Does IP boost the European economy? EPO and EUIPO say so

Hot off the press is a joint report by the European Patent Office (EPO) and European Union Intellectual Property Office (EUIPO) entitled IPR-intensive industries and economic performance in the European Union. Now in its third edition, the findings remain consistent with earlier versions (from 2013 and 2016): according to the header on the EUIPO Observatory's website, the study "confirms the economic benefits for Europe" of trade marks, designs, patents, copyright, geographical indications (GI's) and plant variety rights. 

Reports such as these are of great value: insight into the real-world effects of IP is vital for our understanding of its doctrines and should inform their development. But this Kat has read one too many academic study casting doubt on the economic rationale of IP to devour the 158-page study without a trace of hesitation, especially where the patent-related findings are concerned since that is his main field of specialization. So let's take a closer look.

Methodology: what the authors did

The study was conducted by seven economists and an assistant, with four members of the team coming from each Institution [readers may be interested to know that both the EUIPO and the EPO employ a chief economist: for the EPO, it has been Prof. Yann Ménière since February 2016, who is the fifth holder of the post]. Put briefly, the study (i) identified European industries with the highest number of IP rights per employee; and then (ii) checked how these industries perform on a number of economic indicators, including GDP, employment, wage levels and, interestingly, development of climate change mitigation technologies.

Step (i) involved identification of 'IPR-intensive industries'. In the study, 'industries' are defined according to the NACE-index, a statistical tool which lists different types of business activity under a four-digit code. For patents, trade marks, designs and plant variety rights, the authors first traced the applicants of all successful registrations in the relevant period and determined in which industry they operate using a commercial database of European companies, ORBIS. In this way, a number of registered IP rights per NACE-code was obtained and then divided by the total number of employees in that industry at the EU level. Of the industries where IP rights are held, industries with an above-average number of registered IP rights per employee were considered IPR-intensive industries. [see page 44 et seq]

Because copyrights are not registered, the authors relied on a 2003 WIPO study for a gradual identification of copyright-intensive studies [a revised version of the study was released in 2015, which notes, at 111, that "the different industry groups and categories remain basically the same" – still, one wonders why the authors did not use the more recent version?]. GIs have special characteristics that set them apart from other IP rights, so for these rights the authors relied on data from a 2012 report by DG AGRI.

The study's data matching process is summarized in a chart on page 43

Step (ii) involved seeing how the IPR-intensive industries scored on a variety of economic indicators: employment, GDP, trade and wages [chapter 7]. Chapter 9 shows which IPR-intensive industries contribute most to climate change mitigation- and fourth industrial revolution technologies, and then examines how those industries contribute to the economic indicators above.

Results: what the authors found

The findings of the study are very optimistic and are listed in the executive summary [page 7]:

• "IPR-intensive industries generated 29.2% of all jobs in the EU during the period 2014-2016";
• "Over the same period, IPR-intensive industries generated almost 45% of total economic activity (GDP) in the EU, worth €6.6 trillion"; and
• "IPR-intensive industries pay significantly higher wages than other industries, with a wage premium of 47% over other industries". 

The EPO and EUIPO were quick to spread the news on Twitter, using the hashtag #IPvalue and tweeting a slick video that states that "Europe's innovators are prospering". And as noted above the EUIPO's Observatory takes from the study that the IP rights themselves provide "economic benefits". That's all well and good, but does the report actually support these assertions? 

The EPO is in a celebratory mood (Source: Twitter)

Observation #1: who contributes in IPR-intensive industries?

My biggest reservation about the study is that it does not actually seem to show a direct relation between the IP rights themselves and the economic variables studied, let alone a direct relation with innovation. Indeed, the report itself notes that "It is important to bear in mind that the shares in GDP and employment shown in this report do not necessarily reflect the degree to which a country's economy is innovative" and that "analysing the impact of the IPR at this more granular level in an important area for future research" [at 91]. In light of this caveat, the conclusion that "Europe's innovators are prospering" seems somewhat premature.

A problem is that the findings are reported at a general industry level, but there is no breakdown per industry of the IP landscape. Take the patent methodology as an example [pages 44-45]: IPR-intensity of an industry is determined by reference to patent holdings by individual companies, but scores on the economic variables are reported for the industry as a whole.

For instance, the report states that patent-intensive industries contribute 16,1% of total direct and indirect employment [table 21 at 71], but this is simply a calculation at the general industry level. It does not say anything about which companies within this industry contribute the jobs reported. In other words, it is possible that within these industries, the jobs come mainly from companies that hold no or relatively few IP rights.

Observation #2: aggregation conceals individual industries' contributions

A related problem is that, for the most part, the report makes findings about all identified IPR-intensive industries in the aggregate, which might suggest a stronger correlation between IPR-intensity and the economic variables than warranted. Tables 27 and 28 [pages 78-80] show per industry contributions to employment and GDP, respectively, but those tables in fact suggest the opposite as far as patents are concerned. The top employing patent-intensive industry is 'Engineering activities and related technical consultance'; the top patent-intensive contributor to GDP is 'Manufacture of motor vehicles', which is also the top net exporter [Table 24 at 76]. However, neither of those industries even features in the top 20 most patent intensive industries in table 13 on page 60.

In fact, the economic value generated by the top three patent intensive industries is disputed elsewhere. Far and away the most patent intensive industry is 'Leasing of intellectual property and similar products'. According to footnote 53, that group is "very heterogenous": it comprises IP holding entities within corporate groups, universities and patent assertion entities, among others. These are, in short, Non-Practicing Entities (NPE's) and it is well-known that their actual contribution to the economy in general and innovation in particular is widely questioned, if not always fairly.

Number two on the list is 'Manufacture of communication equipment' and number three is 'Research and experimental development on biotechnology'. According to the EPO's most recent annual report, these are indeed the technical fields where the most patent applications are filed [see here]. But those same applications are the subject of considerable controversy. The automotive industry – incidentally Europe's biggest contributor to GDP among patent-intensive industries, as we saw – feels increasingly threatened by telecoms patents and claims they threaten the viability of their business. And in the field of biotech, there is concern that the growing number of patent applications will foreclose access to next-generation gene-editing techniques such as CRISPR-Cas9.

Conclusion

Much more could be said about the report, e.g. that it would have been interesting to include the tax revenue obtained from IPR-intensive industries [Merpel notes that this could end up disappointing readers, with one IP-heavy tech giant allegedly owing as much as $14.3 billion in back taxes…]. But the most important observation should be that the report contains no evidence of a causal relation between IPR and the studied variables, even if they appear to be correlated. The question of how IP causally relates to economic growth has been studied for decades. In footnote 24, the report itself notes that there "is a rich body of economic literature dedicated to patents", making it all the more surprising that it does not engage with this literature at all.

This Kat's criticism may suggest a lack of appreciation for the hard work of the economists at the EPO and the EUIPO. Not so: as stated above, studies on the real-world effects of IP are very badly needed, and any attempt at it is welcome. But these reports form the basis for EU policy, for instance the European Commission's extremely important 2017 Communication on a balanced IP enforcement system [see footnote 2]. That means critical assessment of these findings by academics – and, ideally, the public – is very important, and it is hoped that this post may form a humble contribution to this debate.