Intellectual Property, Growth and Trade: Volume 2

This series is aimed at economists and financial economists worldwide and will provide an in depth look at current global topics. Each volume in the series will focus on specialized topics for greater understanding of the chosen subject and provide a detailed discussion of emerging issues. The target audiences are professional researchers, graduate students, and policy makers. It will offer cutting-edge views on new horizons and deepen the understanding in these emerging topics.

In the last two decades the subject of intellectual property rights (IPR) took on major significance as an element of global trade regulation and commercial policy. Implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) at the World Trade Organization (WTO) in 1995 obliged member countries, over various transition periods, to adopt and enforce minimum standards of protection for patents, copyrights, trademarks, trade secrets, and related policies. This mandate forced legislative and administrative changes in virtually all countries, but had particular impact in developing nations, which had generally weaker IPR standards prior to TRIPS. Since 1995 there have been additional multilateral negotiations, largely at the World Intellectual Property Organization, over stronger global standards for patents and copyrights for digital electronic goods. Most controversially, in its negotiations of bilateral free trade areas the United States aggressively demands highly rigorous standards, beyond those called for in TRIPS, for patent rules governing pharmaceutical products and new biotechnological goods in the agricultural and life sciences.

I begin with a dispute over a fox hunt, by which to understand the law of tangible property, then develop that metaphor for the major types of intellectual property. I start with domestic U.S. patent law for the sake of concreteness, and generalize to other jurisdictions and types of intellectual property. In the latter parts of the paper I discuss the international implications of intellectual property, including especially the effects of information spillovers. The last part of the paper describes the hazards in analogizing “trade” in intellectual property rights to trade in goods, and particularly in interpreting international patent data. These hazards motivate the search for a structural model specially adapted to the purpose of valuing international intellectual property rights and rules. The goal is to give economists a simple and integrated framework for analyzing intellectual property across time, jurisdiction and regime type, with an eye towards eventually developing other incentive systems that have the advantages of property (such as decentralized decision-making), but fewer of the disadvantages.

Patent data have been exploited to track invention and international technology diffusion. We review evidence on research activity, international patenting, and income differences across countries. Guided by that evidence, we construct a model of ideas in the world economy that includes the decision of whether and where to patent them. The model makes precise connections between international patent statistics and cross-country differences in innovation, technology diffusion, market size, and strength of patent protection. We use it to organize our discussion of existing empirical studies, which typically focus on one of five core relationships: (i) national pools of knowledge and international spillovers from basic research; (ii) aggregate productivity and international technology diffusion from applied research; (iii) international patenting and the production of ideas, international diffusion, market sizes, and intellectual property regimes; (iv) the value of ideas and diffusion, market sizes, and the intellectual property regimes; or (v) investment in research and research productivity, the cost of research, and the value of ideas. While distinguishing between these five relationships proves useful, they are, of course, logically intertwined. Taking these interconnections into account will contribute to the goal of building a quantitative model of the creation, diffusion, and adoption of ideas in the global economy.

Firms have typically tried to profit from their technical innovations by selling them indirectly, embedded in goods and services. Markets for technology, in which innovations are sold or licensed, have been much rarer. Yet, trade in technology has grown systematically over the past 20 years, as reflected in the growth of arrangements such as licensing agreements, R&D joint ventures, and contract R&D. Recent estimates indicate that royalties received by American corporations for industrial processes may amount to about a quarter of total U.S. R&D. A number of supporting institutions that facilitate effective dissemination of information, standardization, and contracting are vital to the rise and functioning of markets for technology. Intellectual property rights, and in particular patents, are one such institution. The main objectives of this survey are to review critically the literature on the relationship between trade in technology and patent protection, and to assess the contribution of stricter and better-defined patent protection to the emergence of technology markets. We start our survey by providing a tentative taxonomy of markets for technology and some recent evidence on their extent and evolution. We then explore several reasons why firms would be willing to act as suppliers in the market for technology. The core of the survey revolves around the idea that patents facilitate the development of markets for technology in several ways: They enhance the ability of the licensor to extract rents from its innovation; they reduce costs in technology trade by forcing an increased codification of knowledge; they reduce information asymmetries, opportunistic behaviors, and transaction costs. However, the literature also points to some potential costs of stronger patents, including litigation costs and the problem of “anti-commons.” Finally, we explore the implications of patents and markets for technology for entry, competition and industry dynamics.

This chapter summarizes the interdependence of network effects, compatibility standards and intellectual property rights (IPR) in the global economy. This interdependence is analyzed at the product market level and at the research and development level. The questions to be examined are: how IPR influence the provision of goods exhibiting network effects; the impact of network effects on the creation, dissemination and protection of intellectual property and of goods with strong intellectual property content; and strategic issues faced by firms and governments in goods that exhibit network effects. We answer these questions by studying how network effects influence the value of IPR and how in turn IPR may influence the size of networks. We highlight the central importance of IPR protection of interface standards for market outcomes, and how different types of IPR generate market power through interface standards. We review similarities of network effects in product markets and research networks as well as impediments to their expansion. We finally discuss alternative outcomes of standardization policies, institutional choices and strategic coordination efforts by firms. We emphasize how the answers to these questions are distinct in an international context.

