Economic Benefits of Intellectual Property Rights

By: Shrivatsav.n

1. Introduction
The question of how Intellectual Property Rights affect the processes of economic development and its growth is complex and based on multiple variables. In theory stronger systems for the protection of intellectual property could either enhance or limit economic growth. Nevertheless, evidence is emerging that stronger and more certain intellectual property law could well increase the economic growth and foster beneficial change, thereby improving developmental prospects, if they are structured in a manner that promotes effective and dynamic competition.

As the global protection regime strengthens due to TRIPS, numerous questions arise about the impact on prospects of economic growth. For a lot of reasons, it is not possible to confidently say that the new regime will raise economic growth and improve development process. There are two major reasons. First, many variables affect the growth in ways that can dominate the impact of TRIPS. Second, economic theory points out that intellectual property rights could have a lot of effects on growth, some positive and some negative.

With this background the paper addresses how Intellectual Property Rights may improve economic development.

2. Economic Development and Intellectual Property Rights
Economic analysis of Intellectual Property Rights is utilitarian, questioning whether the benefits of any system outweigh its costs, both in static and dynamic terms. The anticipated benefits and costs depend on characteristics of markets, products and social institutions.

2a. The Purposes and Mechanisms of Intellectual Property Rights
There are two main economic objectives of any system of intellectual property protection. The first is to promote investments in knowledge creation and business innovation by establishing exclusive rights to use and sell newly developed technologies, goods and services. Not providing such rights would lead to economically valuable information could be appropriated without compensation by competitive rivals; hence institutions and individuals would be reluctant to invest money and effort into research and commercialisation activities. The second goal is to promote widespread dissemination of new knowledge by encouraging or requiring rights holders to place their inventions and ideas on the market. Economically, it is efficient to provide wide access to new technologies and products, once they are developed, at marginal costs production. Such costs would be quite low as it might entail simply copying a blueprint or making another copy of a storage medium.

There is a fundamental tradeoff between these objectives. An overly protective system of IPRS could limit the social gains from invention by reducing incentives to disseminate its fruits. However, an excessively weak system could reduce innovation by failing to provide an adequate return on investment. Thus, a policy balance needs to be found that is appropriate to market conditions and conducive to growth.

Different forms of IPRS operate in distinct fashions and it is misleading to group them together. Therefore, it is helpful to mention briefly what the various mechanisms are. First, patents provide the right to prevent for 20 years the unauthorized making, selling, importing, or using of a product or technology that is recognized in the patent claim and that must demonstrate novelty and industrial utility. Related devices are utility models, or petty patents, which provide exclusive rights for a shorter period for incremental inventions, and industrial designs. In most countries patent applications are made public after a prescribed time period. Thus, patents establish a protected market advantage in return for revealing technical knowledge. Several aspects of patent scope affect the effective strength of protection.

Trademarks protect rights to market goods and services under identified names and symbols. Trademarks and brand names must be sufficiently unique to avoid confusing consumers, thereby playing the important role of reducing consumer search costs. These rights encourage firms to invest in name recognition and product quality. They also induce licensees to protect the value of assets by selling goods of guaranteed quality levels. If trademarks were not protected, rival firms could pass off their lower-quality goods as legitimate versions of those produced by recognized companies. This situation would diminish incentives for maintaining quality and would raise consumer search costs. Economists generally believe that the danger of market dominance through abuse of trademarks is slight in competitive economies but such marks could be accompanied by significant market power in countries with other barriers to entry.

Firms develop some technologies that might not be patentable, might not be worth the cost of applying for a patent, or might be more valuable if kept undisclosed. They prefer to keep knowledge of such processes proprietary as trade secrets, or undisclosed information. Trade secrets are protected by legal rules against learning by rivals through dishonest means. Such protection lapses if the technologies are discovered by fair means, such as independent invention or reverse engineering. Protecting trade secrets is beneficial to the extent it encourages the development and commercial use of sub-patentable inventions. Rules protecting trade secrets thus promote adaptive innovation and encourage learning through legal means.

