The Economic Case for Strong Protection for Intellectual Property

While there is strong evidence that robust intellectual property rights protection fosters economic growth and development, suspicion of stronger intellectual property rights remains front-and-center in the public debate.   This is particularly true in the context of developing countries where some claim that strong IP rights are an obstacle to economic development.  Notably, Brazil and Argentina have led a group of developing countries to propose that “ there should be a presumption against increased international protection of IP rights, allowing ‘higher standards of protection . . . only when it is clearly necessary . . . and where the benefits outweigh the costs of protection.’”[1]

Despite these claims, study after study confirms that strong intellectual property rights are beneficial.  In an UNIDO (United Nations Industrial Development Organization) review of close to 200 studies on intellectual property rights and economic growth, Falvey, Foster and Memedovic (2006) find overwhelming evidence that strong intellectual property rights protection generates economic growth.[2]   Moreover, while the impact depends on the country’s level of development, this powerful result holds true for industrialized and developing nations.  For high-income countries, their analysis concludes that strengthening intellectual property rights leads to growth through increased innovation and technological diffusion.  For middle-income countries, they establish that a more robust IPR environment boosts domestic innovation. Although stronger IPR protection will preclude imitation, domestic firms benefit from technology diffusion through foreign patenting and international trade, all of which can lead to economic growth.  Finally, for low-income countries, the authors conclude that increased IPR protection encourages growth, but the manner in which this is manifest is not yet known.

The bottom line is that decades of study and scores of researchers demonstrate that a robust intellectual property rights regime is beneficial to economic development. Fundamentally, strong IPRs are an essential foundation for long-term growth.  Moreover, this happens through a variety of welfare-enhancing channels, including technology transfer, tacit skill acquisition, education, job creation, wage growth, and foreign direct investment.

While the big picture undeniably indicates that stronger intellectual property rights are good for economic development and growth, it is also worth focusing on the details of this process and the microeconomic ways in which this takes place.   First, the ideas and innovations protected by intellectual property rights are the engines of economic growth that spur development.  IP-intensive industries sustain greater long-term economic growth and job creation.  In a 2010 study on IP, innovation and U.S. competitiveness, Pham analyzes the benefits of IP-intensive industries.[3]  His results are succinctly captured in the table below.

Economic Performance per Employee,

15 IP-Intensive versus 12 Non-IP-Intensive Industries, 2000-2007

(Source:  Pham 2010, p.4.)

Pham establishes that IP-intensive industries pay higher wages, generate more sales and value-added, and result in more exports, R&D spending and capital spending.  Among the key findings of his analysis are the following benefits of IP-intensive industries:

• IP-intensive industries sustain greater long-term economic growth.
• IP-intensive industries accounted for approximately 60% of total US exports (2000-2007).  During 2000-2007, the annual value of exports-per-employee was 235% higher in IP-intensive industries than non-IP-intensive industries.
• IP-intensive industries pay both highly-skilled and low-skilled employees relatively more than non-IP-intensive industries pay their employees.  Wages are 60% higher on average and 40% higher for low-skilled employees relative to non-IP-intensive industries.  (Pham 2006, pp.5-6)

In contrast to the UNIDO analysis, Pham’s study clearly demonstrates the benefits of robust intellectual property protection for individual firms, industries, and employees.

[Kristina]

Beyond these benefits, robust intellectual property rights are an essential component of a nation’s economic infrastructure and a prerequisite for attracting Foreign Direct Investment (FDI). Foreign Direct Investment is far more than an investment of financial and capital resources.  FDI results in technology transfer, the dissemination of new management and production techniques, the transfer of tacit knowledge, productivity gains and job creation.

A recent study by Shapiro and Mathur reviews the economic impact of FDI on growth and development in developing nations.[4]  “In countries as disparate as Mexico, Indonesia, China and Russia – as well as India – FDI has been shown to have strong, positive effects on a country’s growth, productivity and incomes. These positive effects reflect not only the direct benefits from applying the technologies and business methods brought in through FDI, but also spillover effects from domestic workers learning new skills and domestic companies adopting the new technologies and business methods.” (Shapiro & Mathur 2014, p.2)   India is an apt point of comparison, an economically vibrant Asian nation clinging to a weak, ineffectual intellectual property rights regime.  The authors conclude that if India achieved greater levels of intellectual property protection equivalent to those of China, annual FDI inflows would increase by 33% annually.  Further, if India achieved levels of intellectual property protection equivalent to the United States, the benefits would be greater still, increasing FDI by as much as 83% annually by 2020.

In addition to increasing Foreign Direct Investment, stronger IP regimes attract greater spending on research and development (R&D).  Again, to contrast the experiences of India, China and the United States, it is illustrative to consider their abilities to attract global R&D spending.  In 2009, the U.S. share was 34%, which has now dropped to 31%.  Over the same five year period, China’s share has risen from 10% to nearly 18%.  India, with its inadequate intellectual property rights regime, currently attracts a mere 2.7% of global spending on research and development.[5]

While all nations have a great deal to gain from attracting FDI and research spending from multinational firms, developing nations in particular stand to gain tremendously.  These investments create jobs, enhance productivity, and foster economic growth and development.  However, robust intellectual property rights are a necessary prerequisite.  The activists and government policymakers who claim that IP rights are a barrier to economic development have it backwards.  Strong intellectual property rights incentivize innovation which facilitates economic growth and development.  The benefits of intellectual property rights are well established and impossible to deny, translating into greater prosperity for nations, industries, firms and individuals.  We all stand to gain from enhancing IP rights, industrialized and developing nations alike.