Master Thesis
S. van ‘t Hek
Business Studies 5938341
University of Amsterdam
Master Thesis
“The relationship between the Visegrad 4 countries Intellectual Property Rights
protection regime and the entrance by Western pharmaceutical companies into these
countries”
Stijn van ‘t Hek
5938341
Amsterdam, 08 November 2010
Drs. E. Dirksen
MSc Business Studies
Table of Content
Abstract ... 3
1. Introduction ... 4
2. Literature review ... 7
What are Intellectual Property rights? ... 7
The Pharmaceutical Industry ... 8
Why are Multinational Enterprises willing to expand to foreign countries? ... 14
Firm Specific Advantages, entry barriers and the Liability of Foreignness ... 15
How can Multinational Enterprises serve foreign Markets? ... 16
Dunning’s OLI paradigm and Johanson and Vahlne sequential entry process ... 17
Relationship FDI- IPR ... 18
Practical problems for pharmaceuticals while expanding to Central and Eastern Europe ... 19
3. International Convention among Intellectual Property Rights ... 21
Trade Related Aspects of Intellectual Property (TRIPS) ... 23
European Union (EU), European Patent Office (EPO) and the Office for Harmonization in the Internal Market (OHIM) ... 26
The Visegrad 4 countries and Intellectual Property Rights... 26
4. Method ... 32
Data Collection ... 32
Data Analysis ... 33
Limitations ... 34
5. Findings at the EFPIA and EPO ... 35
The EFPIA ... 35
European Patent Office ... 41
6. Findings at Genzyme and UCB ... 44
Genzyme ... 44
Union Chimique Belge (UCB) ... 53
7. Conclusion and discussion ... 64
Conclusion ... 64 Discussion ... 68 8. References ... 69 9. Appendixes ... 74 Appendix A ... 74 Appendix B ... 75 Appendix C ... 76 Appendix D ... 77
Abstract
It is commonly known that Intellectual Property Rights play a crucial role for the originator pharmaceutical industry. In this thesis I review if the Visegrad 4 countries Intellectual Property Right regimes play a crucial role in determining which mode an originator pharmaceutical company will use for establishing itself into these countries. For drawing a proper conclusion I conducted a multiple case study on four organizations which are active in different fields. The main conclusion of this master thesis is that since the Visegrad 4 countries became EU member the level of Intellectual Property Right protection in the Visegrad 4 countries reached the same level as in other EU member states. However, these countries had problems with the enforcement of its Intellectual Property Right regimes. Nowadays the most of these problems are solved, only in Poland there are still some enforcement problems. The role of Intellectual Property Right protection has little influence on the consideration to enter one of the Visegrad 4 countries, the market seeking opportunities outperform the threat of weak Intellectual Property Rights. However, it seems that Intellectual Property Right protection regimes have a huge influence on the establishment mode originator
pharmaceutical companies will use to serve the Visegrad 4 market.
1. Introduction
In the past three decades the international landscape towards Intellectual Property Right (IPR) protection has changed dramatically (Fink & Maskus, 2005). After the fall of communism the Visegrad 4 countries IPR regimes developed from a very weak level of protection to the European standard of protection. The aim of this Master thesis is to describe the relationship between the Visegrad 4 countries IPR regimes and the entrance by Western pharmaceutical companies into these countries. To begin with, I will shortly introduce certain concepts and definitions that will return throughout my thesis after which I will expand on the above mentioned relationship that will be at the core of my thesis.
The pharmaceutical industry consists of different kinds of businesses. For this thesis the distinction between the originator- and generic pharmaceutical industry will be used. Originator pharmaceutical companies can be characterized as innovative firms. The development of new drugs is one of the core businesses of originator pharmaceutical companies. The development costs of a new drug are high because of the high failure rates, the costs of clinical trials and the amount of resources needed to get market approval. Contrary to the originator pharmaceutical industry the generic pharmaceutical companies produce drugs that were usually not invented by themselves. Because of this, the generic pharmaceutical industry is less R&D intensive (Schipper, 2003).
In order to protect R&D investments the originator pharmaceutical industry relies heavily on IPRs. IPRs are rights given to persons to protect the creations of their minds. They give the inventor the exclusive right to use his/her creation for a certain period of time. Normally IPRs are divided in copyrights and industrial property rights. Copyrights are concerned with author rights over his/her literary and artistic work. Industrial property rights are normally divided in two sub categories. The protection of products, which is normally done through trademarks and geographical indications, and the protection of industrial property rights usually happens by patents, trade secrets and industrials designs.1
The Visegrad 4 countries are the former communistic countries, Poland, Czech Republic, Slovakia and Hungary. All these counties became member of the European Union (EU) in May 2004. In order to achieve EU membership these countries had to adopt many European provisions. A highly contested area for the accession of these countries was the introduction of IPRs. Before May 2004 all the Visegrad 4 countries had already its own IPR protection regime. These existing regimes were based on its social and economic perspectives. Consequently, these countries started the negotiations from a different starting point and had different purposes on the field of IPRs. In the end all the countries must adopt the minimum level of European IPR protection (Koutalakis, 2010).
1 World Trade Organization. “intellectual property rights” seen on June 16, 2010,
After the fall of the communism in 1990, the Visegrad 4 market opened up for Western investors. It proved to be a market full of opportunities but with certain very specific characterises that the Western pharmaceutical industry would have to deal with if it wanted to successfully enter it. The primary reasons for entering the Visegrad 4 countries were the opportunity to serve a whole new market with millions of potential customers, the natural resources that the countries possess, its specialized labour force and strategic asset seeking opportunities. It is no wonder that the pharmaceutical industry became interested in entering the Visegrad 4 countries.
It is against this background that I aim to conduct my research. Next, I will focus on the particularities of the Visegrad regimes and the difficulties they entail for foreign industries. Hymer (1976) stated that foreign firms always face added costs while doing business abroad. To overcome the costs of doing business abroad a Multinational Enterprise (MNE) needs to possess Firms Specific Advantages (FSAs) which could be exploited in a foreign country. It is assumed that the originator pharmaceutical industry possesses with its patented drugs a proper FSA which could be exploited in the Visegrad 4 countries. For exploiting its FSAs in these countries multiple entry modes are possible. Pharmaceutical companies could export its products, start up a sales subsidiary, start up production facilities or start up a R&D department. The mode for entering a foreign country is next to its FSAs the firm possess highly dependent on the so-called entry barriers and the Liability of Foreignness (LoF). Sources of this could be economic or political risks.
Because the pharmaceutical industry heavily relies on IPRs it is assumed that the level of a foreign countries IPR regime is of importance in case of foreign expansion by the pharmaceutical industry. Mansfield (1994) concludes that the perceived effect of IPRs on foreign expansion by American pharmaceuticals is heavily dependent on the type of investments. For investments in sales facilities, about a fifth of the firms reported that IPR protection was of importance. For investment in facilities to manufacture components or complete products, about half said it was important. And for investments in R&D facilities about four-fifths said it was important (Mansfield, 1994).
