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THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
CHAPTER 1
INTELLECTUAL PROPERTY RIGHTS AND INNOVATION
IN SOUTH AFRICA: A FRAMEWORK
There is an elaborate and long-established system of IPRs in South Africa dating back to1916, when comprehensive national legislation was passed, much earlier than most in-dustrializing countries. However, despite this long history, while particular aspects of theIP regime in South Africa have received attention, there are virtually no studies or assess-ments that characterize and assess the overall IP regime.1 An even wider gap is the ab-sence of any study of the broader impact of the IP regime on innovation and economicperformance. While innovation in South African firms and publicly funded research or-ganizations (PROs) has received some, albeit limited attention, only a very few of thesestudies pay any attention to the impact of the IPR regime, and then only peripherally.2 This publication represents the first attempt to assess innovation in South Africa and inparticular how it is impacted on and affected by the IP regime. Through a series of stud-ies, this publication attempts to shed some light on these issues and to suggest furtherareas for research. Studies of this kind should always be situated within a broader framework. Four issuesare of particular relevance here. The first is the broad characterization of the overall IPregime and its likely impact on innovation and diffusion. The second is South Africa's in-novation performance overall and its determinants and constraints. The third is the re-lationship of South Africa's innovation performance to the prevailing IP regime. Thefourth is the policy context – government perspective on innovation and the proposedpolicy changes specifically in regard to intellectual property. It is the broader context and these specific issues that are addressed in this chapter.
2. SOUTH AFRICA'S INTELLECTUAL PROPERTY REGIME
South Africa's IP system is, in many respects, very advanced. Legislative provision is par-ticularly strong. There is an elaborate array of legislation, which has its origins in thePatents, Designs, Trade Marks and Copyright Act No. 9 of 1916. This was compendiumlegislation dealing with each of the major categories of intellectual property. Subse-quently, separate statutes were enacted for each category. The South African Patents Actwas initially closely based on British law and, much more recently, the European Patent Professor of Business-Government Relations, Department of Economics, University of Cape Town, South Africa. The views expressed in this paper are those of the author and do not necessarily represent those of WIPO. THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
Convention. Accordingly, when South Africa joined the World Trade Organization (WTO)and thereby adhered to the Agreement on Trade-Related Aspects of Intellectual PropertyRights (TRIPS Agreement), only minor changes were required in the legislation (Wolson,2005:43). The scope of patent legislation is wide. Section 25 of the South African PatentAct 57 of 1978 specifies that: "A patent may…be granted for any new invention whichinvolves an inventive step and which is capable of being used or applied in trade or in-dustry or agriculture". (SA Chapter 5. Section 25 (1):18).3 The courts function effectivelyand strongly to enforce the rights of patent holders. South Africa is a member of mostof the international treaties on IP law. In terms of international patent protection, SouthAfrica is a member of the Paris Convention for the Protection of Industrial Property, thePatent Cooperation Treaty (PCT), the Budapest Treaty on the International Recognitionof the Deposit of Microorganisms for the Purposes of Patent Procedure and the TRIPSAgreement. In terms of copyright and related rights, South Africa was a signatory to theBerne Convention for the Protection of Literary and Artistic Works in 1928 and to theWIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty(WPPT) in December, 1997. South Africa's patent regime is ranked highly among developing countries in terms ofstrength. Lesser (2001) constructed an IPR score for a number of countries based onthree criteria: TRIPS and compliance with the International Union for the Protection ofNew Varieties of Plants (UPOV); PCT applications and prices and a corruption index, withthe strongest weighting to the first criterion (Lesser, 2001:11). Out of a total of 44 de-veloping and industrializing countries, for the year 1998, South Africa scored highest(Lesser, 2001:12). In 2005, South Africa scored 4.25 on the Ginarte Park index – higherthan many countries at comparable stages of development (e.g. Brazil and Chile) andcomparable with a number of industrialized countries (Park, 2008:762-763).4 A recentreport that utilized the Ginarte Park index on the strength of patent protection, but inaddition also assessed the extent of copyright and trademark protection to construct anoverall IP score, gave South Africa seven out of a possible 10 – 22nd highest out of 115countries (Property Rights Alliance, 2008:26).5 The Companies and Intellectual Property Registration Office (CIPRO) administers SouthAfrica's IPR regime. CIPRO was formed in 2002 by a merger of two former directoratesof the Department of Trade and Industry (DTI), the South African Companies Registra-tion Office and the South African Patents and Trade Marks Office. CIPRO is the registrarof patents, designs and trademarks and custodian of the registers of existing rights.
