SHARMILA VISHWASRAO [*]
The incentives of southern governments to protect process and product patents are examined in a game with endogenous research and development and licensing. Patent protection results in the licensing of cost-reducing process innovations to southern firms. By increasing competition, licensing provides an incentive for southern governments to protect process patents. However, optimal patent policy may involve restrictions in the form of licensing contracts. In the case of product innovations, licensing does not occur regardless of whether or not patents are protected. Thus, patent protection serves to reinforce monopoly power without increasing technology diffusion. Southern governments thus have a lower incentive to protect product patents.
One of the real-life anomalies that is often ignored in the debate on trade-related intellectual property rights is that while countries may not offer patent protection for new products, they are likely to do so in the case of new processes. The Indian Patents Act of 1970 disallows patents for products in the fields of chemicals and food and drugs, confining patent rights to manufacturing processes alone. In part, this restriction arose as a response to earlier difficulties in assigning rights for chemicals. Bagchi et al.  describe a case involving Fabwerke Hoechst, a German company, and Unichem, a small Indian pharmaceutical firm. The German firm alleged that Unichem had infringed their patent by manufacturing tolbutamide. Unichem defended its right to manufacture, claiming that the drug was being produced using a different process licensed from an Indian laboratory. While the distinction may have arisen because of purely legal consideration, it cannot be disputed that the legislation can have potentially widespread effects because of the importance of patents to this particular industry.  The same article cites that prior to the enactment of the new patent act, food and drugs and chemicals accounted for more than 54 percent of the patents granted.
In addition to legal considerations, process protection confers certain other advantages. By requiring that the manufacturing process be specified in the patent disclosure, it is easier for domestic firms to construct alternative processes, thereby eroding the monopoly rights of the original inventor. Process protection thus covers the kind of research and development (R & D) carried out most by firms in underdeveloped countries. Minor changes in previously patented technology allow the domestic firm to replace the existing process by a slightly different one, actually facilitating rather than hindering what would be considered imitation under northern statutes.
Additional considerations may affect the choice of product versus process protection. Product patents can be used easily to gain monopoly power. Very often a firm will file for a patent in a country merely to protect its monopoly on imports without any intention of producing in that country or licensing production to domestic firms.  Under very common assumptions on cost structure, a firm may choose to license process innovations but will not license product innovations [Katz and Shapiro, 1985]. This outcome is the result of product innovation conferring a monopoly on the inventor. In the case of process innovations, existing firms often produce the good. Thus, the inventor gains from licensing the process patent for some payment.
The primary focus of this paper shows the effect on technology transfer through process innovation licensing when domestic and foreign firms compete in the same market. The incentives to protect process and product patents are compared in a North-South trade framework where only northern country firms conduct R & D. A number of studies have explored the problems of trade-related intellectual protection [Chin and Grossman, 1990; Deardorff, 1992; Diwan and Rodrik, 1991; Taylor, 1993; Vishwasrao, 1994]. …