and foreigners. This principle
is best defined, in the original text of the Paris Convention, by the provision on national treatment in Article 2:
"The subjects or citizens of each of the contracting States shall, as
regards patents, industrial designs, trade marks and trade names,
enjoy the advantages that their respective laws now grant, or may
hereafter grant, to nationals. Consequently, they shall have the
same protection as the latter and the same legal remedy against
any infringement of their rights, provided they observe the formalities and conditions imposed upon nationals by the domestic
legislation of each State."
ln the first one hundred years since the establishment of the Paris
Convention and the Berne Convention, we have seen growth in the protection of inventions, marks, and other objects of industrial property and
of copyrighted works at the international level. ln these first hundred
years, we have also seen the early development of cooperation among
states in the field of intellectual property.'3 The continued support for,
and development of, the lP system over the last century attests to the
fact that many states recognize the role of lP in promoting and stimulating innovation and technological and artistic achievement.
lndeed, as the former Director General of WIPO, Arpad Bogsch, stated:
"The search for new technological solutions and cultural creative activities deserves constant encouragement because, as the history of nations
has shown, in addition to spiritual development, inventions and cultural
creations are the main sources of social and economic development of
mankind. Food, health, communications and other fundamental needs
for the survival of the human race have improved, are improving and will
continue to improve because of inventions and creations."'o
The history of lP is a much longer topic than can be covered in this chapter. What is important to note here, however, is that the premise underlying lP has always been the recognition that ownership of inventions and
creative works stimulates their creation and, with such creation, also
stimulates economic development. The continuum from problem ) to
knowledge ) to imagination ) to innovation t to intellectual property and
finally + to the solution in the form of products, continues to be a powerful
driving force for economic development. As we will explore in this book, in
today's world the connection between lP and economic development is more
relevant than ever before, as lP comes to the fore in international debate.
Since the birth of the two pillars of lB i.e. industrial propety and copyright, other forms have been developed and established either as subsets of the previously existing types of lP or as new breeds.
The convention establishing WIPO
of 1967" stipulates that lP shall
lnventions in all fields of human endeavor
lndustrial designs
Marks and commercial names and designations
Protection against unfa ir competition
All other rights resulting from intellectual activity in the industrial,
Several international treaties concluded since 1967 , notably the
Agreement on Trade-Related Aspects of lntellectual Property Rights
(TRIPS Agreement) of the World Trade Organization WfO), further clarified and elaborated new types of intellectual property, for example, the
design of integrated circuits, based on earlier work undertaken by WIPO.
This trend shows the dynamic nature of lP in response to technological
and cultural developments concerning, for example, computer hardware
and software, digital communications, the lnternet, and genomics.
-EI I NTE LLECTUAL PROPERTY
The areas mentioned under (1) belong to the "copyright" branch and
under (2)to the "related rights" branch of intellectual property. The areas
under (3), (4), (5), (6), and (7) constitute the industrial property branch of lP.
The most common forms of intellectual property are briefly defined
below.'u
Patent (lnvention)
technical solution to a problem). lt provides protection for the invention
for a limited period, generally 20 years from the filing date, in the country or countries in which it is patented, in exchange for the inventor's publlc disclosure of the invention. A patent owner has the right to decide
who may - or may not - use the patented invention, and may give permission to, or license, other parties to use the invention on mutually
agreed terms. The owner may also sell the right to the invention to someone else, who will then become the new owner of the patent.rT Once a
anyone.'u
A trademark or " mark" is a distinctive name, logo or slgn'n identifying the
source of goods or services. Trademarks help consumers distinguish a
product or service from one source from those produced by another
can remain valid indefinitely through continued commercial use or a registration and renewal process.
Patents and trademarks are often referred
to collectively as "industrial
and artistic works. These creators, and their heirs, hold the exclusive
rights to use or license others to use the work on agreed terms. The creator of a work can prohibit or authorize,'o for example:
its reproduction in various forms, such as a printed publication
its broadcasting, including by radio, television, or satellite;
its translation into other languages, or its adaptation, such as
Copyright applies to many different types of artistic works, including
paintings, music, poems, plays, books, architecture and choreography, as
well as to works that are generally not considered artistic such as computer software, maps and technical drawings.
Related rights are rights that have evolved in the last 50 years or so
"around" copyright, and include the right of a performer in his/her performance, the right of a producer of a sound recording in the recording,
and the right of a broadcaster in a broadcast.
Many creative works protected by copyright generally require mass distribution, communication, and financial investment for their dissemination (for
example, publications, sound recordings, and films). Hence, creators often
sell the rights to their works to individuals or companies that can package,
market, and distribute the works in return for payment (lump sum or royalties). These economic rights have a time limit, according to the relevant
WIPO treaty, of the life of the author plus 50 years after the author's death.
ln some countries, that term has been extended to 70 years. Copyright may
work, and the right to oppose changes to it that could harm the creator!
2A INTE LLECTUAL PROPE RTY
Patents and expired patents, for example, surround our daily life and concern
products such as electric lighting (patents held by Edison and Swan), piastics
(patents held by Baekeland), ballpoint pens (patents held by Btro), and microprocessors (patents held by lntel).
WIPO, World lntellectual Property Declaration WO/GN26/4 Annex l\4 presented
to the Assemb/ies of
http://www.wipo.int/ about-wipo/ en/pac/ip
WIPO (September 2000).
decl ar ation.htm
www.invent.org/index.asp; patent Nos. 1,522, 176;
www -i de afi n de r. co m/h istory / i nv e nto rs/ ca rv e r.htm
for example, the growth mode/s in Robert Solow, "Technical Change and the
Aggregate Production Functions," Review of Economics and Statistics 39 (1957):
12-13 and Paul Romer, "Endogenous Technological Change," Journal of Political
Economy 98 (1990):5, pt.2,574-575. See Chapter 2for greater detail.
Gutenberg is credited with printing the o/dest surviving printed book in the western world, the Gutenberg Bible, which has 42 lines per page and is sometimes
known as the 42-line Bible or Mazarin Bible. He also fashioned a font of over 300
characters, as we// as a variable width mold to accept his blend of lead, antimony
and tin which was used in type foundries into the last century.
Io print the letters means to produce multiple copies of a document by using the
printing press method. John of Speyer designed the first type of roman character
on which he received a patent, which expired at his death in 1470.
See, for example http://artnetweb.com/iola/iournal/history/1994/copyright.
html#fn3, http ://hutzley 1 .tripod. com/ copyrightlhistory.htm,
http / / ruv'w. p I ato p r e ss. c o. u W co py r ght/ ntr o / h i sto ry02. htm,
an d http / / arl. cni. o rg/i nf o/f rn / copy/ti m el n e.html
http:/ / e n glish.ttu.ed u /kai ros/ 3. / cove
rvv eb
/ty/ a n n e.html
J. M. Roberts,A History of Europe (Oxford: Helicon Publishing, 1996):214,217,326.
For example, in Germany, the first federal patent law was enacted in 1B/7. France
modernized its 1791 law in 1844. Many other countries introduced modern patent
laws in the 19'" century: ltaly (1859), Argentina (1864), Spain (1878), Brazil (1882),
Sweden (1884), Canada (1886), lndia and Japan (1BBB), Mexico (1890), Germany
(1891), and Portugal and South Africa (1896).
Consequent to the free trade movement, the Netherlands abolished its patent law
in 1869, although subsequently a new one was re-introduced in 1910.
The lnternational Bureaus created to carry out administratlve tasks for the implementation of the two conventions were the predecessors of the World lntellectual
P ropefty O rg a ni zati o n W PO).
Arpad Bogsch, then Director General of WIPO, The Paris Convention for the
Protection of lndustrial Property from 1883 to 1983, (Geneva, W|PO19B3): Pref ace.