In respect of patents, individuals are able to file provisional patent applications, but fullapplications can only be undertaken by a patent attorney. The fees charged are – 60rand (US$8) for a provisional patent application; 590 rand (US$79) for a full patent ap-plication and annual renewal fees of 130 rand (US$17). The registration of a trademarkis 590 rand (US$79) and a new copyright application in respect of films and videos madefor commercial use is 510 rand (US$68) (CIPRO, 2008).6 This scale of fees is very low byinternational standards. THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
However, CIPRO is a non-examining registration office. The substantive novelty and theinventive merit of the application are not subjected to verification. Apart from registra-tion, CIPRO offers simple searches. WIPO's International Patent Classification System(IPC) is followed only to a limited extent – to the level of subclasses, but not to the levelof groups and sub-groups (Teljeur, 2003:52). Hardcopy registers are available for scrutinybut there is, as yet, no complete electronic system available at CIPRO. There are propri-etary systems such as the Electronics Patent Journal (EPJ). Searches can therefore be per-formed on a contract basis, but only at considerable cost. It is not possible to get anaccurate picture of the current backlog, but it is substantial. As an indication, local patentattorneys report that while registering a provisional patent is quick and effective, thereare substantial delays in other areas. For example, obtaining a file to undertake a patentsearch may take up to a year and trademark registrations currently take two to threeyears (telephonic interviews. February 15, 2008). Since CIPRO does not currently have afully electronic database, hardcopy searches add substantially to the time required. Thus, while South African innovators have cheap and easy access to local registration,there are also some considerable drawbacks. What are the implications for local inno-vators? The absence of search and examination before a patent is granted results in theabsence of any guarantee that the patent is valid. Possession of a patent granted inSouth Africa, will be of no substantive value to any South African innovator wishing tocommercialize a product abroad. Similarly, local innovators who wish to commercializea product or a process in South Africa, and who are at risk of infringing another inno-vator's patent, do not have a secure patent right. Patents are only confirmed, in effect,after being granted, generally by the courts and by patent holders who, on challenge,have to prove the validity of the patent. The South African legal system is expensive andthis imposes a considerable obstacle, particularly for smaller and less capitalized firms.
The absence of a local patent examination system, and the subsequent ease of securinga patent, is also said to result in companies filing a large number of patents locally. Thiscould serve to discourage innovators.7 In addition, the absence of an examination sys-tem may well result in the granting of patents with a very broad scope. Again, this islikely to discourage new innovators. High costs of search, consequent on the non-exis-tence of a freely available searchable electronic database, combined with long delays,create further disincentives to innovation. Finally, the absence of an examination proce-dure, combined with the difficulty of searching patent databases, results in local inno-vators having little incentive to search the patent register. The public good character oflocal patenting, via the diffusion of technological information contained in patent doc-uments and its potential impact on access to new knowledge, is accordingly limited.
Thus the diffusion of new knowledge to local innovators is significantly impeded.
However, despite these considerable disadvantages to local innovators, it is not at allclear that CIPRO should function as an examination office. Legal certainty requires thatthe search and examination undertaken is of a high quality. This is an expensive processentailing large numbers of qualified examiners as well as access to sophisticated tech-nological information in specialized fields. South Africa is a severely skill-constrained so- THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
ciety.8 In addition, it has many competing and urgent demands combined with very lim-ited government resources. There are a number of alternative potential solutions to this problem (for a listing of thepotential possibilities, see WIPO, 2008:54-55). For example, it may be possible to con-tract some other country's IP office to conduct the examination. It may also be possibleto engage the services of the local universities and science councils in conducting searchprocesses – but they too are severely skill-constrained. These and other potential solu-tions need further examination. The issue concerning search and examination is how tomaximize the quality of the patents granted with the limited resources allocated to thepatent office. One possible answer is to engage in more international cooperation – in-tergovernmental regional cooperation has reduced administrative burdens and improvedcost-effective operations as well as fostering trade and investment within the region(WIPO, 2008:55). There is considerable debate as to the impact of IPRs on foreign investment (Maskus,2000). While stronger IPRs are likely to have a positive impact on foreign investment, itis evident that they are not the sole or possibly even a major determinant of FDI. Cer-tainly, South Africa has attracted far less FDI than other countries whose IPR system ap-pears to offer potential foreign investors weaker protection. There are no studies, as yet, of the impact of the current IPR system on FDI inflows oron technology transfer to South Africa – a fertile area for further research. South Africanlawyers report that the larger and more innovative transnational corporations for whomthey act are filing ever more patents locally and that they regard South Africa as a coun-try with fair levels of protection (telephonic interviews, February 18, 2007). It appearsthough that many of the global corporations engage routinely in patenting locally as amatter of course, and it is not clear if this has any impact upon their investment deci-sions. Some sectors and activities will be more sensitive to IP protection than others.9 Ac-cordingly, such studies would need to distinguish between different types of foreigninvestment.
With respect to trademarks, South Africa has offered strong protection, including forwell-known global brands. Thus, to cite one example that has received considerablepublicity, the courts upheld the McDonald's trademark against a local trading firm, eventhough McDonald's had not been trading in South Africa for several years. The Appel-late Division overruled the decision of a lower court that had accepted the argument thatthe company had not proved that it was a well-known trademark in South Africa.10 TheAppellate Division ruling assuaged concerns that South Africa could not be relied uponto fulfill its obligations under Article 6bis of the Paris Convention by not protecting well-known international trademarks.