Because the originator pharmaceutical industry is more R&D intensive than the generic pharmaceutical industry the focus of this thesis will be on the originator pharmaceutical industry. IPRs can be divided in several fields, the focus for this thesis is on the patent side of IPRs. This is because patent protection is the most used IPR instrument for the originator pharmaceutical industry. It is noticed that the originator pharmaceutical industry also uses trademarks. Trademarks are more used for marketing activities and seem to be less important in the case of foreign expansion.
This thesis analyzes the relationship between the Visegrad 4 countries Intellectual Property Right protection regime and the entrance by Western pharmaceutical companies into these countries. The main question that will be answered is: Do the Intellectual property right regimes of the Visegrad
4 countries play a crucial role in determining which mode an originator Western pharmaceutical company will use for establishing itself in the Visegrad 4 countries? In order to answer this question
we first need to find out how the IPR regimes of the Visegrad 4 countries are marked relatively to the Western IPR regimes, why Western pharmaceutical companies will enter the Visegrad 4 countries and will it sequentially enter Eastern- Europe.
While doing research on the main topic I stumbled on certain practical problems the European pharmaceutical industry faces such as the expiration of the patents and the fewer drugs which get authorization. Also the threats of compulsory licensing, parallel imports and the early working exception are recognized. These problems cannot be ignored while dealing with this subject and will be elaborated throughout my thesis.
In order to explore the relationship between the Visegrad 4 countries IPR regime and the way Western pharmaceutical companies enter these countries a multiple case study seems to be the most appropriate research strategy. This multiple case study is two-fold; in the first place a clear view of the emergence of IPRs in the Visegrad 4 countries and its current status is sketched. This is done through interviews with two organizations. First, the European Federation of Pharmaceutical Industries and Associates (EFPIA), the European interbranch for the originator pharmaceutical industry. And secondly, the European Patent Office (EPO), the EPO grants the registration of European patents which are covered by European conventions. The second part of the case study contains the investigation of two originator pharmaceutical companies, Genzyme and Union Chimique Belge (UCB). Genzyme is specialized in orphan drugs2 and the drugs for more common diseases. UCB is specialized in drugs for the more common diseases. The main goal of these two cases is to get insight if the IPR regimes of the Visegrad 4 countries play a crucial role in determining which entry mode an originator pharmaceutical company will use for entering the Visegrad 4 countries. In order to answer this question we need to find out how the originator pharmaceutical companies consider the level of the Visegrad 4 countries IPR regimes, why originator pharmaceutical are willing to expand to the Visegrad 4 countries and if the pharmaceutical industry will, by means of the establishment chain, sequential enter the Visegrad 4 countries. Next to these questions the different impact of IPRs on the orphan drugs and the more common drugs will be explained.
This thesis is structured in the following way. First, a review of the literature on IPRs, the pharmaceutical industry, international expansion by MNEs and the relationship between IPRs and the forms how pharmaceutical firms will enter foreign countries will be given. In the second part an overview of international conventions among IPRs, in particular the TRIPS agreement, will be given. Also the characteristics of each of the Visegrad 4 countries IPR regimes will be sketched. Then the research design and methodology will be illustrated. After that each of the four cases will be described separately. I will end with a conclusion and a discussion.
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2. Literature review
In this part of the thesis a review of the research topic “The relationship between the Visegrad 4
countries Intellectual Property Rights protection regime and the entrance by Western Pharmaceutical companies into these countries” will be presented. As starting point a clear overview of IPRs is given
after which the main characteristics of the pharmaceutical industry will be sketched. The next section highlights why Multinational Enterprises (MNEs) are willing to expand to foreign countries, which Firm Specific Advantages (FSAs) are needed for doing this, the difficulties MNEs face when doing business in a foreign country and the forms in which a MNE can expand to a foreign country. After this an overview of two interesting firm theories namely Dunning’s (2000) OLI paradigm and Johanson and Vahlne (1977; 2009) sequential entry process is given. According to these theories the relationship between foreign expansion by Western pharmaceutical companies and a countries IPR protection regime is explained. The following section provides an overview of some practical problems the pharmaceutical industry are facingwhen doing business in multiple countries.
What are Intellectual Property rights?
Intellectual Property Rights (IPRs) are rights given to persons to protect the creations of their minds. Normally it gives the inventor the exclusive right over the use of his/her creation for a certain period of time. In general IPRs are divided in two main areas copyrights and industrial property rights.3
Copyrights are concerned with the author’s rights over their literary and artistic works such as musical compositions, paintings, books, computer programs and films. Also protected through
copyright are the rights of performers as actors, musicians, singers, broadcasting organizations and producers of phonograms. The main purpose of copyrights is to encourage and reward creative work4.
The second area of IPRs is the more interesting area for this thesis. This area contains
industrial property rights and is usually divided in two sub areas. The first area contains the protection of products and can be characterized as the protection of distinctive signs, which usually are
trademarks and geographical indications. Trademarks are signs so a product or service can distinguish themselves. Geographical indications give a good or service certain characteristics from the place where it’s produced. The protection of such distinctive signs aims to stimulate and ensure fair competition and protect customers 5.
Another area of industrial property involves the protection of processes and is characterized by the protection of designs, innovations and the creation of technology. These subjects are usually protected by patents, trade secrets and industrial design. The purpose of the industrial property is to
3 World Trade Organization. “intellectual property rights” seen on June 16, 2010,
http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm
4 ibid 5
protect the results of investment and encourage the development of new technology. This implies that industrial property rights aims to stimulate Multinational Enterprises (MNEs) to undertake Research and Development (R&D) and innovation activities. A functioning intellectual property regime should also facilitate the transfer of technology in the form of Foreign Direct Investment (FDI) and licensing.6
The difference between product and process IPRs is very important. Product IPRs are usually used as a marketing tool whereby process IPRs as patents, trade secrets and industrial design are usually more connected with the R&D process and FDI. Therefore in this thesis patents will be the main source of the investigating country IPR regime. The importance of trademarks for the pharmaceutical industry will be mentioned.
The Pharmaceutical Industry
The pharmaceutical industry is one of the manufacturing industries in which trademarks and patents on invention have been widely used. Pharmaceutical firmsuse trademarks to differentiate its products and facilitate a non-price competition which is important for this industry. Because of the knowledge intensive character of this industry, the leading originator pharmaceutical firms are active in obtaining patents on processes and products to protect its R&D results. Patents offer the possibility of regulating the use of inventions and charging higher prices over its inventions. Without patent protection there would be no incentive for innovation, especially if you take the developing costs for a new drug in mind. However, not all of the obtained patents do lead to new products. It seems that patent rights leads to licensing agreements between pharmaceutical firms and that patents are also used to raise entry barriers (Chudnovsky, 1983).