Literary and artistic creations and computer software are protected by copyrights, which provide exclusive rights for some period to copy and sell particular expressions of ideas after they are fixed in some medium. Related IPRS include neighboring rights of performers and broadcasters, moral rights of original artists, and copyrights for derivative products. Like patents, copyrights are limited in scope for various purposes of public policy. The most significant limitation is the fair-use doctrine, under which it is lawful to make limited numbers of copies for research and educational purposes.

Several technologies do not fit comfortably into these traditional categories of protection. Because computer programs may contain elements of industrial utility in addition to their expressive elements, some countries make programs eligible for patents. The designs of integrated circuits typically are awarded exclusive rights for shorter time periods than patents, recognizing that semiconductor designs often embody elements of expression and that technology changes quickly in that industry. Electronic transmissions of internet materials, broadcasts, and databases may not be adequately protected by standard copyrights and two recent treaties reached in the World Intellectual Property Organization call for stronger protection in certain dimensions (WTO, 1998).

Particularly controversial, especially in developing nations, are patents for biotechnological inventions and plant breeders’ rights. It could be argued that patents generate strong and unwarranted protection in the biotechnology industry, because such inventions may not embody a truly inventive step. However, representatives of biotechnology firms claim that patents are required to encourage investment in these risky technologies. There are significant concerns that providing exclusive rights in seed varieties without significant limitations for farmers’ use and competitive research could raise costs in agriculture and reduce biodiversity over time.

A final element of an intellectual property system is its enforcement. Such enforcement entails two opposing tasks: punishing infringement by free riders and disciplining enterprises that try to extend their rights beyond intended levels by acting in an anti-competitive manner. These objectives require the development of extensive legal and scientific expertise.

3. Economic Benefits of Intellectual Property Rights
Consider now the opposite direction of causation. Economists recognize several channels through which IPRS could stimulate economic development and growth. These processes are interdependent and it is appropriate to adopt a comprehensive view of the incentives associated with intellectual property protection.

Intellectual property rights could play a significant role in encouraging innovation, product development, and technical change. Developing countries tend to have IPRS systems that favor information diffusion through low-cost imitation of foreign products and technologies. To become competitive, enterprises in developing countries typically must adopt new management and organizational systems and techniques for quality control, which can markedly raise productivity. Such investments are costly but tend to have high social returns because they are crucial for raising productivity toward global norms (Evenson and Westphal, 1995). They are more likely to be undertaken in an environment where risks of unfair competition and trademark infringement are small. Moreover, IPRS could help reward creativity and risk-taking among new enterprises and entrepreneurs. Countries that retain weak standards could remain dependent on dynamically inefficient firms that rely on counterfeiting and imitation.

An example of this process is that protection for utility models has been shown to improve productivity in countries with lagging technologies. In Brazil, utility models helped domestic producers gain a significant share of the farm-machinery market by encouraging adaptation of foreign technologies to local conditions (Dahab, 1986). Utility models in the Philippines encouraged successful adaptive invention of rice threshers (Mikkelsen, 1984).

Maskus and McDaniel (1999) considered how the Japanese patent system (JPS) affected postwar Japanese technical progress, as measured by increases in total factor productivity (TFP). The JPS in place over the estimation period 1960-1993 evidently was designed to encourage incremental and adaptive innovation and diffusion of technical knowledge into the economy. Mechanisms for promoting these processes included early disclosure of, and opposition proceedings to, patent applications, an extensive system of utility models, and narrow claim requirements in patent applications. The authors found that this system encouraged large numbers of utility model applications for incremental inventions, which were based in part on laid-open prior applications for invention patents. In turn, utility models had a strongly positive impact on real TFP growth over the period, while patent applications had a weaker but still positive effect. They concluded that utility models were an important source of technical change and information diffusion in Japan, while patent applications provided both a direct and an indirect stimulus to productivity. It is interesting to note that as Japan has become a global leader in technology creation, its patent system has shifted away from encouraging diffusion and more toward protecting fundamental technologies.

