The Role of Intellectual Property Rights

in International Business and Foreign

Direct Investment with Special
Reference to Developing Nations

Author: Nehal Ahmad

Submitted to: Muhib Anwer

Roll No: 15BALLB-104

B.A.LL.B (hons) 4th Year

Faculty of Law,

Aligarh Muslim University

 The Role of Intellectual Property Rights in International Business and
Foreign Direct Investment with Special Reference to Developing Nations

Introduction

The highly globalized system of intellectual property rights (IPRs) is undergoing a

revolutionary change as we approach the 21st century. Many developing countries across the
world have embarked upon the strengthening their robust IPR regimes. It is an undisputed
fact the role of Trade related-aspects of Intellectual Property (TRIPS) for constituting
multilateral regional agreements and business partnership agreements are undeniable with
special reference to the issues of regulatory convergence. It is pertinent to state that the
significance of IPR protection in developing countries for the development and advancement
of the scientific and technological capacity and, benefits derived from the enhanced level of
development is absolutely a matter of common understanding. It goes without saying that the
role of IPR in International Business and Foreign Direct Investment (FDI) is incredible and it
does have a substantial and unmatched effect on the overall growth of the developing
countries. The recent development and phenomenal rise in relation to Geographical
Indications (GIs) in developing countries like India, Egypt, Pakistan, Sri Lanka and Thailand
have given a new dimension to the regime. It noteworthy to mention that basmati export from
India produces 300mn Euros thereby adding extensively to the nation’s coffer. Astonishingly
enough, Darjeeling tea is being produced approximately 10000m tones in the country
whereas 30000m tones are being sold under the same name across the globe which,
unquestionably, needs strict legal protection.

You may be surprised to know that the retention of a strong intellectual property regime in
the domestic realms is an apple of discord among the developing and developed countries
despite of the substantial economic growth of the nations. More precisely, the contemporary
role of intellectual property rights has invariably brought an upsurge in the outlook of the
developing nations towards the aspect of international business, economic growth and FDI,
this being said with the conclusive presumption that the international business and economic
growth have been the most affected realms and it, undoubtedly, requires a separate spectrum
of analysis.

This project paper attempts to comprehend the immensely significant role played by IPR as a
regime in the development of the international business and foreign direct investment in the
developing countries of the nations. Moreover, it explicitly manifests an inextricable nexus
between IPR and FDI and to highlight the unparalleled effect of IPR on the business of the
developing nations.

Factors of the Foreign Direct Investment

The briefly above-mentioned statement is a clear manifestation of the fact that emerging
countries have enormous growing interests in attracting trade, foreign direct investment
(FDI), and technological expertise, although such indomitable encouragements must be
initiated by accompanying programs to build local skills and ensure that the benefits of
competition actually arise. In this parlance, Keith E. Maskus from the University of Colorado
says intellectual property rights are an important element in a broader policy package that
governments in developing economies could design with a view toward maximizing the
benefits of expanded market access and promoting dynamic competition in which local firms
take part meaningfully.

Foreign direct investment is an investment of establishing or acquiring a foreign subsidiary

over which the investing firm has substantial management control and ownership. In other
words, “foreign direct investment is an act of investment made by a firm or individual in one
country into business located in another country. It, generally, takes place when an investor
establishes foreign business operations or acquires foreign business assets, including
establishing ownership or controlling interest in a foreign economy.”1 One of the most
important attributes of the foreign direct investment is that it fundamentally establishes an
effective control and substantial influence over the decision making of a foreign business.

Multinational Enterprises (MNE) essentially make decisions having many aspects in regards
to means by which they can properly serve foreign markets. It is, however, on the discretion
of the firm to choose simply to export at arm’s-length to a particular country or region.
Alternatively, they may easily decide to undertake FDI, which requires selecting where to
invest or to construct new plants (so-called “greenfield investments”), which production
techniques to pursue, and how large an equity position to take with potential local partners.

Here I would mention the volatile date on the inflows and outflows of FDI in different
nations across the world. For example, “FDI in China has mushroomed in recent years, rising
by a factor of ten between 1990 and 1995 according to the IMF’s figures. Its receipt of nearly

1
Available at: http://www.investopedia.com
$36 billion in FDI in 1995 marks China as easily the largest destination for investment in the
developing world. It received 52% of the inward FDI in 1995 among the developing
countries, a share that rose dramatically from 15% in 1990.”2 Meaning thereby, China has
exceedingly expanded its international business and it market has immensely been boomed
by its exuberant indigenous productions and investments across the world.

