Intellectual property rights and the upgrading of the global value chain status

• Author: Gaoju Yang,Xiao Yu,Yilu Zhang
• Published date: 01 May 2020
• Date: 01 May 2020
• DOI: http://doi.org/10.1111/1468-0106.12325

SPECIAL ISSUE ARTICLE

Intellectual property rights and the upgrading

of the global value chain status

Gaoju Yang

1

| Yilu Zhang

1

| Xiao Yu

2

1

School of Economics, Institute for Fiscal

Big-Data & Policy of Zhejiang University,

Zhejiang, China

2

School of Statistics and Mathematics,

Zheshang Research Institute of Zhejiang

Gongshang University, Hangzhou, China

Correspondence

Xiao Yu, School of Statistics and

Mathematics, Zheshang Research

Institute of Zhejiang Gongshang

University, Hangzhou, P. R. China.

Email: hzyuxiao@zjgsu.edu.cn

Abstract

The present paper explores how intellectual property

rights (IPR) protection affects an economy’s status in

global value chains (GVC) by introducing IPR protection

into the sequential production model. We find that a suit-

able IPR protection system that matches the phase of

economic and technological development a country has

reached is the key for developing countries to upgrade

their status in GVC, which are dominated by multina-

tional firms from developed countries. Empirical analysis

with multinational panel data for 55 countries from 2005

to 2015 provides evidence in support of the predictions of

this model, although the GVC-enhancing effects of IPR

protection are heterogeneous for developing and devel-

oped countries. The empirical conclusions are robust after

using the instrumental variable method and controlling

for endogeneity.

KEYWORDS

global value chain, innovation, intellectual property rights

1|INTRODUCTION

Since the 1970s, with rapid globalization and the technological revolution, international

trade has moved from interindustry and intraindustry trade to intraproduct specialization.

This paper is sponsored by Key Research Base of Philosophy and Social Sciences in Zhejiang Province(20JDZD028),

Chinese National Funding of Social Sciences (15ZDB156, 17VDL019, 19CJL050), National Nature Science Fund

(71433002, 71873120), First Class Discipline of Zhejiang - A (Zhejiang Gongshang University-Statistics), Center for

Research in Regional Economic Opening and Development (REOD20181102), Fundamental Research Funds for the

Central Universities, and funds from China Academy of West Region Development and Center for Research Regional

Coordination Development in Zhejiang University.

Received: 2 April 2020 Accepted: 9 April 2020

DOI: 10.1111/1468-0106.12325

Pac Econ Rev. 2020;25:185–204. wileyonlinelibrary.com/journal/paer © 2020 John Wiley & Sons Australia, Ltd 185

The global value chain (GVC) has created opportunities for developing countries, with

abundant and low-wage labour forces, to participate in the production chain. However,

developing countries’gains from intraproduct specialization, which is dominated by multi-

national firms (MNF) from developed countries, are relatively limited (Dedrick, Kraemer, &

Linden, 2010; Yang & Huang, 2014), because they can only engage in low-profit assembly

and processing production. Under the control ofMNF,itisalmostimpossiblefordeveloping

economies to catch up with developed countries in the global production and value chain.

Today, with intraproduct specialization occurring, competitive advantage relies more on

knowledge, technology, and innovation. According to the World Intellectual Property Report

2017, from 2000 to 2014 the value of intangible capital (mainly referring to brand, design, and

science and technology) in GVC increased by 75%, accounting for 30.4% of the total capital on

average (WIPO, 2017). In 2014, the value of intangible capital around the world was US$5.9tn.

This was almost two times the amount of the tangible capital. Developed economies with abun-

dant factor endowments are, therefore, situated high in the GVC, and it is easy to use this

advantage to compete internationally, while developing economies that relatively lack such fac-

tors remain at the low end of the GVC. Moreover, as the importance of intangible capital in the

GVC increases, the role of intellectual property rights (IPR) becomes vital, and it is an effective

strategic tool for sustaining the advantage in intangible capital.

However, the role of IPR in promoting the status of countries within the GVC has barely

been explored. The present paper builds a model by introducing IPR into the sequential produc-

tion model of Feenstra and Hanson (1995) to investigate the mechanism by which IPR affect

the status of countries in the presence of intraproduct specialization. The model is empirically

tested using 2005–2015 multinational panel data for 55 countries. The remainder of the paper is

organized as follows. Section 2 reviews the literature. Section 3 introduces the theoretical model

and the empirical analysis is presented in Section 4. Section 5 concludes.

2|LITERATURE REVIEW

Arrow (1962) regards innovation as the process of creating knowledge: if innovators cannot

obtain the total returns from their effort because of imitation, innovation will stop. Conse-

quently, it is important to guarantee that innovators have enough incentive to do more innova-

tion. This guarantee is provided by the patent system. A patent’s optimal length (or patent right

duration) and width (defined by Gilbert and Shapiro (1990) as the total profit gained by the

patent holders within the patent rights’duration) have always been core issues in studies on

patents; however, there is no agreement on these two issues. Nordhaus (1969) put forward

the idea that IPR protection, on the one hand, encourages innovation; on the other hand, the

monopolistic institutional arrangement harms the interests of the consumer. Consequently,

the optimal length of a patent should be limited, which is supported by Kamien and Schwartz (1974)

and Ordover (1991). Regarding patent width, according to Gallini (1992), a relatively wide patent

width should be imposed to prevent imitation, while Maurer and Scotchmer (2002) argue that pat-

ent holders can prevent competitors from being imitated in a variety of ways and that too wide a

patent width is not conducive to innovation in the whole society.

In the context of globalization, the North–South trade model was the first to introduce IPR

into the open economy analysis. Chin and Grossman (1988) explored IPR issues under the

North–South trade framework and found that based on their own national interests, the North

and South will have contrasting views on the issue of whether to implement better IPR

186 YANG ET AL.