With respect to plant breeder's rights, South Africa joined UPOV in 1977. Local courtshave functioned effectively to uphold plant breeder's rights.11 While there is no direct ev-idence, this is likely to be a positive factor in encouraging foreign owners of plant vari-eties to supply propagating material to South Africa. THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
In respect of enforcement, South Africa has adhered to the practices required under in-ternational obligations. There is a Counterfeit Goods Act which lays down strong penal-ties for illegal activities. There also is a specialist police unit engaged in enforcing the Act.
This unit works closely with business. However, in general, policing is not always effec-tive in South Africa and, while there is no data, it would seem likely that policing in thisarea may be similarly limited in efficacy.
South Africa has made very little use of mechanisms to limit the rights of patent hold-ers in the interests of broader public interest – compulsory licensing or parallel importa-tion, for example. In 2001, 39 large pharmaceutical companies withdrew from a legalattempt to stop the government promulgating legislation that it had passed in 1997. Thelegislation aimed at lowering the cost of drugs including Section 15C on the importa-tion of drugs. Following the withdrawal, the South African government gave assurancesto the industry that it would only utilize Section 15C to import brand-name drugs, whichare on the market in other countries at a lower price than in South Africa. The govern-ment also reiterated its commitment to honor international obligations, in particular theTRIPS Agreement. Overall, therefore, the IP system in South Africa can be considered generally as favorableto foreign investors who are concerned with the protection of their intellectual property.
But, to reiterate, FDI into South Africa has not been strong generally. Furthermore, thereis no evidence of significant investment from foreign firms in areas where IP protectionwill be of particular concern – IT and pharmaceuticals, for example. This is certainly anarea that merits much further research.
Likely future changes in South Africa's IP system are considered later (Section 4).
3. SOUTH AFRICA'S INNOVATION PERFORMANCE
3.1. Inputs
In 2004, South Africa's Gross Expenditure on R&D (GERD) was 0.87 per cent of GDP. Thisis comparable with many industrialized countries and significantly higher than many ofthe middle-income countries with the same level of GDP per capita.12 While there areproblems interpreting the data, GERD has been growing steadily. Between 1993 and2004, it almost doubled, and the GERD/GDP ratio increased from 0.60 per cent to 0.87per cent (DST, 2007b:9-11). A significant feature is the share of GERD performed by business enterprises in SouthAfrica – at 56.3 per cent in 2004, this is comparable with a number of industrializedcountries and significantly higher than most comparable middle-income countries(OECD, 2007:5; 45). Business expenditures on R&D are heavily focused in four areas –engineering sciences (32 per cent), information, computer and communication (20 percent), medical and health sciences (15 per cent) and applied sciences and technologies(13 per cent) (OECD, 2007:49).
THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
In 2004/5, there were almost 30,000 full-time equivalent personnel engaged in R&D. At2.7 researchers per 1,000 employees, this is low relative to industrialized countries, butalso relative to a number of countries with a comparable GDP per capita. Although SouthAfrica devotes comparatively large resources to R&D, this is not reflected in a greaternumber of researchers employed. The reason is that South African research workerscommand significantly higher salaries than in comparable countries. Moreover, whilethe number of full-time equivalent (FTE) researchers has increased, this has been slow –rising by only seven per cent in the period 1992-2004.
Growing commitment of resources has been accompanied by extensive policy experi-mentation. Grounded in the overall concept of the National System of Innovation (NSI),policy design has drawn extensively from international experience and thinking. It hasincluded policies to improve governance of the innovation system; the more effectivefunctioning of key performers of S&T, especially the science councils; new mechanismsfor funding R&D and innovation; and the development of new organizational arrange-ments and programs to support R&D and to undertake R&D directly.
While there is clearly considerable room for improvement, extensive institutional reformand ongoing evaluation have enhanced efficiency of organizations as well as increasedinter-organizational cooperation. In the main, the institutions undertaking financing andsupporting innovation function effectively (Kaplan, 2008).
3.2. Outputs
More resources combined with an effective and improving institutional structure and in-novative and directed policy changes might have been expected to yield significant re-sults. However, the high-level output performance indicators for the S&T system aredisappointing. 3.2.1 Publications In terms of publications, there has been a slight increase in the number of South Africa'sscientific publications (listed by the Institute for Scientific Information) since 1994. In rel-ative terms, South Africa's global share has declined significantly from a peak of 0.7 percent in 1987 to 0.48 per cent in 2003. In contrast, other comparable countries, such asBrazil, India, and the Republic of Korea, starting from a lower base, have overtakenSouth Africa as their share of world publications has climbed steadily (NACI, 2003:60;Pouris, 2003:425-6). The situation with regard to South African patents registered abroad is broadly similarto publications. Since the end of apartheid and the election of a democratic govern-ment in 1994, there has been a slight increase in patents. However, no clear trend is ev-ident. Indeed, the number of South African patents registered in the US has remainedstagnant throughout the period 1994-2007.
THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
Table 1. Patents of South African Origin Granted by the USPTO, 1994-2007
Source: USPTO, 2006(a); USPTO, 2006(b).
Data for 2007 supplied by the USPTO, January 18, 2008.
South Africa's relative position in terms of patents has declined. Its share in all foreignpatents registered in the USPTO has consistently declined from 0.28 per cent in 1992 to0.13 per cent in 2007. For utility patents, South Africa's share declined from 0.3 percent in 1992 to 0.11 per cent in 2007. A recent study of the patenting activity at theUSPTO by the five most innovative South African universities concludes that their per-formance is well below that of other countries (Lubango and Pouris, 2007:7).
In terms of South African patent applications filed through the PCT, the trend is lesswell-defined. The PCT only became operative in South Africa in March 1999. Since thatdate, there has been no clear trend and considerable fluctuation. However, the figurewas lower in 2007 than in 2001. Moreover, as with the USPTO, South Africa's share inPCT patent filings has declined consistently – from 0.42 per cent in 1999 and 2000 to0.26 per cent in 2007. Table 2. Patents Applications of South African Origin Filed through the PCT, 1994-2007
Source: WIPO Statistics Database.
Table 3 shows the number of patent applications made at the local Companies and In-tellectual Property Office (CIPRO). The number of patents remained constant through-out the period 1994 -1998 and then declined by a third. Numbers picked up again in2001, but have been slowly declining since. The drop in 1999 may largely be attributedto South Africa becoming a part of the PCT system in March 1999 as many internationalcompanies would have channeled their applications to South Africa via the PCT system,with a time-lag until such applications entered the national phase in South Africa. Over-all, local patenting at about 270 patents per million population is low and, at least since2001, showing a slowly declining trend.
Table 3. Patent Applications at CIPRO, South Africa, 1994-2005
Total 10,414 11,050 10,956 11,734 11,953 7,838 10,553 10,408 9,955 Note: Data are for provisional and complete patent applications. For 1994-1997 from Teljeur; data for 1998-2005 from Innovation Fund, 2007.
Source: Teljeur, 2003:55; Innovation Fund, 2007:36.
THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
A recent study concluded that "…at least 50% of the patent applications filed at CIPROin this period (2000 – 2002) were filed by foreign nationals, with the biggest contribu-tors being USA and German nationals". (Innovation Fund, 2007:28). From the tablebelow, a clear and consistent trend is evident for the period 2001-2006: (1) the overallnumber of patents has been stagnant; (2) the number and the share of resident patentapplications has been declining; (3) pari passu the number and particularly the share ofnon-resident patent applications has risen significantly.
Table 4. Number and Share of South African Resident and Non-Resident Patent
Applications (Filed and Granted) at CIPRO, 2000-2002 and 2004-2006
Non-resident percentage of total Source: Data for 2000-2002 from Innovation Fund, 2007:28. Data for 2004–2006 supplied by CIPRO. A detailed breakdown of patents filed in South Africa by country reveals that every coun-try increased the number of its patents, between 2004 and 2006. However, patentingby South Africans declined in the same period by almost 12 per cent.
Table 5. Patents Filed in South Africa, by Country of Origin, 2004-2006
Source: Data supplied by CIPRO.
Royalty Receipts and Payments14 The technology balance of payments (TBP) registers a country's commercial transactionsrelated to international technology and transfer of know-how. It consists of paymentsmade or received for the use of patents, licenses, know-how, trademarks, designs andtechnical services. These receipts and payments are generally registered as royalties paidabroad and royalties received from abroad.
In South Africa, consistent data for royalties received is only available from 2000. Analy-sis of the data regarding royalties from 2000 shows that in the period 2000-2007, roy-alties received from abroad increased by 58 per cent – a compound annual rate of 6.8per cent per annum. In the same period, royalties paid abroad increased by 360 per cent– a compound annual growth rate of 20.1 per cent per annum. THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
Moreover, royalty payments greatly exceeded royalty income. In 2000, royalty paymentswere some 10 times royalty income. In 2007, royalty payments were 30 times royalty in-come.