The pharmaceutical industry consists of different kinds of businesses, which rely more or less heavily on IPRs. The first distinction is the difference in products a firm is selling. A firm can be the supplier of raw pharmaceutical materials or the firm produces final drugs for the consumer market. The firms which produce final drugs for the consumer market can be divided in two different
categories the “originator pharmaceutical companies” and the “generic pharmaceutical companies”. The difference between originator pharmaceuticals and generic pharmaceuticals will be further outlined in the following section. When a pharmaceutical firm produces end products there is the difference between firms producing drugs for groups of patients with high frequency diseases as diabetes, heart and vascular disease, in these cases the drugs have a large market potential. There are also diseases that a few people have, in this case the market potential is much smaller and therefore the costs per patient for obtaining these drugs are much higher. Drugs for markets with a few patients are called Orphan drugs. Another distinction in the Pharmaceutical market is the difference between firms
6 World Trade Organization. “intellectual property rights” seen on June 16, 2010,
which produce drugs which are only available with a doctors prescription or products which are available without prescription the so called Over the Counter (OTC) drugs (Schipper, 2003).
For this thesis the term pharmaceutical firm is used for the pharmaceutical firms which produce final products for the consumer market. The focus of this thesis will be on the originator pharmaceutical companies. The characteristics of the generic pharmaceuticals will be explained because it is important to understand the difference between the originator- and generic
pharmaceutical.
Originator- and generic pharmaceuticals
Originator pharmaceutical firms can be characterized as innovative firms. In contrast to generic pharmaceutical companies the originator pharmaceuticals rely heavily on its patented drugs. The development of new drugs is one of the core businesses of the originator pharmaceutical so, the R&D expenditure is high. The development of a new drug is a complex process. The development cycle of a new drug, as stated in figure 1, lasts long and consists of different phases. After a new molecule is founded and patented the drug is put on the market after ten till thirteen years. These years are filled with several stages. After a patent is granted the next stage is pre-clinical development, the main goal of pre-clinical studies is to determine a product's safety profile. After the pre-clinical development the clinical trials started. The clinical trials are conducted in four rounds, during these rounds the new drug is tested. With the information obtained from the clinical trials authorization for the new drug can be requested. After authorization is given the pharmaceutical company is allowed to sell the drug in the country for which authorization is obtained. But first the drug must be reimbursed by the governments, insurance companies and health care organizations. This reimbursement phase implies that these organizations calculate which percentage it wants to finance. While determining the percentage the costs/benefits of a drug seems to be the most important issue. The pharmacovigilance phase implies the long term monitoring of the side effects of the drug.
The new drug is from the moment the patent is granted twenty years protected, immediately after the patent is granted the development phase starts, thus, the originator pharmaceutical firm has seven till ten years to recover its development costs. In some cases it is possible to get an extension on the time a drug is protected by patents. With the so-called Supplementary Protection Certificate (SPC) it is possible to obtain an extension of the patent time with a maximum term of 5.5 years. The SPC is introduced to compensate for the long time needed to obtain regulatory approval of products
(Schipper, 2003).
The development costs of a new drug are rising. The costs for a new drug were in 2006 on average 1,318 million dollars instead of 802 million dollars in 2001. This increase is attributable to high failure rates, the significant cost of clinical trials and the amount of resources needed to get approval by regulatory authorities. New molecules reach frequently an advanced stage of clinical
research before the results demonstrate that the drug cannot meet the required conditions. On average two out of the ten new founded molecules will reach the market as a drug, this implies that there are eight failures. A successful drug must generate billions of dollars to recoup research costs and to finance new research (EFPIA, 2010).
FIGURE 1: The development cycle of a new drug
Source: European Federation of Pharmaceutical Industries and Associates (EFPIA) (2010). The pharmaceutical industry in
The originator pharmaceutical industry is facing nowadays two problems among its patented drugs. The first problem is that the number of new drugs which get market authorization reaches the lowest point in years. A second problem is that a lot of patents are expiring the coming years. When the patent expires it is legal to copy the product and thus it is legal for other companies to sell the same drugs. To counteract this last problem originator pharmaceuticals are trying, before a patent expires, to patent a new version of the drugs. It can be that the drug initially is sold as gel. Before the patent expires the firm is trying to patent the drug as a powder. Thus, adjust a little on the drug and get a new patent for the “new” drug. This is called the me-too strategy (Schipper, 2003).
Another form how a pharmaceutical firm can operate is the so-called generic form of producing drugs. The generic pharmaceutical firm produces drugs whereby it is usually not the inventor. The generic pharmaceutical companies usually started with the production of the drugs when the patent is expired. Because of this, the generic industry is less R&D intensive. Generic products have the same quality and achieve the same results as an originator pharmaceutical product but at much lower costs. There are two reasons for the rise of generic pharmaceutical firms, first as already mentioned, patents from the originator pharmaceuticals are expiring, this making it possible for generics to produce formerly patented drugs in a generic way. Secondly, the search from insurance companies for inexpensive drugs ensures that the position of generic pharmaceutical companies strengthened. The generic industry is growing more than 7.8 % a year, this is much faster than the originator pharmaceutical industry (IMS Health). By 2015 more than 50% of current originator drug sales will go generic (GPHA, annual report). So the originator pharmaceutical industry is facing a serious threat from the generic pharmaceuticals (Schipper, 2003). The market share of generics cannot be analyzed without taking market conditions for drugs in each country into consideration. In general there is a link between high levels of generic penetration and poor reimbursement conditions for innovative drugs. The market share of generics is lower in price-controlled environments than in unrestricted ones, except in new EU Member states with historically low levels of IPR protection (EFPIA, 2010).
The pharmaceutical industry in the Visegrad 4 countries
After the Second World War Hungary, Czechoslovakia7 and Poland were led by the Soviets and the countries transformed to the communist ideals. The markets were centrally planned by the Council for Mutual Economic Assistance (COMECON) framework, an economic organization of communistic states. Within the COMECON countries private ownership was not allowed. All the firms within the COMECON were state-owned enterprises (SOEs). The same applies to the pharmaceutical industry within the COMECON. After the fall of the communist regimes in 1989 many SOEs transformed to
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private owned enterprises. And instead of the COMECON many former communist countries were willing to join the EU (Koutalakis, 2010).
To achieve EU membership a difficult and long process precedes. In order to achieve membership the “new” EU member states must apply many European rules and legislation. The conditions how a new member can join the EU was a highly contested area. Pharmaceutical harmonization was an important area of the pre-accession negotiations between the European Commission and the former Soviet republics (Prange and Koutalakis, 2005). The EU legislation for the pharmaceutical area addresses medical standards and protocols in the areas of testing,
manufacturing, distribution and pricing. From the first of May 2004 new member states as Hungary, Czech Republic, Slovakia and Poland, had to upgrade its legislation to the European standards. Drugs produced by companies from the Visegrad 4 countries had to obtain European market authorization. Therefore, the domestic producers had to update its authorization dossiers which contain all the information necessary for entering the European market (Koutalakis, 2010).
