April 18, 2018 / 2:32 PM / 4 months ago

Breakingviews - Hadas: Knowledge is better shared than patented

LONDON (Reuters Breakingviews) - China may yet become a world leader in patent protection. That would be the natural result of becoming a world leader in many technologies. But Beijing’s approach to intellectual property may become part of a larger change in the world’s approach to the control of knowledge.

Officers show fake masks after being seized by customs in Shanghai, China, December 8, 2015. Picture taken December 8, 2015. REUTERS/Stringer

Historically, patents were part of a culture of knowledge-hoarding. Economic catch-up required countries to adopt creative strategies for involuntary sharing. China’s leaders understood that. They wanted foreign expertise, whether it was obtained through legal contracts or by more informal methods.

In China, the methodological indifference is on the way out. Protection of intellectual property is part of the government’s ambitious “Made in China 2025” plan to bring domestic companies up to world standards. Not that Beijing is promising a level playing field for foreign companies. The authorities are expected to promote the national interest. Still, the central planners do seem sincere in wanting China to play a responsible and leading role in the global economy. That includes respect for patents.

A sharp rise in patent filings may be a sign of things to come. Between 2010 and 2016, China’s share of global patent filings rose from 20 to 43 percent, according to the World Intellectual Property Organization. Many of these filings may well have little content. But even the sceptical U.S. Chamber of Commerce sees “real—albeit incremental—signs of positive reform” in the protection of foreign companies’ intellectual property in the People’s Republic.

Donald Trump’s threatened sanctions may speed up the process. Beijing could please the mercurial U.S. president by announcing further steps along the road it was already on. But just how much difference will stronger patents make? The legal protection that patents provide is still quite valuable. However, patented knowledge does less for corporate earnings and national development than intellectual, organisational and political capital – skilled workers, extensive investment in research, and effective governments.

As once-poor countries gain more of these intangible assets, the economic value of patents is likely to decline. Consider the pharmaceutical industry. In rich countries, the temporary monopoly provided by patents is still a gold mine. Not so much in developing countries. When India limited illegal copies of foreign drugs in 2005, pharma prices rose by a modest 3 to 6 percent, according to a recent study by Mark Duggan, Craig Garthwaite and Aparajita Goyal.

Foreign drug producers had good economic reasons to show pricing restraint. Their Indian rivals are not global leaders, but some of them can offer almost-as-good products at very competitive prices. Besides, the Indian market is potentially huge, and regulators will not look kindly on foreign groups that engage in price-gouging. Exploiting patents might boost revenue now, but at a high cost later.

The Indian example suggests that stronger patents will not be enough to protect foreign companies’ knowledge advantage. The next generation of global tech companies which challenge Apple and Google’s parent Alphabet may be less profitable, and they may not be American.

Politics could interrupt the trend. For example, the diplomatic tension between China and the United States threatens to slow the development of the latest generation of mobile phone technology, known as 5G. Still, planners are well advised to get ready for a more integrated and less unbalanced global economy.

For that, today’s industry leaders might want to focus on something they already do a lot of – sharing their intellectual capital. Knowledge spreads by the widespread cross-licensing of patents, poaching competitors’ key employees, and relying on common equipment suppliers.

Requiring foreign companies to work with domestic firms accelerates the spread of expertise. China has long demanded this type of knowledge-sharing, and other countries are catching on. For example, India is requiring foreign groups contending for orders to supply the country with $15 billion worth of fighter jets to engage in domestic production.

Knowledge easily crosses political as well as corporate borders. China sends some of its most talented young people abroad, and India’s tech diaspora is legendary. Its members, along with world-standard professionals from rich and poor countries, constitute an expanding global intellectual and technical community. Although they are employed by rival companies in rival countries, they basically work together.

This new group has a distinguished precedent. In the 17th century, leading European philosophers and scholars stayed in friendly communication despite their political rulers’ political and religious divisions. The name given to this community of minds was the Republic of Letters.

So now there is a Republic of Technology. This placeless polity should unnerve shareholders of established companies. Their market share and earnings are threatened by the ready availability of knowledge and expertise.

Patent protection can strengthen resistance, but the battle could still be lost. What is bad for shareholders may not be bad for the world, though. The trends certainly look brighter from the global perspective of the Republic of Technology.

Wealth is expanding along with knowledge. Poorer countries and their companies are taking their rightful place in the world. This new virtual Republic and its citizens of nowhere can help keep industrial peace. The world is safer when knowledge is shared than when it is hoarded and fought over.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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