IPRs, Technological Development, And Economic Development

8/2/2019 IPRs, Technological Development, And Economic Development

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IPRs, Technological Development, and Economic DevelopmentAuthor(s): Wilfred DolfsmaReviewed work(s):Source: Journal of Economic Issues, Vol. 40, No. 2 (Jun., 2006), pp. 333-342Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4228255 .

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J JOURNAL OF ECONOMIC ISSUESVol. XL No. 2 June 2006

IPRs,TechnologicalDevelopment,and EconomicDevelopment

Wilfred Dolfsma

Since t is rootedn a contradiction,here anbe no such hing s an ideally eneficialpatent ystem,ndit is boundoproduce egativeesultsnparticularnstances.-Joan Robinson

[O]wnership.. givesheowner otonly heright fuseover hecommunity'smmaterialequipment,utalsotheright fabuse ndof neglectnd inhibition.-Thorstein Veblen

In 2000 some $142 billion in royaltieswerepaid internationally y users of a specificpieceof knowledge hatwasprotectedunder intellectualproperty ight(IPR) aw to par-ties that ownedthese rights.!Undercurrent ircumstances hereknowledgeand innova-tion playan increasingly ignificantrole in the economy (Forayand Lundvall1996;Cowan,David,andForay2000;Cooke2002;Dolfsmaand Soete2006;Dolfsma2005),IPRs have become increasinglyprominent in debates and are almost unanimouslydeemedto favoreconomicdevelopmentby policymakersandcertainly y policymakersin developedcountries.While it has been acknowledgedhat some partiesmaybenefitmorefrom a systemof IPRsthanothers,in relative erms a Pareto mprovements theexpectedoutcome(Langford 997).This hasbeen the motivation o includeIPRs n theWTO negotiations.The TRIPSagreement Trade-Related spectsof IntellectualProp-ertyRights)resulted n 1994 fromthese negotiations.Especiallyduring the 1990s thenumberof patentsgrantedhas grown remendously espitethe factthat manya scholarTheauthors atETasmusniversityotterdamnda 2005/6 NIASFellow. hispaperwaspresentedt theWorld um-mitontheInformationociety, unis,November3-19, 2005, as wellas at theannualAssociationorEvolutionaryco-nomicsmeetingsnBostonanuary -8, 2006. Theauthorwouldike othank articipantsf these essionsndespeciallyRobert oube.

333


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still supportsFritzMachlup's 1958, 28) conclusionthat "itwouldbe irresponsible, nthe basis of ourpresentknowledgeof its consequences, o recommend nstitutingone.Butsince we have hada patentsystem or a longtime, itwouldbe irresponsible, n thebasisof ourpresentknowledge, o recommendabolishing t."The academic economic)community s almost unanimousabout the systemof IPRovershootingtsgoals.2Fromothercorners,wherespecificeffects of IPRs areconsidered,a differentandlesscircumspect ound maybe heard.Examplesof this areattempts o make availableHIV/AIDSdrugsat a reducedpricecomparedwithwhat thepharmaceuticalompaniesthat have the patents on these drugs demand.3 I will focus on patents.Empiricaland theoretical indingsbearingon the questionof IPRs'effect on tech-nologicaldevelopment,and thus prospectfor economic development,are reviewed.Staticanddynamiceffectsaredistinguished.Areaswhere staticeffectsmaybe expectedincludetransfer f knowledge,balanceof paymenteffects,effects orlargeasopposed tosmallfirms,andeffecton the "extentof the market."Areasfordynamiceffects ncludetechnologicaldevelopmentandtechnologicalpreemption.4The listmaynot be exhaus-tive, andeffectsareinterlocking:heymaybe mutually einforcingortheymayconflict.I will mostlyfocus on "dynamic"ffects.

