International policies toward protecting intellectual property rights (IPRs) have seen profound changes over the past two decades. Rules on how to protect patents, copyrights, trademarks, and other forms of IPRs have become a standard component of international trade agreements. Most significantly, during the Uruguay Round of multilateral trade negotiations (1986-94), members of what is today the World Trade Organization (WTO) concluded the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets out minimum standards of protection that most of the world's economies must respect. Additional international IPR rules have been created in various bilateral and regional trade agreements and in a number of intergovernmental treaties negotiated under the umbrella of the World Intellectual Property Organization.
At a general level, these policy reforms were driven by two related forces. First, the emergence of new technologies has demanded continuous adaptation of IPR instruments. Key examples of areas in which technological developments have raised new intellectual property questions include integrated circuits, computer software, and biotechnology inventions. The advent of the Internet has posed special challenges to the printing and publishing and entertainment industries, because content in digital form can be perfectly reproduced at minimal cost. Second, the Page 2 process of economic globalization has enabled intellectual property to cross international boundaries more easily. Indeed, for many rich countries, IPR-intensive goods and services constitute a rising share of the income they derive from their presence in foreign markets. It is therefore not surprising to see political economy forces at work in these countries, leading governments to raise IPR protection as a key negotiating issue in international trade agreements.
Spurred by these real-world developments, researchers have sought to understand better the economic underpinnings of different degrees and forms of IPR protection. In particular, economists have tried to assess the effects of stronger standards of protection on various measures of economic and social performance-ranging from innovation, competition, and market structure to trade, investment, and licensing decisions. Such analysis can be useful to policy-makers, both in deciding what kinds of IPR standards are in a country's best interest and in designing complementary policy reforms that help minimize the costs and maximize the benefits of new IPR regulations.
This book presents studies conducted by economic researchers at or affiliated with the World Bank. Intellectual property policies can play an important role in efforts to foster development and reduce poverty. The World Bank has had a keen interest in better understanding this role, both to inform public opinion and to equip governments in developing countries with knowledge about the implications of policy reforms. Global requirements that these countries expand and strengthen their IPR systems are both new and complex. Accordingly, relatively few policymakers in developing nations have sufficient experience and knowledge to understand the potential effects of this change. Members of the World Bank trade research team have discussed these issues extensively with authorities in a number of developing countries, encountering a range of attitudes-from outright opposition to reforming IPRs to an unthinking acceptance that doing so will encourage innovation and growth. As we will argue, the truth lies somewhere between these poles, and the effects of awarding stronger rights to protect technology will depend on the underlying circumstances in each country.
In this introductory chapter, we first set the stage by describing why and in what areas economic research can make a useful contribution to our understanding of IPR policies. In particular, we stress that many effects of stronger IPR standards are theoretically ambiguous and thus need to be subjected to empirical analysis. Second, we summarize some of the key conclusions of the studies presented in this book and assess their implications for policy. The discussion also points to areas where research does not yet provide reliable policy guidelines. Thus, we also outline priorities for future research. In the final section we offer some concluding remarks.
Before proceeding, we need to make two important caveats. First, these studies by no means constitute a comprehensive compendium on the economics of IPRs.1
There are important studies conducted by university professors and research institutes-many of which are cited in the references to this chapter-that complement the findings presented here. Second, an edited volume on such a complex topic necessarily must be limited in scope. In particular, the studies included here focus on patents, copyrights, and trademarks and ignore questions of traditional knowledge, access to genetic resources, and other topics that are increasingly relevant to policy-makers in developing countries. On the latter issues, we refer interested readers to the volume by Finger and Schuler (2003) that is published in this series.
Intellectual property law awards to inventors, artists, and institutions certain exclusive rights to produce, copy, distribute, and license goods and technologies within a country. In principle, when a country strengthens its IPR protection, it must strike a balance among several important tradeoffs. In a closed economy, IPRs provide incentives to inventors to develop new knowledge and to authors and artists to create forms of artistic expression. Thus, over time there are dynamic gains from the introduction of new products, information, and creative activities. But from the perspective of efficiency, they are only a second-best means of encouraging invention, because the market exclusivity conferred by IPRs reduces current competition and may therefore lead to a static distortion in the allocation of resources. Patents and copyrights have a limited term, which minimizes the costs of market exclusivity. The optimal length of protection becomes an empirical question, taking into account the social value of new inventions and artistic creations, preferences of consumers, and the extent to which IPRs raise prices above marginal costs.2
Additional tradeoffs come into play once one considers an open economy. How do foreign owners of intellectual property react to the possibility that their goods may or may not be copied in the domestic market? From a static perspective, it is easy to show that the effects of strengthened IPRs on the sales of a foreign firm are ambiguous.3 The assurance that copycat firms are excluded from the market enlarges the demand for the foreign IPR holder's good, suggesting a positive effect. But at the same time, the market exclusivity conferred by IPRs increases the market power of the foreigner, which may lead to curtailed sales. In short, the net effect of stronger IPRs is an empirical question.
If one considers separately the various ways in which an IPR holder can serve a foreign market-exports, foreign direct investment (FDI), licensing-a further source of ambiguity arises. The approach most commonly used by economists in analyzing why firms may prefer one mode of delivery over another is the so-called ownership-location-internalization (OLI) framework. In a nutshell, the OLI Page 4 framework suggests that firms that possess ownership advantages-for example, in the form of IPRs-would choose foreign production over export if the attributes of a particular location (for example, lower wages or proximity to international markets) favor production abroad. The choice between FDI and licensing would depend on internalization advantages-for example, the transaction costs of maintaining an arm's-length relationship with an independent foreign firm relative to the costs of establishing a wholly owned subsidiary. IPR policies can have an effect on both location advantages and internalization advantages, such that strengthened protection can lead a firm to invest in different places and switch from wholly owned production to licensing. The strongest theoretical case can probably be made for a positive link between IPRs and international licensing, because the enforceability of licensing contracts relies fundamentally on the security that these rights provide for a firm's technologies and reputation-enhancing assets. But in general, the effect of IPRs on firms' international economic transactions is an empirical question.
From a dynamic perspective, open economies face another tradeoff. A weak IPR regime might allow domestic firms to imitate foreign technologies and thereby contribute to economywide productivity and income growth. That perspective assumes, however, that firms can master all components of new technologies, including both codified knowledge and know-how, without the participation of foreign intellectual property holders. If that were not the case, stronger IPRs could be better suited to promoting technology diffusion, by enhancing access to knowledge-intensive foreign inputs and promoting formal technology transfer through joint ventures and licensing agreements. Assessing which scenario is more realistic in which industry requires careful empirical study.4
A special dimension of IPR policy that becomes relevant in open economies is the extent to which rights holders retain control over the distribution of protected goods once they have been placed on a national market for initial sale. In circumstances where such goods vary in price...