Chapter 6: Industry, Technology, and the Global Marketplace

U.S. Royalties and Fees Generated From Intellectual Property

The United States has traditionally maintained a large surplus when trading intellectual property. Firms trade intellectual property when they license or franchise proprietary technologies, trademarks, and entertainment products to entities in other countries. Trade in intellectual property can involve patented and unpatented techniques, processes, formulas, and other intangible assets and proprietary rights; broadcast rights and other intangible rights; and the rights to distribute, use, and reproduce general-use computer software. These transactions generate revenues in the form of royalties and licensing fees.[19]

U.S. Royalties and Fees From All Transactions

In 2001, U.S. receipts from trade in intellectual property declined for the first time, interrupting a steady succession of year-to-year increases dating back to 1982.[20] New data for 2002 and 2003, however, show a resumption of the prior growth pattern. U.S. receipts grew by 8.7% in 2002 and by nearly 9.2% in 2003. In 2003, U.S. receipts totaled $48.3 billion (figure 6-17 figure.; appendix table 6-7 Excel table.).

In contrast to the country's merchandise trade, U.S. receipts for transactions involving intellectual property generally were four to five times greater than U.S. payments to foreign firms. During the late 1990s, however, this gap began to narrow as U.S. payments increased faster than receipts. The ratio of receipts to payments shrunk to about 3:1 by 1999 and nearly 2:1 by 2002.

In 2003, U.S. trade in intellectual property produced a surplus of $28.2 billion, up about 5% from the $25.0 billion surplus recorded a year earlier. About 75% of transactions involved exchanges of intellectual property between U.S. firms and their foreign affiliates.[21] Exchanges of intellectual property among affiliates grew at about the same pace as those among unaffiliated firms. These trends suggest both a growing internationalization of U.S. business and a growing reliance on intellectual property developed overseas.[22]

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U.S. Royalties and Fees From Trade in Manufacturing Know-How

Data on royalties and fees generated by trade in intellectual property can be further disaggregated to reveal U.S. trade in manufacturing know-how. Trade in manufacturing know-how described here tracks U.S. trade in industrial processes used in the production of goods. Tracking data on transactions between unaffiliated firms in which prices are set through market-based negotiation may better reflect the value of manufacturing know-how at a given time than tracking data on exchanges among affiliated firms. When receipts (sales of manufacturing know-how) consistently exceed payments (purchases), these data may indicate a comparative advantage in the creation of industrial technology. Tracking the record of receipts and payments also provides an indicator of trends in the production and diffusion of manufacturing knowledge.

The United States is a net exporter of manufacturing know-how sold as intellectual property (figure 6-18 figure.; appendix table 6-8 Excel table.). The gap between imports and exports narrowed during the late 1990s and has remained somewhat erratic. The most recent data show a trade surplus of $2.6 billion in 2003, which is 28% higher than 2002 and the second highest surplus on record, after the peak $3.0 billion surplus recorded in 2000. U.S. receipts totaled to $4.8 billion in 2003, an increase of 19% over the previous year and the first increase in 2 years. A large part of this increase is due to a rise in receipts reported by several large pharmaceutical and telecommunications companies. This rise in receipts lifted total U.S. 2003 receipts from trade in manufacturing know-how above those earned from licensing use of computer software (Borga and Mann 2004).

Trading Partners

The U.S. surplus from trade in manufacturing know-how is driven largely by trade with Asia (appendix table 6-8 Excel table.). In 1995, U.S. receipts (exports) from manufacturing know-how licensing transactions were nearly seven times the amount of U.S. payments (imports) to Asia. That ratio closed to less than 4:1 by 1999, but has since widened. The most recent data show U.S. receipts from manufacturing know-how licensing transactions at about five times the amount of U.S. payments to Asia (figure 6-19 figure.). Japan and South Korea were the biggest customers for U.S. manufacturing know-how sold as intellectual property, accounting for 45% of total receipts in 2003.

Receipts. Japan has consistently been the single largest consumer of U.S. manufacturing know-how, although its purchases have fluctuated downward since the mid-1990s. Japan's share of U.S. receipts peaked in 1993 at approximately 51%; more recently, Japan's share was 30% in 2002 and 28% in 2003. South Korea was the second largest consumer, accounting for 17% of U.S. receipts in 2003. A major consumer of U.S. manufacturing know-how since the early 1990s, South Korea's share of U.S. receipts was 11% in 1990 and reached its highest level, 19%, in 2000.

Unlike trade with Asia, U.S. trade with Europe in manufacturing know-how in the form of intellectual property is fairly balanced. U.S. firms trade manufacturing know-how primarily with Switzerland and the EU countries of France, Germany, Sweden, and the United Kingdom. Receipts from European countries nearly reached $1.7 billion in 2003, or about 36% of all U.S. receipts for technology sold as intellectual property. EU countries accounted for 30%. Germany is the third-largest consumer of U.S. manufacturing know-how, spending twice as much as the other large European customers, the United Kingdom, France, or Switzerland.

Payments. Foreign sources for U.S. firms' purchases of manufacturing know-how have varied over the years (appendix table 6-8 Excel table.). The EU has been the biggest supplier for U.S. firms, accounting for 37%–54% of foreign-supplied U.S. purchases of manufacturing know-how sold as intellectual property over the 15-year period examined (1987–2003). Germany, the United Kingdom, and Switzerland are the principal European suppliers.[23] In 2003, U.S. payments to Switzerland exceeded those paid to any other European country, second only to those paid to Japan.

Asia also has been an important supplier of manufacturing know-how, although its share of U.S. purchases has dropped considerably since 1999. In 2001, Asian countries accounted for 26% of U.S. purchases, down from 39% in 1999. Japan is the source for nearly all of these purchases, with small amounts coming from South Korea, Taiwan, and China. Since 1992, Japan has been the single largest foreign supplier of manufacturing know-how to U.S. firms; about one-fourth of all U.S. payments in 2003 were made to Japanese firms.

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[19] The U.S. government and U.S. corporations have long advocated the establishment and protection of intellectual property rights. The Office of the U.S. Trade Representative monitors countries with reported violations and reports on the status of intellectual property protection in its annual report, Foreign Trade Barriers .

[20] Data presented in appendix table 6-7 Excel table. only go back to 1987, but data held by the Bureau of Economic Analysis indicate that year-to-year increases date back to 1982. See Borga and Mann (2004).

[21] An affiliate refers to a business enterprise located in one country that is directly or indirectly owned or controlled by an entity in another country. The controlling interest for an incorporated business is 10% or more of its voting stock; for an unincorporated business, it is an interest equal to 10% of voting stock.

[22] In addition, data on the destination of multinational corporate sales to foreign affiliates also suggest that market access is an important factor in the firms' decision to locate production abroad. See Borga and Mann (2004).

[23] France also has been an important source of technological know-how over the years. In 1996, France was the leading European supplier to U.S. firms. Since then, data for France have been intermittently suppressed to avoid disclosing individual company operations. Data were last published for France in 2003 and showed an increase in U.S. purchases of French technological know-how compared with 2000 or 1996.

National Science Board.