The Convention Establishing the World lntellectual Property Organization (signed
Stockholm, July 14, 1967 and amended on September 28, 1979). See,
/ /vvvvw. w i p o. ntJ cl e a / d o cs/ e n /w o /w o029 e n. h t m
Condensed from the WIPO website (http://www.wipo.int).
Patent rights are usually enforced in a court which, in most systerns, holds the
authority to stop patent infringement. Conversely, a court can also declare a patent
invalid upon a successfu/ challenge by the defendant or a third party.
Once the patent of the invention expires (even before the expiry of the patent term,
the patent expires if its inventor or patent holder stops paying the patent maintenance fees) the patent holder can no longer exercise control over the use made of
the invention; that is, the exclusive rights of the owner to the invention cease and
the invention becomes available for commercial exploitation by others.
Its origin dates back to ancient times, when craftsmen reproduced their signatures,
or marks, on their artistic or utilitarian products. Over the years the practice of using
these marks evolved into todayb system of trademark registration and protection.
or the owner of the copyright in a work
can enforce rights in the
courts where the owner may obtain an order to stop unauthorized use (often called
piracy), as well as obtain damages for loss of financial rewards and recognition.
P ROPE RTY
fhe Process of Economic Growth
24] I NTE
For ,un,
to provide an explanation as to
perform badly; in other
why some economies
words, why some countries are rich and others are not. Different theories
and models of economic growth have been suggested. lt may be that,
taken together, economic history and new growth theory provide a more
complete picture of technological change than either one can give on its
years, economists have tried
It is generally agreed that technology and knowledge have played an
important role in recent economic growth.'zThis chapter will address the
relation between economic growth and knowledge (or in the broadest
sense, technology) by introducing several economic growth theories that
have been proposed and discussed over the last 50 years. lt will then
examine the role of intellectual property (in particular, patents) in facilitating the creation of knowledge, paying particular attention to the
recent technology revolution and to the increasing degree of sophistication in both "hard" and "soft" industries.
lntellectual property could be called the Cinderella of the new economy.
A drab but useful servant, consigned to the dusty and uneventful offices
of corporate legal departments until the princes of globalization and
technological innovation - revealing her true value - swept her to prominence and gave her an enticing new allure. Not so long ago, protecting
and managing intellectual property was a fairly quiet field of endeavor
not given to making headlines or causing ripples on the stock market.
However, in the space of a few years, lP issues have come to feature regularly as major news items and have taken their place as a key element
in corporate strategy, affecting company ratings.
ln the days of classical economists such as Adam Smith, Ricardo, and
Marx, capital played an important role in theories of growth. Although
writing from different perspectives, classical economists believed that
grew. Smith, for example, believed that improved technology would lead
to increased labor productivity. He saw division of labor as the accelerator
of invention, and hence, technological progress. Despite the belief that
technological progress contributed to increased productivity, classical
economists, in particular Ricardo and Malthus, thought that in the long
term, increased populations would outpace the productivity of labor,
which would lead to what is known as the law of diminishing returns.3
Based on the law of diminishing returns, it was thought that there could
not logically be infinite groMh, and that growth would diminish at some
point. Donella Meadows in Ihe Limits to Growtho postulated that limitless growth was not only undesirable, but also unsustainable.
Unrestrained growth would exhaust the earth's supply of life-sustaining
resources and would in the end annihilate the human race by driving it
into extinction. A mood of pessimism prevailed in the face of an exploding world population that was seeking to be sustained by resources that
were at best constant, but in reality could well be dwindling.
It is important to look at how these earlier economists viewed the role of
technology in the growth of an economy, because the insights they provided prepared the ground for growth theories that were developed in
the last century while focusing on the contribution of technology to economic groMh. These theories may be grouped into two models, known
as exogenous and endogenous growth theories (see Chart - 2.1); both
theories agree that technology is the engine of groMh, but differ on how
to treat technological progress as a factor in economic growth.s
Endogenous growth theory: According to this theory, technological
change is included in the new capital stock. From this perspective,
technological change is induced by previous economic
conditions. ln other words, economic AroMh originates from
within the system, usually a nation-state, and technological
progress is regarded as an endogenous factor. Endogenous
growth theory focuses on education, on-the-job training, and
development of new technologies for the world market, as major
factors which determine the rate of growth of a nation-state.6
26I I NTE
Exogenous growth theory: According to this theory, technological
change contributes to increased output without any change to the
input of labor and capital in the production process. ln other
words, technological progress leads to increased output while
using the same amount of labor and capital. However, the theory
does not specify any particular transmission mechanism by which
technological progress takes place; rather, such progress is
disembodied and assumed to fall like "manna from heaven". This
perspective sees technology as an exogenous factor.
CHART-2.l TWO MODELS OF GROWTH THEORIES
Endogenous: lnternal Power
Exogenous: "Manna From Heaven"
The work of Joseph A. Schumpetet which is discussed below, has laid the
necessary groundwork for the endogenous growth theorists. lt explains
why he saw technological progress as an endogenous process.
NNOVATION FOR CREATIVE DESTRUCTION
Schumpeter developed a groMh theory centered on innovation and
entrepreneurship. He saw a dynamic economy not as one in equilibrium,
but rather, as one that is constantly disrupted by technological innovation.7 Entrepreneurs took advantage of a basic invention, be it a new
product or a new technique, transforming it into economic innovation.
lnventions were economically irrelevant until entrepreneurs got involved,
to make them operational and to market them. ln his view, entrepreneurs
were motivated by the potential to make a profit. These new innovations
would then be imitated, and in the process, this would lead to a boom in
the economy, though the imitators would curtail the entrepreneurial
profits.B Although agreeing that several factors were necessary for economic development, Schumpeter regarded entrepreneurial zeal for profit as the driving force of most innovation.
Schumpeter considered that some degree of monopoly power would be
necessary to enable entrepreneurs to continue innovating. However, he
later predicted the demise of entrepreneurs and the emergence of a new
mode of economic organization in which innovation and R&D would be
conducted by large firms.n This conclusion led some economists to see
two Schumpeters: Schumpeter l, who saw entrepreneurs playing a leading role in technological progress; and Schumpeter ll, who saw scientific
and technical activities being undertaken by large firms.'o According to
Schumpeter ll, large monopolistic enterprises were the principal engines
of technological progress, as they had the necessary resources to undertake complex technological activities and were also threatened by what
he termed creative destruction (that is, innovations displacing inferior
Recently, some economists, in particular William Baumol, have attempt-
ed to pick up on Schumpeter's work by trying to introduce the role of the
entrepreneur into the groMh process. They have postulated that an lP
system is to be regarded as an important factor influencing the behavior
of the entrepreneur in encouraging innovators, applying the innovation,
introducing it into the economy, and marketing the product in a creative
or innovative way."
ln the 1950s, the neoclassical economists, led by Robert Solow, started
focusing on technological progress as an important variable in economic growth. Unlike his neoclassical predecessors who treated capital as the
main contributing factor in economic arowth, Solow, based on his study
of gross domestic product (GDP) data for the United States of America
from 1909 to 1949, suggested that the growth in capital stock contributed to less than 20 percent of the gromh of GDP per person
employed, and argued that the growth in labor and capital explained
only half of the growth in total GDP. He concluded that the remaining
unexplained portion of growth, which came to be known as the Solow
residu al, resu lted from tech no lo g ica I prog ress.'2
2A INTE LLECTUAL PROPERTY
fhe Process o{ Economic Growth
Solow introduced technological improvements as an exogenous variable
into his growth model and changed the way economists perceived the
contribution of technological progress in the economic growth of a
nation-state. His findings were later supported in a study by Edward
Denison, which concluded that, between 1929 and 1951 , 40 percent of
the increase in per capita income in the United States of America was
due to the "advance of knowledg""." Today, these figures are likely to
be much higher. Thanks to constant and rapid innovation, more than half
of US economic growth is currently generated by industries that were
hardly in existence a decade ago.''