Hungary was seen as leading pharmaceutical country within the COMECON framework. Due to the complexity of the pharmaceutical industry around 1960, the Hungarian pharmaceutical industry received a special status within the COMECON. This special status was two-fold, in 1968 some degree of decentralization instead of the physical planning mechanism was implemented, this implied that Hungarian pharmaceutical firms got a little independence but the enterprises were still state owned. In 1982 the pharmaceutical industry and other industries within the COMECON faced several problems among its competitiveness. Because of these problems some large Hungarian industries were allowed to trade with Western countries. The Hungarian pharmaceutical firms were the first to benefit from these reforms and soon considerable exports were made to Western- Germany and Austria. Because of its export oriented view the Hungarian pharmaceutical market was based on Western standards. Around 1989 Hungary had one of the most advanced pharmaceutical markets in the region. After the fall of the communistic regime in 1989 FDI of western pharmaceuticals was catalytic to the competitiveness of Hungarian pharmaceutical industry. All formerly Hungarian state owned
pharmaceutical companies were privatized between 1991 and 1996 (Koutalakis, 2010).
After 1989 Hungary became a CEE country that demonstrated R&D potential. It was listed among countries with the highest number of innovative projects initiated by universities, government and private companies. Because of these country characteristics the export orientation of Hungarian pharmaceuticals reversed from Russia and former Soviet republics (FSR) to the EU. Trade with the EU brought alignment with the EU standards. Several important EU implications Hungary had already introduced before the EU accession, compulsory registration in 1933, laboratory controls in 1927, clinical trials in 1951 and human pharmaceutical experiments in 1967. In the post-1989 period Hungary undertook a number of initiatives with the goal of structuring the Hungarian market to Western regulatory standards. The Hungarian innovative pharmaceutical associations (AIPM) for
originator pharmaceuticals were active in co-operation with the European umbrella associations as the European Federation of Pharmaceutical Industries and Associations (EFPIA). According to this co-operation Hungary effectively implemented the EU standards and has therefore the capacity to attract private industrial actors. The co-operation between the EFPIA and the AIPM implies the exchange of employees in order to familiarize the European regulatory domain in Hungary. This exchange of expertise and experience was so successful that it was repeated in Romania and Bulgaria. Through the co-operation between in this case the EFPIA and AIPM and many other organizations Hungary managed already in 2003 an effectively harmonization between its domestic regulatory regime and the EU standards (Koutalakis, 2010).
Under the COMECON Czechoslovakia was after Hungary and the Soviet Union the largest pharmaceutical producer. Instead of Hungary, Czechoslovakia got no incentive to trade with Western European countries. On the first of January 1993 Czechoslovakia was split up in the Czech Republic and Slovakia. The Czech Republic was one of the larger countries that joined the EU in May 2004. It has the third largest pharmaceutical industry in the region. Local production of generics was
traditionally strong. The Czech Republic has a history of high drug consumption. After 1993 the Czech Republic and Slovakia were still connected in the pharmaceutical field. Many former Czechoslovakia pharmaceuticals still operate in Czech Republic and Slovakia. In line with the accession to the EU, Czech Republic and Slovakia have made the greatest advancement among other candidate countries in legislation convergence and medicine authorization. In the spring of 2000 the both countries launched the project of approving medicinal products under EU standards.8
Since 1995 the Czech pharmaceutical sector has been in harmonization with the EU
legislation. The most important agreement is the Pharmaceutical Act (no.79, 1997). This agreement is established in collaboration with the Evaluation of Medicinal Products (EMEA) and the EFPIA. The state Institute for Drug Control (SUKL) is responsible for the registration of new drugs. SUKL uses its own sets of legislation which is fully harmonized with EU standards. All drugs produced in Czech Republic are EU authorized and can be traded through the whole EU.9
Also Slovakia has adopted the EU legislation in 1995. Nowadays the most demanding task for Slovakia is it held its drugs registration up to date, Slovakia also have to ensure it still meet all EU requirements. The weak law enforcement together with deficiencies in building-up the institutions still remains a problem in Slovakia, also government interventions play still a crucial role.10
Under the COMECON system, Poland was rather a peripheral market in pharmaceuticals. The Polish pharmaceutical firms were mainly inward-oriented. During the communistic regime POLFA
8 ESPICOM Business Intelegence. “The history of the Czechslovak pharmaceutical industry” seen on Juli 13,
2010,https://www.espicom.com/ProdCat2.nsf/Product_Alt_URL_Lookup/pharmaceutical_market_czech_republi c?OpenDocument
9 ICEG European Centre. “The history of the Czechslovak pharmaceutical industry” seen on Juli 13, 2010,
http://www.icegec.hu/
10
was the largest pharmaceutical firm in Poland, it was a state-owned generic pharmaceutical and mainly interested in the domestic demand. After 1989 the outlook of the Polish pharmaceutical industry was changed. In contrast to Hungary the state- owned pharmaceuticals in Poland failed to attract significant Western investors. The reason can be found in the traditionally inward market orientation. After 1989 the total value of exports declined from 171.3 million dollar in 1994 to 151 million dollars in 2003. This fall of exports is the outcome of the distortion of the traditional trade links with Russia and other former Soviet republics (FSR). From the EU pre-accession negotiations the pharmaceutical industry was seen as a sensitive political field. Poland’s main goal was minimizing damage on its domestic generic industry instead of applying legislation to the EU standards (Koutalakis, 2010).
Around 1991 Poland had two external institutions which deal with the authorization of new drugs, this was in line with the international trend where external parties give authorization for new drugs. In 2002 a new law was approved, this law implies that both external institutions were integrated within Poland’s ministry of health. The main logic behind this action was to maintain political control over public health-care expenditure in drugs. The political control caused delays in the authorization of new drugs and has disturbed the business and scientific community. The most negative aspect of the reform was employee turnover, both institutions had about 200 experience staff members. After the reform the Polish government needed only 70 employees. The new institution had purely scientific interests and administrative work was seen as less important. These effects have a negative effect on the Polish capacity to effective harmonize the EU regulatory practices. Around 2001 Poland was not able to defend Polish interest because it lacked expertise and experience. During the negotiations for entering the EU, Poland wanted to upgrade the market of national law instead of introducing EU law. Because the dossiers have not been updated to EU standards many Polish drugs are not approved in the rest of Europe (Koutalakis, 2010).
Why are Multinational Enterprises willing to expand to foreign countries?