Scientific knowledge has characteristics of a pure public good. It is non-rivalrous in the sense that once generated, it is neither depleted nor diminished by use. Knowledge is also non-excludable since, once it is made available, in the absence of clearly defined property rights, users cannot be excluded from using it. These aspects imply that private market mechanisms will not provide adequate incentives for knowledge creation. Legal property rights, such as patents, are one means of dealing with this problem. Patronage in the form of government support for research provides another solution, as does the priority system of awarding credit for scientific discoveries to the first to find them. In the last two decades, there has been a growth in the relative importance of the use of legal property rights in the university setting and with it a growing controversy as to whether the costs may be outweighing the benefits. In this chapter, we discuss issues and evidence with regard to the ownership and licensing of publicly funded research intellectual property rights (IPR). We begin with an overview of incentives created by the patent system and discuss the ways in which these incentives differ from traditional norms of science. We then draw on the legal and economic literatures which distinguish among the incentives to invent, disclose, and innovate, and argue that the rationale for providing IPR for university research stems from the last of these. Finally, we discuss the available evidence on the creation and diffusion of academic research under current IPR regimes.

Intellectual property rights and competition policy are intimately related. In this chapter I survey the economic literature analyzing the interaction between intellectual property law and competition law and how the boundary between these two policies is drawn in practice. Recognizing that intellectual property rights and competition law can interact in many different ways, the presentation focuses on several key issues. The economic literature on the interaction between competition law and intellectual property rights shows that these regulatory systems are consistent in terms of basic principles. Significant tensions exist, however, and it is difficult to balance IPR and competition law in practice. The significant differences in approach between the United States and the European Union simply reflect the underlying reality that efforts to achieve a sensible balance do not result in policy harmonization.

The existence of parallel imports (PI) raises a number of interesting policy and strategic questions, which are the subject of this survey article. For example, parallel trade is essentially arbitrage within policy-integrated markets of IPR-protected goods, which may have different prices across countries. Thus, we analyze fully two types of price differences that give rise to such arbitrage. First is simple retail-level trade in horizontal markets because consumer prices may differ. Second is the deeper, and more strategic, issue of vertical pricing within the common distribution organization of an original manufacturer selling its goods through wholesale distributors in different markets. This vertical price control problem presents the IPR-holding firm a menu of strategic choices regarding how to compete with PI. Another strategic question is how the existence of PI might affect incentives of IPR holders to invest in research and development (R&D). The global research-based pharmaceutical firms, for example, strongly oppose any relaxation of restrictions against PI of drugs into the United States, arguing that the potential reduction in profits would diminish their ability to innovate. There is a close linkage here with price controls for medicines, which are a key component of national health policies but can give rise to arbitrage through PI. We also discuss the complex economic relationships between PI and other forms of competition policy, or attempts to limit the abuse of market power offered by patents and copyrights. Finally, we review the emerging literature on how policies governing PI may affect international trade agreements.

This chapter provides a selective survey of the theoretical and empirical literature to date on the relationship between intellectual property rights (IPRs) and measures of innovation and international technology transfer. The chapter discusses the empirical implications of theoretical work, assesses the theoretical work based on the evidence available, and identifies some gaps in the existing literature.

What roles do trade and foreign direct investment (FDI) play in international technology transfer? Do technologies introduced by multinational firms diffuse to local firms? How does the level of intellectual property rights (IPRs) protection in a country affect its ability to absorb foreign technologies? Using these questions as motivation, this paper surveys the recent trade literature on international technology transfer, paying particular attention to the role of FDI. Several useful conclusions emerge. First, the theoretical literature has shown that trade necessarily encourages growth only if knowledge spillovers are international in scope. Second, existing empirical evidence on the scope of knowledge spillovers (national versus international) is ambiguous. Third, recent empirical plant level studies have called into question earlier studies that argued that FDI has a positive impact on productivity of local firms that compete directly with multinationals. Fourth, there is strong evidence in support of vertical spillovers from FDI: i.e. those firms that either supply multinationals or use goods and services produced by them as intermediate inputs experience productivity gains from such interaction. Fifth, it is well established that the degree of global IPR protection affects the pattern of international trade and convincing evidence that it also influences flows of international technology transfer and FDI has also started to emerge.

