FRBSF Economic Letter
2004-11; May 14, 2004
Can international patent protection help a developing country
grow?
International patent protection was a key issue at the multilateral trade talks
sponsored by the World Trade Organization in Cancun in September 2003. Indeed,
since the organization was founded almost ten years ago, the international protection
of intellectual property rights (IPR) has been a bone of contention between developing
and industrialized countries. At that time, developing countries did agree to
adopt some minimum protection by 2006. But since then, they have continued to
argue that the international protection of IPR entails high costs to their economies.
For example, a patent system is costly to set up and enforce. In addition, only
a few exceptions permit the use of patented technology for public health reasons
without paying the innovators. International patents also limit the developing
countries’ ability to copy expensive technologies that they claim are essential
to their economies.
One issue that gets somewhat less attention in the debate is
the potential for certain dynamic benefits of international protections
of IPR for developing countries.
Specifically, IPR may increase growth in these economies and thus improve their
living standards. This Economic Letter explains how the benefits may accrue.
IPR increase the incentives for the creators of innovations that improve productivity.
Even if faster productivity occurs initially in industrialized countries, IPR
protection may lead to an increase in the spread of these technologies to developing
countries. If the rate of the spread of new technologies is fast enough, then
the economies of developing countries can grow faster, allowing them to improve
their living standards, even after taking into account the higher price needed
to pay for patented technologies.
Productivity differences, income differences,
and technological diffusion
Recent work by Parente and Prescott
(2002) finds that the main determinant of income differences across
countries is not so much
the quantity of capital
and
the number of workers available, but rather the productivity of these factors
of production; that is, what matters is the) finds output per hour from that
capital equipment and those workers. Indeed, the authors illustrate by citing
the post-World War II “growth miracles” in countries such as Japan,
South Korea, and Taiwan. After the devastation of the war, Japan rebuilt its
plants and infrastructure adopting the latest technologies from abroad, making
it among the fastest growing economies in the world during the 1950s, 1960s,
and 1970s; indeed, its income per capita grew by a factor of five between 1955
and 1980. Similarly, South Korea and Taiwan made deep structural reforms between
1965 and 1990 that encouraged the adoption of foreign technology and led output
per capita to grow by a factor of 5 and 6.3, respectively, over the period
(Parente and Prescott, 2002).
Adopting technologies from abroad is part of the
phenomenon called technological diffusion. According to recent studies, technological
diffusion may boost a
country’s
productivity and growth faster than investing its resources in research and
development and innovating domestically; the reason, presumably, is that
the latter is a
more costly way to introduce new technologies into the economy. For example,
Eaton and Kortum (1996) examined 19 mainly industrialized countries and estimated
that 50% of their GDP growth can be explained by innovation in the United
States, Germany, and Japan. For developing countries, research by Connolly
(2003that
foreign technology imports from industrialized countries contribute more
to their GDP growth than domestic innovation does; these imports also encourage
research
and development and raise productivity more in those countries than in industrialized
countries.
The process of technological diffusion across countries generally
takes one
of two forms. One form involves imitating existing foreign technology without
paying
for it, for example, through reverse engineering or by producing technological
goods using information from patent applications. The other form involves
importing new technology through licensing or importing intermediate goods
that embody
the new technology (for example, through foreign investment). Clearly,
the first form, which runs counter to the principle of international
protection
of IPR,
is less costly, at least in the short run. But in the longer run, it may
be more costly if it entails significant adverse incentives for creating
the very
technological
advances that ultimately promote developing countries’ economic growth.
How
do intellectual property rights affect the incentives to innovate?
To
understand how violating the international protection of intellectual
property rights can reduce the incentives to innovate, first consider
the protection
of these rights within a country. Technology is what economists call
a “public
good”—its use by one person or organization does not prevent
others from using it. In a perfectly competitive world, people might
have little incentive
to innovate, as their new technology may be distributed freely, leaving
the innovator unable to reap benefits from its production. Therefore,
the argument goes, it
is socially optimal for the market for technological innovations to be
imperfectly competitive for some period of time, that is, for the government
to protect the
innovator temporarily by conferring intellectual property rights. Typically,
intellectual property rights are patents, which give innovators a temporary
monopoly over the sales of the knowledge or good; this provides the innovator
with the
profits needed to cover the R&D expenditures and, thereby, the incentive
to innovate. In the United States, for example, patents are given for
twenty years, dating from the time of the application.
