Zero-Sum Games – Cyber wars in global battle for intangibles

INNOVATION is moving from West to East in the shift from tangibles to intangibles, says Francis Gurry, who heads the World Intellectual Property Organisation (WIPO). Competition has a soft and a dark side, he says – the soft side to attract investment and skills, the dark side involving espionage and patent war . . .

ASIAN COUNTRIES, which grew rich on re-engineering technologies imported from the West, have emerged as big spenders on research and development.

Based on R&D spending and filings to the World Intellectual Property Organisation (WIPO), China, Japan and South Korea could well drive the future generations of  inventions.

Francis Gurry, WIPO’s Director-General, says the world is witnessing two big shifts in innovation, research and development. One is a shift from tangibles to  intangibles. The second is the shift from West to East.

The quietly-spoken expatriate Australian first observed the emergence in this space of North Asian countries, particularly China and South Korea, a few short years ago. In fact, it was in the wake of the global financial crisis — when developed nations fell behind in their filings — that China and South Korea surged
ahead in their number of patent filings with the United Nations agency.

WIPO is dedicated to the use of intellectual property (IP) as a means of stimulating innovation and creativity.

In an interview with ATI in 2011, Gurry said China had started to lead the world in filing for patent rights. “This is going to change the landscape completely for intellectual property,” he predicted at the time.

He also admitted to being amazed at how quickly China had become a bigger producer of technology than all European countries except Germany. China in 2011 had also surpassed Japan in R&D investment. Gurry, arguably the world’s foremost authority on intellectual property rights, says the emergence today of China, Japan and South Korea underscores the massive global shift in the IP world.

In part, it reflects the shift of geopolitics from  West to East, and, along with this, the shift in the centre of economic activities and technological gravity, he says.
As they seek to move up the value-added chain, Asian countries are realising that the future is about innovation. In 1999, Asian countries represented 24 per cent of global spending on R&D, and by 2009, that figure rose to 32 percent, says Gurry.

“Today, 38.8 per cent of all international patent applications are filed from Asia — China, Japan, and Korea. That compares to 31 per cent from Europe and 27 per cent from the US. If you go back 15 years, Asia’s 38.8 per cent was seven per cent. This is a huge change.”

Between 1995 and 2011, the number of patent applications worldwide rose from 1.05 million to 2.14 million. Gurry says East Asian filings come from a wide cross-section of societies, whereas in the US, filings come mostly from universities. “The growth of international patent filing has been higher than the global growth rate,”
he says. “Last year, for example, growth in international filings was 6.6 per cent (twice global economic growth).”

However, the rise in Asian filings has created a language problem for other countries. Traditionally, countries have filed in English. Now, Asians are lodging
supporting documents in Chinese, Japanese and Korean.

WIPO has the technology to translate these languages into English, but machine translation is never going to be perfect, says Gurry.

He adds that there has also been a globalisation of R&D, with some countries relocating some of their R&D facilities to other countries.

Globally, US$1.3 trillion is spent on R&D each year, and the level of investment has gone up considerably over the years. China is now the second-largest R&D investor, in absolute terms, after the United States. Japan is the third largest spender on R&D. Korea is now at the leading edge in some technologies.

In parallel to this trend, Gurry notices that Asia is producing more scientific publications.

Gurry says nobody wants to compete on the price of labour. “You don’t want to be the one paying the lowest wages. What else can you compete on? You can compete on commodities, which are very volatile, or you can compete on adding value through manufacturing processes, or through innovation.”

The upshot is that States compete against States, and, at another level, enterprises compete against enterprises. “Competition has a soft side and a dark side, the soft side to attract investment and skills, the dark side involving espionage or patent war.”

The intensity of the rhetoric on espionage has been rapidly escalating in the recent past. Gurry recalls that Gen. Keith Alexander, Director of the US National Security Agency and Commander of the US Cyber Command, referred to the loss of industrial information and intellectual property through cyber espionage as “the
greatest transfer of wealth in history”.

He says IP is the custodian of the economic value of innovation. A study, published by the US Government last year, estimated that, in 2010, IP accounted for US$5.096 trillion in valueadded, or 34.8 per cent of US GDP. The study also attributed 18.8 per cent of all employment in the US to IPintensive industries. Gurry says the importance of innovation is not new — economists have been aware of its importance for economic growth since the 1950s. But the general consciousness of innovation’s role has accelerated in the last 20 years because countries realise that the source of wealth generation has shifted from physical capital to intellectual capital — from tangible to intangible assets.

Gurry says that, in 1978, 95 per cent of assets held by the top 500 companies in the Standard & Poor’s Index in the US were tangible, and only five per cent were intangible. By 2010, that position had reversed.

He says this fundamental shift from tangible assets to intangible assets has become more pronounced in recent years. “Intellectual property captures the economic value of those intangibles. That is why there is much more contest in relation to intellectual property.”

Innovation is all the intangible value that a company has, Gurry adds. That intangible value is expressed in technology, branding, marketing and design. By 2010, it was estimated that intangible assets had added about US$30 billion to the value of the Apple iPhone, but Gurry points out that only about 25-30 per cent
of the iPhone is made with patented technology — the rest comes from design, marketing and branding.

The smartphone industry is based on innovation. “This is the reason we are seeing patent wars there.” (Apple and the South Korean electronic giant, Samsung, have been suing and countersuing each other over patent claims.)

Companies are buying arsenals of patents. Gurry says they do so to have a stake at the table in the game of competition based on innovation and intellectual property.

Google purchased Motorola Mobility for US$12.5 billion for its trove of more than 17,000 patents in 2011, while the Rockstar Group, led by Apple and Microsoft, trumped Google in its bid to buy the patent portfolio of Nortel Networks Corp (which sold for US$4.5 billion). All patents are important, says Gurry, adding
that, with inventions, there is rarely a single innovation. For instance, sophisticated wind turbines are born out of up to 500 different patents. As the man with his fingers on the global creative pulse, Gurry says there is a convergence of information technology and lifestyles, bioinformatics, synthetic biology, computational
biology and nanotechnology.

“There is, no doubt that these are the big areas for the future,” he says.

“Life span is getting longer and health is a big ticket in national budgets,” he adds, leading to the focus on life sciences. A key player is the pharmaceutical sector in the US, Japan and Europe, along with China and India. This sector, in particular, has been investing heavily in R&D in search of the next big breakthrough.

WIPO, which has a staff of 1,230, is the keeper of global intellectual property — patents, copyright, trademarks, designs and so on) — and the arbitrator of IPR disputes (it has grown from a modest organisation with about 200 people, when Gurry first joined WIPO as a consultant some 30 years ago).

Gurry says intellectual disputes are becoming more serious, and they underline the importance of having a rulesbased multilateral system.

“We don’t want technological protectionism or innovation mercantilism. We need a rules-based system.”

(Innovation (or technology) mercantilism has been described as countries bending and breaking the rules, playing zero sum games, and thinking only about the short-term gains for themselves.)

However, the proliferation of regional, bilateral and pluralistic trade agreements is threatening the multilateral rules-based system governing global trade, warns Gurry.

“The challenge for us — at a multilateral level — is to try to be relevant. Obviously not everything can be done multilaterally, but some things need to be done  multilaterally. If you want a mobile telephone to work in any country in the world, which you do, then you need a multilateral agreement.”