In this context, some of the developing countries have significantly witnessed the inwards
FDI flows while others have suffered from the economic problems. As a consequence of this,
there appeared declining trend in terms of inward FDI flows. “Malaysia, Indonesia, and
Thailand have all received rising inward FDI flows, while Thailand’s investment abroad rose
sharply in the 1990s. Singapore became a significant supplier of FDI in this decade as well.
There are two African countries listed, Kenya and Egypt. Both display declining trends in
inward FDI over the last decade, indicative of severe economic problems in that continent. In
contrast, Mexico experienced a sharp rise in FDI in the 1990s, some of it undoubtedly related
to negotiation and passage of NAFTA. Brazil and Chile received similar large increases in
FDI since 1990.”3

It is interesting to mention that there has been a tremendous growth in Indian economy from
1995 to 2018. “Foreign direct investment in India increased by 1898 USD million in August
of 2018. Foreign direct investment in India averaged 1322.17 USD Million from 1995 until
2018, reaching an all times high of 8579 USD Million in August of 2017and a record low of -
1336 USD Million in November of 2017.4 Hence, it has acted as a catalyst to boost economic
transformation thus protecting and strengthening nation’s economy from stagnation. In this
regard, the contributions and stupendous achievements of Indian IT industry are
unforgettable.

The Role of IPR

The development of international business and foreign investment is the root-cause of the
phenomenon rise in the teaching and learning of IPR over the years. Its protection and
enforcement have, therefore, been considered as one of the major components of international
economic trade and business transactions. Notwithstanding the fact, it is quite difficult to
demonstrate the relations between IP and GDP or GNP in terms of national income and living

2
Keith E. Maskus, “The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and
Technology Transfer” p.4, Brussels, July 16-19, 1997
3
ibid
4
Available at: http://www.tradingeconomics.com
standards. However, there have been numerous studies, extensive research and
comprehensive analysis in order to establish the close proximity of IPR with economic
growth in general and international business in particular. Pertaining to this proposition, Rapp
and Rozek (1990) made some rough assessments while performing the task of cross-country
research wherein they consulted the legal texts of each country’s patent laws maintaining the
minimum standards of proposed by the US Chamber of Commerce. Paradoxically, their
approach was full of lacunas, since some of the features of patent laws in terms of presence
and absence were considered while its enforcement and effectiveness were blatantly missed.

Ultimately, the direct and proportional linkage between GNP and IPR has clearly been
established by Maskus and Penubarti’s efforts. It is one of the most outstanding and
extraordinary effort and merit special mention. The role of foreign direct investment (FDI) in
a nation’s economy and its holistic growth is apparently clear. One can easily anticipate the
importance of IPR for the growth of international business by the fact that its protection has
emerged as one of the most important consideration for international business diplomacy,
multinational companies and firms are increasingly becoming dependent on copyright,
trademark, patent and design in order to protect goods and services in the global market.5
Simultaneously, when it comes to implementation and implication such initiatives, it has
become the prime concern of a great deal of countries especially India just because of the
enormous pressures from the WTO.

It is interesting to note that India’s approach towards the entire issue of IPR is praiseworthy,
since it has been in accordance with the landmark provisions of TRIPS (Trade Related
Aspects of Intellectual Property), TRIMS (Trade Related Investment Measures), OECD
(Organization for Economic Cooperation and Development), GATS (Agreement on Trade
and Services) and Multilateral Investment Guarantee Agency. Needless to say that the recent
bilateral agreements with European Union permitting foreign direct investment is a great
manifestation of the fact that IP has been instrumental in the development of international
business in general and a nation’s growth in particular. In addition to this, if I borrow the
words of Meeting of Foreign Investment Implementation 16 Feb. 2004, it says that
“deliberations on modifying the present IP laws in consonance with TRIPS are also an
indication towards the general attempt to enhance FDI in this country via this sector.” Hence,

5
MacCalman Phillips, Foreign Direct Investment and Intellectual Property Rights: Evidence from Hollywood
Global Distribution of Movies and Videos, 1st January, 2004.
Available at: http://econ.ucsc.edu/faculty/mccalman/modesept.pdf
it would not be unreasonable to state that the government has acted upon the agenda by
constituting internal IP protection team, comprehensive examination of works in the shape of
copyright and patent ‘offshore vendor history’ while eliminating the availability of the
unauthorized software products. All the above-mentioned points explicitly indicate to an
important proposition that the contribution of IPR in international business and foreign direct
investment cannot be neglected.

Empirical Study in Relation to Developing Nations

The recent development and phenomenal rise in relation to Geographical Indications (GIs) in
developing countries like India, Egypt, Pakistan, Sri Lanka and Thailand have given a new
dimension to the regime. It noteworthy to mention that basmati export from India produces
300mn Euros thereby adding extensively to the nation’s coffer. Astonishingly enough,
Darjeeling tea is being produced approximately 10000m tones in the country whereas
30000m tones are being sold under the same name across the globe which, unquestionably,
needs strict legal protection.

