Capturing more rents
In the last years, the development of rent strategies considerably developed through various channels related to innovative activities. Regarding the topics addressed in this article, the two last decades witnessed a broadening of private property rights to various intellectual activities. Central in the broadening of private property rights is the development of Intellectual Property Rights (IPRs), viewed by some as the “new enclosures” (May, 2000). Another analysis stresses that “the solution searched for by capital is now to advance rights to intellectual property in order to collect monopoly rents” (Vercellone, 2008, p. 19).
As it is well known, the development of IPR gained momentum in the 1990s through the TRIPs (Trade-related aspects of intellectual property rights) agenda, adopted under the auspices of WTO. As far as knowledge is widely acknowledged as a public good generating high positive economic and social effects (the so-called externalities), the construction of scarcity through the commodification of knowledge plays in contemporary global capitalism raises daunting challenges, which are ethical (Perelman, 2002) and economic efficiency related (Nelson, 2004). The break occurring from the 1980s onwards in long-term evolution is clear: the number of triadic patent families – which account for the bulk of total world patents – has more than doubled since the mid-1980s. In this process large world companies dominate patenting. In the US, the top 35 world companies accounted for around 9% of utility patents in 2006; in France, concentration was still stronger, with the top 30 companies accounting for over 30% of utility patents in 2007. The rise of patenting can be explained by two main drivers. One, IPR is a significant source of revenues which considerably accelerated at the world level. Athreye and Cantwell show that technology licensing payments and receipts have accelerated considerably since the 1980s, after being roughly constant between 1950 and 1980 (2007) (see also figure 2).
Figure 2 - Growth in non-US held patents and worldwide (cross-border) royalty and license receipts
Source: World Bank, World Development Indicators online database
In the EU, the Commission estimates the global trade to be €100 billion, a 40-fold increase in the past 20 years. In the United States too, it has been estimated that patent licensing revenues rose from US$ 15 billion in 1990 to more than USD 100 billion in 1998, and experts estimated that revenue could top half-trillion dollars annually by the middle of next decade (OECD, 2006). In France, royalties and licenses considerably increased between 1995 and 2007, the surplus (payments – incomes) contributing to a as high as 59% of the overall service trade surplus, up from 12% in 1995 (figure 3).
Figure 3 - Royalties and licenses, export, imports, and surplus in proportion of total service trade surplus in France (1995-2007)
Source: Author, data collected from Balance des paiements.
The same process runs at the firm level. A study covering over 400 world-class European TNCs found that the average Revenue earned from the licensing of intellectual property reached 12% of their total revenue in 2007. According to this 2007 study, 53% say the use of intellectual property rights (IPR) will be very important or critical to their business model in a two years, compared with 35% who say this is the case today (The Economist Intelligence Unit, 2007) (see also convergent results in a PricewaterhouseCoopers’ survey, 2007).
Two, technological innovation is only one of the driver of patenting. The idea that patent would spur technological innovation has been under sharp criticism of scholars of innovation. This ill-founded view comes from various reasons, including the implicit assumption that the nature of “knowledge” is totally captured by the notion of “information” thus technological knowledge may be institutionally treated in uniform ways (Dosi, Marengo, Pasquali, 2007). Others confirm that there “is so little empirical evidence that what is widely perceived to be a significant strengthening of intellectual property protection had significant impact on the innovation process” (Jaffe and Addam, 2000, p. 540).
Indeed, the considerable rise in patenting that occurred in the last decades is somewhat at odds with the cautious view adopted by academics and business as well on the weakness of patenting as far as protection from imitation is concerned. Imperfect protection conferred by patents induces firms to adopt other strategies, including secrecy, lead time over competitors, the tying of the innovation to complementary activities (manufacturing, sales and/or services) (Cohen, Nelson, Walsh, 2000). So, if preserving a technological advance is not a reason accounting for this overall steep rise, why firms run to file patents? An answer, which is in keeping with what has been described in section 1 as financialization of the global value chain, is as follows. On the one hand, the ownership of large portfolio of patents allows TNCs to increase their market power and capture part of the value created by other, generally smaller firms. On the other hand, in world oligopolistic industries and markets, IPRs play a double role. They facilitate, to borrow wordings from industrial economics findings, ‘mutual recognition’ and tacit collusion’ among lead firms. They also increase imbalances between the lead firms, endowed with a large portfolio of IPRs and smaller firms, both hardly able to finance litigation and less able to avoid going to court to settle their conflicts (Lanjouw, Schankerman, 2004).
Finally, an underestimated driver could be is that patents may improve access to capital markets (Christensen, 2008). IPRs are increasingly seen as a financial asset (Christensen, 2008, p.16). In the USA, financial markets have developed sophisticated vehicles based on securitization and the Commission has begun to develop similar policies. “Patent race” could reflect that Venture capitalists and other financiers may be more reluctant to finance companies only based on soft intangibles rather than a documented portfolio of IPR (id.). As for large public companies, convergent results indicate that, while advertising, goodwill, and research and development do not have significant positive impact on shareholder value, intangible assets other than goodwill, which include the value of patents, copyrights, licenses, and trademarks, have a positive impact on shareholder value (Heiens, Pleshko, Leach, 2004).
Overall, the mutual reinforcement of financial assets and intellectual property rights, both assets aimed at generating rents for shareholders, means emphasis put on increasing market power-oriented innovation. This could explain that other expenditures than research-development are on rise. They include marketing, advertising, communication, and the expenditures which are aimed at increasing the TNCs’ organizational and relational capital
Relational capital includes, according OECD (2006,...
