Centrum Analiz Spoleczno-Ekonomicznych
Fundacja Naukowa

To what extent should less developed countries enforce Intellectual Property?

Gilles Saint-Paul

The case for Intellectual Property

  • Inventing a new product is costly
  • If an invention can be freely copied, competitors will use it at no cost
  • The price falls to its marginal production cost
  • The inventor will not recoup the costs of his invention
  • Too little innovation

IP as a second best policy

  • Intellectual property rewards innovators by granting them a monopoly right over their invention
  • But the price is too high, and output too low, relative to the optimum

The free lunch argument

  • Consider an economy which is -Small
    • Has no R & D sector
  • Not enforcing IP has a negligible impact on global innovation
  • But it benefits its consumers through lower prices
  • Even with an R & D sector, it can free-ride on global IP.

Global consequences

  • If many countries act that way, world market size for patented goods falls.
  • World growth and innovation smaller
  • Effect can be large: a 1 % increase in market size for pharamceuticals increases innovation by 4 %
  • Flow of new software would double if piracy in Developing Countries converged to OECD

Gainers and losers

  • Even if world growth smaller, Developing Countries may still gain because of cheaper products
  • More likely if innovators are in developed countries, then IP creates a transfer from South to North
  • Poorer consumers care less about diversity: less gain from innovation, but less losses from expensive patented goods (can consume generics)

Estimating the gains

  • Traditional estimates of TRIPS impact find South4North transfers
  • Buy they ignore gains from innovation
  • Consumers in a non innovating country gain provided
    d In p < (d In n)/((σ-1)

The role of coordination

  • Coordination of IP policy may improve welfare, as in other areas.
  • Would lead to higher IP levels than otherwise
  • Can be obtained via supranational agreements
  • Coordination =/= Harmonization

Lower IP in LDCs?

  • One may increase IP in the North and reduce them in the South with no change in global innovation
  • However, efficient for patents to expire simultaneously worldwide:
    • Arbitrage
    • Compatibility with free trade
  • Inefficient to redistribute via different IPR.

An alternative:

  • Trading reduced tariffs in the North against higher IPR in the South
  • Global price distortion unaffected
  • But price distortions now efficiency­enhancing
  • Developing countries get higher import prices and higher export prices.

Local effects of lPRs: specific needs

  • LDCs have specific needs
  • Free-riding reduces innovation in the goods they need most (ex: malaria cure)
  • Diwan-Rodrik (1991) show that if needs are specific, IPR enforcement must be high in LDCs
  • In practice, low income compensated by large number of consumers.

Local effects of free-riding: comparative advantage

  • If IP not enforced, innovators will focus of goods that developing countries have trouble producing.
  • These are the goods at which developing countries are relatively unproductive (comparative disadvantage)
  • Productivity gap will widen between North and South

IPR have direct effects on trade and FDI

  • Low IP enforcement makes foreign firms reluctant to export IP-sensitive goods
  • Low IP enforcement reduces FDI.
  • Low IP changes the composition of FDI:
    • More distribution and assembly
    • Less manufacturing and R & D
    • Less licensing

Consequences of low IP enforcement

  • Easier to copy foreign goods
  • Fewer foreign goods available for being copied
  • Technology transfer may be slowed
  • Growth may fall
  • Empirically:
    • Less enforcement4 Less growth
    • Effect stronger in more open economies
    • But IP may just proxy for rule of law.


  • Enforcement more costly, the less advanced the country: argument for lower level.
  • However, large economies of scale in transnational IP law: coordination, conflict resolution, compatibility with world trade, etc.
  • Joining a transnational system allows to upgrade to more advanced IP laws at low cost.

A moratorium?

  • Allows a one-off adoption of a set of crucial technologies.
  • However:
    • Credibility problem - Retaliation

The role of world growth

  • Faster growth makes patented goods more valuable relative to public domain goods.
  • Incentive to free ride is larger.
  • That in turn reduces world growth.

IPR as an industrial policy?

  • Government could strategically use IP to foster national industries
  • Example: OSS has been suggested as a cheap way to start a national software industry.

Is a high-tech sector desirable?

  • High-tech not a good in itself
  • Typically, one should specialize according to comparative advantage.
  • However, two arguments:
    • Dynamic learning externalities
    • Good jobs/ bad jobs

Dynamic learning externalities

  • Productivity depends on past cumulative output as industry moves down the learning curve
  • Artificially boosting the sector's output increases future productivity, buttressing comparative advantage
  • Country may grow faster if sector has greater learning potential than others

Good jobs/ bad jobs

  • Wages higher in some sectors than others
  • Private cost of labor > Social cost of labor • One may want to subsidize employment in high-wage sectors
  • Need not be the high-tech ones, but employee rents depend on capital intensity


  • Government not good at identifying sectors worth subsidizing
  • Externalities are hard to measure
  • Other countries will want to do the same
  • Terms of trade effects
  • Political influence on subsidies
  • High-tech industries may create inequality

High-tech industry may take-off in an developing country

  • Dynamic software industry in India (Poland potentially in an even better situation)
  • Low relative supply of human capital, but high in absolute terms
  • Technical catch-up easier in « light » industries
  • But industry in danger if other industries catch up: wage increases, comparative advantage logic?

Which IP regime is best?

  • OSS: firms have trouble making money
  • If there are learning externalities, rest of world benefits from our learning.
  • Consequently, relative productivity growth is lower.
  • Industry competitiveness threatened in the future

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