Intellectual Property RightsIntellectualobjectsarenonexclusive: onsumptionor use bynonpayerscannotbeexcluded. In addition,intellectualobjectsarepartlynonrivalrousas well:theyarenotconsumedby their use.This makes ntellectualobjects(quasi-)publicoods,givinggov-ernmentsa reasonto influence relevantprocesses n society.As costs of imitating orcommunicatingntellectualobjects endto be low,theremaybe a tendency orthese tobe underproducedNelson 1959; Romer2002). IPRswouldprovidea wayto compen-satecreative ndividuals hat is savingon transactions osts bystipulating hat the com-mercial use of knowledgeis exclusiveto the right-holder.Discussion of the need forsocietyof IPRshas waxedand waned(Towseand Holzhauer2002). Notwithstandingsuch discussions, he scope and durationof IPRshas increased teadilyovertime.Rationalesfor IPRs fall into four partlyrelatedcategories Hettinger1989). Theextentto whichrationalesarestressed n lawdiffersbetweencountries,reflected n the

authority hat administers hem. In the United Kingdomand the United States,theincentiveforcreative ndividualsor organizationshatIPRsoffer is emphasized:devel-opment anddiffusionof newknowledge spromotedbytheprospectof aperiodof timein whichone is able to commerciallyxploitthe innovation.5Similarly, PRsaresaid tobe necessary or firmsto enticethem to investin facilities or the productionof goodsbasedon the intellectualobjectprotectedunder IPR.Without it, firmswouldfacemorethan the usualbusinessrisk and refrainfrom the productionof such goods. In theUnited Kingdomand the United States, hesearethe rationales mphasized, ndthis isreflected n the factthat the CommerceDepartmentadministers uchrights.The two


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other rationalesare not relatedto such utilitarianconsiderationsand arespecificallyemphasized n the legal systemsof continentalEurope (and those based on or influ-enced by them). The first is one of dessert. If someone has prioduced n intellectualobject,she deserves omekind and measureof reward.Thefinalrationale s apersonal/moral one. In creatingan intellectualobject,someoneexpressesone's personality.6Overtime, the firstand second rationaleshave become increasinglydominant inthe discussions.Philosopher ohnLocke'sargumentn his Second reatisefCivilGovern-ment(1690) for a "natural" ropertyright in what one makes has a strong intuitiveappeal.In reality,however, t is a government hat createsand polices IPRs; heyareasociallycreatedprivilege. ntellectualobjectsdifferfromphysicalones. Intheircreation,for instance, one drawson work done (by others)in the past;creationis often not denovo. When use of existingwork is restricted,society may be hurt. As intellectualobjectsarepublic goods, grantinga (temporary)monopolyon their commercial xploi-tation may not leave"enoughand as good."7Independentinventors are hurt as theymay be prohibitedfromusing something theyhavedevelopedthemselvesbut anotherpartywasgranteda patentfor earlier.It is furtherarguedthat intellectualobjectsaremore often than physicalones the resultof cooperation-a cooperation hatmayormaynot be promotedby IPRs(Dolfsma 2007).Thispaperdoesnot call intoquestionthe needforasystemof IPRper se, yetit doeselaborateon criticismsof it for possible hamperingof future economic developmentevenfor developedeconomies (Dolfsma2005).The IPRsystemalsopresents mmanentproblems, especially for developing countries.The immanent problems referredtorelate o the consequencesof thesystemof IPRs or the distributionof national ncomeswithin and amongcountries.In orderto reapthe benefits believed to result fromjoin-ing consecutive rounds of negotiations to liberalize nternational trade, developingcountrieshave had to acceptWTO standards or IPRs.

The Patent PracticeWhile one may quarrelabout the theorythatsupportsa systemof IPRs n generaland patentsin particular,here is also the practiceof filing, evaluating,and granting.This practice differs between countries,with effects for the firms involved (OECD

1997). While most countries maintain a "firstto-file"policy, the USA maintainsa"first-to-invent"olicy.Thisdifferencehas majorconsequences or strategicbehavioroffirmsseeking patentsunder the differentregimes.Another difference s between thescopeof the claimstaked in a patent.In Japan,for instance, the claim must be muchmorenarrowly efinedthan in the USA.A broadclaimin apatent is a stronger laim na pre-emptive ctionthana narrowclaim is. There are also featuresabout patent systemin generalthat havebeen lamented. Some point to the grantingof patents that obvi-ouslydo not meet the criteria or patents:patentshave been givenfor technology hathadalreadybeen developed,for technology hat had no industrialapplicationor physi-