In this chapter I put forward a framework to help us understand the underlying sources of national policy failures regarding intellectual property rights (IPR) protection, the need for international coordination, and how the coordination should be done. I also analyze whether global harmonization of IPR standards is necessary or sufficient for achieving globally welfare-maximizing policies. Then I move on to analyze the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which is a mighty effort to coordinate IPR policies across member countries of the World Trade Organization (WTO). I discuss what TRIPS was supposed to do and what it has actually achieved, with reference to my theoretical framework. I explain that it is desirable for IPR to be included in world trade talks and be negotiated along with other trade issues. I offer analyses on the extensions of the basic model by introducing political economy and trade barriers, as well as allowing countries to discriminate against foreign firms. Finally, I comment on further potential extensions such as introduction of foreign direct investment (FDI) or licensing, parallel imports, cumulative innovations, subject matter of protection and costs of implementation. The main thrust of the basic model is that, provided that there is free trade and non-discrimination of foreign firms, there exist positive cross-border externalities as a country strengthens its IPR protection, since it raises the profits of foreign firms and the welfare of foreign consumers without causing any deadweight loss on foreign soil. This implies that national governments tend to provide too little IPR protection compared with the global optimum. The model also implies that a country with higher innovative capability and larger domestic market would provide stronger IPR. Thus, it is natural for the South to protect IPR less than the North in the absence of international coordination. These basic results largely continue to hold under various extensions.

We survey several of the theoretical models that have been applied to the analysis of the GATT/WTO dispute settlement process. These include repeated game models, which emphasize the punishment aspect of dispute settlement, and incomplete contracting models, which emphasize the “gap-filling” aspect. Our analysis emphasizes the implications of these models for the strengthening of the dispute settlement process under the WTO and for its application to the TRIPS agreement. We also discuss how models of settlement bargaining can be applied to obtain empirical predictions about which cases will actually proceed to an actual finding by the dispute panel.

The World Health Organization estimated that in 1999 roughly one-third of the world's population lacked access to essential medicines that would have saved or improved their lives. Our analysis focuses on how pharmaceutical product patents restrict access to essential medicines in developing countries. It is well established that pharmaceutical product patents provide little incentive for pharmaceutical companies to develop new medicines designed to treat diseases prevalent in developing countries or to market in developing countries those patented medicines developed to treat diseases prevalent in developed countries. Economists have developed theoretical models showing that these incentives could be changed if (1) developing countries provided intellectual property protection for new pharmaceutical innovations and (2) an international regulatory framework were established to facilitate pharmaceutical companies setting lower prices in developing countries and higher prices in developed countries for patented medicines. We develop an index of property rights in pharmaceutical innovations covering 129 countries from 1960 to 2005. It shows that in 1960 only a handful of countries provided significant protection for pharmaceutical innovations, but by 2005 over 95 percent of countries in our sample provided significant statutory protections. However, an international framework to allow pharmaceutical companies to price discriminate has not been put in place. We conclude that international price discrimination mechanisms, compulsory patent licenses, and regional patent buyouts are not viable mechanisms for providing access to essential medicines to patients in developing countries. Global patent buyouts are more likely to achieve this goal, as they are not founded on an impractical separation of pharmaceutical markets in developing and developed countries and they provide critical incentives to develop new essential medicines.

The Green Revolution was a singular event in world history; because of the Green Revolution, world prices for all crops declined. The agricultural mechanization issue was also driven by intellectual property rights (i.e., the right to patent products), as was the agricultural chemical revolution. The livestock industrialization revolution sharply lowered the prices for all livestock products. The Gene Revolution (i.e., the recombinant DNA revolution) further lowered the cost of producing farm products. The Gene Revolution was based on three events. The first was the discovery that DNA (Delbrook) was the carrier of genetic information. The second was the discovery by Watson and Crick of the double helix structure of DNA. The third was the method of stable insertion of DNA into a host genome (Cohen and Boyer). The future of agricultural research depends on the capacity of countries to invent and imitate.

This chapter reviews the economics literature on the development aspects of a substantially strengthened global regime of intellectual property rights (IPR). In this regime developing countries must adopt tighter standards governing patents, copyrights, and related policies, in order to protect global innovation. Some analytical literature finds that these changes could improve prospects for technology flows to poor countries, helping to integrate them into the global knowledge economy. Other authors raise deep concerns about whether these policy shifts will restrict growth through raising the costs of imitation, innovation, and acquiring international technologies. Poor countries may face permanently higher costs, raising questions about both the efficiency and equity implications. The chapter considers first the role of a balanced IPR regime in an overall economic development policy. This balance could involve widely varying protection standards at differing levels of economic development, growth, and social preferences. This situation is especially true in the world economy, where poorer countries may prefer to free ride on available international technologies. Much of the theoretical literature takes this view, suggesting that harmonized global policies could reduce innovation and growth. More recent literature takes a broader view of the ability of IPR to build global technology markets and support international information exchanges. Ultimately these are empirical questions and the available literature differs considerably in analytical approaches and conclusions. Thus, the chapter analyzes contributions from theory, empirical analysis, and case studies regarding prospective improvements or impediments to economic development arising from IPR reforms. These issues are especially important in public health and nutrition. The chapter concludes with an overview of how the globalized nature of IPR protection could affect developing countries. The essential point is that policy governing patents and copyrights needs to be embedded effectively in an overall economic development strategy.