It is quite convenient to mention over here that the importance of traditional knowledge
especially in India is not unknown, since traditional knowledge is the root of modern
biotechnologies and the new advancement and discoveries in pharmaceuticals, agriculture,
chemical and various other fields. That is why IP has been considered as one of the greatest
mechanism to protect it from its abuse. For instance, “there are about 600,000 licensed
practitioners of classical traditional health system and over one million community-based
traditional health workers.”6 Sadly enough, no exclusive provision has been mentioned so far
in TRIPS agreement pertaining to the protection traditional knowledge. Notwithstanding the
fact, that there must be the distinction between the traditional knowledge or indigenous,
community based knowledge and industry based-knowledge.

As per the data of the World intellectual Property Organization that successful patents are
generating approximately 180 billion USD in licensing each year by 2% successful patents
out of hundred. However, a recent World Bank analysis suggests that major beneficiary of
TRIPS in terms of enhanced value of patents are the developed countries with USA alone
expected to make an annual gain of US$ 19 billion while developing countries face loss of
US$ 7.5 billion on royalties and license fees.

6
Available at: http://www.wipo.org/about-wipo/en/dgo/wipo-pub-888
Despite all the perplexities, the developing nations are moving forward for the establishment
of a robust IPR regime. Therefore, many developing countries have begun to reform and
fundamentally constitute their IPR regimes in response to new international commitments,
domestic economic reforms, and external pressures.

The World Investment Report 2005 prepared by UNCTAD shows that FDI peaked in 1999-
2000 and then actually declined significantly in 2001, 2002 and 2003 by 41%, 13% and 12%
respectively, before increasing in 2004.7 However, the UNCTAD also notes that the
difference between inflows to the developed and developing countries shrank to 147 billion
USD, a significant narrowing of the gap compared with previous year.8 According to Daniel J
Gervais from the University of Ottawa, Canada says that “without adequate intellectual
property protection, economic development beyond an initial phase will not happen. We now
know that intellectual property regulation is an essential ingredient, it does not make an
economic plan, many more elements are needed.” It would be much better to refer the
prophetic statements propounded by Anselm Kamperman Sanders, Professor of European,
International Intellectual Property Law at Maastricht University, the Netherlands and a
former research fellow at the Queen Marry University of London. He states that “the
recognition of the interests of both developed and developing nations is a part of the wider
concern regarding the fundamental basis of current IPR system. WIPO, as the UN’s office for
the development of IPR, should take a leading role in tailoring IPR system to accommodate
the nee of all stakeholders.”

Conclusion

It has been established beyond any reasonable doubt that the public interest in intellectual
property rights has reached unprecedented levels with special reference to international
business and economic growth of developing nations. In fact, the economy of developing
country is undoubtedly witnessing a new dawn to paradigm shift in the approaches of
international business, commercial values of business and foreign direct investment.
Significantly enough, the inextricable nexus between IP regime and FDI can be imagined
from the fact that the post- independence India has ushered in new era where the protection
and proper enforcement of IP laws stands on the apex of the market economy. Moreover, the
developing countries must recognize that reformation in IPR regime in the pretext of changes

7
Available at: http://www.unctad.org
8
Ibid
in substantive law is an inception. All we need is the proper enforcement, execution,
implementation of the provisions in accordance with TRIPS Agreement.

Bibliography

1. Keith E. Maskus, Intellectual Property Rights, Foreign Direct Investment, And

Competition Issues in Developing Countries, International Journal of Technology
Management, August 1997 (Policy Discussion Paper No. 97/09)
2. Journal of Intellectual Property Rights Vol. 10 November 2005
3. Ishita Chatterjee, International Trade Law, Central Law Publications, Allahabad,
edi.2nd 2016
4. Shahid Akhter, International Trade, ABD Publishers, New Delhi edi.2011
5. Daniel J Gervais, Intellectual Property Trade And Development, Strategies to
Optimize Economic Development in TRIPS Plus Era, Oxford University Press
6. Mac Calman Phillips, Foreign Direct Investment and Intellectual Property Rights:
Evidence from Hollywood Global Distribution of Movies and Videos, 1st January,
2004
7. Keith E. Maskus, “The Role of Intellectual Property Rights in Encouraging Foreign
Direct Investment and Technology Transfer” Brussels, July 16-19, 1997

Webliography

1. www.investopedia.com
2. www.tradingeconomics.com
3. http://econ.ucsc.edu/faculty/mccalman/modesept.pdf
4. http://www.wipo.org/about-wipo/en/dgo/wipo-pub-888
5. Www.unctad.org