Basically, the Solow model (see Chart - 2.2)focuses on four variables: out-
put, capital, labor, and knowledge. lt analyses how capital, labor and
knowledge combine to produce output, the level of which can determine the growth of an economy over a period of time. This model
assumes that technological progress occurs when there is an increase in
the amount of knowledge, and that the production function constantly
returns to scale in relation to capital and effective labor.
CHART-2.2 THE SOLOW MODEL
According to Solow, the growth of an economy depends on the rate of
groMh of capital, labor, and technological improvement. Solow believed,
and tried to prove, that an economy would grow if a large share of its
total output was devoted to investment or if there was a rapid growth of
technology. Technological progress was the key factor leading to economic growth. Gromh had little to do with the state of the internal economy, and progress in science and technology depended little on monetary or fiscal policy (that is, economic policy).'' ln other words, treating
technological progress as exogenous meant that the implementation of
economic policy did not directly influence technical progress, but technical progress could influence economic policy. That is why the Solow
model did not attempt to define where technology was coming from; it
just recognized when technological progress had occurred and assumed
that it was growing at a constant rate.16 The inclusion of technological
progress in the Solow model meant that a country with a higher rate of
technological growth (hence greater productivity growth) would experi-
ence a higher standard of living than those countries without such
ln explaining the applicability of his model, especially in relation to the
rising standard of living as far as output growth and consumption groMh
were concerned, Solow introduced an assumption of technology growth
as being exogenously determined and thus increasing the productivity
of labor. This assumption meant that the natural rate of groMh was not
only composed of the biological rate of population groMh, but also
included the rate of technological progress; this is known as effective
labor. The neoclassical economists are of the view that government policy does not have an effect on the growth of technology." Furthermore,
the neoclassical approach emphasizes such issues as competitive behavior, equilibrium dynamics, and the way diminishing returns affect the
accumulation of labor cost and capital.''
NTE LLECTUAL PROPERTY
NEW ENDOGENOUS GROWTH THEORIES
the 1980s, after several economists'e made contributions on the importance of technological progress to economic groMh, new growth theories, also known as new endogenous growth theories, emerged, formulating technological progress as an endogenous variable, which could be
influenced by government policy. These theories suggested that a country's long-term growth rate could be influenced by government policies,
among others the protection of intellectual propefty, taxation, maintenance of law and order, and fiscal and monetary policies.
Paul Romer introduced a model which suggested that the accumulation
of knowledge was the driving force behind economic growth.2. Romer's
paper reopened the debate on the contribution of technological
progress to the economic groMh of a nation-state. His model assumes a
monopolistic competitive environment and suggests that R&D activities,
and the accumulation of human capital through education and training,
play important roles in generating long-term growth in per capita
income. Like Solow, Romer also focused on labor, capital, technology,
and output, and how the first three variables combine over a period of
time to produce output. ln an attempt to avoid the paradox encountered
by the Solow model concerning the failure of less-developed countries
to take advantage of existing technological progress, Romer postulated
that technological progress in industry requires concerted, profit-oriented activity that yields two distinct components: (a) specific technical features embodied in products that can be patented and produced, excluding rival firms from the same activity; and (b) the knowledge that those
features were essentially for the public good.'' ln order to encourage
people or institutions to be involved in knowledge creation, the principle
of excludability had to be invoked. He argued that two ways can be used
to exclude others: first, keeping the knowledge a secret and second,
invoking effective intellectual property laws.
Romer concluded that for countries to promote groMh, their economic
encourage investment in new research, as opposed to
encouraging investment in physical capital accumulation, and
subsidize the accumulation of total human capital, as the higher
the level of human capital a country possesses the higher its
productivity, which translates into sustained economic groMh.
Grossman and Helpman'2 refer to studies made in several industries
including machine tools, aircraft, synthetic chemicals, metallurgy, and
semiconductors, which showed that the driving force behind investment
in new technology was the potential of earning profit. They argue that
among the factors which determine the profitability of such investment,
and thus affect the pace and direction of technological change, are the
institutional, legal, and economic environments. Various models of
endogenous groMh have been introduced so far and the debate on the
relevance of exogenous or endogenous groMh theories in explaining
the factors determining the growth of countries is far from over.
A GLOBAL AWAKENING TO THE ROLES OF
INTELLECTUAL PROPERTY IN THE 1990s
Looking back at the economic development achieved by some economically strong countries in the 1990s, there were, first, policy changes
emerging from rapid knowledge creation and the adoption of new
knowledge management practices and, second, changes due to the
One of the consequences of the new pattern of global trade that started at the beginning of the '1990s was the forging of a deliberate connection between trade law and lP policies when some advanced countries began to "use trade measures to curb piracy of intellectual property rights abroad."" Among other things, this led to the inclusion of the
3Z I NTE LLECTUAL PROPE RTY
Ihe Process o{ Economic Growth
the multilateral trade negotiations under the Uruguay Round. That Agreement
established global standards for lP protection that would be binding on
both developed and developing countries, including enforcement and
TRIPS Agreement as one of the agreements in the framework of
The rapid development of new technologies has led to adaptation to,
and in some cases criticism of, prevailing lP regimes. This comprehensive
technological revolution touched many areas, among others, information and communication technologies, biomedical research and development of new drugs, digital technology, high-performance materials,
artificial intelligence, and virtual marketing in cyberspace. The adaptation of lP protection to biotechnology and the protection of intellectual
property in cyberspace, in particular, posed many profound challenges.
ln the special case of biotechnology, the advent of new tools for research
in genetic engineering has had a strong impact on agricultural and
biotechnological research programs. ln agriculture, the relevance of lP
has traditionally been limited, as most R&D has been conducted by
public sector institutions. Biotechnology, however, is increasingly private-
An additional level of complexity is introduced through the use of many biological or genetic
research materlals from the gene-rich developing world."
sector driven and increasingly relies on
The combined application of computer and telecommunications technologies, as reflected by the lnternet, poses another set of problems for
lP regimes. With a few keystrokes one can anonymously download copyrighted material from numerous websites around the world.2s Moreover,
the scope and extent of liabilities between providers of information on
the lnternet and content right holders need to be better understood.
These developments are only a sampling of how the lP system is being
integrated into the knowledge economy, and how it poses interesting
challenges to industry, government policy-makers, scholars, and
researchers in both developed and developing countries.
r.?.r
STATI STICS SUGG ESTING TH E RE LATION
BETWEEN ECONOMIC GROWTH, R&D
Some statistics support the relation between economic growth, R&D and
lP. As discussed above, economists have explained the process of economic growth as being driven by two main sources: the supply of factors
of production, namely physical capital and labor (or human capital), and
technology. Many studies have shown that the influences underlying
economic performance are affected by the interaction between the two
sources of groMh, and the relative proportions of labor and physical capital and technology.26
It has been postulated that lP significantly influences the appreciation in
value and the accumulation in quantity of human capital, and the rate
and direction of technological change." Recent literature also describes
the emerging attitudes toward lP protection in both developed and
developing countries - for example, how the growth in patent filings is
concomitant with the groMh of knowledge activities (see for instance
Table - 2.3)," and even how patent-related statistics can act as an indicator of the strength or weakness of the economy.
TABLE-2.3 GROWTH OF US UTILITY PATENTS BY SECTOR,
1982-1996,'
Aporoximate Number
of Uditity Patents per Year
89 "/"
All US Patents
34 I NTELLECTUAL PROPERTY
ln the 1990s, an increasing number of policy-makers in countries with
emerging economies recognized the role of the lP system as an important element of the institutional infrastructure for encouraging private
investment in R&D, especially in the industrial and scientific fields. This is
supported by the pattern of business R&D investment in the
countries, for example, which suggests that a strong correlation exists
between the level of R&D expenditure and the level of patenting activity
(see Chart - 2.4).