, both capital being a significant, albeit imprecise, component of their intangible capital (Marrano, Haskel, 2007). Marketing and advertising expenditures have risen so high as to match technology-related expenditures. It is in particular the case in the French manufacturing industry (figure 4). The trend is unambiguous: between 1996 and 2006, the growth in advertising has been twice faster (+59%) than the growth in R&D expenditures (33%).
Figure 4 - Growth of Business R&D and Advertising expenditures in the French manufacturing industry, 1996-2006
Source: Author from Rapport de la Commission Permanente de Concertation pour l’industrie
As the preference given for advertising in France could reflect the traditional disaffection of French companies for self-funded R&D, it is by no means an exception. The same situation prevails in the US (Corrado, Hulten, Seichel, 2006). Not only intangible assets have risen faster than tangible assets, but among intangible assets, non-traditional types of intangible capital such as non-scientific R&D, brand equity and firm-specific resources (worker training and strategic planning and reorganization costs) together account for almost 60% of intangible capital deepening since 1995 (figure 5).
Figure 5 - Estimated Intangible Investments in the United States, 1947-2003 (Per cent of business output)
Source: Corrado, C., Hulten, C., Sichel D. (2006), “The Contribution of Intangible Investments to US Economic Growth: A Sources-of-growth Analysis”, NBER Working Paper 11948.
Macroeconomic data on the increasing role held by non-scientific R&D in total intangible assets are buttressed by case studies. In an IBM’s CEO study, which polled 750 CEOs, respondents ranked R&D as their eighth source for new ideas (Bednarz, 2006). Even High Tech industries, allegedly based on strong R&D expenditures, are not immune, and in recent years expenditures aimed at increasing rents gained momentum compared to R&D expenditures. In the US pharmaceutical companies spend almost twice as much on promotion as they do on R&D (Gagnon and Lexchin, 2008)
There are still divergences on the effects of marketing...
. Indeed, the percentage of sales spent on promotion for the industry as a whole increased from 14.2% in 1996 to 18.2% in 2005 (Donohue, Cevasco, Rosenthal, 2007). In France, similar data have been released showing that promotion expenditures account for over 12% of the total pharmaceutical business turnover, a figure slightly higher than the share of self-funded business R&D in business turnover (Bras, Ricordeau, Roussille, Saintoyant, 2007).
Reorientation of R&D expenditures
The strategy of rent-seeking based on IPR (patents, brands…) also modified the nature of research-development which is undertaken by TNCs, including HT companies. Usually, at the industry level, R&D intensity (e.g. expenditures on R&D-to-value added ratio) is used as the main indicator of technological intensity, along with the level of technology used by industry but produced in other industries (measured by the technology embodied in intermediate and capital goods divided by production). In most cases, HT Companies belong to HT industrial sectors.
As indicated, non-R&D intangible expenditures are now much higher than R&D expenditures, including in HT companies. Moreover, R&D expenditures, despite efforts for normalisation, are ill-measured. When Companies R&D statistics coming from different official sources are compared, they show significant discrepancies, evidencing somehow the black hole on what R&D is about. To give an example, in the UK, Business Expenditures in Research&Development (BERD) as collected by the UK government in 2004, were only 46% of R&D tax credit companies credits (Caro, Grablowitz, 2008). Besides these divergences in the gathering of data, it is now increasingly acknowledged that some expenses accounted for as R&D have little to do with research or even with technological development. As signaled by R&D analysts: “from a strict R&D standpoint, it’s somewhat questionable to count the two-thirds of the pharmaceutical spending that is dedicated to the execution of clinical testing. Similarly, nearly 85% of automotive spending is principally dedicated to the development of tooling for the year’s new models. These development funds have historically been included in a company’s general R&D funding program and difficult for analysts to financially separate from the company’s total research effort. When combined, clinical trials and automotive production tooling account for about 45% of the total spending of the top 25 companies. But while they’re essential to the execution of the overall product development program, the actual costs are for mostly low- or non-technical items” (R&D Magazine, 2008, p. 14).
R&D data on US companies confirm this reorientation towards more short-term development, including expenditures aimed at reinforcing IPR policy rather than carrying out R&D per se (figure 6). The trend which has been lasting ever since the forecast index was introduced is worrying enough to have led the authors of the survey to wonder: “Will there come a point where U.S. industry no longer conducts directed basic research?” (IRI, 2007, p. 20).
Figure 6 - “Sea change index”*
Note: The Sea Change Index is calculated by taking the difference in the sum of the last two categories (more than 5 percent growth) and the sum of the first two categories (zero or negative growth).
Source: IRI 2008
From a more longer perspective (1995-2008), another report found there has always been a tendency for US companies to invest R&D dollars more toward new business projects than to the support of existing business or directed basic research
“Directed basic research,” as used in the industrial...
. Furthermore, the report noted that ambiguous nature of R&D, since new business projects could well refer to new markets (e.g. foreign markets) rather than new products or processes (R&D Magazine, 2008).
A negative correlation between financialization of TNCs and R&D expenditures is also argued by Lazonick (2008). Focusing his analysis on the role of stock repurchases, he clearly demonstrates that the ultimate justification was the ideology of maximizing shareholder value. This ideology led, according to data collected in his paper, 8 out of the 11 High Tech companies (defined by a R&D expenditures-to-sales higher than 10%) to devote, over the 2000-2007 period, more funds to repurchase and dividend payouts than to R&D expenditures. Blue-chip High Tech, including Cisco, Microsoft, Amgen, Oracle, Texas instruments are in this situation.