It is important which incentives Hungary, Czech Republic, Slovakia and Poland possess for the Western pharmaceutical companies. Dunning (2000) stated that MNEs are willing to expand to foreign countries because these countries can eventually offer interesting opportunities. The opportunities are different in sort. In the first place a country can offer market seeking opportunities. The foreign country can be a potential market for the MNEs products or services. Secondly, a country can offer
resource seeking opportunities; a foreign country possesses natural resources where the MNE is in
need for. Thirdly, a country can offer rationalized or efficiency seeking opportunities, the MNEs is willing to add a more efficient division or specialized labour to its portfolio which it can find in the foreign country and, fourthly, a country can offer strategic assets seeking opportunities, the MNE is willing to protect or augment its firm specific advantages or to reduce those of its competitors (Dunning, 2000).
Firm Specific Advantages, entry barriers and the Liability of Foreignness
After having stated above that foreign markets can offer interesting opportunities for MNEs, we need to explore which factors determine whether a MNE will enter a foreign market. A general assumption is: If a MNE is exactly identical to a firm which already exists in a particular foreign country it’s not profitable to enter this market. Because, when doing business abroad MNEs face always added costs, as entry barriers and the Liability of Foreignness (LoF) (Maskus, 2005)
When an investor is willing to expand to a foreign country he prefers a stable macroeconomic environment in that particular country. He is willing to minimize the “investment risk”. These risks can be divided in economic risk as the stability of foreign currency and social stability or political risk as the unrest in the labour force and the chance on strikes. The availability of infrastructure, a stable tax regime, stable institutional and regulatory factors and free trade agreements are seen as other important factors for investors (Bitzenis & Szamosi, 2009).
The investor wants to reduce investment risks, however, he has to take in mind, as Hymer (1976) stated:
“Foreign firms always face added costs of doing business abroad, these costs can be in the
form of communication costs, transporting costs and others costs of doing business abroad”11
These costs of doing business abroad can be a barrier to enter a foreign country, the so called entry barriers. Sources of entry barriers are cultural and institutional environments that differ from those of a firm’s home market. Therefore MNEs face several risks which are defined as obstacles or constraints to enter a foreign market (Bitzenis & Szamosi, 2009).
Another form of costs for doing business abroad is the so called Liability of Foreignness (LoF). “The additional cost of doing business abroad not incurred by local firms”12 From this definition one can conclude that foreign firms are at a competitive disadvantage relative to local firms in a country. Zaheer and Mosakowski (1997) provide an overview of the sources which could possibly lead to a LoF, such as geographic distance, unfamiliarity with local cultures and legislation, lack of information networks or political influence, lack of legitimacy and strict home-country regulations. In general the LoF is a very broad concept.
11
Hymer, S.H. (1976). The international operation of national firms: a study of direct investment. Ph.D.
dissertation, M.I.T. (published by M.I.T. Press in 1976)12
Zaheer, S., & Mosakowski, E. (1997). The dynamics of the liability of foreignness: a global study of survival
in financial services. Strategic Management Journal, 18(6), p. 439In the case of LoF Zaheer and Mosakowski (1997) found two interesting points. First, they found that the LoF decreases over time due to the fact of learning and increases in legitimacy. The second interesting point they found is that the LoF decreases with deregulation and global market integration, this because the playing field is levelling (Zaheer and Mosakowski, 1997).
For this thesis the IPR regime of a host country can eventually be seen as a barrier to enter a foreign country. Because, when a host country IPR regime is in the eyes of the MNE not proper the MNE will fear counterfeiting activities and will therefore not enter a host country. It can also be seen as a source of the LoF. In the first place a host country IPR regime is seen as stable and well defined, but over time the IPRs are interpreted in favour of the host country firms. Therefore the MNE can face additional costs which are not incurred by local firms.
To overcome the costs of doing business abroad Hymer (1976) stated that MNEs need to bring Firm Specific Advantages (FSAs) to a foreign country. FSAs can be different in sort. Firstly, the advantage can be location bound or non-location bound. Location bound advantages are firm advantages that only can be exploited in one particular location. Non-location bound advantages are advantages that can be exploited in several independent places. The second distinction concerns the position of the advantage in the value chain. Can the FSA be found more upstream in the value chain as technological knowledge or can the advantage be found more downstream in the form of brand names and market knowledge. In general if a MNE is willing to expand to a foreign country the MNE is in need of non-location bound and more upstream FSA (Rugman and Verbeke, 2004).
How can Multinational Enterprises serve foreign Markets?
When the MNE sees an opportunity in a foreign country and possess properly FSAs to expand to that foreign country, there are many different forms of expansion possible. In the first place a MNE has to choose between non-equity and equity entry modes. Non-equity entry modes can be in the form of exporting or licensing products or services. In the case of exports FSAs are embodied in final products or services. When the MNE has chosen for licensing, FSAs are transferred to foreign licensees. If a MNE is undertaken equity-based entry modes, FSA are transferred to foreign owned subsidiaries. These subsidiaries can be partially owned in the form of a joint venture (JV) or wholly owned in the form of a wholly owned subsidiary (WOS) (Harzing, 2002). This equity transaction to foreign countries is the so-called Foreign Direct Investment (FDI).
“FDI is an investment involving a long-term relationship and reflecting a lasting interest and
that the investor exerts a significant degree of influence on the management of the foreign enterprise13”
If the MNE has chosen for an entry in the form of an equity transaction the MNE face the establishment issue, acquire an existing firm (acquisition) or setting up a new firm (Greenfield investment) (Harzing, 2002).
Dunning’s OLI paradigm and Johanson and Vahlne sequential entry process
After having a clear notion why MNEs are willing to enter a foreign country, the difficulties it may face and the manner how the MNE can enter a foreign market, now two interesting firm theories related to FDI will be analyzed. These theories will give a deeper explanation of the FDI; the first theory will be Dunning’s (2000) OLI paradigm and the second theory will be the sequential entry process sketched by Johanson and Vahlne (1977; 2009).
Dunning (2000) highlighted the connection between the MNEs technological capabilities and the decision to undertake FDI. He has proposed that three conditions need to be present before a MNE is undertaking FDI. This is known as the eclectic OLI paradigm: ownership, location and
internalization. First, MNEs need ownership (O) advantages. These O advantages of the investing firm
could be a product, production process or intangible assets as reputation or trademarks and could be seen as FSA. These FSAs must be better than that of other firms and in particular firms of the country in which they are seeking to make its investment. Second the location (L) advantages of a particular region or country which are interesting for the MNE. This means that foreign production needs to be more profitable than exporting. The four mentioned issues why MNEs will enter a foreign country are the most obvious sources of location advantages. The third sub-paradigm the internalization (I) paradigm is the choice between FDI and licensing. In house foreign production needs to be more profitable than arm’s length production through market mechanism. This arm’s length production can be in the form of outsourcing a production process or licensing the technology (Dunning, 2000).