CHART-2.4 LIN K BETWEEN BUSINESS R&D EXPENDITURE
AND PATENT APPLICATIONS IN THE US (1997)'
.."&.'E'ffi:'ffi
-e8888
=:.E.E
Business R&D expenditures (US$mill.)
Legend: AU (Australia), BE (Belgium), CA (Canada), CH (Switzerland),
DE (Germany), DK (Denmark), ES (Spain), Fl (Finland), lE (lreland), lS (lceland),
lT (ltaly), JP (Japan), KR (Repub/ic of Korea), MX (Mexico), NL (Nether/ands),
NO (Norway), PL (Poland), SE (Sweden), TR (Turkey), UK (United Kingdom),
L.)S (United States of America)
The influence of lP is also reflected in the increasing contribution of
knowledge-intensive industries to gross national product (GNP) (for
example, in the United States of America, this increased from 21 to 27
percent from 1982 to'1995). ln the'1990s, the rapid expansion of a new
global trading regime following the establishment of the World Trade
Organization 0A[O) also triggered much attention to, and increasing
demand for, lP protection, especially in the high technology and other
knowledge-intensive industry sectors.
The propensity of firms to patent their inventions has similarly increased
worldwide. Patent applications and grants have increased even in developing countries where patent filing rates have traditionally been very low
(see Chart - 2.5).
CHART-2.s TOTAL PATENT APPLICATIONS IN SELECTED
(PERCENTAGE INCREASE FROM 1994TO 1998)
il-'+ft
lil ililtt
!,UU-U
|j c\LI k
The upward trend in patent applications is particularly noticeable in
Japan, the United States of America, and Europe. ln Japan, it took 95
years to grant the first million patents, whereas it took only 15 years to
grant the next million. A very similar trend is noticeable in the filing of
administered by WIPO (see Chart - 2.6).fhe PCT had a membership of
7 States as of August 2002. WIPO received over 103,000 PCT applications in 2001, a 14.3 percent increase from 2000. For the eleventh consecutive year; inventors and industry from the United States of America
(38.5 percent of all applications in 2001), Germany ('13. 1 percent), Japan
1.4 percent), the United Kingdom (6.0 percent), and France (4.4 percent) topped the list of the biggest users of the system.
36INTE LLECTUAL
PROPE RTY
CHART-2.6 INCREASE IN PCT APPLICATIONS SINCE
1oo,0oo
-.,Qo!2
2o'ooo
</oY tooot:
@6OrNoSn€N@6Q-No$6€N@OO!
c6 @ @ @ q c o 6 6 6 c
6 o i6 irj 6
55FE95a9ee399e99eee93eRR
However, use of the PCT in developing countries that have started to
accumulate knowledge and gain economic power is increasing (see
Table - 2.7). For example, the number of PCT applications filed by developing countries in 200'l rose by 70.6 percent, with the largest number
generated by users in China, the Republic of Korea, and South Africa.
Compared to the 2000 statistics, the increase was pafticularly high in
China (1BB percent), lndia (103 percent) and the Republic of Korea (53
TABLE-2.7 NUMBER OF PCT APPLICATTONS FILED
PCT USERS IN SELECTED DEVELOPING
2ooo.ffi
zwrittgilGrowth;.
lBB%
103"/o
51o/o
Current data regarding the importance of lP in economic development
is still limited, however. Visible and demonstrable evidence of economic
payoff attributable to lP protection is currently not sufficiently developed.'' lt is difficult to analyze the role of lP in the economic development process because of complexities in separating or disaggregating
the effects of lP protection from other factors that impact developing
economies." Some expefts argue that the role of lP in economic development is Iikely to be case-specific, with variations both from industry to
industry and among countries.33 Others, however, contend that the
strength or weakness of the lP situation has a strong effect on foreign
direct investment (FDl),' and that a low level of lP protection will preclude certain types of investment in various industries.3s
The difficulty in analyzing the economic aspects of intellectual property is
attributable to the complex interplay of many factors. The nature and
extent of this complexity can be clearly seen by examining the role of the
patent system in the performance of the economy.
Typically, a patent system is established for the following reasons: (a) to
promote creativity and inventiveness by offering exclusive ownership rights
and a reasonable period for recovering R&D costs for the invention, (b) to
promote investment to commercialize new inventions through limited
exclusive rights in working the invention and marketing it, and (c) to diffuse
knowledge and information through publication of patent applications and
grants for the benefit of other R&D and society as a whole. These reasons
more applicable and relevant
economies than to the developing and least developed countries due to a
number of factors surrounding local creativity and inventiveness in the latter
countries,$ including a different lP paradigm that arises with the emerging
demand for protection of "rural inventions" and traditional knowledge.
lndeed, in developing countries, the majority of patent applications are
filed by foreigners from developed countries," and the conditions for promoting local innovation in many fields are far from ideal, due to constraints
in resources and other factors (limited access to research material, facilities,
and prototyping possibilities, lack of relevant technical and managerial
skills, disorganized markets, and so forth).
NTE LLECTUAL
ROPE TITY
Critics of the patent system hypothesize that, because of these factors, the
economic rewards for innovation will flow from the developing to the
developed countries, and that capital investment in developing countries
is likely to center on foreign-owned or controlled enterprises. The latter; of
course, is expected to result in the payment of royalties to foreign-owned
enterprises.3u Taken in isolation, these factors would seem to present a bias
against developing economies.
However; the patent system offers practical and positive advantages, especially to developing countries. For instance, it facilitates transfer of technology
and patent licensing through an active use of patent information (see more
in Chapter 4). Moreover, it can be utilized as a practical guide to investment
decision-making by corporations looking for lower factor prices in developing countries for their manufacturing activities.3n ln many ways, the
patent system functions as an indicator of the level of protection afforded
to the introduction or transfer of proprietary technologies to developing
countries, and as a rough assessment of the risk of working a particular
invention without full patent protection in a particular sector where there is
an observed high rate of patenting activity. The quality of the national
patent law attests to the seriousness of a government's commitment to
encourage both innovation and respect for the lP related to it, and its belief
in the positive role played by the patent system in national development.
Economists have not adequately dealt with issues directly related to economics and intellectual property. Among the few who have addressed
this subject, there are differing opinions. Some are supportive of the pos-
itive relationship between intellectual property and innovations and
inventions, and others have different views.a. Many researchers have suggested a direct link between enhanced lP protection and an increase in
inward FDI in certain countries.o' A steady and steeply rising increase in
FDI in lndia has been evident (except for a dip in 1999 due to the adverse
impact of the east Asian crisis) ever since patent and trademark reform
was introduced in the early 1990s. The equivalent increase in Brazil is more
dramatic, with a spectacular growth in FDI following the introduction of
new industrial property law in 1996, which provided patent protection for
20 years, as well as pipeline protection for drugs not yet on the market.
It is common knowledge that investment in R&D is quite an expensive
undertaking. lnvestors will under-invest in such activity if they are not
assured of reaping the lion's share of the resulting benefits.o' lt can be
convincingly argued that lP protection plays a catalytic role in stimulating
R&D.€ Furthermore, protection of intellectual property has the potential
to contribute positively to a country's efforts to attract FDl, increase foreign trade, and provide the necessary conditions for transfer of technology. The combination of all these factors contributes to a greater potential for increased growth. ln the case of Japan, for example, the rate of
technological development since 1945 can significantly, though not
entirely, be associated with intellectual property and, in particular; the
patent system, which was widely used in the "catching-up" process.oo
The relationship between international economic activity and lP for
developing countries in the post-TRIPS era was recently examined by W.