Recent studies suggest that innovation through product development and entry of new firms is motivated in part by trademark protection, even in poor nations. A survey of trademark use in Lebanon provided evidence on this point (Maskus, 1997). Lebanon has an extensive set of intellectual-property laws but they are weakly enforced. Firms in the apparel industry claimed to have a strong interest in designing apparel of high quality and style aimed at Middle Eastern markets. Such efforts have been frustrated by trademark infringement in Lebanon and in neighboring countries. Thus, local product development and establishment of new firms have been stifled by trademark infringement targeted largely at domestic enterprises.

Similar problems exist in China, as found in a second survey (Maskus, et al, 1998). While the information was anecdotal, it suggested that trademark infringement negatively affected innovative Chinese enterprises. Many examples were cited of difficulties facing Chinese producers of consumer goods, such as soft drinks, processed foods, and clothing. The establishment of brand recognition in China requires costly investments in marketing and distribution channels. Enterprises that achieved this status quickly found their trademarks applied to counterfeit products. Such products were of lower quality and damaged the reputation of the legitimate enterprise. Furthermore, this problem was difficult to overcome and, in some cases, forced enterprises to close down or abandon their trademarks. According to survey respondents, this situation had a deterrent effect on enterprise development and effectively prevented interregional marketing. In turn, enterprises were less able to achieve economies of scale. Chinese trademark infringement was concentrated on products with low capital requirements and high labor intensity. These are sectors in which China has strong comparative advantages. On this evidence, the authors concluded that trademark violations may be particularly damaging to enterprise development in poor nations.

Similar comments apply to copyrights. Copyright industries, such as publishing, entertainment, and software, are likely to be dominated by foreign enterprises (which can absorb temporary losses and afford the costs of deterring infringement) and pirate firms in countries with weak protection and enforcement. Thus, lower-quality copies would be widely available but the economy’s domestic cultural and technological development would be hampered. This situation was clear in the Lebanese survey. Lebanon has a small but vibrant film and television industry that could successfully export to neighboring economies if those countries engineered stronger copyright protection. In China, the domestic software industry has grown rapidly in the area of particular business applications, which did not suffer extensive unauthorized copying, but has faced obstacles in developing larger and more fundamental programs. Thus, domestic commercial interests in stronger copyrights have emerged and are now playing a role in promoting enforcement.

Intellectual property rights also could stimulate acquisition and dissemination of new information. Patent claims are published, allowing rival firms to use the information in them to develop further inventions. This learning process takes place in 10 to 12 months in the United States (Mansfield, 1985). Knowledge formation is cumulative and as new inventions build on past practices the process of technical change could accelerate (Scotchmer, 1991). Patents, trademarks, and trade secrets also afford firms greater certainty that they face limited threats of uncompensated appropriation. This certainty could induce them to trade and license their technologies and products more readily, enhancing their diffusion into the economy.

In strengthening their IPRS regimes, either unilaterally or through adherence to TRIPS, developing countries hope to attract greater inflows of technology. There are three interdependent channels through which technology is transferred across borders. These channels are international trade in goods, foreign direct investment (FDI) within multinational enterprises, and contractual licensing of technologies and trademarks to unaffiliated firms, subsidiaries, and joint ventures. Economic theory finds that technology transfers through each channel depend in part on local protection of IPRS, albeit in complex and subtle ways.
There are important practical implications of this analysis. First, countries with weak IPRS could be isolated from modern technologies and would be forced to develop technological knowledge from their own resources, a difficult and costly task. Second, those countries would obtain fewer spillover benefits and demonstration effects of new technologies in their economies. Third, technologies available to such nations would tend to be outdated. Finally, nations with weak IPRS would experience both limited incentives for domestic innovation and relatively few inward technology transfers.