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cal component,and so on. Others,in contrast,point to the losses in terms of forgonelicense paymentsdue to poor IPR lawand/or poor protection.The expansion n both scopeandlengthhasbeen criticizedorrepresenting"anewstage in commodification," "corrupting society," and "destructing productivity"(Perelman2003). In recentyearsplant varietyrightshavebeen strengthened;businessmodels andsoftwarehavecome tobe protectedunderpatent aw.The numberof patentapplicationshave risen by an annual 6 percentsince 1990 to total 350,000 a year;190,000 are awarded,half of which to non-USAfirms.8 n 2003, abacklogof halfa mil-lion applicationswasreported.The U.S. PatentOffice is nowreceiving ts incomefromparties hat havebeen awardedpatents-no incentiveto diligently earch or "priorart"and determinewhetheran applicationmeets the criteria.The burden of proofseemstobe on the side of the USPTO to provethat a patent application s not to be granted.Indeed,half of all patentsthat wereapparently mportantenoughto be litigatedwerefound to be invalid.Only23 percentof newdrugsdevelopedprovide herapeuticbene-fit over existing drugs(Hubbardand Love 2004)-a notable figurefor an industry hatreliesheavilyon patents Levinet al. 1987;Arundel 2001). Despitethesupposed ncen-tivepatentsoffer,a mere 1 percentof R&D is spenton "neglecteddiseases."William Baumol(2002) has estimated that 20 percentof the benefits associatedwith an invention areappropriated y the partiesdirectlyor indirectly nvolvedwith theinvention. Only partlywill the appropriation f benefitsbe due to IPRs.Patentsoffernocertaintyof appropriatingmarketrents.Manywillnot haveeconomic value; ncreasingnumbershave very little technicalvalue. Of all U.S. patentsgranted,55 percent to 75percent apsefor failure o paymaintenance ees; f litigationagainsta patent'svalidity sa signof commercial alueof that patent,the factthat only 1.5 percentof patentsare iti-gated and only 0.1 percent litigatedto.trialdoes not bode well (Lemleyand Shapiro2005)."Even"mainstream conomic literaturehasarguedatlength andin greatdetail thedrawbacksnd pitfallsof currentIPR aw and developments herein. Let me discuss hemost important indings.

StaticEffectsof IPRsIt is becoming ncreasingly ifficult or developingcountries o ignoreIPRpolicies.Only when a countryhas a sufficientlyattractive nternal market and/or has a suffi-ciently strong research radition itself will it be able to negotiate on an equal footing.China, India,and Brazilareexamplesof countries hat are ableto crediblyuse the threatof drawingon the compulsory icense clause in TRIPSto make right holders lower thepriceof the products hey offer. Particularlyf the productand its uses can drawa lot ofattention in the media-such as in case of HIV/AIDS medication-such an approachmaybe successful.


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Ifa countryoffersprotectionof IPRs hat isperceivedas tooweak,FDImightsufferandexportsof products hatembodynewtechnologymightbe lowertoo for fearof suchproductsbeingre-imported.Althoughnot in the spiritof the WTO, parallel mportsofIPR or productsembodyingprotectedrightsareforbidden,thussettingboundaries othe "extentof the market." n legal terms,IPRsexhaustnationally,not internationally.This has the effectof drivingup marketprices,obviously,asmarket tructureandcom-petitive relationsare affected(Klaes 1997).Alternatives o any product mayexist thatdrawon technology hat is not patentedor thatasecondfirmowns thepatentfor,affect-ing prices. Demand elasticityand pricing regulationsare other elements that mightaffectprices.Administrativeprice ceilings-allowedunder TRIPS-are a commonstrat-egyof developingcountries.Thesemaynot promptforeignpatent-owningirmsto sup-ply countries hathavesuchmeasuresn the firstplace.As ceilingstendto be basedon acost-plus ormula,thereis an incentivefor supplying irms to inflate transferprices.Aceiling in any particular developed)country mightalsobe indexed to pricesin other(developing)markets.There is thus an incentive to negotiate high prices in indexcountriessuch as India.