The second interesting theory of the firm is the sequentially entry process mentioned by Johanson and Vahlne (1977; 2009). They proposed that firms follow a sequential process in entering foreign markets. This sequential process is two-fold, first, it’s focused on the establishment chain and second it’s geographically focused. When there is spoken of the establishment chain, the focus is that a market is entered sequentially. The first step will be exporting the products to a foreign country, the second stage is setting up sales subsidiaries and the third step involves setting up a foreign production
13
United Nations Conference on Trade and Development (UN) (2009), World investment report, 2009, United
Nations Report, p. 243.subsidiary. The geographically focused sequential entry means that the MNE will enter foreign
countries stepwise. The MNE moves from one country to another (Johanson and Vahlne, 1977; 2009).
Relationship FDI- IPR
MNEs make decisions regarding how it can serve foreign markets. As stated the MNEs can choose to export at arm’s length to a particular country or region. Also a MNE may opt to license its
technologies, products or services to local firms and earn royalties in reward. Alternatively, it may decide to undertake FDI. In the case of FDI the MNE face questions as where to invest? What kind of subsidiaries to invest? Should we purchase an existing firm or undertake a greenfield investment? Use new or obsolete production techniques? Will we undertake the investment alone or with partners? Those questions are different for each MNE and the outcome depends on the previous named barriers to enter a foreign market or the sources of LoF. Complex factors as geographic distance, unfamiliarity with local cultures and legislation, lack of information networks or political influence, lack of a stable tax regime and free trade agreements are seen as important factors for investors. IPRs are also seen as an important factor, the influence from a host country IPR regime on FDI varies by industry and market structure (Maskus, 2005). When the relationship between FDI and the IPR regime is sketched the importance of tacit knowledge in the industry, the type of relationship between user and producer are seen as important factors. As stated an IPR regime consists of various forms of law. Each industry relies on a different set of IPRs, publishers rely more on copyrights and the clothing industry rely more on trademarks. So, it can be concluded that different industries rely more or less heavily on different types of IPR protection. For the pharmaceutical industry patents and trademarks are seen as most important IPR sources (Correa, 2000). According to the theories of Dunning (2000) and Johanson and Vahlne (1977, 2009) the relationship between FDI and the host countries IPR regime will be
explained.
In general a weak IPR regime increases the probability of imitation, counterfeiting activities and other forms of piracy. According to Dunning’s (2000) OLI paradigm a weak IPR regime diminish the firm’s ownership advantages and decreases the location advantages of a host country. A weak IPR system also reduces the benefits of internalization, because the MNE is associated with greater risk of the licensee’s. The licensee’s can disrupt the licensing contract and can become a direct competitor of the MNE. Therefore an insufficient IPR regime discourages FDI and encourages exports. On the other hand a strong IPR regime can also negatively affect FDI because licensing becomes a good alternative. Thus a weak IPR regime and a strong IPR regime can negatively affect FDI, because of this the relationship between IPR and FDI is a complex one (Javorcik, 2004).
To sketch the relationship between Johansson and Vahles (1977; 2009) establishment chain and IPRs I will refer to Mansfield (1994) working paper. In addition to Johanson and Vahlne (1977; 2009) establishment chain Mansfield (1994) classifies four types of investments. Investments in sales
and distribution facilities, investments in rudimentary production and assembly facilities, investments in facilities to manufacture components or complete products and investments in R&D facilities. Mansfield (1994) concludes that the perceive effects of IPRs on FDI were heavily dependent on the type of investments. For investments in sales and distribution facilities, only about a fifth of the firms reported that IPR protection was of importance. For investments in rudimentary production and assembly facilities, less than a third said that IPR protection was important. But for investments in facilities to manufacture components or complete products, about half said it was important. And for investments in R&D facilities about four-fifths said it was important (Mansfield, 1994).Mansfield (1994) concluded:
“It seems likely that FDI by US pharmaceuticals is largely devoted to sales and distribution outlets
and rudimentary production and assembly facilities, a country IPR protection regime will have little effect on the total amount invested by US firms in that country. However, it is likely to have a considerable effect on how much is invested in facilities to manufacture components and complete products as well as R&D activities14”
Practical problems for pharmaceuticals while expanding to Central and Eastern
Europe
As stated the originator pharmaceutical firms face in general two threats, the expiring of its patents and less new drugs which are approved for selling on the international market. Besides these threats the originator pharmaceutical face also other threats as; compulsory licensing, parallel imports and the
early working exception (also know as the Bolar provision15).
Compulsory licensing
Before a drug is sold in a given country the drug must get approval in the country where it will be sold. To obtain authorization the government of the particular country wants to know several facts as;
14
Mansfield, E. (1994). Intellectual Property Protection, Foreign Direct Investment and Technology Transfer.
International Finance Corporation, Discussion paper no. 19 p.2.
15
In Canada the early working exception is named after the case Roche Products v. Bolar Pharmaceutical and is
therefore know as the Bolar provision. Bolar was a generic drug manufacturer. Roche was a brand-name pharmaceutical company which made and sold Valium. Before patent expiration, Bolar used the patented molecule during experiments to determine if its generic product was equivalent to Valium in order to obtain FDA approval for its generic version of Valium. Bolar argued that its use of the patented product was not infringement under the experimental use exception to the patent law. The Court rejected Bolar’s contention holding that the experimental use exception did not apply because Bolar intended to sell its generic product in competition with Roche’s Valium after patent expiration and, therefore, Bolar’s experiments had a business purpose.Shortly after Roche v Bolar was decided, Congress did pass a law permitting use of patented products in experiments for the purpose of obtaining FDA approval which established the modern system for FDA approval of generic drugs.the side effects of medication, how well the drug works etc. Also the government gets insight in the formula of the drug. The State is able to use the formula for compulsory licensing. This means that the state can force a pharmaceutical firm to licence its drug, or the formula of the drug is passed by the State to a third party, normally the patent holder gets a reward as compensation. Compulsory licenses can be granted according to several grounds, as public interests, emergency, non-working of the invention, dependency of the patents and anticompetitive practices (Correa, 2002).
Parallel imports
Pharmaceutical companies sell its drugs in different countries against different price conditions. Usually the drug is put on the market through a sequential launch (which will be further explained by the case studies). Because of the fact that the drug is sold against different price conditions, parallel trade is a threat for pharmaceutical companies. Parallel trade means that patented products are bought in country one where the price is lower than in country two. The product is sold in country two against a lower price then the normal market price. Parallel trade is founded upon the principle of free
movement of goods (article 28EC, Article 30) and therefore is part and parcel for the pharmaceutical companies which doing business in Europe. The variations in country prices lead to the attractiveness for parallel trade. This because of the freedom for countries to define its local prices, obligatory price reductions and the fluctuations in exchange rates (Presentation Genzyme).
Early working exception (Bolar exception)
Pharmaceutical patents are granted for twenty or twenty-five years. After this period of time generic pharmaceuticals are allowed to produce and sell a generic form of the drug. Due the difficulty of producing a drug, the time to get authorization for selling a drug and other implications, a generic pharmaceutical company need a certain amount of time before it is able to sell a generic drug. Because of this the originator pharmaceutical can enjoy longer of its patent exclusivity. To combat this, the early working exception is created. This allowing generic firms to initiate and obtain approval of a patented drug before the expiration date of the respective patent. This means that immediately after the patent is expired a generic drug can be put in the market (Correa, 2002).
