Intellectual Property Rights Protection And Indigenous Innovation In Developing Countries

Morden economy is based on knowledge. A growing percentage of world wealth is comprised of intellectual assets. The value of intellectual property may soon outweigh the value of physical property. Shapiro and Hassett (2005) estimated that the value of intellectual property in United States in2005is at$5trillion, which stands for roughly50%of U.S. GDP. Greene (2001) asserted that the value of intellectual property in corporations of the industrialized countries amounts to more than2/3of their total value. Idris (2004) estimated that about62%of corporate assets in U.S. were physical assets in1982, but by2000, the figure had shrunk to a mere30%. According to the new growth theory, the accumulation of knowledge is the driving force of economic growth. Today the income gap between advanced and developing countries is caused by technological differences rather than the differences in factor endowments. By granting property rights over intellectual assets, intellectual property institutions provides incentives for research and development, facilitates technology transfer and investment, which in turn, accelerates economics growth.Knowledge diffuses across nations through international activities such as trades and foreign direct investments, which represents enormous interests and benefits. PrincewaterhouseCoopers (1999) reported that the global intellectual property licensing market totaled more than$100billion. However, the infringement of foreign intellectual property rights (henceforth IPRs) is frequent. According to World Customs Organization, European Commission and Organization for Economic Co-operation and Development, the market in counterfeit and pirated products is more than5%of world trade. Developing countries account for the largest portion of manufacturing and exchanging such products. For example, the World Health Organization estimates that approximately6%of pharmaceutical products sold worldwide are counterfeit, while in some African countries, up to70%of medicines sold are counterfeit.Technologe diffusing from developed countries to developing countries motives the latter’s economic growth. In some countries,90%of the productivity growth depends on foreign technologies. Developed countries and developing countries have opposite opinion on the problem of IPRs. Developing countries called for a new IPRs institution to promote technology transfer, while advanced countries push for changes to strengthen protection worldwide. Since1970s, the conflicts over IPRs protection between advanced and developing countries have been more intense. The conflict is temporarily settled by the signing of TRIPs. But the battle to protect IPRs didn’t stop. IPR has never been so important and controversial as it is today.This paper examines the protection of IPRs in developing countries. We focus on two questions:1) what is the incentive for developing countries to protect IPRs. And2) how does this protection affects indigenous innovation and economic growth.Chapter2briefly introduces IPRs system. We described the notion and historical development of IPRs regimes within countries and globally. The study showed that many now-advanced countries used weak IPRs protection in their early stages of industrialization, discriminated against foreign inventors, increasing protection as they approached the leaders. Although the modern-day developing countries protect IPRs much better than the now-advanced countries did at the similar stage of development, TRIPs agreement is asking them to behave even better. It seems like that the process of growth by copying and learning by doing will never happen again. How to catch up with the developed countries is of great importance for developing countries.To solve the problem, we surveyed the theoretical and empirical literatures linking the IPRs protection to innovation, economic growth and technology diffusion in Chapter3. The literature suggests that strengthening IPRs protection has different effects in advanced and developing countries. Stronger IPR protection has a significantly positive impact on innovation, technology inflow and growth in advanced economies, but insignificant impact on innovation and growth in developing countries. And the effects on technology diffusion in developing countries depend on other factor such as imitative abilities. These phenomena bring about two more questions:what is the benefit for developing countries to protect IPRs and will it do any good to world welfare.Chapter4investigates the relational incentive of developing countries to protect IPRs. We established a static game model on the basis of Chin and Grossman (1988) to explore the factors that influence the level of protection of IPRs in the South, as well as to estimate the welfare effects of southern IPRs protection. In the benchmark model, northern firm endogenously decides its R&D investment and competitive strategy. South government endogenously decides the level of IPRs protection, rather than a bilateral choice between protection or not. Thus we relaxed some specification of Chin and Grossman model, made it a special case of our model. Then we examined the impact of IPRs protection on southern innovation. We first explored the conditions of southern innovation in an exogenous technology difference model. It suggests that although IPRs protection provides incentives to innovation, it decreases the level of southern welfare. Then we developed a three-player game model, with the level of IPRs protection in South, the R&D investments of northern and southern firms are all endogenously decided. We found that social welfare in the South will be higher if it does not protect IPRs at all when the productivity of southern innovation is low. When the efficiency of Southern innovation is high enough, indigenous innovation will dominate imitation. But southern innovation reduces the profits of Northern firm, it will induce the latter to increase R&D investment to deter southern innovation. Stronger IPRs protection encourages south indigenous innovation and increase the level of southern welfare.The analysis in Chapter4is tentative. Since IPRs is dynamic in nature, and therefore a dynamic analysis is called for. Chapter5developed a dynamic general equilibrium model on the basis of Helpman (1993), to examine the long run effects of south IPRs protection on growth rate and technology transfer rate. In order to explore the impact of the channel of production transfer on the effects of IPRs protection, we distinguished the product cycles with and without FDI. We considered two types of innovation in our model. The northern innovation is to invent new products and is protected by invention patents. The southern innovation is to improve the quality of invented products and is protected by utility-model patent. Many empirical studies indicate that in the early stage of development, the domestic innovative activities in Japan, South Korea and Taiwan are often imitative or adaptive. Utility model is essential for their transforming from imitation to innovation. Some experts suggest that the specific characteristics of utility models may serve as a useful tool for promoting the type of innovation generated in developing countries. This paper is the first to analysis utility model in a North-South trade framework.We found that in the absence of FDI, stronger IPRs protection in South decreases the rates of both northern and southern innovation, increases the measure of northern production and northern relative wage. In the presence of FDI, however, stronger IPRs protection always increases the rate of southern innovation, but the effects on the rate of northern innovation and FDI depend on the initial rates of Southern innovation and imitation. When the rate of imitation is high, or the rate of imitation is low but the rate of Southern innovation is high, tighter IPRs enhances Northern innovation and FDI, increases the measure of South production and the Southern relative wage. When the rates of imitation and Southern innovation are both low, tighter IPRs hinders Northern innovation and FDI, and decreases the measure of South production and the Southern relative wage.Chapter6examines the impact of southern IPRs protection on cumulative innovation. O’Donoghue et al.(1998), Bessen and Maskin (2009) find that strong patent protection impedes innovation in the case of cumulative innovation. Glass and Saggi (2002), Glass and Wu (2007) extend Helpman (1993) model to investigate cumulative innovation. They find that southern protection of IPRs has negative impact on northern innovation and southern development. Unfortunately, both studies ignored the possibility of southern innovation. We introduced endogenous southern innovation to Glass and Wu (2007) model. In our model both the northern and southern firms are able to conduct vertical innovation to improve the quality of products. The southern firms have lower technological capabilities, which makes southern innovation is less efficient and dependent on the spillover of FDI. We found that strengthening IPR protection in South discourages northern innovation, FDI, and southern indigenous innovation, lowers the rate of production transfer, curtails Southern economy development. We further analysed product-cycle models without FDI, and considered the situation that northern follower firms are no less efficient at innovation than leaders. Our investigation suggests that the negative impact of southern IPRs protection on innovation is robust. Whether there is FDI or not, whether followers innovate or not, tighter Southern IPRs protection always decreases the rate of innovation.