IPRs, Technological Development, and Economic Development Author(s): Wilfred Dolfsma Reviewed work(s): Source: Journal of Economic Issues,

Vol. 40, No. 2 (Jun., 2006), pp. 333-342 Published by: Association for Evolutionary Economics Stable URL: http://www.jstor.org/stable/4228255 . Accessed: 24/03/2012 09:36
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JOURNAL OF ECONOMIC ISSUES Vol. XL No. 2 June 2006

IPRs,TechnologicalDevelopment,and EconomicDevelopment
Wilfred Dolfsma

in as Sinceit is rooted a contradiction, can beno suchthing an ideally there beneficial results particular in patent and to instances. system, it is bound produce negative -Joan Robinson ... the not the immaterial of [O]wnership gives owner onlytheright useover community's but and and equipment, alsotheright abuse of neglect inhibition. of -Thorstein Veblen In 2000 some $142 billion in royaltieswere paid internationally users of a specific by piece of knowledgethatwas protectedunder intellectualproperty right(IPR)lawto parties thatownedtheserights.!Under currentcircumstances whereknowledgeand innovation play an increasingly significantrole in the economy (Forayand Lundvall 1996; Cowan, David,and Foray2000; Cooke 2002; Dolfsmaand Soete 2006; Dolfsma2005), IPRs have become increasinglyprominent in debates and are almost unanimously deemedto favoreconomicdevelopmentby policymakersand certainly policymakers by in developedcountries.While it has been acknowledged that some partiesmaybenefit more from a systemof IPRsthan others, in relativetermsa Paretoimprovementis the expectedoutcome (Langford 1997).This has been the motivationto includeIPRsin the WTO negotiations.The TRIPSagreement(Trade-Related Aspectsof IntellectualProperty Rights)resultedin 1994 from these negotiations.Especially during the 1990s the numberof patentsgrantedhas growntremendously despitethe fact that manya scholar
Theauthor at ETasmus is Rotterdam a 2005/6 NIASFellow. paper presented theWorld and University This was at Summiton theInformation Society, Tunis, November 13-19, 2005, as wellas at theannual Association Evolutionary for Economics in meetings Boston January 2006. Theauthor 6-8, would to thank like participants these of sessions especially and Robert Loube.

333 (? 2006, Journal Economic Issues of

still supportsFritzMachlup's(1958, 28) conclusion that "itwould be irresponsible, on the basisof our presentknowledgeof its consequences,to recommendinstitutingone. But since we have had a patentsystemfor a long time, it would be irresponsible, the on basisof our presentknowledge,to recommendabolishingit."The academic(economic) communityis almostunanimousabout the systemof IPRovershootingits goals.2 Fromother corners,where specific effectsof IPRsare considered,a differentand less circumspectsound maybe heard. Examplesof this are attemptsto make available HIV/AIDS drugsat a reducedpricecompared with whatthe pharmaceutical companies
that have the patents on these drugs demand.3 I will focus on patents.

Empiricaland theoreticalfindingsbearingon the question of IPRs'effect on technological development, and thus prospect for economic development, are reviewed. Staticand dynamiceffectsaredistinguished.Areaswherestaticeffectsmaybe expected includetransfer knowledge,balanceof paymenteffects,effectsfor largeas opposedto of small firms,and effect on the "extentof the market." Areasfor dynamiceffectsinclude technologicaldevelopmentand technologicalpreemption.4 The list maynot be exhaustive, and effectsare interlocking: they maybe mutuallyreinforcingor they mayconflict. I will mostlyfocus on "dynamic" effects. Intellectual Property Rights Intellectualobjectsare nonexclusive:consumptionor use by nonpayerscannot be excluded. In addition, intellectualobjectsare partlynonrivalrousas well: they are not consumedby their use. This makesintellectualobjects(quasi-)public goods, givinggovernments a reason to influence relevantprocessesin society. As costs of imitatingor communicatingintellectualobjectstend to be low, there maybe a tendencyfor these to be underproduced(Nelson 1959; Romer 2002). IPRswould providea wayto compensate creativeindividualsthat is savingon transactions costs by stipulatingthat the commercialuse of knowledge is exclusiveto the right-holder.Discussion of the need for society of IPRs has waxed and waned (Towse and Holzhauer2002). Notwithstanding such discussions,the scope and durationof IPRshas increasedsteadilyover time. Rationalesfor IPRs fall into four partlyrelated categories(Hettinger 1989). The extent to which rationalesare stressedin law differsbetweencountries,reflectedin the authoritythat administersthem. In the United Kingdomand the United States, the incentivefor creativeindividualsor organizations that IPRsoffer is emphasized: development and diffusionof new knowledgeis promotedby the prospectof a periodof time in which one is able to commercially exploitthe innovation.5Similarly, IPRsaresaid to be necessary firmsto entice them to invest in facilitiesfor the productionof goods for basedon the intellectualobjectprotectedunderIPR.Without it, firmswould face more than the usual business risk and refrainfrom the production of such goods. In the United Kingdomand the United States,these arethe rationalesemphasized, this is and reflectedin the fact that the CommerceDepartmentadministerssuch rights.The two

