Sunday 19 April 2009

The Malign and the Benign of the Transfer of Know-How

There are various ways to view trade secrets and know-how. From the strict IP vantage point, we like to juxtapose trade secrets with patents on the basis of their largely diametrically opposed characteristics. The one is open, fully disclosed, subject to examination and registration good against the world, limited in time and governed by various international treaties. The other is unexamined, unregistered, disclosed, if it all, on the basis of personal undertakings based on mutual trust, unlimited in time but always vulnerable to public disclosure that reduces its value to first mover advantage, if at all.

From the vantage point of policy and trade, patents are researched from multiple angles, focusing on the role of patents in enabling innovation, and calculating the national winners and losers in the patent registration race. On the contrary, trade secrets are accorded far less research attention. Hand over heart, how many of us have read articles discussing the role of trade secrets in innovation, much less any consideration about one even goes about setting out a a score card for national winners and losers in the trade secret arena. (That is not quite right: there is, of course, the one well-known exception attributed to the OECD, which is reported to have concluded that more technology is due to trade secrets than to patents.)

Against this backdrop, I was struck by two brief passages that appeared in two articles, one right after the other, in the March 21st issue of The Economist . In the first, a three-page Briefing entitled "China and the West", it was observed, citing an article in a Chinese publication (Economic Reference), that the current economic troubles offered China a unique opportunity to expand its strategic influence. One way was for China to purchase U.S. companies with the explicit purpose of acquiring "sophisticated know how". If the Americans resist, China can use its dollar holdings to force the Americans to comply.

In the second article ("Ireland's Economy: The Party is Definitely Over"), the report noted that first phase of the Irish economic miracle, which ended in 2002, was "led by exports and direct foreign investment", primarily American, whereby Ireland was provided with "bags of capital and know how." In exchange, Ireland offered a combination of educated and youthful workforce, at reasonable wage, plus tax benefits, state grants and EU membership. The property bubble came later, and I seem to recall that Dell, one of the early entrants into Ireland, has recently pulled out in favor of Eastern Europe (although this is not mentioned in the article).

What is striking here is the difference in the strategic treatment of approach to know how, as set out in the two articles. In the first article, know-how is treated as a strategic asset, to be prised from its owner by financial force, if necessary. Lurking behind this characterization, it seems to me, is the issue of how know-how shared with Chinese partners can still be protected from unauthorized use and exploitation. There is a view out there that the sharing of know-how via direct investment into China is subject to material risk in this regard, with the result that some valuable know-how is still not shared.

The acquisition of U.S. companies, and the concomitant threat of the dollar weapon, is a means to presumably provide a solution for this problem. There is a sinister, almost Ludlum-like character to the role of know-how in China-U.S. relations. Whether all know-how can be so lumped in this regard, and how about the acquisition of U.S. companies can achieve this presumed goal (as opposed to targeted direct foreign investment and technology transfer), is left for another day and perhaps another article.

When Ludlum meets trade secrets and know how

In contrast, the treatment of know-how in the article on Ireland is, at least superficially, more benign. American know-how (and capital) were transferred to Ireland, factories, plants, and the like, were built, but time marches on (and indeed some of the facilities are going elsewhere). In the meantime, labor costs, retail spending, and a property bubble conspired to halt the Celtic Tiger in its tracks.

In this later phase, the issue of the transfer of know-how seems to have disappeared. This is so, both because inflation and labor costs made the exploitation of the know-how less attractive economically, and presumably because the ultimate ownership of the know-how remained in foreign hands, such that the transfer did not lead to a significant development of more broadly based local Irish technology based on the know-how. It would be interesting to know more about the role of know-how in Irish development, then and now. but here as well, this is left for another day and perhaps another article.

Find the know-how

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