Dynamic Effects of IPRsPatentsmayraise incentivesfor R&D in neglectedareasof technology.Yet it maynot lead to such investmentsand mightthusbe said to haveperverse ffects.This sec-tion looksat suchperverse ffectson technologicaldevelopmentand futurepossibilitiesfor economicgrowth(Dolfsma 2005).Overly tringentprotectionmightlead to more resourcesbeingdevotedto IP man-agement(Langford1997): technology ransfercost maywell increase.Overlystringentprotectionofferedby patents andotherIPRs)mayalso lead to wastefulresearch pend-ing suchaspatentracesand the constructionof patentportfolios. RichardLevinet al.(1987) andAnthonyArundel(2001) havefound thatpatentsarenot seen by firmsas themost importantwayto appropriate he benefits of their innovativeefforts: ecrecy, eadtime, and complementary apabilitiesare.Certainly his holds for smallerfirms. In aclassicalstudy,EdwinMansfield(1986) suggestedthat in most industriesfirms seekpatents mostlyforstrategic easons.Havingapatentcan lead a firmto delayofferingproductsbasedon it, as competingfirmsmaynot be able to offer alternatives TakaloandKanniainen2000). Although themonopoly awardedbya patentor any kindof IPR is neverperfect, t maywell induce afirmto consciously orgothe developmentof a new technologythat would be sociallymoredesirable-itmay,for instance,develop a technologically nferior echnology hatyieldsit higherprofits AdamsandEncaoua1994).Anotherdynamiceffect maybe thatresearcheffort mayshift from areaswhere IPRsare less extensive and not as strictlyenforced to areaswherethey are (Langford1997). Firmsare deterredfrom trying toinvent "inthe neighborhood"of patentsgrantedpreviously, ncluding from undertak-


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ing follow-upinventivework (Mazzoleniand Nelson 1998; Scotchmerand Green1990).This holdsparticularly here the technology nvolved s "complex"nd itsdevel-opment cumulative:much research as well as developmentis highly cumulativeinnature.9 n apatentrace an incumbentmightwantto maintain tsposition bypreempt-ing entryrather handeveloping echnology Harrisand Vickers1985).Ifanincumbentdoes obtaina patentit maynot be a valuableone in an economic or a technicalsense(GilbertandNewbery1982).Forcomplextechnologieswhose development s highlycumulative,where econo-mies of scale aresubstantial,andgivenadditionalmeans to appropriatehe benefits ofinnovation, the extent to which agentsin developingcountries can imitate is limited,whethertheywouldlike to imitateor not. Insuchcases,atighteningof IPRwillactuallyhurt the developedcountriesasproduct ineswill shift to or remain in these countries(Helpman 1993). Cost advantagesof production in developingcountries,assumingsuch advantageswould benefit consumers,would favor the developedcountries.AtighterIPRregime n case of a slow imitationpacehurtsdevelopedcountries n general,eventhoughit maybenefitproducersof the goods involved.When imitationratesarehigh,a tighterIPRregimewillbenefitdevelopedcountriesbutcertainlynot developingcountries-it is underthese circumstances hat the general nterestof the twogroupsofcountriesconflict.10Poolingof patentsmaybe efficient,but it certainlyalsoconstitutesanentrybarrierand is disadvantageousor smaller irms(Lanjouwand Schankermann 004).11 Litiga-tion costs can be so inhibitive hatindividualand smallfirmpatentholdersstrikeadealwith a largefirmthat filed a suit evenwhen on legalgroundstheywould have a strongcase; isted firmshavelower filing rates(ibid.).Smallfirmshave been found not to pur-

sue innovativepathswhere the threatof a law suit by alarger irm ishigh (Lerner1995).Rentseekingmaythus have an effect not juston the applicationof newtechnologybutalso on the kind of new technology hat firms seek to develop.Certainly, hen, thereis a tension, in general,betweenanti-trust aw and IPlaw.Surely, oo, thereis a possibletension between IPRanddevelopment,especially nthe earlyphasesof economicdevelopment.ConcludingRemarks

Developedcountries stand to gain most from liberalizing he trade in IPRswithprotection levels and scopes determinedas they are in these countries,specifically nindustrieswhereimitation can be rapid and thus the benefits of diffusion aresubstan-tial. RobertoMazzoleniand RichardNelson (1998) arguedthat the USA has pushedTRIPSmost adamantly,attributingts zeal to self-interest swell as an "honestbelief."That zealhas not alwaysbeen there. The USA and othercountriesthatnow havedevelopedeconomies havebeen haphazardn implementingandenforcingIPRswhentheywerenot yetso relativelydevelopedthemselves.Had Japandone so with regard o