3. International Convention among Intellectual Property Rights
Intellectual property rights (IPRs) are originally territorial in character, through globalization IPR protection became a key issue for international trade agreements (Fink and Maskus, 2005). In the past three decades the international landscape towards IPR protection has changed drastically. International IPR policies are traditionally governed by several international conventions most prominently, the Paris Convention for patents and trademarks and the Berne Convention for Copyrights, theseconventions are administered by the World Intellectual Property Organization (WIPO) (Fink & Braga, 1999). Next to these two conventions nowadays most important convention is the Trade Related Aspects of Intellectual Property (TRIPS) agreement. This agreement was outlined during the Uruguay round of multilateral trade negotiations (1986-1994). Members of the today called World Trade Organization (WTO) arrange the TRIPS agreement. This agreement sets out minimum standards of IPR protection and is signed by 123 countries. Additional international IPR rules have been formed in various regional trade agreements and in a number of intergovernmental treaties which usually are negotiated under the wings of the WTO and WIPO. In figure 2 an overview of the instruments and agreements for protecting IPRs is given.
FIGURE 2: Instruments and Agreements for protecting IPRs
Source: Maskus, K.E. (2000). Intellectual Property Rights in the Global Economy. Chapter three: The Economics
International agreements on the protection of IPRs are part of international trade agreements. Agreements among IPRs were firstly constituted by the Paris Convention for patents and trademarks in 1967 and the Berne Convention for Copyrights in 1971, which are today administered by the World Intellectual Property Organization (WIPO). The WIPO was founded in 1967 as an institutional body of the United Nations (UN). As with all institutional bodies of the UN the WIPO is not an elected body. It reaches consensus by member state voting, each member state is entitled to one vote. By this provision developing countries were able to block agreements which were important for Western countries. During the sixties and seventies developing countries blocked newly formed IPR treaties. Because an arrangement among IPR protection was not possible within the WIPO the US and other developed countries were shifting to another institutional body, the General Agreement on Tariffs and Trade (GATT).16
The GATT was founded after the Second World War in 1948. The original intention of the GATT was to create an international institution that intends to supervise and liberalize international trade. The GATT was linked to other institutional bodies for international economic cooperation as the International Monetary Fund (IMF) and the World Bank. The GATT held eight rounds of negotiations and was replaced by the World Trade Organization (WTO) in 1995. The topic intellectual IPRs was discussed during the Uruguay round 1986- 1994. This round was the most ambitious, 123 countries took part and important areas as capital, textiles, agriculture and intellectual property, were discussed. One of the most significant implications of this round was the creation of the World Trade
Organization (WTO) and the signature of the TRIPS agreement. The WTO was founded in January 1995 even as TRIPS agreement entered into force. Because of this the TRIPS agreement is seen as starting point of the WTO. The difference between the GATT and the WTO is that the GATT was a set of open- ended rules where the countries could decide to implement it or not. In contrast with the GATT the WTO is an institutional body where the countries have to apply the agreements set by the WTO.17
16 World Trade Organization. “History” seen on June 20, 2010,
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm
17
Trade Related Aspects of Intellectual Property (TRIPS)
What is the Trade Related Aspects of Intellectual Property (TRIPS) agreement? The TRIPS agreement18 is approved by the 123 WTO member countries. This agreement establishes minimum standards on the IPRs. Compared to the previous Berne and Paris convention this new TRIPS agreement is seen as a major progress for the global level of IPRs. The agreement provides specific obligations related how countries must adopt the agreement. Article 1.1 of the TRIPS agreement stated:
“Members shall give effect to the provisions of this Agreement. Members may, but shall not be obliged to, implement in their law more extensive protection than is required by this Agreement, provided that such protection does not contravene the provisions of this Agreement. Members shall be free to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice”19
This article implies that member countries can not apply a lower level of protection than provided under the agreement. On the other hand, members can not be mandatory to implement a more extensive protection (Correa, 2000). For the pharmaceutical industry the implementation of the TRIPS requirements required that the 123 member states provide protection for all patented drugs for a twenty-year period (Elms, 2003).
Violations of the agreement as piracy or counterfeiting activities can be punished by fines or other restrictions. When there is dispute among the TRIPS agreement this is a subject for the Dispute Settlement Understanding (DSU). When the existence of abuse of the agreement is shown, the affected country can apply restrictions for the offending country in all the areas covered by the WTO. This mechanism can provide drastic multilateral means to solve IPR disputes (Correa, 2000).
Why TRIPS agreement?
Around the mid eighties the industrialized countries forced developing countries to initiate
negotiations for an agreement on international protection of IPRs. The objective was universalizing IPR standards. A number of factors that emerged during the mid eighties and early nineties explain the priority, given by some industrialized countries, for an advanced reform of the world wide intellectual property system.
In the first place, technology became a factor of importance in international competition, in particular for the production of high technology goods and services. Key examples are the emergence
18 The text of the TRIPS agreement can be found on the homepage:
http://www.wto.org/english/docs_e/legal_e/27-trips.pdf
19
of new technology driven activities as computer software and biotechnological inventions. Because of the R&D intensive and innovative character of these businesses, patents became an important tool for protecting its results. The industrialized countries pioneered the extension of IPR protection in the field of new technologies. Based on US progress the international community was willing to set international standards for IPR protection (Correa, 2000).
A second point stated by Correa (2000) is the emergence of economic globalization. The disappearance or reduction of trade barriers in developing countries increased the opportunities to export to those countries. Due to the fact that MNEs are willing to exploit its patented innovations across borders MNEs prefer IPR regimes which cross international borders (Correa, 2000).
Thirdly, during the eighties US supremacy in manufacturing and technology decreased. First the Japanese came, with its innovating business processes, in the field of the US firms, later other Asian industrializing countries became also a threat for US firms. These Asian countries emerged as aggressive competitors in microelectronics computers and peripherals. The erosion of US leadership was partially attributed to the open system without a clear IPR protection. It was allowed for foreign countries to imitate and profit from US inventions. A major source for the declining US supremacy was attributable to piracy and counterfeiting activities. This could be stopped by universalizing IPR protection (Correa, 2000).
Limitations of the TRIPS agreement
The main goal of the TRIPS agreement is “to reduce distortions and impediments to international
trade”. According to the international character of the TRIPS agreement article 7 stresses the
importance of national welfare on social and economic grounds for each particular country.
“The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations”20
Article 7 implies that the recognition and enforcement of IPRs is the primary goal but, not the only goal. The intention is that each country can define a balanced regime of IPR protection, with the objective to gain mutually advantages for the users and producers of technological knowledge and to promote social and economic welfare in each particular country (Correa, 2000).