The widening adverse technological balance of payments and, even more significantly,the relatively slow growth of royalty receipts from a very low base, are a further indexof South Africa's weak overall innovation performance.15 Share of Global Trade A country's performance in global trade in industries where innovation is central to eco-nomic success is an important output indicator, particularly in respect of business sectorR&D. In the period 1992-2005, South Africa's exports of high technology products grewat 9.5 per cent per annum. While at first sight, this appears impressive, it is lower thanthe global average (11 per cent), and well below that for developing countries (21 percent). As a result, as with scientific publications and patents, South Africa's share ofglobal high technology exports has declined. This cannot be attributed to the country'sdependence on commodity exports. Brazil's share of global high technology exports in-creased and the share of high technology exports in total country exports has risen sig-nificantly. South Africa's export performance was similar to that of Argentina. The shareof high technology products in South Africa's total exports is much lower than that ofBrazil and marginally lower than Argentina. Table 6. Share of Global High-Technology Exports, 1992-2005 and Share of High Technology
Exports in Country Exports, 1992-2002: South Africa, Brazil and Argentina
Share of Global High-Technology Exports Share of High-Technology Exports in Country Exports Source: COMTRADE, TIPS and own calculations There are a number of composite indicators that measure the ability to generate, adoptand utilize new knowledge. The Knowledge Economy Index (KEI) compiled by the WorldBank, probably the most widely used, is based on the average of the normalized per-formance of a country or region in four areas – economic incentives, institutional regime,education and human resources, the innovation system and ICT. In terms of the KEI,South Africa has declined since 1995. In contrast other commodity-based exporters, THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
such as Brazil, have seen a rise in the index as has the upper middle-income countrygroup. Overall, South Africa is currently ranked 50 out of 140 countries – a decline ofnine places since 1995. South Africa's performance on the KEI is again similar to that ofArgentina.
Table 7. Knowledge Economy Index (KEI): South Africa in Comparative Perspective, 1995-
Latest Year
Upper middle income Source: World Bank, 2007:7, available at http://info.wordbank.org/etools/kam2/KAM_page7.asp (accessed September 7,2007).
3.3. Constraints on Performance
In summary, the resources committed to R&D in South Africa are commensurate withother countries at similar stages of development and have been increasing significantly.
Moreover, business accounts for a very significant and rising share of expenditure onR&D. However, the number of personnel engaged in research is lower than for manycomparable countries and has risen only slowly. This reflects the high cost of skills en-gaged in research, which in turn is a consequence of the limited supply of the skillsneeded. While each of the system level output indicators has its limitations, all of them – publi-cation counts; patents (local, US and PCT); royalty receipts and payments; shares ofglobal trade and composite KEIs – tell essentially the same story; despite the injection ofmore resources and the introduction of a raft of new policies derived from internationalexperience that have significantly improved the policy environment at the aggregatelevel, South Africa's innovation performance is largely stagnant if not declining slightly,particularly seen in a comparative perspective. At the same time, South Africa has a number of highly innovative firms situated in dif-ferent sectors and embracing a wide range of activities. In addition, there are also or-ganizations in the public sector that are strong innovators. Many firms and public sectororganizations have been able to profitably exploit this expertise in innovation in globalmarkets. South Africa is host to many innovative firms. A range of government policies and pro-grams provides support for innovation; public funding is significant and growing andthere is a local supply of engineering and scientific skills. There is an emerging consen- THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
sus that the key factor that acts as a constraint on innovation and the emergence ofmore innovative firms is a severe shortage of skills (Blankley and Kahn, 2005; Kahn,2006; Breitenbach, 2007; NACI, 2006). The recent Review of South Africa's InnovationPolicy by the OECD confirmed this consensus. The OECD identified a looming crisis intwo areas. The first is a large and growing "engineering gap". "A very large gap appearsto be opening up between the supply of design, engineering and related managerialand technical capabilities and demand for such resources being generated by the in-creased rate of investment across the economy." (OECD, 2007:7). The second is the verylimited supply of university graduates capable of undertaking research. Unless this is ad-dressed, the entire innovation system will be constrained (OECD, 2007:7). The OECDassessed human resource development as "…perhaps the issue that will be central toall other aspects of the development of the STI system over the next decade". (OECD,2007:87) THE SIGNIFICANCE OF IP TO INNOVATION
As noted earlier, there is a dearth of studies attempting to assess the specific impact ofthe IP regime on innovation in South Africa. There are two major criteria by which wemight measure the impact of the IP regime on domestic innovation. The first would beto assess the extent to which local innovators, particularly innovating firms, make use ofpatents, both to protect their own intellectual property and as a source of information.
The second would be to assess the impact of intellectual property in encouraging theemergence of specialist suppliers of technology – firms that are able to earn returnsfrom their intellectual property, notably patents (Arora et al., 2007:27).16 With regard to the first, the Innovation Survey of 2005 provides an overall picture ofthe usage of IPRs on the part of innovative firms. Between 2002 and 2004, 11 per centof innovative firms registered a trademark while 5 per cent claimed a copyright and 4per cent registered an industrial design; 3.1 per cent of innovative firms secured a patentin South Africa while 2.5 per cent applied for a patent outside South Africa. About 1.7per cent of innovating firms granted IPRs originating from their own innovation activi-ties to third parties (DST, 2007:28-29). As outlined above, the indications are that patent-ing activity – particularly international patenting – has been in decline among SouthAfrican firms. Other research performers, publicly funded science councils and universi-ties, also make little use of patents: "analysis of the patent patterns for South Africaninstitutions shows very low levels of patenting by publicly funded institutions." (NACI,2006:36) The percentage of South African innovative firms applying for a patent abroad (2.5 percent) is lower than for any of the EU 27 Member States plus Norway, except for Cyprus(data supplied by William Blankley, February 8, 2008). The system level data suggest that only 21 per cent of innovating firms in South Africamake use of patents as sources of information – and only 8 per cent of innovating firms THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
regard patents as important (5 per cent) or very important (3 per cent). Apart from theinnovation centers (which have a very limited presence in South Africa), patents ranklowest as sources of information for innovating firms in South Africa.
