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1 Introduction How can the United States ensure that fundamental scientific breakthroughs made in American universities and industry are translated into economic benefits for its citizens? A number of observers connected with U.S. commercial biotechnology fear that biotechnology may go the way of semiconductors, with Japanese and other foreign-based firms reaping most of the economic benefits generated by a high technology industry in which the breakthroughs and pioneer- ing commercialization largely occurred within the United States. Along with other factors, they point to differences in the treatment of intellectual property rights (IPR) between the U.S. and Japan, suggesting that these disparities may give Japanese firms active in biotechnology a long-term competitive edge.) Commonly heard complaints about the Japanese system include the long waiting period for patent awards and the narrow scope of claims granted by the 'See G. Steven Burrill and Kenneth B. Lee, Biotech 91: A Changing Environment (San Francisco, Calif.: Ernst and Young, 1990), p. 28. Of companies surveyed on the factors affecting the international competitiveness of U.S. biotechnology, 63% believed that foreign patent practices tilt the global playing field against U.S. firms and only 10% saw the patent situation as a positive. Only Wall Street's short-term focus was rated more negatively than patents in its impact on industry, at 74% negative vs. 1 1% positive. Other parts of the survey show that firms generally credit the U.S. Patent and Trademark Of rice (PTO) with moving in the right direction in instituting reforms that will benefit U.S. biotechnology companies. See p. 62.
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2 Japanese Patent Office (JpO).2 While not discriminating against foreigners in a narrow sense, the Japanese IPR environment may have a systematic bias against innovators that discourages emerging U.S. biotechnology companies from mar- keting products in Japan, facilitates the development of second and third genera- tion products by Japanese firms, and allows these firms to access technology developed by U.S. companies and universities at favorable prices through licens- ing, marketing agreements and other mechanisms. The concern that the Japanese IPR environment will shift in the direction of stronger protection for biotechnol- ogy inventions only after Japanese firms demonstrate more of a capacity for innovation is also frequently expressed by American companies. Others, some in the legal profession, argue that the responsibility for difficul- ties experienced by U.S. companies with IPR in Japan, in general as well as in biotechnology, lies mainly with the companies themselves. Differences in patent and legal systems can be expected to exist between countries until international harmonization of some sort is achieved. Some international patent attorneys assert that the success of American firms seeking to protect their innovations in Japan has historically been proportional to the attention and resources they have devoted to understanding and playing by the Japanese rules. In contrast to the extensive efforts made by Japanese companies to learn and utilize the American patent system, U.S. firms may in some cases pay insufficient attention to such matters as obtaining effective Japanese representation and submitting properly translated patent applications. Further, a number of experts argue that the U.S. patent system presents more difficulties for foreigners than the Japanese system does. Which of the above views more accurately captures reality? Do both views carry some validity? The current and future impact of IPR on the development of commercial biotechnology in the global marketplace is not a ratified academic topic. A recent report by the President's Council on Competitiveness asserts present American leadership in commercial biotechnology, and also sums up the importance and promise of this relatively new field: "In the long run, because of the pervasive role of biologically produced substances in everyday life, biotech- nology has the potential to surpass the computer industry in size and scope."3 The report also underscores the importance of intellectual property nghts, stating that 2For a discussion of objections to the Japanese patent system made by many Americans, see Stephanie Epstein and James Matthew Jones, Intellectual Property at a Crossroads: Global Piracy and International Competitiveness (Arlington, Va.: Congressional Economic Leadership Institute, 1990), pp. 87-95. 3The President's Council on Competitiveness, Report on National Biotechnology Policy (Wash- ington, D.C.: President's Council on Competitiveness, 1991), p. 4.
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3 IPR is "one of the foundations for the successful operation of any innovative market."4 Discussion of IPR and U.S.-Japan competition in biotechnology is complicated by the fact that pertinent issues arise from a range of fairly specialized areas of knowledge and expertise, including: 1) The financial and technological aspects of the competitive environment; 2) The subtleties of patent law and enforcement within the two countries; 3) The special questions that biotechnology itself raises for IPR; 4) National and international trade law; 5) Differences in market and regulatory structures between the U.S. and Japan, particularly in the pharmaceu- tical industry; and 6) Overall trends in U.S.-Japan economic relations. In addition, policies determined in a number of arenas have had and will continue to have an impact on IPR and U.S.-Japan competition in biotechnology. The IPR environ- ment for biotechnology is influenced by judicial decisions in the United States and Japan, international patent harmonization talks, the Uruguay Round of General Agreement on Tariffs and Trade (GATT) negotiations, legislation, and possible changes in U.S. International Trade Commission (ITC) procedures. Since a multitude of issues and policymakers influence the treatment of biotechnology and the competitiveness of U.S. and Japanese biotechnology firms, it is difficult to measure precisely the unique impacts of IPR policies. In addition, legislation or other measures that attempt to use IPR in order to promote international competitiveness in biotechnology may conflict with other goals of U.S. policy. Discussion of the impact of IPR on U.S. and Japanese biotechnology compa- nies may be relevant to broader questions in U.S.-Japan competition in high technology industries. Are U.S. competitive problems more a result of Japanese unfairness or a lack of effort on the part of American firms? Is the structure of the American biotechnology industry, with a multitude of small, financially weak U.S. companies, the major cause of technology transfer to foreign purchasers? How does the U.S. government balance concerns about competitiveness with its longstanding commitment to support basic biomedical research in order to improve public health? What, if anything, can the United States do to create a "level playing field" when faced with conflicting goals and uncertain results? While a complete examination of these larger questions is far outside the scope of this study, they do form an important part of the environment in which policy changes will be debated and implemented. The focus here will be on the impact of intellectual property rights on the competitive strategies and fortunes of Japanese and American commercial bio- technology firms. It is not inevitable that the United States will dominate this industry in the next century. Neither should the collapse of one more industrial Ibid.. p. ~ 6.
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4 "domino" to Japanese competition be assumed. The treatment of IPR has a major impact on product development, access to capital markets, and other aspects of the competitive equation in this industry for firms and countries. Understanding this impact is a basis for informed policymaking. Future international competitive dynamics in biotechnology, and which countries and companies eventually reap the economic benefits, will be determined to a significant extent by the course set today by leaders in industry and government. This report of a workshop organized by the Committee on Japan, with assistance from the Office of Japan Affairs, brings together some of the highlights of the discussions. Chaired by Dr. Hubert Schoemaker, Chairman and CEO of Centocor, the workshop was designed to provide a forum to examine the experi- ences of U.S. firms with the IPR environment for biotechnology in Japan, to discuss the implications of the growing presence of Japanese firms in the United States, and to evaluate future prospects and policy implications for the United States. The report was reviewed by the workshop panelists, who offered many useful insights, but it is not a consensus document.