Katonomics 18: more on IP and economic growth

Just like cats, countries come in two
different styles: the developed and
the developing

In this week's Katonomist column, experienced IP-flavoured economist Dr Nicola Searle continues her quest to make economics intelligible to intellectual property folk. This week she returns to last week's theme -- IP, economics and growth, and develops it:

IP and Economic Growth – La Segunda Parte

Last week, I looked at the relationship between IP and growth. A sub-theme of the post was the concept that IP might affect growth different in developing versus developed nations. What can developing nations expect from increasing the strength of their IP regime?

First, a note on the vocabulary of economics of development. Terms like North-South divide  or First and Third world have fallen out of favour due to their perceived biases. The generally preferred terms are developed and developing countries. Again, these are somewhat controversial as ‘developing’ implies inferiority, but they are widely used [as an aside, the IPKat wonders why there's no term for countries that have finished developing and are now heading back the other way; after all, there seem to quite a few of them around. Words such as 'declining' and 'disintegrating' would seem quite handy but, again, they may have problems with perceived biases]. A second note is to clarify, in response to reader comments, what I mean by “IP regime strength.” The term represents an overall measurement of IP and bundles together enforcement, the quality of institutions, and the legal structure of IP policy. The use of this measurement allows for policy analysis of IP but potentially conflates issues.

History offers insight into the relationship between IP and development. As countries develop, their interest in IP increases. For example, the US was slow to recognise foreign-owned copyrights. The American film industry relocated to Hollywood to escape patent enforcement actions. The “father of the American Industrial Revolution,” Samuel Slater, started his career by memorising (export was banned) British machinery designs. Now considered developed, the U.S. is in the position of owning a lot of economically relevant IP and is a proponent of stronger IP regimes.

The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is a defining moment in the relationship between IP and economic development. It sets an international standard for IP regimes and is compulsory for members of the World Trade Organization (WTO). Membership is desirable as it stimulates economic growth and promotes free trade. Despite criticisms that the WTO favours developed countries, the perceived benefits of membership to developing countries outweigh the perceived costs. Are strengthened IP regimes a cost or a benefit?

The benefits of stronger, standardised IP regimes internationally are relatively straightforward for developed countries. As the owners of economically relevant IP, an increase in the international strength of IP could mean increased profits. For example, over 70% of the world music market is owned by UK and US based companies. The top 15 pharmaceutical companies (http://en.wikipedia.org/wiki/Pharmaceutical_industry#Industry_revenues) are also based in developed countries. New markets in developing countries with sufficiently strong IP protection are an attractive proposition. For the developing country, strengthened IP regimes should attract foreign investment, increase the diffusion of knowledge (known as technology transfer) and encourage innovation. However, the relationship is not straightforward. Most economic research finds that stronger IP regimes do attract foreign investment.

For example, Oxford economist Javorcik finds that foreign investors in technology intensive sectors are sensitive to IP regime strength. If the regime is weak, investment in all sectors favours distribution projects over production. American-based Maskus has an accessible summary of economic papers on this topic.

However, as Makus argues, investment eventually gives way to licensing as IP regimes strengthen. American economist McCalman notes that foreign revenues outweigh domestic revenues for Hollywood films. He finds that moderate IP regimes are associated with higher licensing but that the picture is less clear with stronger or weaker IP regimes. Overall, it appears that stronger IP regimes do increase activity by foreign firms in markets.

The same is true for technology transfer and the spread of innovation. Maksus’s summary catalogues research which supports a positive relationship between IP regime strength and technology transfer. National Bureau for Economic Research (NBER) economists Branstetter, Fisman and Foley find that American companies increase technology transfer when IP regimes strengthen. The promise of TRIPS to bring in new investment and technology from developed countries to developing countries appears to be holding up. However, that relationship still implies dependency. Countries are also interested in creating their own innovation. Some authors argue that innovation in developing countries is largely imitative – meaning that it imitates IP owned elsewhere. When IP regimes increase, this innovation is shut down as it infringes on the IPR of others. Would Hollywood be as successful if it had respected patents from the start?

Another issue to consider is global pricing. This international report argues that a factor exacerbating piracy is that copyrighted material is priced internationally. When you adjust for income, the price of legitimate copies in developed countries matches that of pirated copies in developing countries. For example, the U.S. price of $24 for a DVD of The Dark Knight, is equivalent to the $25 price of the pirated copy in Russia (this comparison uses the technique of purchasing power parity which adjusts prices to match purchasing power based on incomes. The Economist has a fun example of this called The Big Mac Index.) Similar arguments can be made in the pricing of pharmaceuticals.

Finally, there are considerations about access to medicines, traditional knowledge and bio-piracy that may not be captured by looking at economic development as a whole.

So, we do not have a clear picture on how IP affects development. A colleague recently reminded me of a Winston Churchill joke about how economists never agree: “If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.” IPKat readers will have their own opinions -- are stronger IP regimes good for development?