Lesser of Cornell University, in a paper commissioned by WIPO. He
examined in particular the link between stronger lP protection and two
international factors: FDI and imports. Lesser reports his findings that
"the relationship between the lP score and both FDI and imports is both
positive and significant" and concludes that "...taken in the context of
previous studies, [the result] is compelling evidence that stronger [intellectual property rightsl IPR do indeed provide some domestic benefits
for developing nations."os
There are many other positive aspects to the question of intellectual
property and its benefits in the economic equation, especially if one
looks at intellectual property other than patents. Take the case of trademarks, for example. Trademarks are an important component of the lP
system and have a strong influence on private investment and marketing
decisions. They have been in use for many years in many countries, both
developed and developing (see Chart - 2.8). lP executives consider the
market value of their trademarks as part of their intellectual and intangible capital (see "The World's Most Valuable Brands" in Chapter 5).
NTE LLECTUAL PROI'ERTY
CHART-2.8 S HARE OF IN DIVIDUAL COUNTRIES
IN TOTAL TRADEMARKS REGISTERED IN
usA - 11.3%
Japan - 10.0%
Others - 52.0%
Rep. of Korea - 4.Oo/"
Argentina - 2.5%
Brazil - 3.7o/"
Germany - 3.37o
Chile - 1.9%
The value added from the cultural industries (literature, music, art, etc.)
should similarly be considered. ln developing countries, this economic
sector has grown considerably as suggested in Table - 2.9 concerning the
book publishing sector. Copyright and related rights of authors, performing artists, producers of sound recordings, broadcasters, and other
creators have been in the limelight for some time because of the economic losses attributed to piracy of works protected by copyright, particularly, software, music, and film. Based on OECD data, the proportion
of counterfeit goods in total sector sales has reached 33 percent for the
music sector, 50 percent for the video sector, and 43 percent for the software sector.
TABLE-2.9
ANNUAL BOOK TITLE PRODUCTION IN
6,W2
51,4&
120,1M
45,U4
14"/o
3,320**
96"/o
24"/"
7"/o
11,8&
110/"
67,7U
48o/"
Source: lnternational Publishers Assoctation
* China: figures for 1993 and 1996
Overseas investments and the amount and kind of technology transfer
by Germany, Japan, and the United States of America seem to be affected significantly by a recipient country's system and level of lP protection.ou ln spite of the lack of quantitative evidence regarding the impact
of lP protection on developing economies, there seems to be agreement that a positive, two-way, and mutually-reinforcing relationship
between lP and international trade exists, i.e. lP protection enhances
international transactions and vice versa.47 Moreover, there are short-term
and long-term gains and losses that should be considered. As regards
patents, the literature has shown that "patent protection enhances economic growth rates once a particular level of development has been
reached."4B Recently, there have been indications that lP protection may
also be directly or indirectly influenced by wide and intensive discussions
on lP policies, e.g.the debate on lP in the fields of biotechnology and
genetic resources, plant variety and farmers rights, the emerging patent
debate over the human genome mapping projects, genetic resources,
biodiversity, traditional knowledge, folklore, and other areas of intensive
intellectual and commercial activity.
Z2] I NTE LLECTUAL PROPE RTY
lntellectual propefty has become a common feature in business regulation, especially in Europe and the United States of America.oe lt influences
the behavior of firms when dealing with investment in innovation projects
or product differentiation,s0 mergers and acquisitions (see Box - 2.'10),
technological alliances, joint ventures, and licensing."
BOX-2.10 IP-BASED MERCERS AND
ACQLJTSITTONS
ln Novembe r 1997,Texas lnstruments paid a staggering US$39S,rnitlion for Amati Communications, a small California-based company
founded by Professor Cioffi at Stanford University. The figure surprised
many as it appeared extremely high given Amati Communications'
annual sales and financial situation. Why would a large semiconductor
company pay such a high price for a small Silicon Valley start-up? The
answer is simple. Amati Communications held 25 key patents on
Digital Subscriber Line (DSL)technology which Texas lnstruments considered crucial for entering the DSL market. The 25 patents covered
some important areas of next-generation modem technology which
have been adopted by the American National Standards lnstitute as
the standard for DSL. Owning Amati Telecommunications' patents
allowed Texas lnstruments to acquire a leading position in the new '
technology as well as promising profits from licensing the technology
Ownership of other forms of intellectual property, such as trademarks,
may also be a decisive factor behind mergers and acquisitions (M&As).
lndian tea-maker Tata Tea, for example, recentlyr acquired UK-based
Tetley Ltd. declaring that one of the main reasons for the acquisition
was to obtain access to a global brand name and a global distribqtion
network. The acquisition of Tetley enabled Tata Tea to expand its
operations and obtain a globally recognized trademark to sell its furod-"
ucts worldwide.
The past two decades have seen a great expansion in M&As, which
have been growing at an annual rate of 42 percent and reached
US$2.3 trillion in the year 2000. Reasons for domestic and cross-border
M&As are multifold, including advantages relatihg to:economies of
to new markets. According to the World lnvestment
Report 2N0,
second main motivation for firms to merge and
acquire an existing company, rather than to grow organicalty, is "the
quest for strategic assets, such as R&D or technical know-how,
patents, brand names, the possession of local permits a'nd licenses,
and supplier or distribution networks" [italics added].
Source: Rivette and Kline, "Rembrandts in the Attic"; World lnvestment Report
2000: "Cross-Border Mergers and Acquisitions and Development", UNCTAD,
There are ways to stimulate innovative activity, such as governmentfunded R&D, encouraging use of savings and other resources of the
inventori family for capital investment, and more recently, facilitating the
participation of the so-called "investment angels."" However, the influence of lP has been growing steadily on its own, especially in knowledgedriven areas such as information technology, communications, and
IP PROTECTION AS GROWTH POLICY
lntellectual property protection is often seen as an instrument of industrial policy that has wide-ranging ramifications on the economy."
ln the context of developing countries, two factors define the environment for acquiring technological capability. On the one hand, developing
countries realize that to join the global trend towards greater free trade
and to encourage foreign investment, adequate lP protection is essential.*
On the other hand, the amount of technological knowledge that is in the
public domain is much greater than just two decades before."
ln every country there are bright people who have the ability to innovate,
and it is hoped that the capacities of such people are invested positively for national economic development. The lP system can and does play
a crucial role in this regard, in particular, by making available to them,
through patent information, the most up-to-date technological information; the lP system should also prevent the "exportation" of knowledgecreating national capacities to other countries which can better exploit
44I I NTE
Ihe Process of Economic Growth
them. ln one country, for example, commercially significant innovations
made at the national university were being disclosed abroad for patenting and development by others in Canada, Mexico, and the United
States of America, since the local patent law was considered inadequate
by university officials. This meant that value would be added abroad
rather than in that country.s6
The effects of lP on economic development are sometimes tempered by
the perceived availability and strength of lP protection.s' For example,
higher levels of lP protection for a firm's technologies and business methods could conceivably encourage the firm to invest in the training of its
workers in order to enhance productivity and competitiveness. ln the
area of venture capital development, unless there is perceived adequate
lP protection, individual inventors and small companies tend not to disclose their innovations during venture partnership negotiations for fear
of losing ownership or control.sB ln the agricultural sector, where governments are traditionally reluctant to invest in research, funding from the
private sector is often sought. However, in many cases, the private sector
is unwilling to invest in research because it is not able to protect research
Strong views prevailed in the 1970s that since "developing countries
were not technologically at the forefront, the incentives provided by lP,
and patents in particular, for investment in research and development
were not meaningful".se ln situations where only low levels of lP protection are available, as in most least developed countries (LDCs) and certain developing countries, companies often rely on older, off-patent or
unpatented technological solutions. Many inventions from developing
countries, particularly in state-funded universities, have not been recognized as patentable. Thus, potential technological advances often never
get to see the light of day.' ln a recent electronic conference on the subject, a recommendation was made to the World Bank that urging and
assisting developing countries to establish higher levels of lP protection
should be the preferred approach in the field of biotechnology, so that
greater market value can be considered locally as biological resources
are developed, rather than promoting what is essentially the continuing
export of raw materials through material transfer agreements.
