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IPRs, Growth and Development
CARSTEN FINKCARSTEN FINK
The Development Implications of Intellectual Property Rights and TRIPS
Washington, DC, June 4-5, 2008
OverviewIPRs in developed countries
The linkages between IPRs, trade, foreign investment and technology transfer
IPRs in developed countries
Historical perspectiveDebate about the “optimal” scope of IPRs protection is centuries old
“Cycles” of strong/weak IPRsprotection, reflecting political economy forces and newly emerging intellectual movements
Case study: Dutch patent systemStrong patent law adopted in 1817, no requirement that patents be examined
Issuance of patents that were neither new nor practical
No publication of patents, making Dutch firms less willing to innovate than their peers in London or Hamburg
1864: Dutch manufacturers petitioned the King to abolish the patent system
Case study: Dutch patent systemBroader anti-patent movement in Europe“The community requires … that skillful men who contribute to the progress of society be well paid for their exertions. The Patent Laws are supported because it is erroneously supposed that they are ameans to this end.” –The Economist (July 26, 1851)
Dutch abolished the patent system in 1869
Impact remains controversial: extensive industrialization, bitter complaints by local innovators
Re-introduction of patents only in 1910, following pressure from trading partners (e.g., Germany)
Machlup’s conclusion in 1958“If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it.”
Anecdotal and survey evidencePatents are considered critical in pharmaceutical and chemical industries
In other industries, patents are less important as a mechanism for appropriating returns from R&D
First mover advantage, rapid movement down the learning curve more important
“Defensive” patents to preserve market position
Concerns about implications for follow-on research
Innovations and its Discontents
The silent revolutionCreation of the Court of Appeals for the Federal Circuit (CAFC) in 1982, which over time proved more favorable to the claims of patent holders
In the early 1990s, US Congress converted US patent office from an agency funded by tax revenues, into one funded by the fees it collects
Patent surge in the USAnnual number of patent applications and grants in the United States
Source: WIPO
US Patent #6,368,227“A method of swing on a swing is disclosed, in which a user positioned on a standard swing suspended by two chains from a substantially horizontal tree branch induces side to side motion by pulling alternately on one chain and then the other.”
US Patent #6,368,227“A sealed crustless sandwich for providing a convenient sandwich without an outer crust which can be stored for long periods of time without a central filling from leaking outwardly. The sandwich includes a lower bread portion, an upper bread portion, an upper filling and a lower filling between the lower and upper bread portions, a center filling sealed between the upper and lower fillings, and a crimped edge along an outer perimeter of the bread portions for sealing the fillings therebetween. The upper and lower fillings are preferably comprised of peanut butter and the center filling is comprised of at least jelly. The center filling is prevented from radiating outwardly into and through the bread portions from the surrounding peanut butter.”
Implications for businessesThreat of being sued has increased and the likelihood of losing a court trial has gone up
Many firms accused of patent infringement settle
Patents that should probably never have been granted remain valid
Firms (especially small ones) are less likely to innovate or move into new product lines for fear of being sued
Fixing the US patent systemPromote patent quality:
Pre-grant opposition: create incentives for parties that have information about the novelty of inventions to bring that information to the PTO when the patent is being examined
Strengthen procedures for re-examination upon grant: allow other parties to make a case that patent is invalid
Replace juries with judges and special masters in infringement cases
The linkages between IPRs, trade, foreign investment and
technology transfer
IPRs and international tradeWhy do we care?
Economic literature suggests that trade may be an important vehicle for international knowledge transfer (Coe and Helpman, 1995)
Theoretical effect of stronger IPRs ambiguous:Positive effect: exporter faces larger market due to displacement of imitators
Negative effect: enhanced market power may lead title holder to curtail exports
Empirical evidenceEconometric work points to the following picture:
General positive IPRs-trade link
No or only weak link found for high technology or patent sensitive products
Possible explanation:Producers of high technology products may respond to stronger IPRs by servicing foreign markets through foreign direct investment and/or licensing
IPRs and foreign direct investmentWhy do we care?
Policymakers care a lot
FDI can enlarge the domestic capital stock and may be associated with employment creation
FDI may be associated with transfer of skills, technology, and managerial know how
CaveatTo what extent are investment incentives desirable?
Empirical evidence on knowledge spillovers is mixed
FDI flows to developing countriesNet inflows of foreign direct investment, US$ billion
Source: World Bank Development Indicators
0
50
100
150
200
250
1985 1988 1991 1994 1997 2000 2003
Middle incomeLow IncomeAll developing
Dunning’s OLI paradigmWhy do firms invest abroad?
Ownership advantages: knowledge and reputationalassets--including all types of IPRs (see next slide)
Location advantages: market size, factor costs, transport costs, taxation, access to distribution networks, labor and environmental standards
Internalization advantages: avoidance of transaction costs; control of inputs, protection of quality
Protection of IPRs affects all three advantages
Ownership advantages and FDI
0
5
10
15
20
25
30
35
40
45
0 2 4 6 8 10 12 14 16
R&D expenditure as a percentage of industry value added
FDI s
tock
as a
per
cent
age
of in
dust
ry v
alue
add
ed
Services
Chemicals andallied products
Transportationequipment
Electronic and otherelectric equipment
Industrial machineryand equipment
Food and kindred products
Primary and fabricated metals
Source: Primo Braga, Fink, and Sepulveda (2000)
US outward FDI and R&D intensities, 1995
Empirical evidence on IPRsSurvey evidence (Mansfield, 1994/1995):
IPRs holders regard the degree of IPRs protection as a relevant variable in FDI decisions (in particular, in the chemical and pharmaceutical industries)
Aggregate econometric evidence:Results are mixed, depending on approach and estimation sample
Conclusion: a sharp strengthening of the IPRsregime alone is unlikely to substantially boost overall FDI inflows
Insightful “micro” evidenceJavorcik (2004) employs survey data of multinational companies investing in Eastern EuropeMultinomial logit model finds:
Weak IPRs have a negative effect on the likelihood of investments being madeCompanies tend to avoid investing in local production if IPRs are weak and instead they concentrate on distribution facilities
IPRs and international licensingWhy do we care?
IPRs may be an important vehicle for formal technology transfer
Conceptual considerations:Enforceability of licensing contracts relies fundamentally on legal protection of knowledge and reputational assetsSecure IPRs allow firms to disclose technology for the purpose of negotiating a licensing agreement
Empirical evidenceStudies on German and US licensing receipts suggest a significantly positive effect of the strength of IPRs protection abroadProblems
Recorded licensing receipts may partially capture multinational firms’ transfer pricing practicesSeparating price and quantity effects
