Can Wenzhou and cigarette lighters tell us something about why there are IP rights?

IPKat recently discussed arguments made by Professor Joseph Stiglitz and his colleagues in favor of alternatives to the current patent system for incentivizing research and innovation. Kat friend Dr. Aloys Hüttermann, of Michalski, Hüttermann & Partner in Germany, has offered his views on the topic, focusing on whether an initiative taken by the cigarette lighter industry in Wenzhou might have some lessons for the issues raised.

As recently discussed on this blog, conferring IP rights is not the only way of incentivizing innovation. Baker, Jayadev and Stiglitz have suggested that innovation can also be incentivized by offering tax subsidies or by granting prizes or award. So why is it that the patent system, with its grant of an exclusive right to the patent holder for a fixed period of time, has prevailed over other alternatives for incentivizing, primarily, prizes and awards, which already in the 19th century had been proposed by German and Swiss scholars as an alternative to patents, but at best play a minor role, if at all? Again: why does the current patent prevail?

Contrary to what Baker, Jayadev and Stiglitz write (“The patent, of course, is a prize”), a patent is usually not a prize. It is rather better conceived as something like an "option", in the sense that it does not guarantee higher revenue due to the ability to charge a higher price, but only gives the patentee a chance to do so by virtue of the granted monopoly (or, as patents for some technical sectors have been somewhat deprecatorily called by Mark Lemley and Carl Shapiro, a "lottery ticket"). But even if so, why the strong preference for patent protection in the form of conveying IP protection in favour the patentee, as opposed to having society give out awards and prizes for incentivizing research? If you ask companies, it is this blogger's impression that most would choose the latter instead of being required to make often substantial expenditures to secure such an uncertain right as IP protection, in general, and patent protection, in particular.

At first glance, the answer seems easy: It costs less - or to be precise, IP rights costs society less than providing awards or prizes. The advantage of an IP system for the state, in contrast to a price or award system (with tax subsidies also being a form of a premium system ), is that, at least initially, the burden of selecting which innovation is worth a prize is shifted from the governmental institution to the applicant. Moreover, an IP recordal system need not cost any tax money (if the patent authority is self-funded). As we know since, at least since Roman times, in the words of emperor Caracalla,"No one may have money except me and I need it to give it to the soldiers", i.e., the government's resources seemingly are always needed elsewhere.

But the issue of the limitations on the allocation of public moneys addresses only one-half of the story; economists such as Michele Boldrin and David Levine are vocal in their hostility against IP rights as being superfluous subsidies that should be abandoned. In their view, competition amongst companies is fully sufficient to ensure an adequate level of investment in productive R&D, since companies will always try to distinguish themselves from their competitors in order to achieve higher prices. Stated otherwise, "copycat capitalism" is adequate to incentivize innovation.

That this approach may be misplaced as an empirical matter can be seen by the example of Wenzhou, the "dark dubious sister" of the radiant and urban dynamo, Shenzhen. As Wenzhou emerged in the 1980's to become one of the industrial centres of Deng Xiaoping's China, Friedrich Engels would surely have observed striking parallels between it and 19th century Manchester in terms of unhindered capitalism. One product where Wenzhou developed a manufacturing stronghold was in the area of cigarette lighters. such that, by 1993, there were more than 2,000 such manufacturers in the city. However, the cigarette lighter manufacturers discovered that copycat capitalism has its downsides too, and the solution that they adopted was remarkable. Prof. Andrew Mertha (of Cornell University) writes:

"At the end of 1992, the Wenzhou Lighter Industry Association (WLIA) was established. [...] WLIA began a program to protect industry from unfair competition in which each industry association member was compelled sign an affidavit to defer to association rulingswhen applying for product design rights (i.e., de facto patents). These designs are then evaluated and published in local newspapers for comment. If nobody opposes the new design within a five-day window, the “patent” is granted. As a result, there is an IPR/Patent mechanism completely within the industry association. If there is found to be cases of infringement, the association handles it" (emphasis in the original text).

When one takes into account that a cigarette lighter is a relatively simple product, in contrast to pharmaceuticals or mobile telecommunication, it is remarkable that the actors in this industry concluded that some kind of protection was deemed to be needed, but it was provided, not by the government, but rather by the industry itself. So the WLIA system is another example of a “norm-based” system, like the system of French chefs in keeping their recipes secret. The WILA system existed quite effectively for more than a decade until, in the course of the strengthening of the IP system by the Chinese government, it was abandoned.

So to summarize:

- Some kind of innovation incentives are needed, as the example of Wenzhou tells us;

- But prizes or awards have the downside of being costly, both directly and in their administrative costs.

On the basis of the foregoing, permit me put forward a new patent definition that I have suggested:

"Patents (and designs) exist because they form an indirect system of stimulating innovation, which is low in risk and costs for the government"("Mitteilungen der deutschen Patentanwälte", 2013, 181-187).

Photo on lower left by Joe Haupt (https://www.flickr.com/people/51764518@NO2) and is licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license