To what extent should less developed countries enforce Intellectual Property?
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
- 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.
- 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:
- Compatibility with free trade
- Inefficient to redistribute via different IPR.
- 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
- 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.
- Allows a one-off adoption of a set of crucial technologies.
- 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