VISIBILITY OF IP IN POOR COUNTRIES
- 2.11 shows the difference in economic output (value added in
GDP) according to a country's income level. Because of these differences
in the structure of output, developing countries may use and develop different types of technologies and consequently benefit from lP in different
CHART-2.11 DIFFERENCES IN STRUCTURE OF OUTPUT
ACROSS INCOME GROUPS
Hish income countries
Source: World Development lndicators, World Bank
ln the manufacturing sector, it is very likely that the main impact of lP protection would be on the modernization of machinery and manufacturing
processes. But in the poorest regions of the world, where people live on
less than a dollar a day, less than 5 percent of economic activity relates
to manufacturing.6r lntellectual property activity will have to be relevant
to the economic priorities of the country. lt is clear, that while an lP
regime can bring out the potential for innovation, creativity, and growth
in the national economy, it is not by any means a cure-all. Not only are an
46 I NTE LLECTUAL PROPERTY
adequate legal infrastructure and progressive policies on protection of
intellectual property required, but also active national lP policies and
positive and widespread public conviction and awareness. Chapters 4, 5
and 6 address how lP, specifically in the patent, trademark, geographical
indications, and copyright fields, can promote economic development.
Paul M. Romer, "Why, lndeed, in America? Theory, History, and the Oigins of
Modern Economic Growth," NBER Working Paper No. W5443 (January 1996); also
American Economic Review 86, No. 2 (May 1996): 202-206.
Economic arowth can be defined as "the increase in the real level of net national
product, although the measure will then be sensltive to the way in which national
productis measured." One should also bear in mind that the theory of economic
growth is a long-run theory. David W. Pearce, ed., The MIT Didionary of Modern
Economics, 4"' ed. (Cambridge, MA: MIT Press, 1992).
The law of diminishing returns states that when increasing quantities of a variable
factor, e.g., labor or capital, are added to fixed quantities of some other factor (say
land), first the marginal and then the average returns on the variable f actor will, after
some point, diminish.
Donella H. Meadows, Dennis L. Meadows, and Jorgen Randers, The Limits to
Growth: A Report for the Club of Rome's Project on the Predicament of Mankind
(New York: Untverse Books, 1972).
For a review of different growth models, see Gongalo L. Fonseca and Leanne
J. Ussher; "The History of Economic Thought"
http / / cep a. n ewsch ool. e du / h et/ h o m e. htm
Gladys We, "What is Endogenous Growth Theory?" (1994)
http / /thu mb. cp rost. sf u. ca/ :
w e / m isc/ e n do g e n o
Joseph A. Schumpete4 The Theory of Economic Development (Cambridge, MA:
Harvard University Press, 19j4). First published in German in 1911.
An example of disruptive technologies and creative destruction has been elaborat
ed in a case study about the development of various types of memory discs. See
Clalrton M. Christensen, The lnnovator's Dilemma (Cambridge, MA: Harvard
Business Schoo/ Press, 1997): Chapter
Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper &
Brothers, 1942).
Some economists challenge this notion of two Schumpeters. For a detailed discus-
sion see Richard N. Langlois, "Schumpeter and the Obsolescence
Entrepreneur," (paper presented at the History of Economics Society annual meeting, Boston, June 21,1987)
http / /www. u cc. u co n n. e du / - LAN G LO S/ SCH U M P ET. HT M L
4A I NTELLECTUAL I'ROIE RTY
F. W. Rushing and M.
Thompson, "lntellectual Property Protection,
Entrepreneurship, and Economic Growth," Journal of Enterprising Culture 4 No. 3
(September 1996): 267 -285.
R. G. Lpsey and K. A. Chrystal, An lntroduction to Positive Economics, B"' edition
(Oxford: Oxford Universtty Press, 1995): 6j7.
Edward Denison, The Sources of Economic Growth in the United States and the
Alternatives Before Us (New York: Committee for Economic Development, 1962).0
"lndustry Gets Religion," The Economist (February 18, 1999).
J. Bradford De Long, "A Short Review of Economic Growth: Theories and Policies,"
Preliminary Draft (Berkeley: University of California at Berkeley and National Bureau
of Economic Research, 1996) http://econ161 .berkeley.edu/Econ-Articles/ACCF-Growth/Growth-ACCF4.html
Charles l. Jones,lntroduction
to Economic GroMh (New
York; W. W. Norton & Co,
However, Robert So/ow elaborates that technological progress is at /east partially
endogenous to the economy and identifies the patent systern as one of the instruments used to attract more resources into the research for new products and
processes. Robert Solow, "Perspectives
Economtc Growth," Journal of
Economic Perspectives 1 UVinter 1994):45-54.
Sinead Walsh, "Endogenous Growth Theory."
http ://www. eco n omi
cs. n u i g a lw ay. i e / stu de
nts/w alshsi n e a d/ p a ge)j.html.
For example, Nicho/as Klador (1957), Kenneth Arrow (1962), Richard Ne/son and
Sidney Winter (1982).
Paul M. Romer, "lncreasing Returns and Long Run Growth"Journal of Political
Economy 94:5 (October1996): 1N2-1037 and Gladys We, "What is Endogenous
Growth Theory?"
F. M. Scherer, New Perspectives on Economic Growth and Technological lnnovation
(/Vashington, D.C.: Brookings /nstitution Press, 1999).
G. M. Grossman and E. Helpman "Endogenous lnnovation tn the Theonl of
Growth," Journal of Economic Perspectives & No. 1 g/Vinter 1994): 27.
Carsten Fink, paper on general trends (April 27, 1998), electronic conference on
lntellectual Property Rights and Economic Development, April 27-May 15, 1998,
organized by the World Bank TechNet, World Bank Economic Development
/nstitute, and the World Trade Organization - http://www.vita.org/technet/iprs
(hereafter cited as lntellectual Property Rights and Economic Development).
Fred Abbott, lntellectual Property Rights and Economic Development.
Using MP3 compression software for downloading music on the lnternet, and filesharing programs and systems for example.
See, for example, the growth modeis in Solow, "Technical Change and the
Aggregate Production Functions" and Romer, "Endogenous Technological
Fink, lntellectual Property Rights and Economic Development.
See a/so Global Patenting Trends in Technological Sectors, US Department of
Commerce, 1998.
Source: United States Department of Commerce, 1998. Advanced Materials sector
patents related to biomaterials, high temperature superconductors, advanced
ceramics, alloys, composites, diamond thin films, membranes and selected polymers. lnformation Technology sector patents related to digital, optical and analog
computing hardware and software and semiconductor manufacturing and applications. Health sedor patents related to drugs, medicines and biotechnology.
Automotive sector patents related to engines, transmissions, brakes, steering
wheels and tires, vehicle bodies and chassis, passenger accommodation and safety, pollution controls and automotive manufacturing technology.
Sources: OECD and United States Patent and Trademark Office.
Keith E. Maskus, lntelleaual Property Rights in the Global Economy (/Vashington,
D.C.: /nstitute for lnternational Economics, August 2000).
Abbott, lntellectual Property Rights and Economic Development.
50] t NTE
t-LECTtJAL PROPE RTY
lbid. Abbott also wrote "...Patent protection may have an impact on the develop
ment of a pharmaceutical industry that is different than its effects on the development of an automobile industry. Patent protection is likely to have a different effect
on the development of a newly-industrialized economy as compared with a least
developed economy."