Table 8. Innovative Firms' Usage of External Information Sources
Used and important Professional literature Electronic info.
Sector institutes Innovation Centers Source: Innovation Survey, 2001 quoted in OECD, 2007:53 In a recent study of 20 innovative high technology firms in South Africa, the absence ofan examining patent office was listed as a constraint on innovation (Breitenbach et al.,2006:11). Lodging a patent with CIPRO and obtaining a South African patent is straight-forward and inexpensive. However, most innovators are looking to global markets andCIPRO does not undertake any search for prior art. As a result, obtaining a local patentprovides no indication of whether this patent could succeed in any other dispensation.
As a consequence, innovative firms which are considering attempting to exploit globalmarkets will have little incentive to secure a local patent. They accordingly undertake atime-consuming and difficult process of engaging local patent lawyers who then instructpatent lawyers abroad to file.
With regard to a second major criterion by which we might measure the impact of theIP regime, there is no systematic data on the extent and growth of specialist technologysuppliers in South Africa. However, there are a number of examples of such firms, no-tably in the mineral and other resource-based industries. A number of these specialistfirms have spun off from the large mining houses themselves, exploiting and further de-veloping technology that was first established within the firm. One example is LodoxSystems. The company was spun off from De Beers, the diamond mining company. It isengaged in advanced full-body radiography equipment, initially for the mines, but nowprincipally for healthcare applications. It has had considerable success in developed coun- THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
try markets and its Scannex product is now installed on five continents. Another exam-ple is Merisol, a joint venture between the large South African chemical firm, Sasol, andthe US firm Merichem. Established in 1997, this firm supplies high quality phenolic prod-ucts to the chemical industry. The company holds numerous patents. Gradchem Solu-tions was established in 1999 by engineers previously employed by Sasol. It providesinnovative solutions to the fine chemical industry through innovation – including plantdesign and novel equipment. There are many other examples (Breitenbach et al., 2007). The development of specialist technology suppliers seems to have accelerated as SouthAfrica has liberalized in terms both of trade and investment. Faced with global compe-tition, South African firms have faced increasing pressures to specialize in their areas ofcore competence and to out-source other activities to specialized technology suppliers.
In particular, there has been a significant growth of local engineering service firms, es-pecially geared to supporting resource-intensive activities, but also more widely (OECD,2007:96; Segal and Malherbe, 2000). A comprehensive mapping of such specialty sup-pliers and the precise factors underpinning their growth require investigation. Moreover,the role that intellectual property has played in the emergence and development of thesefirms is unknown. They are all fertile areas for future research.
GOVERNMENT POLICY ON INNOVATION AND INTELLECTUAL PROPERTY –
CURRENT DEVELOPMENTS
South Africa's National Research and Development Strategy (NRDS), published in 2002,provides the framework for South Africa's policy. The NRDS highlights South Africa's lowlevels of patenting and the importance of intellectual property to wealth creation andforeign investment. Noting South Africa's weak performance in patenting, the NRDSidentifies the lack of a policy framework for intellectual property as one of six key weak-nesses that need to be addressed in order to improve system performance (DST,2002:21). The NRDS is especially concerned about the lack of a policy framework in re-gard to intellectual property that arises from public funds allocated to research (Kaplan,2004:283). Indeed, while expressing concerns about the IP framework in general, the NRDS confinedits analysis and concrete recommendations to considerations of publicly funded research.
There was no examination of the totality of the wider IP system, or of its economic andsocial impacts. Nor has such an investigation been undertaken following the NRDS. Theimpact of the IP system as a whole has never been examined nationally. Curiously, thisneglect is matched by the lack of any consideration of this issue by any internationalagency reporting on South Africa's innovation system. The OECD has recently completeda full-scale review of South Africa's innovation policy (OECD, 2007). In contrast with theNRDS, intellectual property is not identified by the OECD as one of the weaknesses inthe innovation system. Accordingly, the OECD makes no proposals with respect to it –indeed the report is completely silent on the whole issue. THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
As a consequence, there has never been a discussion or consideration of the economicrole of the IP system in toto in South Africa or of the objectives sought. While there is ageneral perception that an overhaul of this system may be required and that this willneed to be based on clear principles and objectives (NACI, 2006:80), it does not appearthat such an exercise is on the agenda in the short term. While there have been recentchanges to the IP regime, these have been largely to accommodate international re-quirements and have been amendments to the legislative framework and the PatentsAct. South Africa is a signatory to the 1992 Convention on Biological Diversity (CBD) and in2004 introduced the South African Biodiversity Act (BA) to comply with its internationalobligations under the Convention. In terms of the BA, any patent sought in South Africawill be required to state whether the invention is derived from any indigenous biologi-cal or genetic resource. In this event, provision must be made to ensure compensationfor the person or community providing access to the indigenous biological resource.
