Sourav Chatterjee, Jesse David, Fei Deng, Christian Dippon and Mario Lopez
Intellectual property rights (IPR) are legal entitlements granted by governments within their respective sovereignties that provide patent, trademark, and copyright owners the exclusive right to exploit their intellectual property (IP) for a certain period. The basic rationale for IPR protection is to provide an incentive for innovation by granting IP owners an opportunity to recover their costs of research and development.
While many countries have some form of IPR protection, the degree to which IPR is protected varies greatly. For economists, IPR protection represents a tradeoff between the benefits of innovation and the costs of exclusivity. Property rights encourage the development of new technologies, products, music, and other creative output. Exclusivity, however, protects IP owners from competition and, in some cases, can grant monopoly power. For this reason, IPR protection is always limited in either the length or scope of protection. After expiration, for example, the knowledge embodied by a patent enters the public domain.
The U.S. has a relatively well-defined IPR policy that is enforced and protected by its applicable laws. However, this is not the case for many of its trading partners around the world. In particular, developing countries often lack any substantial IPR protection. In a recent report, the Organization for Economic Co-operation and Development (OECD) estimated that "international trade in counterfeit and pirated goods could account for up to US$200 billion in 2005." (OECD 2007) This amount does not include any counterfeit products produced and consumed in the same country or counterfeit digital products sold over the Internet. Consequently, the U.S. and other developed countries have called on other, often less-developed, nations to adopt IPR protection or increase its current protection in order to stop counterfeiting and piracy.
Countries with weak IPR protection, however, stand to realize an immediate benefit to lower-priced products or technologies. Cheaper DVDs, access to AIDS drugs, or other types of imitation can represent increases in consumer welfare when compared to the higher prices that would prevail with stronger IPR protection. In addition to the potential benefits to consumers, existing commercial operations in developing countries may already be set up and may be significant contributors to a country's economic growth. Countries with weak IPR protection must therefore weigh these gains with the loss of international incentives to invest resources or develop products, as well as reduced innovative output within the country.
The net economic impact on less-developed nations from implementing and protecting IPR is not clear. Some have argued that increasing IPR protection will improve economic growth and welfare in less-developed nations, and others claim it will be of no help or even a detriment, thereby decreasing overall welfare.
In this paper, we review economic research investigating the impact of IPR protection on less-developed countries with regard to the primary measures of economic well-beingóeconomic growth, technological innovation, and welfareóas well as foreign direct investment and international trade. The literature reflects that under some circumstances and model assumptions IPR protection has a positive effect for some countries, while under other circumstances it has a negative effect. The lack of any uniform result may suggest that a case-by-case analysis must be performed to determine how IPR protection will affect a country's economic growth and welfare.
Review of Relevant Literature
The economic literature on the relationship between IPR protection and economic development falls into two broad strandsóone theoretical and one empirical. The theoretical literature focuses on identifying the potential avenues by which a developing country's IPR protection regime affects economic welfare. Economic welfare is typically defined as the sum of consumer and producer surplus (i.e., the combined net benefits to consumers and industry). The empirical literature attempts to quantify the effect of IPR protection on various measures of economic performance, such as gross domestic product (GDP) growth, total factor productivity (TFP), foreign direct investment (FDI), innovation, and international trade.
The theoretical literature considers the costs and benefits of introducing or increasing IPR protection. Among the potential costs of this type of policy are decreased revenues in industries that rely on imitating the products of developed nations and the associated increases in the prices of protected goods. The potential benefits include increases in FDI, foreign technology transfer, local innovation, and research and development (R&D). The fundamental questions asked in the theoretical literature are whether these costs and benefits are in fact present, and, more importantly, what the net effect of increased IPR protection is on economic growth and consumer welfare. Following are the findings of nine theoretical papers that examine these aspects of the relationship between IPR protection and economic welfare and growth in developing nations.
Some of the theoretical literature considers a stylized world with a technologically developed "North" and a less technologically developed "South." These models are based on the premise set forth in Chin and Grossman (1988) where the North innovates and the South imitates the Northern technologies. The main finding of Chin and Grossman (1988) was that a persistent tension exists between the North and the Southówhile the North innovates, the South chooses low levels of IPR protection because it benefits from the innovative output of the North. Whereas these models may capture the dichotomous incentives between the North and the South in the short run, they may ignore other dynamic incentives of the South to increase IPR protection in the long run. For instance, increasing IPR protection in the South can prompt innovation in the South, thereby increasing investment in R&D and thus possibly positively contributing to economic growth.
Studying the effects of tighter IPR protection in a less technologically developed South on welfare in both the North and the South, Diwan and Rodrik (1991) found that net-innovation-consuming countries (the South) were only motivated to safeguard IPR if the type of innovation demanded was different from the type demanded in the net-innovation-producing countries (the North). Their model, a theoretical model of trade and technology transfer, was based on the premises of Chin and Grossman (1988)óin particular, the fact that the South had strong incentives to free ride at the North's expense. Diwan and Rodrik arrived at their main conclusion by noting that demand for innovation in the South differed from that of the North. They used the example that the North might prefer to develop drugs for cancer and heart disease, while the South might prefer drugs to fight tropical diseases like malaria. The greater the difference between the type of innovation demanded by the South and that demanded by the North, the more incentive the South had to increase its IPR protection, which induced greater innovation by the North focused toward the South's needs.
Diwan and Rodrik noted two other specific conclusions related to determining the right level of IPR protection for developed and less-developed nations. The first was that if the South were given a greater weight in the welfare calculation, overall welfare could be maximized by setting greater IPR protection in the North than in the South. Diwan and Rodrik found that differential weights could be justified using the assumption that increasing welfare in less-developed countries was more important than increasing welfare in developed countries. The second was that, as the market size in the South increased, both the South and the North would choose to reduce IPR protection. This counterintuitive result comes from modeling how the North and the South set their optimal levels of IPR protection in a Nash Equilibrium.1 As the size of the market in the South increases, the scope of innovation increases beyond the optimal level, and the North will reduce its level of IPR protection. At the same time, the larger the Southern market, the greater its incentives are to free ride, all else being equal. The South will then have an incentive to reduce its IPR protection. Diwan and Rodrik differed from Chin and Grossman (1988) in that they assumed that the two regions had varying needs and tastes. This difference in assumptions challenged the result that free riding by less-developed countries increased their welfare.
Helpman (1993) evaluated the effect of tighter IPR protection in the South on welfare in the South and the North. He based his study on the premise that weak IPR laws in the South reduced innovation in the North, which in turn reduced the benefits from innovation in both regions. Helpman's study commenced with a model that had a constant (and exogenous) rate of innovation. Helpman found that two factors affect welfare. First, strengthening IPR protection in the South shifted the terms of trade in favor of developed countries, making the South worse off. Second, production resources moved from the low-wage South to the high-wage North, which made both regions worse off. In Helpman's initial model, the South was always worse off, while the effects on the North were ambiguous. The key factor in Helpman's model was the rate of imitation by the Southóthe higher the rate of imitation, the more valuable IPR protection became to the North.
Helpman then made two additions to his initial model. First, he assumed that innovation was endogenous, which simply implied that as IPR protection increased in the South, the rate of innovation...