Recent survey evidence from China supported these arguments (Maskus, et al, 1998). When interviewed, managers of many foreign enterprises expressed reluctance to locate R&D facilities in China, citing fear of misappropriation and patent infringement. Nearly all reported that their enterprises transferred technologies that were at least five years behind global standards, unless other means could be found to protect them, or brought in technologies that would be obsolete in a short time. Note that the importation of lagging technologies is not necessarily inappropriate for China’s cost conditions and such knowledge could help encourage follow-on innovation. However, as China moves toward best practices in technology the problem could become more restraining. Moreover, concerns about weak IPRS discouraged foreign enterprises from fully integrating their Chinese operations. Instead they tended to divide production processes among facilities in order to avoid revealing the full nature of their technologies in any one location.

Indeed, IPRS should encourage the development of interregional and international distribution and marketing networks that are critical for achieving economies of scale. Weak IPRS could limit incentives for such investments because rights owners would be unable to prevent their marketing outlets from debasing the quality of their products, nor could they readily deter counterfeiting of their trademarks. Thus, IPRS should permit effective monitoring and enforcement of activities throughout supply and distribution chains, providing both innovators and distributors an incentive to invest in marketing, service, and quality guarantees.

Quality assurance is important for safeguarding the interests of consumers. However, widespread distribution of counterfeit products can ruin reputations achieved at considerable cost, a problem that can be overcome only with additional investments. For example, in food products, beverages, cosmetics, and medicines, counterfeit products can be hazardous for consumers. Indeed, field research in China suggested that despite the benefits to poor consumers of low-cost product knockoffs, they were becoming resentful that market saturation by unauthorized goods diminished the available range of legitimate goods (Maskus, et al, 1998).

A further potential benefit of strengthened intellectual-property protection is that it could induce greater R&D aimed at meeting the particular needs of developing countries. Inventive firms in developed economies tend to orient their research programs toward products and technologies for which they expect a large global demand and that may be protected through IPRS and trade secrets. This means that a disproportionately small amount of global R&D is focused on the needs of developing economies with low incomes and weak IPRS. For example, the World Health Organization (1996) claims that of the $56 billion spent globally on medical R&D in 1994, only 0.2% was aimed at pneumonia, diarrheal maladies, and tuberculosis, which together account for 18% of global illness.

It is possible that the new patent regimes introduced by TRIPS could change this situation. The total market size for pharmaceuticals of the countries that must upgrade their patent protection over the medium term is sufficiently large that, even at current shares of drugs patented elsewhere, the rise in demand could be as much as 25% of global spending (Lanjouw, 1997). Thus, the incentives generated for R&D focused on diseases of poor countries could be significant. While this is a crude calculation, it suggests that pharmaceutical firms could anticipate higher profits in developing nations, some portion of which could be devoted to research on their endemic diseases.

Nonetheless, there is considerable uncertainty about this outcome and it is possible to doubt its practical significance. Even with stronger patents (the enforcement of which would be problematic), the ability of impoverished people to buy protected treatments would not rise much for a long period of time. In this context, a strong argument for public promotion and international procurement and distribution of new drugs may be made.

4. Conclusion
Economic theory demonstrates that IPRS could play either a positive or negative role in fostering growth and development. The limited evidence available suggests that the relationship is positive but dependent on other factors that help promote benefits from intellectual property protection. In brief, IPRS could be effective and market-based mechanisms for overcoming problems that exist in markets for information creation and dissemination. However, their existence could pose problems in terms of their potential for costs and anticompetitive abuse.

Accordingly, modern IPRS systems are not sufficient by themselves to encourage effective technology transition. Instead, they must form part of a coherent and broad set of complementary policies that maximize the potential for IPRS to raise dynamic competition. Such policies include strengthening human capital and skill acquisition, promoting flexibility in enterprise organization, ensuring a strong degree of competition on domestic markets, and developing a transparent, non-discriminatory, and effective competition regime.