Maskus, lntellectual Properly Rights in the Global Economy, Table 4.9, 126
lbid., Table 4.10,
Jayashree Wattal, in an e-mailed discussion paper (April 29, 1998), lntellectual
Property Rights and Economic Development, identified several conditlons that
makes patent protection /ess relevant to low-income countries, notably (a) lack of
really new or original ideas that are " protectable"; (b) no perceived or popular need
to follow honest or fair commercial practices to respect lP, particularly as regards
goods of foreign origin; and (c) the kind of creative and innovative ideas generated
do not fit into c/assica/ lP regimes found in high-income countries.
More than 95 percent of patent applications in developing countries are filed by foreigners (based on 1997 WIPO statistica/ compilations).
Edwin Mansfield, "lntellectual Property Protection, Direct lnvestment, and
Technology Transfer: Germany, Japan, and the United States", lnternational Finance
Corporation Discussion Paper No. 27, (VVashington DC: The World Bank, 1995).
a discussion of this perspective, see Fritz Machlup, "The Optimum Lag of
lmitation Behind lnnovation," (Copenhagen: Festskrift til Frederik Zeuthen, 1958).
See, for example Tony Samuel, "The Value of Protection", Managing lntellectual
Property, (November 2000): 14.
F. W. Rushing and M. A. Thompson, "lntellectual Property
Entrepreneurship, and Economic Growth," Journal of Enterprising Culture 4, No.
3, (September 1996):267 285.
Ove Granstrand, The Economics and Management of lntellectual Property: Towards
lntellectual Capitalism, (Northampton, MA: Edward Elgar Publishing, 2000): 170.
of TRIPS-Mandated lntellectual Property Rights on
Economic Activities in Developing Countries," (VVIPO Paper, April 2001, available at
Lesser, "The Effects
www.wipo. int/ about-ip
p/ e n /studi es/ n dex.htm
/i ndex.html?wipo_conte nt_f r ame: / about-
ntellectu al Property Protecti on. "
Maskus, lntellectual Property Rights and Economic Development.
See, Mark A. Thompson and Francis W. Rushing, "An Empirical Analysis
Patent Protection", Journal of Economic Development 21 No. 2,
(December 1996). See also David Gould and William C. Gruben, "The Role of
lntellectual Property Rights in Economic Growth," Working Papers, 94,09, Federal
Reserve Bank of Dallas, (1994), who conclude that intellectual property is a signifi-
cant determinant of economic Arowth and that the impact is stronger in more open
See, for example, US and EC policies
http / / www.
p m atte r s. n et/ f e at u r e s / N0526_p
http / /www. cpte
ch. o r g/ip
/ h e alth / pi
patents and parallel importation
e l. h t m I
ln the chemical and pharmaceutical industries, over 40 percent of firms surveyed in
Germany, Japan, and the United States of America felt that protection in certain
developing countries was too weak to permit the licensing of its newest or most
effective technology (M ansfi eld, I ntellectu al P roperty P rotecti on)
Rich individuals interested in pioneering new business ventures or exploiting infant
industry potential or opportunities (see also |JNICE Annual Report, 1998).
"Economy" is understood ln this case to fall within the broader context, to include
general social welfare trickle-down effects from the use of new technologies and
other creative and innovative ideas and their impact on the quality of human life (for
example, impact
on industrial productivity, educational opportunity,
growth, healthcare, decreasing poverty levels, and so forth.).
52 INTE LLECTUAL PROPE RTY
The Process o{ Economic Growth
TR/PS Agreement on intellectual
The Effects of TRIPS-Mandated
Lesser,"
property policies in developing countries
lntellectual Property Rights on Economic
Richard Ne/son, Pane/ Discussion Summary, lntellectual Property Rights and
for instance, the perceived impact of the
Sherwood, lntellectual Property Rights and Economic Development.
Mansfield, "lntellectual Property Protection."
for example, "Benchmarking lndustry-Science Re/atlonships," Workshop ll of
the Joint German-OECD Conference (Berlin, October 16-17, 2000).
From the lntroduction of Lesset "The Effects of TRIPS-Mandated lntellectual
Property Rights on Economic Activities in Developing Countries"
www. wi p o. i nt/ ab o ut- i p / e n / i n d ex.htm I ?wi p o
-co nte
p/ e n / stu di es/ n dex.html
Sherwood,lntellectual Property Rights and Economic Development.
/ ab o
A Power Tool for Economic Grovvth
54 I NTE LLECTUAL PIIOPE RTY
lntellectual Property, Knowledge and Wealth Creation
Athorgn tangible assets such as land, labor, and capital used to be the
yardsticks of economic health, this is no longer the case. The new drivers
of wealth in contemporary society are knowledge-based assets.r
HIDDEN VALUE AND NEWFOUND WEALTH
lP assets are gaining ground as a measure of corporate viability and
future performance. ln 1982, some 62 percent of corporate assets in the
United States of America were physical assets, but by 2000, that figure
had shrunk to a mere 30 percent (see Chart - 3.1). At the beginning of the
1990s, in Europe, intangible assets accounted for more than a third of
total assets. ln 1992, in the Netherlands, for example, intangible assets
accounted for more than 35 percent of total public and private investments. A recent British study shows that, on average, 40 percent of the
value of a company is not shown in any way on its balance sheet.'z lP is a
significant component of intangible assets.
CHART-3.l
US COMPANIES' INTANGIBLE ASSETS
AS A PERCENTACE OF TOTAL ASSETS'
8O"/o
20"/"
lntangible assets
A survey conducted in 1993, sampling a total of
284 Japanese firms,
revealed that lP assets accounted for 45.2 percent of corporate knowledge accumulated during a reporting period (covering both codified
knowledge, such as that fixed in documents, and tacit knowledge that
cannot be fixed, such as human skill sets)..
The bricks-and-mortar economy is, thus, being replaced with the economy of ideas in which lP has become one of the major currencies. ln the
new economy, wealth is generated through creating and capturing the
value of knowledge. Throughout the history of human civilization, wealth
was based on the possession of physical assets. Today, however, the paradigm has changed, and knowledge has become the new wealth.
The significant, positive impact that the protection of lP can have on the
technological progress of a country can be clearly seen at the macroeconomic level. But, until recently, it was hard to assess the value of lP at
the micro level, partly due to the lack of viable methods of valuation. lP
assets have not been adequately reflected in corporate balance sheets.'
Howevel the environment surrounding the valuation of intangible assets
has significantly changed over the last decade. This chapter will discuss
these changes and the recent developments and efforts to find a robust
way of valuing lP assets. lt is through these efforts to assess the hidden
value of lPthat many have realized how and to what extent lP has contributed to, and will continue to increase, company earnings.
With the growing realization of the hidden value of lP, companies
increasingly managing and wielding their patents, not just as defensive pro-
tection against intellectual theft, but as an active and powerful tool to
sharpen their competitive edge, increase their sector influence, and
enhance their reputation as market innovators.6 Discussions on these issues
at the international level have begun to emerge, particularly regarding the
extent to which lP is seen as a new form of capital and an ingredient for success in business.' Shareholders are increasingly sensitive to the value of lP
assets and are using them as an indicator of company earning potential.
5d] I NTE
It has been said that "intellectual creation can make economic sense
only when we wake up the innovator in an entrepreneur and also the
entrepreneur in an innovator." Globalization, technological development, and the lnternet have brought a new realization of the worth of lP
to entrepreneurs and innovators, and both are waking up to the need to
protect it and to build "a strong bridge between invention and the market place."B
ln the new economy, innovative thinking is as valuable as skill. When vast
generic information is creatively managed, business ideas spring forth as
value-added knowledge. Often, glving knowledge a central place in
business strategies is the key that makes both traditional firms and new
start-ups competitive, successful and unique. lntellectual capital embodies the results of innovative knowledge management. Today, lP rights
count heavily amongst the intangible assets of enterprises, along with
other proprietary knowledge-like business procedures.