The notion that
patents are socially desirable has not been without challenge. Boldrin
and Levine (2002) argue that patents may not be necessary to
foster the creation of new technologies because copying new technology
is often
expensive and time-consuming. As a result, the innovator has time to
sell the product
and
reap temporary profits even without patent protections. In fact, Boldrin
and Levine argue that shortening the duration of a patent can benefit
society by
enabling the new technology to enter the public domain faster, increasing
competition among existing producers and fostering faster productivity
growth. The development
of computer operating systems is one area with contrasting approaches
to promoting innovation: open-source software, such as Linux, does
not enjoy
IPR protection,
while closed-source software, such as Microsoft Windows, does enjoy
IPR protection. Thus, for some industries, IPR protection is not
essential
to innovation.
Most growth economists, however, agree that some degree
of patent protection is needed to give innovators incentives to
create new technologies
for many industries, especially if the new technologies become public
quickly
before
the product can
be sold. The most frequently cited example is pharmaceuticals. Developing
new drugs is costly in part because there are often far more failures
than successes;
in addition, the drug technology may be public for quite some time
before the drug is marketed because of the lengthy approval process
imposed
by health authorities. Thus, without patent protection, the pharmaceutical
companies
would not be able
to recover the costs of their R&D, and, as a result, many drugs
might not be developed.
How does weak international protection of IPR
hinder technological diffusion to developing countries?
Weak international
enforcement of IPRs affects technological innovation and diffusion
by changing the incentives to innovate and to imitate
in both developing
and
industrialized countries. If developing countries do not enforce
IPRs and appropriate new technology without paying for it, the industrialized
country
producers’ profits
are reduced as are their incentives to innovate. In addition, if
developing countries use the appropriated technology to export goods
that compete with the goods produced
in the industrialized country at a cheaper price, then the industrialized
country producers’ profits are further reduced. In these circumstances,
an industrialized country would engage in less R&D investment
and less innovation would occur. Thus, the pool of innovations that
could diffuse to emerging markets would be
smaller.
Countries with weak enforcement of IPRs also may suffer a
reduced flow of goods that embody technology. Innovators in industrialized
countries
may
decide not
to export those goods to them in the first place for fear of imitation.
In addition, weak enforcement of international IPR may affect decisions
about
where to locate
production facilities. There is much anecdotal evidence about firms
choosing not to locate facilities doing work on higher technology
production stages
in China and India for fear of losing the intellectual property;
these firms usually
move only their lower value-added assembly work to those countries.
Again, less innovation occurs and less technology flows to developing
countries,
making both
industrialized and developing countries worse off. In the end,
the rate of growth is reduced for all.
To illustrate how the long-term
gains from international IPR protection can outweigh the short-term
costs, consider the case of pharmaceuticals.
If the
original innovators
had not received patents, then perhaps the rapid advances in
medicine would not have occurred. Today, developing countries can
often
import medicines
and improve
living standards at greatly reduced prices without having to
pay the cost of the initial development. Eventually, as drug manufacturing
becomes standard
to produce, production stages with high value-added are moved
to
the
developing countries. In this way, these countries can benefit
not only from purchasing
higher technology at a cheaper rate in the future, but perhaps
even from producing
it. These benefits may outweigh the initial high cost of protecting
IPR.
Conclusion
Technological diffusion is an important mechanism by
which developing countries can grow faster, improve their standard
of living,
and perhaps catch up
to the income levels of more industrialized countries. The
international protection
of IPR affects the incentives to innovate and imitate and,
therefore, is an important
determinant of the rate at which new technologies flow to
developing countries. While there may be short-term benefits for
developing
countries from copying
new technologies without paying license fees, there are potential
costs from an overall slowdown of total knowledge creation.
Weighing these
costs and
benefits, then, should be a key element in deliberations
about policies for protecting
intellectual property rights.
Diego Valderrama
Economist
References
Boldrin, Michele, and David Levine. 2002. “The Case against
Intellectual Property.” American Economic Review 92 (May)
pp. 209–212.
Connolly, Michelle. 2003. “The Dual
Nature of Trade: Measuring its Impact on Imitation and Growth.” Journal
of Development Economics 72 (October) pp. 31–55.
Eaton, Jonathan,
and Samuel Kortum. 1996. “Trade in Ideas:
Patenting and Productivity in the OECD.” Journal of International
Economics 40 pp. 251–278.
Parente, Stephen L., and Edward
C. Prescott. 2002. Barriers to Riches. Cambridge, MA: MIT Press.
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