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This paper provides an analytical overview of how economic development may be promoted or hindered by an effective system of intellectual property rights (IPRS). IPRS can play a positive role in encouraging new business development, rationalization of inefficient industry, and inducing technology acquisition and creation. They may harm development prospects by raising the costs of imitation and permitting monopolistic behavior by owners of IPRS. The potential gains and losses depend on the competitive structure of markets and the efficiency of related business regulation, including aspects of competition policy and technology development policy. The paper reviews available empirical evidence on these issues. The evidence supports the view that product innovation is sensitive to IPRS in developing countries, while FDI and technology transfer go up when patent rights are strengthened. Overall, there is a positive impact on growth, but this impact depends on the competitive nature of the economy. The paper concludes by putting forward suggestions for integrated policy reforms.

1. Introduction

The question of how intellectual property rights (IPRS) affect the processes of economic development and growth is complex and based on multiple variables. The effectiveness of IPRS in this regard depends considerably on particular circumstances in each country. While economists are devoting more attention to this issue, evidence to date is fragmented and somewhat contradictory, in part because many of the concepts involved are not readily measured. As I discuss below, stronger systems for protecting intellectual property could either enhance or limit economic growth, in theory. Nevertheless, evidence is emerging that stronger and more certain IPRS could well increase economic growth and foster beneficial technical change, thereby improving development prospects, if they are structured in a manner that promotes effective and dynamic competition.

As the global protection regime strengthens due to implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), concluded under auspices of the World Trade Organization, numerous questions arise about impacts on prospects for economic growth. For many reasons, it is impossible to claim confidently that the new regime will raise growth and improve economic development processes. Two such reasons are paramount. First, many other variables affect growth in ways that could dominate the impacts of IPRS. Such elements include macroeconomic stability, market openness, policies for improving the economy’s technological infrastructure, and the acquisition of human capital. Second, economic theory points out that IPRS could have many effects on growth, some positive and some negative. Further, the significance of these effects would be dependent on circumstances in each country. However, in a broad setting of appropriate complementary policies and transparent regulation, IPRS could play an important and positive role in promoting economic growth. Indeed, the system of IPRS itself may be structured in particular ways to favor dynamic competition within a system of rights and obligations.

With this background, the paper addresses two broad issues. In Section Two I discuss theory and evidence regarding how IPRS may improve or retard economic development. The primary finding is that development is a complex process and that IPRS could have a range of impacts. The policy approach most conducive to expanding development is to implement an integrated system of both IPRS and corollary policies that strike a balance of incentives in favor of rigorous but fair dynamic competition. Thus, in Section Three I overview these broader policy initiatives, suggesting methods by which developing countries might wish to complement their emerging IPRS regimes. Section Four provides concluding remarks.

Intellectual Property Rights and Economic Development

Before considering how IPRS influence economic activity and growth, consider their intended roles in the economy. Economic analysis of IPRS is utilitarian, asking whether the benefits of any system outweigh its costs, both in static and dynamic terms. The anticipated benefits and costs depend on characteristics of markets, products, and social institutions. Thus, a “one size fits all” approach to harmonizing international IPRS makes little economic sense.

The Purposes and Mechanisms of Intellectual Property Rights

There are two central economic objectives of any system of intellectual property protection. The first is to promote investments in knowledge creation and business innovation by establishing exclusive rights to use and sell newly developed technologies, goods, and services. Absent such rights, economically valuable information could be appropriated without compensation by competitive rivals. Firms would be less willing to incur the costs of investing in research and commercialization activities. In economic terms, weak IPRS create a negative dynamic externality. They fail to overcome the problems of uncertainty in R&D and risks in competitive appropriation that are inherent in private markets for information.

The second goal is to promote widespread dissemination of new knowledge by encouraging (or requiring) rights holders to place their inventions and ideas on the market. Information is a form of public good in that it is inherently non-rival and, moreover, developers may find it difficult to exclude others from using it. In economic terms it is socially efficient to provide wide access to new technologies and products, once they are developed, at marginal production costs. Such costs could be quite low for they may entail simply copying a blueprint or making another copy of a compact disk or video.

There is a fundamental tradeoff between these objectives. An overly protective system of IPRS could limit the social gains from invention by reducing incentives to disseminate its fruits. However, an excessively weak system could reduce innovation by failing to provide an adequate return on investment. Thus, a policy balance needs to be found that is appropriate to market conditions and conducive to growth.

Different forms of IPRS operate in distinct fashions and it is misleading to group them together. Therefore, it is helpful to mention briefly what the various mechanisms are. First, patents provide the right to prevent for 20 years the unauthorized making, selling, importing, or using of a product or technology that is recognized in the patent claim and that must demonstrate novelty and industrial utility. Related devices are utility models, or petty patents, which provide exclusive rights for a shorter period for incremental inventions, and industrial designs. In most countries patent applications are made public after a prescribed time period. Thus, patents establish a protected market advantage in return for revealing technical knowledge. Several aspects of patent scope affect the effective strength of protection. A similar type of industrial property is plant breeders’ rights, which have fixed terms, novelty requirements, and disclosure rules. They are intended to encourage development and use of new seed varieties for agriculture.

Trademarks protect rights to market goods and services under identified names and symbols. Trademarks and brand names must be sufficiently unique to avoid confusing consumers, thereby playing the important role of reducing consumer search costs. These rights encourage firms to invest in name recognition and product quality. They also induce licensees to protect the value of assets by selling goods of guaranteed quality levels. If trademarks were not protected, rival firms could pass off their lower-quality goods as legitimate versions of those produced by recognized companies. This situation would diminish incentives for maintaining quality and would raise consumer search costs. Economists generally believe that the danger of market dominance through abuse of trademarks is slight in competitive economies but such marks could be accompanied by significant market power in countries with other barriers to entry.

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