Intellectual property — proprietary know-how — is either secret or licensed under strict controls in developed countries. Unfortunately, most emerging countries do not have the educational or state institutions, legal system, social stability, or economic opportunities needed to endow and retain human capital. As a result, emerging countries face severe challenges in empowering and rewarding innovation among their own people.
International Monetary Fund (IMF) data on royalties and license fees show just how difficult it is for emerging markets to realize proprietary gains from innovation.
Almost no large emerging economies earn more than 0.1% of annual GDP from royalty and license fees, according to IMF data. Mexico, with 0.18% of GDP (2013 data), is an exception, but China and India illustrate the difficulty in realizing gains from proprietary innovation in the global marketplace, with such external receipts constituting just 0.01% and 0.02% of GDP, respectively. Given the degree to which these Asian giants have innovated, the end results have been either not very marketable or not for sale. See this chart.
The IMF data cover receipts and payments of residents and nonresidents for the authorized use of assets and proprietary rights such as trademarks, copyrights, patents, and other processes as well as the use through licensing agreements of originals or prototypes such as manuscripts, films, and other intellectual works.
Accordingly, the data include revenues from film distribution, which may seem like a broad definition of innovation. Every Kung Fu Panda film that is globally distributed is one film China didn’t make.
Integration into global manufacturing does not seem a recipe for learning much in itself. Malaysia and China, despite being so well-integrated in global supply chains, earn between 30 and 100 times less, as a proportion of GDP, than established intellectual property exporters such as Switzerland and the US. See this chart.
Such established players continue to dominate cross-border earnings from the fruit of innovation, with small highly innovating economies such as Sweden, Switzerland, and Finland earning up to 1% of GDP, net of their own payments abroad. Larger economies such as the US, the UK, Germany, and Japan earn up to 0.5% of GDP per year. Tax laws that favor patent-holders can distort the flows of such revenues — Malta and Ireland spring to mind — but this does not break the pattern.
Even for the licensees of technology — countries paying to use foreign know-how — licensing foreign technology is still a limited phenomenon in emerging markets. Only mid-income Thailand and upper-income Singapore and South Korea license foreign know-how heavily enough in the Asia/Pacific region to be among the top 10 licensees as a percentage of GDP.
Among Dun & Bradstreet’s top 10 emerging markets (ranked by the DB1-7 country risk rating), India, Indonesia, China, Chile, and Malaysia pay at least 0.2% of GDP more than they earn for know-how. However, precisely because most emerging markets do rely so heavily on foreign technology, their enterprises and governments would like to limit the bill, where possible.
The context is of advanced, highly technical competition, often in oligopolistic industries. For example, General Electric and United Technologies dominate certain aerospace sectors; L-3 Communications, Rockwell Collins, and Honeywell dominate avionics. There are no substantial competitors in the developing world in these extremely technical sectors.
Meanwhile, intellectual property, whether foreign or homegrown, is simply not secure in many emerging markets, markedly discouraging innovators. The converse of this is that in jurisdictions with good investor protection, it is also jealously policed. This is the age of the freelance patent troll, a term for those who at their own risk buy up patents they believe to be underleveraged and legally pounce on companies that may have infringed them.
The Fruits of Innovation: Difficult to Harvest
This difficulty in “catching up” for countries that are literally centuries behind in developing innovation is part of the context for industrial espionage. Previously, this was done via industrial fairs and trade visits, delegations taking unauthorized photographs, employee infiltration, and classic covert techniques. Today it’s via cyber-hacking, both in the private sector and, where the gains are large enough, state-backed cyber-espionage.
China has leveraged a small amount of foreign technology licensing to spectacular effect. But industry leaders are still acutely aware of the nation’s relative backwardness and the difficulty of retro-engineering the achievements of advanced countries’ industry via open-source materials and foreign study.
In general, emerging markets have not diversified into knowledge-intensive industries. Some have taken advantage of gaps or grey areas in intellectual property enforcement. A few have developed sectors using expired patents or nonproprietary know-how. Such are the pressures of unequal development.
Isaac Leung is a senior economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow/United Kingdom, he covers China, India, and other parts of the Asia/Pacific region as a contributor to D&B Macro Market/Country Insight Products. His areas of interest include maritime economics. He has degrees from Cambridge University and the London School of Economics.