Where the invention is based on or derived from traditional knowledge and where theindigenous community is the owner of this knowledge, such indigenous communitiesmust be adequately compensated. The Patents Act has similarly been amended to en-sure disclosure of any biological resources utilized with all patent applications.
Another recent amendment to the Patents Act allows third parties, during the term ofthe patent, to make use of patented inventions for non-commercial R&D purposes. Thisallows users to enter the market immediately upon expiry of the patent (Wolson,2005:21).
Two further changes to the IP regime are to be effected in the short term.
The first relates to intellectual property arising from public funds allocated to research.
The approach that was taken by the NRDS to this issue was to list the general attributesthat such a policy framework should possess. Thus, it should be based on best globalpractice and create a context for benefit sharing. It should also be legislated (DST,2002:68-69). This approach led to the formulation of a new Bill entitled Intellectual Prop-erty Rights (IPR) From Publicly Financed Research. This has been widely discussed and isdue to be debated shortly in Parliament . The other concrete measure proposed by theNRDS was: "A dedicated fund to finance the securing of intellectual property rights re-sulting from publicly financed research and development." (DST, 2002:69) An Innova-tion Fund Commercialization Office has subsequently been established to providefinancial support for intellectual property resulting from publicly funded research. In addition to legislation relating to intellectual property arising from publicly fundedR&D, Parliament is expected in 2008 to debate a Bill in respect of traditional knowledge,which will be protected sui generis within the framework of existing legislation. Ac-cordingly, there will be amendments to existing acts – the Copyright Act, the Trade MarkAct and the Patents Act. These amendments will require inter alia that recognition of TKwill have to be accompanied by a clear benefit-sharing arrangement with an indigenouscommunity. THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
South Africa's innovation system is at a critical stage. System performance has not beenstrong, particularly relative to the increases in resources committed. There has been con-siderable policy experimentation and innovation in many areas, but with regard to in-tellectual property, policy changes have been piecemeal and largely reactive to changingcircumstances, particularly international obligations. There is a need for a comprehen-sive review of the IP regime. Such a review should rest on a consideration of the role thatit has played and could play in enhancing innovation, investment (particularly FDI) andgrowth. This, in turn, requires considerable research on the economic impact of intellectual prop-erty – an area that has attracted very little attention in the past. The purpose of this pub-lication is to provide some initial research, but also to initiate and stimulate furtherresearch. Such research has the potential to enhance understanding, and also make aninvaluable contribution to ensuring that future policy changes in South Africa rest on firmempirical foundations.
Teljeur, 2003 is a valuable exception, but it is of limited scope. The Department of Trade and Industry hasindicated its plans to address this issue by embarking on a project that would analyze the impact of in-tellectual property on education, health, research, innovation and development, franchising, informationsharing, telecommunications and ICTs, technology transfer, consumer protection and access to knowl-edge in South Africa. The following are excluded as not being considered as an invention – "(a) a discovery; (b) a scientific the-ory; (c) a mathematical method; (d) a literary, dramatic, musical or artistic work or any other aestheticcreation; (e) a scheme, rule or method for performing a mental act, playing a game or doing business;(f) a program for a computer or (g) the presentation of information." (SA Chapter 5. Section 25 (2):18.) The mean for all countries was 3.34 with a standard deviation of 0.89 (Park, 2008:763).
It is understood that such indexes can only be indicative and must be taken with caution, as they onlyreflect certain aspects of the IP system and may not be a good reflection of actual IP protection (and enforcement) in any given country.
Conversions at 7.50 rand to US$1.
Teljeur cites "anecdotal evidence" of companies registering large numbers of patents which would notpass the international criteria and as result, "…some companies have diverted R&D funds away from anarea in which superfluous patents exist, even though the company can contest the validity of the patent".
(Teljeur, 2003:54).
Enterprise managers identified the skills constraint as the most serious obstacle to their operations andgrowth. Clarke et al. (2007: xvii).
On May 1, 1995 a new Trade Marks Act, No 194 of 1993, was promulgated in South Africa and Sec-tion 35 thereof made provision for the protection of well-known foreign trademarks.
A recent well-publicized case concerned the local propagation of a variety of sweet pepper – peppadew.
The Appeal Court upheld the plant breeder's rights of the developer. The Sunday Times, ‘Peppadewcourt victory protects breeder rights'. Business Times, February 16, 2007:6.
THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
"…the proportion of GERD performed by business enterprises in South Africa is broadly similar to, or alittle higher than, in (sic) several other countries, with much higher GERD/GDP ratios like Spain, NewZealand, Norway, Netherlands and Canada. It is also 1.6 to 2.0 times higher than the levels in countrieswith lower GERD/GDP ratios, including some with higher levels of GDP per capita like Portugal orGreece." (OECD, 2007:92) As explained above, the low number of non-resident patent applications for the year 2000 is likely due to South Africa becoming a member of the PCT in March 1999.
14 This section is based on data supplied by the South African Reserve Bank. Royalty payments and income are not currently published by the Bank. It therefore gave permission to the author to outline the datatrends, but not to publish the actual data.
15 The rapid increase in the import of foreign technology may partly be the result of strong IP protection.
In addition, increased inflows of technology will impact on productivity. These are issues that merit fur-ther research. 16 A third might be the impact of intellectual property on the access of South African companies to inter- national markets for technology and the extent to which this enhances productivity and local innovation. 17 The Department of Science and Technology announced on January 14, 2009, that the Intellectual Prop- erty Rights Bill had been signed into law.
Arora, A., A. Fosfuri and A. Gambardella, ‘Patents and the Markets for Technology' in The Handbook of Intellectual Property Rights and Technical Change, K. Maskus, 2007.
Breitenbach, P., D. Kaplan and E. Wood, ‘The Influence of Publicly Funded R&D on National Development', Report for the National Advisory Council on Innovation, mimeo, Center for Innovation and Entrepreneur-ship, Graduate School of Business, University of Cape Town, 2006.
Buys, A.J., L.A.G. Oerlemans, M.W. Pretorius and G. Rooks, Report on the South African Innovation Survey 2001, University of Pretoria, Pretoria, 2003.
Clarke, George R.G., J. Habyarimana, M. Ingram, D. Kaplan and V. Ramachandran, An Assessment of the Investment Climate in South Africa, World Bank, Washington, D.C., 2007.
Companies and Intellectual Property Registration Office (CIPRO) Products and Services, and Fees and Costs, available at http://www.cipro.co.za/fees.costs-asp (accessed on February 15, 2008).
Javorcik, B.S., ‘The Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: E vidence from Transition Economies', European Economic Review, 48:39-62, 2002.
Kaplan, D., ‘South Africa's National Research and Development Strategy: A Review', Science, Technology and Society, vol. 9, No.2, 2004.
Lesser, W., ‘The Effects of TRIPS Mandated Intellectual Property Rights on Economic Activities in Developing Countries', paper prepared under WIPO Special Service Agreement, available athttp://www.wipo.int/about-ip/en/studies (accessed on February 14, 2007), 2001.
Lubango, L.M. and A. Pouris, ‘Industry Work Experience and Innovation Capacity of South African Academic Researchers', Technovation, vol. 27, No. 12, pp. 788-796, December 2007.
Maskus, K.E., ‘Intellectual Property Rights and Foreign Direct Investment', Working Paper No. 22, Center for In- ternational Economic Studies, Center for Economic Studies and Ifo Institute for Economic Research,World Bank, May 2000.
THE ECONOMICS OF INTELLECTUAL PROPERTY IN SOUTH AFRICA
National Advisory Council on Innovation (NACI), ‘The South African National System of Innovation: Structures, Policies and Performance', Background Report to the OECD Country Review of South Africa's NationalSystem of Innovation, mimeo, NACI, Pretoria, July 2006.
Organisation for Cooperation and Development (OECD), ‘Review of South Africa's Innovation Policy', Direc- torate for Science, Technology and Industry, Committee for Scientific and Technology Policy, mimeo,March 15, 2007.
Park, W.G., ‘International Patent Protection:1960-2005', Research Policy 37, 761-766, 2008.
Property Rights Alliance, ‘International Property Rights Index, 2008 Report', Property Rights Alliance, available at http://www.IntellectualProperty RightsIndex2998.htm, Washington, D.C., 2008.
Segal N. and S. Malherbe, ‘A Perspective on the South African Mining Industry in the 21st Century', Report by the Graduate School of Business, University of Cape Town, Chamber of Mines of South Africa, Johannesburg, mimeo, 2000.
Sibanda, M., ‘The State of Patenting in South Africa. Special Report. Analysis of the South African Patent Landscape', Innovation Fund Intellectual Property Management Office, Pretoria, 2007.
Teljeur, E., ‘Intellectual Property Rights in South Africa: An Economic Review of Policy and Impact', The Edge Institute, South Africa, mimeo, 2003.
Wolson, R.A., ‘The Role of Technology Transfer Offices in Building the South African Biotechnology Sector: An Assessment of Policies, Practices and Impact Paper prepared for the Bringing Sciences to Life Conference',University of Toronto, April 29 to May 1, 2005.
World Intellectual Property Organization (WIPO), Report on the International Patent System, Standing Committee on the Law of Patents, Twelfth Session, WIPO, Geneva, June 23-27, 2008.

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