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patents, it might not have had its strong electronics industry(Mazzoleniand Nelson1998). Had the USA done so with regard to copyrights, t might not have had itsstrength n the entertainment ndustry hat it now has.12So, what should be done to preventthe systemof IPRs from being hijackedbylarger irms,particularlyor strategicpurposes?Raising tandardsor obtainingpatents,aligning ncentivesof patentofficerswith that of the general nterest,and makingsurethat incentivesto initial inventorsare moreclearlyand evenlyweighed "againstncen-tives for follow-on nnovators" Barton2000) arenot enough.Narrowing he scopeofpatents s one option;shortening he durationof (some)patents s another.Differentiat-ing between patents coveringdifferentareashas been suggestedbyBill Gates.In addi-tion, anti-trust olicyshouldbe aszealouslypursuedat theglobal evelas IPRsareat themoment by such organizations s WIPO and WTO. Such an organization ould focusin particular n the effects for technologicaldevelopment n or technology ransfer odevelopingcountries.Thereareothersuggestions.Firstwould beto phase n asystemwhere nnovation sstimulatedby (optionally) ewarding nnovators.This system s superior o the IPRsys-tem under a rangeof circumstances Shavelland van Ypersele2001; Wright 1983).ThorsteinVeblen'sspiritof workmanship an be trusted o someextent to producenewanduseful technologyeven without directmonetary eward-theapplicationof the ideaof open sourcedevelopmentproves hiscase.Directmonetary eward an decreasepeo-ple's efforts o reacha specificgoalas much as it can stimulate hem(LeGrand2003).13

Notes1. Intellectualproperty ights nclude patents utility,design,andplant),copyrights, nd trade-marks.A common definitionof intellectualpropertyightss the rightsgivento personsoverthecreationsof theirminds.2. Legal cholarsare clearon this as well. A. SamuelOddi (1987) offeredanearlydiscussiononthe effectsof IPRson the prospects ordevelopmentof ThirdWorld countries.3. Some firms, ncludingMerck& Co, Bristol-Myersquibb Co, GlaxoSmithKlinePLC,andAbbottLaboratories, ave reducedprices n Africaand Brazil or medicationagainstHIV/AIDS. These firmsmaybe genuinelyconcernedbythe toll of this disease orthese countries.They mayalso be concernedabout theirreputation,as well as by threats o producegenericvariants f the drugsafter nvokinga compulsoryicenseclause.It is likely hatthese firmsareequallykeen to preventparallel mport, nbreachof stipulations boutnationalexhaustionnIP aw.The 'WTO-TRIPSgreementplaces ignificant estrictions n theabilityof developingcountries o imposecompulsoryicenses Oddi 1987); he bilateral greementshat the USAhas madewithseveralcountries s evenmore restrictiveHubbardand Love2004). Contrastthe discussionaboutHIV/AIDS drugswith the much moremooted discussionaboutpatentson drugs hatpreventor cure anthraxor avian nfluenza. n the formercase the USA threat-ened to invoke the compulsoryicense clauseagainst he GermanmanufacturerBayerwhohad the patenton the drugto cure anthrax. n the lattercase,a largernumberof predomi-nantly developedcountriesare worriedabout their populationsbeing affected.The SwisspharmaceuticalompanyRoche owns the patentfor and producesTamiflu.4. Includingestablishment f "priorart,"andbio-prospecting.


