Each year, 26 April, the World Intellectual Property Organization (WIPO) marks World IP Day. The day helps showcase how intellectual property inspires innovation and creativity — yet recent research gives another perspective. For example, how TRIPs type agreements may be stifling ‘development by imitation’ and thus holding back the Global South. Dr. Neil Foster-McGregor shares his thoughts ahead of World IP day.
Intellectual Property Rights (IPRs) are supposed to encourage innovation by granting successful innovators a temporary monopoly over their innovations, with the resulting monopoly profits providing the returns to successful innovation. Yet evidence on the importance of IPRs for innovation do not provide unqualified support for this hypothesised relationship, with a body of evidence suggesting that IPRs are not a particularly important factor in procuring the profits from innovation in most industries.
In addition to their perceived role in encouraging innovation, IPRs are expected to facilitate the diffusion of technology, in particular the diffusion of technology from the advanced ‘North’ to the emerging ‘South’. Given that innovative activities are heavily concentrated in a small number of countries, the diffusion of knowledge and technology is likely to be of greater concern for most countries, with the WTO’s TRIPs agreement highlighting the role of IPRs in facilitating technology diffusion.
Article 7 of the TRIPs agreement states for example that “The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.”
Choosing channels, merging markets
Given difficulties in measuring cross-border technology diffusion it is common to consider the impact of IPRs on the channels through which diffusion is expected to occur. Such channels are numerous and include international patenting, trade in goods, Foreign Direct Investment (FDI), technology licensing, migration of skilled workers, and product imitation. Yet the impact of IPRs on each of these diffusion channels is generally ambiguous and likely to depend upon third factors.
Moreover, the strength of IPRs also potentially impacts on the chosen mode of diffusion. In the case of international trade for example, there are two offsetting effects. On the one hand, there is a market size effect, with firms being more willing to export their goods to countries with stronger IPRs, since the risk of imitation of their technology is diminished. On the other hand, the market power that is generated in a market through IPRs may encourage monopoly power and lead to diminished supply. Ultimately, the question of whether IPRs impact upon trade flows is an empirical issue, with an existing body of research addressing this question. Such studies generally relate the exports of a set of developed countries to a set of developing countries.
Existing studies find evidence of both market power and market size effects, depending upon the sector, the development level of the importing country, and the threat of imitation in the importing country. Results can be summarised as follows: (i) IPRs do matter for some trade flows in manufactured goods; (ii) there is evidence of market power effects of IPRs for some trade flows, especially in importing markets where the threat of imitation is small (due to a small market, limited capacity for imitation or an existing high level of IPRs); and (iii) IPRs can lead to market expansion effects, especially in importing markets with a significant threat of imitation.
Products & prices, variety & volume
Digging deeper, Ivus (2011) and Foster (2014) examine how IPRs impact upon trade flows, and in particular whether they work by affecting the variety of products exported or the volume of existing varieties, i.e. the so-called extensive and intensive margins of trade respectively. Ivus (2011) and Foster (2014) examine this issue, for US exports in the former case and for exports from a broader set of 21 OECD countries in the latter, and find that stronger IPRs in an importing developing country encourage a wider variety of exports from developed countries, but reduce the volume of products that were already exported. In the case of Ivus (2011) the results further suggest that strengthening IPRs lowers the quantity of products traded along the intensive margin, but increases the prices of those goods.
Such results are interesting and suggest that market expansion and market power effects can both be present within a sector, but that they work on different aspects of trade. The market expansion effect of stronger IPRs impacts upon the variety of products traded, while the market power effect of IPRs impacts upon the volume of products traded, with the quantity of products traded falling and the prices of products rising along the intensive margin. The overall impact of IPRs on trade flows from the ‘North’ to the ‘South’ then depends upon the relative impact of IPRs on the extensive and intensive margins, with the extensive margin tending to dominate in these existing studies.
With ongoing debate on the benefits and future of TRIPs type agreements, this type of research continues to be relevant for a number of reasons. In particular, it helps identify the channels through which countries can access technology from the frontier and ultimately catch-up; it sheds light on the mechanisms by which diffusion occurs through the different channels; and ultimately it can help provide information on whether the stronger levels of IPRs demanded by TRIPs allows for countries away from the frontier to access advanced technology. With development by imitation – a path followed by many currently rich, innovating countries – ruled out by TRIPs, this latter issue has major implications for emerging economies.
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