Modern competitive management is mindful of the strategic use of lB
and creates the environment for innovative thinking and knowledge-mining by its workers (e.g., sharing of skills among knowledge teams, strategic selection of innovations for lP protection, and valuation of lP assets).
Business in the new economy depends largely on stable and long-term
relationships based on trust and win-win partnerships, and the careful
balancing of new knowledge creation and creation of benefits for civil
society. An lP-minded management approach provides the bargaining
power to exchange intellectual assets and to develop more advanced
strategic partnerships. ln the market for patented technologies, M&As,
and business-to-business (B2B) relationships, the positive valuation of lP
is a driving force. lntellectual property also allows firms to establish a
robust brand (trademarks, domain names, etc.), which is essential to cultivate recognition and trust in the lnternet environment. The creation and
exploitation of intellectual assets by empowering knowledge workers are
fundamental strategies for firms. lP provides important motivation and
incentives to workers through the recognition and rewarding of their
intellectual contribution to the process of internal assets generation and
the seeking of legal protection thereafter.
ln the rapidly changing markets where products and services have shorter life cycles, firms need a decision-making system that allows accurate
strategic evaluation of intellectual assets and swift action to secure legal
protection of lP rights. The tactics of "file first and evaluate later" seem
to be viable for those assets that have uncertain possibilities of commer-
INTANGIBLE AND IMMEASURABLE
Every firm has a portfolio that includes both tangible and intangible
assets, including lP. These lP assets have the potential of significantly
contributing to an increase in the return to investors. Firms that fail to
fully comprehend and realize that potential run the risk of lost revenue,
poor positioning, diminished market value, and possible collapse.'
According to Generally Accepted Accounting Principles (GAAP), assets
are composed of (a) current assets; (b) plant, property, and equipment
(corresponding to tangible assets); and (c) other assets (corresponding to
intangible assets). Though accountants have recognized the existence of
intangible assets for many years,10 different types of intangible assets
were aggregated in a class called "goodwill" without being specifically
identified. ln the 1960s, the wave of corporate M&As prompted a review
of the accounting of intangible assets. ln 1981, the United Kingdom
enacted the Companies Act, which permitted firms to include intangible
assets in their accounts. However, it was not until the 1990s that governments started to develop more specific standards for such assets. During
the last decade, when the economy and business increased their focus on
value-added, and became more services-oriented and knowledge-intensive, the proportion of intangible assets to tangible assets increased.
Strategic alliances became popular as a way of coping with global market competition, and the value of M&As worldwide has, according to
The Economist, continuously increased from US$0.5 trillion in 1990 to
US$3.5 trillion in 2000."
58] I NTE
I{OPE RTY
lntellectual propefty assets have emerged as an important factor in corporate strategy in the 1990s. One reason the new economy has been
called invisible is that old accounting methods have trouble monitoring
it.'2 ln response to the trends, legislation addressing this issue has been
drafted in many countries. ln the United States of America, the Omnibus
Budget Reconciliation Act of 1993 introduced the definition of several
classes of intangible assets (for example, goodwill, going concern value,
lists of customers, patents, copyrights, formulas, processes, designs, patterns, know-how, and licenses) and allowed firms to amortize the cost of
The lack of reliable and widely accepted accounting standards for intangible assets resulted in differences between companies' book values and
their market capitalization. For example, a review of the accounts of the
350 largest British companies with a combined total market capitalization
of US$2,167 billion revealed that, of that value, total balance sheet assets
amounted to US$603 billion and intangible assets a mere US$38.9 billion.
This leaves an unexplained gap between market capitalization and balance sheet assets of about US$1,500 billion or 72 percent.'' Accordingly,
in parallel with the development of national laws, regional efforts at coordination have been made. For example, since its establishmenlin 1977,
the European Accounting Association has tried to link the Europe-wide
community of accounting scholars and researchers. This initiative has
been dealing with the presentation and valuation problems associated
with intangibles.'o
At the international level, the lnternational Accounting
Committee (IASC),'' an independent private sector body, has also been
working to develop internationally acceptable accounting standards.
The IASC publishes its standards in a series of pronouncements called
lnternationalAccounting Standards (lAS). ln 1998, IASC published IAS 38,
a revised standard on intangible assets.'6 lt applies to expenditures on
advertising, training, start-up, and R&D activities. One of the main features
of IAS 38 is the requirement that an intangible asset should be recognized
in financial statements only if it is an identifiable asset that is controlled
and clearly distinguishable from an enterprise s goodwill. lntangible assets
should be amortized over the best estimate of their useful life. The
disclosures on intangible assets should enable users to understand the
types of intangible assets that are recognized in the financial statements
and the movements in their carrying amount (book value) during the year.
ln contrast to the
keenness of some accountants and government
authorities, many firms have been slow in introducing fullJledged strategic management of lP. This is probably due to the fact that, in many
countries, recognition of lP as a natural part of management's responsibility has not included the practice of assessing its value.'' However, to
meet the requirements on disclosure of assets, effective methods of
assessing the value of intangible assets, including lP, are needed. Experts
have not found a robust method that could fully satisfy firms in different
sectors of industry and this may also be another reason which prevents
many firms from systematically assessing the value of lP.'u
The methods for the valuation of lP so far developed are either
tive or quantitative. Oualitative methods provide different scores
ings based on certain assessment criteria. Ouantitative methods
actual figures for the value. Valuation methods may be divided
following three groups:''
qualitaor rankprovide
(a) Cost Approach
The expenses for acquiring lP from external sources or for generating lP assets internally are indicated. This method measures
future benefits by quantifying the amount of money that would be
required to replace the future service capability of the property.
The value is subject to amortization and write-downs.
(b) lncome Approach
The income approach focuses on a consideration of the incomegenerating capability of the property. The underlying theory is that
the value of property can be measured by the present worth of the
net economic benefit on the assumption that lP is capable of producing the income. lt is generally agreed that this approach often
proves to be the most reliable for the valuation of lP.
60 I NTE LLECTUAL PTIOPE RTY
The market approach is the most direct and the most easily understood appraisal technique. lt measures the present value of future
benefits by obtaining a consensus of what others in the marketplace
have judged it to be. There are two requirements: the existence of
an active and public market and an exchange of comparable prop-
erties. Until recently, these conditions were considered difficult to
meet. However, the emerging web-based patent exchange markets
may change the picture as the next section will describe.
VALUATION OF IP IN THE PRIVATIZMION
The issue of privatization (simply defined as the transfer of assets from
the state to the private sector) was recently identified as having significant influence on lP policy and strategy formulation, and vice versa.'o
WIPO's study on privatization, carried out by an advisory panel, readily
identified the question of valuation of lP assets as a key and possibly seriously under-researched area with clear relevance to decisions to privatize
or not, and highlighted many examples where lP assets had possibly
been undervalued, or not valued at all. The panel noted that existing
international accounting standards and valuation methodologies might
be inadequate in providing a sound foundation for valuing intangible
assets, including lP assets in processes that were immensely important to
the economies of many countries, in particular those economies in transition to free-market principles. While the panel concluded that there is
virtually no overlap in current literature on privatization and lP as such,
there was much interest in the assertion that lP figured significantly in the
valuation of intangible assets and, therefore, in the estimation of a firms
capitalization and strategic value, which in turn is important in dealing
with the question of privatization of public enterprises.
One of the striking figures brought before the panel was the suggestion
that between 50 and B0 percent of the value created by a firm originates
from intellectual capital rather than from traditional physical assets