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5. This rationale s founded nJohnLocke'sargumentorproperty ights ngeneral. n hisview,a personestablishes rightof propertyn thatwithwhich she"mixesherlabor,"providedhat"enoughand as good [is] left in common for others."The laterproviso has, as might beexpected,provokeddiscussion.6. The productof the mind is partof the self,so to speak.A resultof this is thatcopyrightsn aEuropeancontext includeso-called"moral" ights.These are inalienable,nontransferable.Evenwhen apiece protectedundercopyrightaw issold,thenew ownermaynot alter twith.out consentof the author.7. This would hold particularlyn the case of patentsasthey protectthe idea itself and not theparticular ay nwhichan idea sexpressed, sisthe case orcopyrights,rombeingusedwith-out the permissionof andpossiblepayment o the rightsholder.Copyrightprotectiondoestend to lastlonger (life of the authorplus seventyyears) han the protection patentsoffer:twentyyears n mostcases.8. The numberof patentsgranted o developing ountries, speciallyo countries n Asiasuch asIndiaandChina,increases apidly,albeitfrom a smallbase(UNCTAD 2005).9. From he perspective f a legalscholar,A. SamuelOddi (1987, 839) hascrucially rgued hat"[platent tatutes do not distinguish,and appear o be incapableof distinguishing, hoseinventions hatarepatent nducedfromthosethat arenonpatent nduced."He has held thatfar less inventions n developingcountriesarepatentinduced.10. Some of thatimitationwill result n the creationof new processesand new products, ven ifonly incrementalmprovements.t is shown that when the supplyof newinnovations s elas-tic,thebestway o induce innovation s throughcontracts nd not throughpatents.AsBrianWright(1983, 702) argued,"contracts re best when the researchprocess s most like activi-tiesroutinelyundertaken."11. In one of the few studies that can shed some empirical light on this issue, GeorgeBittlingmayer1988) claimed hat the settingup of apatentpool for the aircraftndustry,atthe behest of theU.S. government s it wasdrawn ntoWWI, certainly nded aparalyzing at-ent dispute.Bittlingmayer248) foundno evidence hat thispatent pool suppressednnova-tion andprovidedconsumerswith an inferiorproduct. What s significants that the boardoverseeinghepatentpool justwould not allowanypatentgrantedbythe USPTO to enter he

pool. Given thatpatent stackings anoften-used trategy, pening upthe possibilityof creat-ing a patentpool does decrease he possibilityof negotiationsbreakingdown (Levin et al.1987).12. The UnitedStatesdid not allow foreigners o obtaincopyrights or a long time (Henn 1954).The firstU.S. CopyrightAct expressly tatedthatnothing in the act should be readto "pro-hibitimportationorvending,reprinting, r publishingwithin the United Statesof anymap,chart,book,orbooks, written,printedor publishedbyanypersonnot a citizenof the UnitedStates, n foreignparts" Post 1998).A similar ituationheld for patent aw (Oddi 1987).13. Wright 1983,704) hasshown thatcontracts, ather han patents,workbest to induce nnova-tion when researchers rehighlyresponsiveo incentives!

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nomics31, no. 1 (1988): 227-248.


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Cooke, Philip. Knowledgeconomies. ondon:Routledge,2002.Cowan, Robin,PaulDavid,andDominique Foray."TheExplicitEconomicsof KnowledgeCodificationandTacitness." ndustrial hange nd Corporate hange , no. 2 (2000):211-53.Dolfsma, Wilfred. "Towards Dynamic(Schumpeterian)WelfareTheory."Researcholicy 4, no. 1 (2005):69-82.-. Knowledgeconomies-Innovation,rganization,nd Location. ondon:Routledge,2007.Dolfsma,Wilfred,and LucSoete, eds. UnderstandingheDynamics ftheKnowledgeconomy.heltenham:Ed-wardElgar,2006.Foray,Dominique,andBengt-AkeLundvall."TheKnowledge-Based conomy:From he Economicsof Knowl-edgeto theLearningEconomy."n OECDDocuments:mploymentndGrowthn theKnowledge-Basedcon-omy,11-32. Paris:OECD, 1996.Gilbert,Richard .,and DavidM.G.Newbery."Preemptive atenting ndthe Persistence f Monopoly."Amer-icanEconomic eview 2, no. 3 (1982): 514-526.Harris,ChistopherJ.,andJohnS.Vickers."PatentRacesand the Persistence f Monopoly." ournal fIndustrialEconomics3, no. 4 (1985): 461-481.Helpman,Elhanan."Innovation, mitation,and IntellectualPropertyRights."Econometrica1, no. 6 (1993):1247- 1280.Henn, H. G. "TheQuestfor InternationalCopyrightProtection."Cornell awQuarterly3 (1954).Hettinger,EdwinC. "JustifyingntellectualProperty." hilosophynd PublicAffairs18, no. 1 (1989):31-52.

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IPRs, Technological Development, And Economic Development

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