Further limitations for the industrialized countries can be found in article 8.1 and 8.2 (Principles).
20
“Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement”21
“Appropriate measures, provided that they are consistent with the provisions of this Agreement, may be needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology.”22
Article 8.1 and 8.2 are important principles for framing national IPR laws which are in conflict with public health and other areas of public interests. These articles leave room for adopting different solutions at the national level. Under these conditions, national legislation can provide a wide variety of measures which promote national competition (Correra, 2000).
Doha declaration on the TRIPS agreement and Public Health
In November 2001 the WTO member states agreed on an extension of the TRIPS agreement, the Doha declaration.23 During the Doha meeting the member states recognize the gravity of the public health problems many developing and least-developing countries, especially those resulting from
tuberculosis, malaria and HIV/AIDS. Patent protection is of importance for the development of new drugs, in the case a drug is patented the price for obtaining these drugs will rise. Developing and least-developing states could not afford to pay developed-world prices for the drugs. They are in most cases also unable to produce a generic variant of the drugs and were prevented from importing limited quantities of available generics by trade rules favouring patent holders. The Doha declaration clarifies that “public health crises” can represent a national emergency and the member states agreed that the TRIPS agreement does and should not prevent members from taking measures to protect public health. The members affirm that the TRIPS agreement can and should be interpretive and implemented in a manner supportive to promote access to drug for everyone. The members recognize that WTO members with insufficient or no manufacturing capacities in the pharmaceutical sector could face difficulties in producing of the compulsory licensing drug. Therefore in case of an emergency the member states must help each other in providing drugs.
Each provision of the TRIPS agreement must be read in the light of its objective and purpose as stated in the previous sections. Each member has the right to determine what constitutes a national
21 Article 8.1 of the TRIPS agreement 22 Article 8.2 of the TRIPS agreement
23 The text of the Doha declaration can be found on the homepage:
emergency. And in that context, has the freedom to determine the grounds upon which compulsory licenses are granted. The effect of the provision in the TRIPS agreement is relevant for the exhausting of IPRs. Each member is free to establish its own regime for such exhausting without challenge.24
European Union (EU), European Patent Office (EPO) and the Office for
Harmonization in the Internal Market (OHIM)
The TRIPS agreement is a world wide convention among protection of IPRs. Next to this convention many institutional bodies are concerned with the enforcement of the TRIPS agreement.
The European Union has a uniform system for the protection of IPRs, ranging from industrial property to copyright and related rights. IPRs constitute the foundation for creativeness and innovation within the European Union. The standardization of IPRs at European level is based on the basic principles of the free movement of goods and services and free competition. The European Union possesses two important bodies which deal with the related aspects among IPRs. First, the Office for Harmonization in the Internal Market (OHIM), which is responsible for the registration of Community trade marks and designs, and second, the European Patent Office (EPO) which grants the registration of European patents which covered by European conventions.25
The OHIM deals with trade marks. As already stated, trade marks identify the origin of goods and services. It guarantees the quality of services or products. Because of this fact a trade mark
becomes a form of communication and is therefore a basis for publicity and advertising. For this thesis the EPO is a more interesting organization. A patent covers the function, operation or construction of an invention. To be patentable, a function must be innovative, have an industrial application and be described in such a way as to permit reproduction of the process.26
The Visegrad 4 countries and Intellectual Property Rights
In this section the Visegrad 4 countries will separately be described. First an overview of the most important conventions which the countries have joined will be sketched. Secondly, the countries position in the Intellectual Property Rights Index (IPRI) will be mentioned. This index provided by Strokova & de Soto Fellow (2010) describes every country in the world on the hand of three variables. Legal and Political Environment (LP), Physical Property Rights (PPR) and Intellectual Property Rights (IPR). With the average of the three scores the IPRI score is calculated. The LP is divided in judicial independence, rule of law, political stability and control of corruption. PPR consists of the variables protection of the physical property rights, registering property and access to loans. For this thesis the IPR is the interesting part of the IPRI. The IPR variable is divided in the protection of IPRs,
24
World Trade Organization. “Doha Declaration” seen on June 21, 2010, http://www.wto.org/english/tratop_e/dda_e/dohaexplained_e.htm
25 European Patent Office. “aim of the EPO” seen on June 11, 2010, http://www..epo.org 26 Office for Harmonisation in the Internal Market. “aim of the OHIM” seen on June 11, 2010,
the level of patent protection and copyright piracy. For each Visegrad country the IPRI and IPR score will be sketched.
For having a better understanding of the results I will first provide a list with the IPRI and IPR scores off the top five countries, the Visegrad 4 countries and the last five countries. As we can conclude from figure 3 and 4, the Visegrad 4 countries performs much better than the developing countries as Bangladesh and Zimbabwe, but the countries are behind the developed Western countries as Japan and the Netherlands. We can also conclude that Hungary is in case of the IPRI and IPR scores the best performing Visegrad 4 country on the other hand, Poland is the worst performing Visegrad 4 country. Slovakia is the second best performing Visegrad 4 country in case of the IPRI score, Czech Slovakia possesses this position based on the IPR score. In the following sections a deeper explanation of the IPR regimes of each of the Visegrad 4 countries will be given.
FIGURE 3: Countries ranked by IPRI score
Source: Strokova, V., & de Soto Fellow (2009). International Property Rights Index. 2010 report. Americans for tax reform
foundation/ Property Rights Alliance, 1-147.
FIGURE 4: Countries ranked by IPR score
Source: Strokova, V., & de Soto Fellow (2009). International Property Rights Index. 2010 report. Americans for tax reform
Czech Republic
After 1990 the former Czechoslovak republic has introduced several new regulations among IPRs. From January 1991 the time a patent is granted was extended from fifteen till twenty years. As already stated the Czech Republic was founded from January 1993. On this date, the Czech Republic has joined several international bodies included the WIPO. According to its WIPO membership it joined the Paris convention and the Berne convention and several other conventions. From January 1995 the Czech Republic became a WTO member and simultaneously it signed the TRIPS agreement. The supplementary protection certificate (SPC) was introduced in May 2000, this means that
pharmaceuticals obtain the possibility to patent its invention for five more years (WIPO).
As stated in figure 5 Czech Republic’s 2010 IPRI score was 6.2. With this score it occupies a 38th place in the world wide ranking. This score increased for the second year consecutively. Its score on IPRs was in 2010, 6.6. With this score it occupies a 32nd place in the world wide ranking. This score also increased for the second year in a row, piracy and counterfeiting activities are still held on a large scale. The Czech Republic made efforts to constrain its IPR problems, but further improvement is necessary. Despite these problems the Czech Republic remains enjoying a second place, in terms of IPR protection, in the CEE region (Strokova & de Soto Fellow, 2009).
FIGURE 5: Czech Republic’s IPR and IPRI score
Source: Strokova, V., & de Soto Fellow (2009). International Property Rights Index. 2010 report. Americans for tax reform
