By Donald Kalff
Intra-European trade can still grow substantially. Moreover, EU-wide corporate partnerships in all shapes and forms are required to combine expertise and assets, to improve productivity, and to develop new markets and new products. As a result, transaction costs in the broadest sense of the word become more and more important.
In the United States, business partners are allowed to do anything that is not explicitly prohibited by law or in their contract. This legally and culturally enshrined premise, in combination with the peculiar ways in which case law is administered, produce a business world driven by antagonism -- with control at a premium and cooperation a second-rate solution. Conflicts are often settled by litigation at very considerable expense. The cost of legal support is impressive -- and still rising. Compensation for damages and punitive damages has taken on grotesque proportions. Cases linger for many years in an endless quest for relevant legal precedents and are given a broad scope for appeals on procedural grounds. But the greatest economic damage is caused by missed business opportunities: companies and their shareholders become risk-adverse and avoid promising areas for business development.
So far, European companies have enjoyed relatively low transaction costs of this nature. Partners are generally aware that building trust is a precondition for economic gain. The legal systems on the continent provide contracting partners flexibility and protection thanks to the civil code, which in modern times has clear advantages over case law. For example, the relatively strong legal position of the weaker of the two contracting parties is crucial in an economy in which large companies engage large numbers of small innovative companies in a variety of ways.
If and when their contract cannot resolve a dispute between partners, a professional judge will rule on the basis of the original intentions of the parties and their obligation to take the interests of each other into account. Punitive damages have only recently been introduced but appear to still be confined to gross negligence. In most European countries rulings can be appealed only once, settling the issue definitively within a reasonable timeframe. Increasingly, arbitration and mediation are being used to settle disputes.
Key EU policies have added benefits. In a completed internal market, increasing numbers of transactions, investments, alliances, and takeovers will cement the use of the civil code in economic life. This should help to counter the inroads of British corporate and contract law on the continent and the aggressive marketing of large British law firms. Rational managers of continental companies should resist the choice of UK law as an unhappy compromise if neither partner feels uncomfortable going to court in the jurisdiction of the other.
Patents and Innovation
There is far too much emphasis on the patent system as a way of enticing companies to invest in research and development. The reasoning is that only the protection of intellectual property will tempt companies to use shareholder money in ventures with a highly uncertain payoff. One implication of this is that interesting lines of research-that could add economic value-are abandoned if findings cannot be legally protected. In addition, the patent system has been degraded to the exploitation of legal definitions of novelty and originality. In this system, companies start the evaluation of opportunities to obtain a license by looking for ways to circumvent the patent on which the license is based. There are also far too many companies and traders that abuse their position as exclusive license holders or create havoc by challenging patents on dubious grounds, assuming that sooner or later the owners who have businesses that depend on these patents will buy them off.
The original and more important function of the patent system is the provision of access to what the world has learned at reasonable expense. The number of small and large licensing deals that are closed year after year is the proper measure for its success. There is no new step in biotechnology that does not depend on a string of technology platforms, procedures, and products that were developed in the past by academics and competitors. No company will refuse licenses to reputable companies with sound plans.
The question is how to capitalize on the four million patents in the world and the 800,000 patent applications annually added to the pool. Europe is well-placed to turn the patent system into the cornerstone of an open innovation policy. There has never been a better reason to remove the political barriers that have plagued the growth of the European patent system. The community-wide patent and a single patent court are crucial.
Electronic access to patent texts is already easy, but patent language is arcane and requires a combination of business acumen and scientific insight to appreciate its potential. The European Union could increase transparency by adding summaries in plain language to the patents. Of course, patents are a long way away from reliable new technologies. It is therefore important to make information available about the ways licensees have put a patent to good use. This is, at a minimum, in the interest of the licensor in his quest for more licensees. More importantly, it will stimulate innovation by crossing sector boundaries, as has already happened with findings to improve pumps, membranes, and excavation equipment.
The name of the game in stimulating medium-term economic growth is the creation of new combinations of tested technologies, services, and trademarks. The present emphasis on the development of new technologies can only contribute to growth in the long-term. The innovation exchange networks sponsored by the European Patent Office deserve more attention. Furthermore, Europe should play to its strengths as the world's leader in design and the sophisticated way it protects designs and trademarks. Enabling entrepreneurs to seek and find protection for combinations of different forms of intellectual property is an enticing prospect.
Open innovation calls for the stimulation of trade in intellectual property within the European Union and with other economic regions in the world. This goes to the core of the internal market and the stimulation of world trade. As matters now stand, European companies file more patents in the United States and Japan than vice versa. The approximately sixty billion euro that is presently exchanged between regions in royalties and licensing fees is only a modest beginning.
Home of the World's Largest Players
Large companies play a far greater role in transforming innovation into economic growth than is generally assumed. They own most of the world's intellectual property, patents, designs, and trademarks. Large companies have the financial resources to translate intellectual property into products and services that add economic value. They provide the continuity that is required for persistent step-by-step improvements. They are masters of marketing and control most of the sales and distribution channels. They can mobilize any team of specialists on all topics at short notice. They have experience in managing networks of companies and institutions. They dominate world trade and the transfer of technology. They are indispensable partners in designing industry standards and regulation.
Europe is the home of 60 of the world's largest 100 companies. This is a considerable advantage although many of its listed companies, particularly banks, are not sufficiently different from their American counterparts. It is crucially important that they remain part of the social and economic fabric of Europe, maintaining their own and tailor-made ways to conduct business. Europe's large and generally successful family-controlled conglomerates have a special responsibility to set standards that other large companies could emulate.
The fact that Europe is the recipient of 40 percent of the world's FDI bodes well; that large European companies seek their expansion in Europe is also encouraging. The battering that free market capitalism has received over the past year will also help. The need for the European Union to open up the common market remains as indispensable as ever. These new directions are intended to advance the private sector and to create the sustainable economic growth Europe needs in order to develop its own highly competitive brand of capitalism and to pursue its economic, social, and political objectives.
Since the outbreak of the credit and economic crisis, three of the six European advantages -- avoidance of the shareholder model by non-listed European companies, Europe's greater diversity in enterprise models, and more diversified sources of finance -- have taken on additional significance.
Of all the EU institutions, it would seem that the meeting between finance ministers of the countries that have adopted the euro is best placed to draft the new agenda. The Economic and Financial Affairs Council, which includes the finance ministers of the UK and most of the new members, will hopefully be divided from the outset. The same holds for the Competitiveness Council, with the added disadvantage that it yields very little power. The Commission has nailed its colors to the mast of the Lisbon process. Among the euro zone finance ministers it falls, as in times past, to Germany, a country endowed with a healthy skepticism of Anglo-Saxon economic prescriptions.
Editor's note: To read the footnotes that accompany this story, please visit IP Global Edition.
Donald Kalff is senior fellow in the management department of the Wharton School, University of Pennsylvania. His most recent book is "Modern Capitalism: Alternative Foundations for Large Enterprises."
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