other rationalesare not relatedto such utilitarianconsiderationsand are specifically emphasizedin the legal systemsof continental Europe (and those based on or influan enced by them). The first is one of dessert. If someone has prioduced intellectual The final rationaleis a personal/ object,she deservessome kind and measureof reward. moralone. In creatingan intellectualobject,someone expressesone's personality.6 Over time, the first and second rationaleshave become increasingly dominant in Treatise CivilGovernthe discussions.Philosopher John Locke'sargumentin his Second of ment(1690) for a "natural" propertyright in what one makes has a strong intuitive appeal.In reality,however,it is a governmentthat createsand polices IPRs;they are a sociallycreatedprivilege.Intellectual objectsdifferfromphysicalones. In theircreation, for instance,one drawson work done (by others) in the past;creation is often not de novo. When use of existing work is restricted,society may be hurt. As intellectual objectsare public goods, grantinga (temporary) monopolyon their commercialexploitation may not leave "enoughand as good."7Independent inventorsare hurt as they maybe prohibitedfrom using something they have developedthemselvesbut another partywas granteda patent for earlier.It is furtherarguedthat intellectualobjects are more often than physicalones the resultof cooperation-a cooperationthat mayor may not be promotedby IPRs(Dolfsma2007). This paperdoes not call into questionthe need for a systemof IPRperse, yet it does elaborateon criticismsof it for possible hamperingof future economic development even for developedeconomies(Dolfsma2005). The IPRsystemalso presentsimmanent problems, especiallyfor developing countries. The immanent problems referredto relateto the consequencesof the systemof IPRsfor the distributionof nationalincomes within and among countries.In orderto reapthe benefitsbelievedto resultfrom joining consecutive rounds of negotiations to liberalizeinternational trade, developing countrieshave had to acceptWTO standardsfor IPRs. The Patent Practice While one mayquarrelabout the theorythat supportsa systemof IPRsin general and patents in particular, there is also the practiceof filing, evaluating,and granting. This practice differs between countries, with effects for the firms involved (OECD 1997). While most countries maintain a "firstto-file" policy, the USA maintains a "first-to-invent" policy.This differencehas majorconsequencesfor strategic behaviorof firms seeking patents under the differentregimes.Another differenceis between the scope of the claim staked in a patent. In Japan,for instance, the claim must be much more narrowly defined than in the USA. A broadclaim in a patentis a strongerclaimin a pre-emptive action than a narrowclaim is. There arealso featuresaboutpatentsystem in generalthat have been lamented. Some point to the grantingof patents that obviously do not meet the criteriafor patents:patentshave been given for technologythat had already been developed,for technologythat had no industrialapplicationor physi-

336

Wilfred Dolfsma

cal component, and so on. Others, in contrast,point to the losses in termsof forgone license paymentsdue to poor IPR law and/or poor protection. "a for The expansionin both scope and length has been criticized representing new stage in commodification," "corrupting society," and "destructing productivity" business (Perelman2003). In recentyearsplant varietyrightshave been strengthened; modelsand softwarehavecome to be protectedunderpatentlaw.The numberof patent applicationshave risen by an annual 6 percent since 1990 to total 350,000 a year; half of which to non-USAfirms.8In 2003, a backlogof half a mil190,000 areawarded, was lion applications reported.The U.S. PatentOffice is now receivingits income from partiesthat have been awardedpatents-no incentiveto diligentlysearchfor "priorart" The burdenof proof seems to and determinewhetheran applicationmeetsthe criteria. be on the side of the USPTO to prove that a patent applicationis not to be granted. Indeed, half of all patents that were apparently importantenough to be litigatedwere found to be invalid.Only 23 percentof new drugsdevelopedprovidetherapeuticbenefit over existingdrugs(Hubbardand Love 2004)-a notable figurefor an industrythat reliesheavilyon patents(Levinet al. 1987;Arundel 2001). Despite the supposedincentive patentsoffer, a mere 1 percentof R&D is spent on "neglecteddiseases." William Baumol (2002) has estimatedthat 20 percent of the benefits associated with an invention areappropriated the partiesdirectlyor indirectlyinvolvedwith the by invention.Only partly the appropriation benefitsbe due to IPRs.Patentsofferno will of certaintyof appropriating marketrents.Manywill not haveeconomic value;increasing numbershave verylittle technicalvalue. Of all U.S. patentsgranted,55 percentto 75 percentlapsefor failureto paymaintenancefees;if litigationagainsta patent'svalidityis a signof commercial valueof that patent,the factthat only 1.5 percentof patentsarelitigated and only 0.1 percent litigatedto.trial does not bode well (Lemleyand Shapiro

2005).
"Even" mainstream economic literature arguedat length and in greatdetailthe has drawbacks pitfallsof currentIPRlawand developmentstherein.Let me discussthe and most importantfindings.

StaticEffectsof IPRs
It is becomingincreasingly difficultfor developingcountriesto ignoreIPRpolicies. Only when a country has a sufficientlyattractiveinternal marketand/or has a sufficiently strong researchtradition itself will it be able to negotiate on an equal footing. China, India,and Brazilareexamplesof countriesthat areableto credibly the threat use of drawingon the compulsorylicense clausein TRIPSto make rightholderslowerthe priceof the productsthey offer. Particularly the productand its uses can drawa lot of if attention in the media-such as in case of HIV/AIDS medication-such an approach maybe successful.

If a countryoffersprotectionof IPRsthat is perceivedas too weak,FDI mightsuffer and exportsof productsthat embodynew technologymightbe lowertoo for fearof such productsbeing re-imported. Although not in the spiritof the WTO, parallelimportsof IPR or productsembodyingprotectedrightsare forbidden,thus settingboundariesto the "extentof the market." legalterms,IPRsexhaustnationally,not internationally. In This has the effect of drivingup marketprices,obviously,as marketstructureand competitive relationsare affected(Klaes 1997). Alternativesto any product may exist that drawon technologythat is not patentedor that a second firmowns the patentfor, affecting prices. Demand elasticityand pricing regulationsare other elements that might affectprices.Administrative price ceilings-allowed underTRIPS-are a common stratfirmsto supegyof developingcountries.These maynot promptforeignpatent-owning plycountriesthat havesuch measuresin the firstplace.As ceilingstend to be basedon a cost-plusformula,there is an incentive for supplyingfirmsto inflate transferprices.A ceiling in any particular(developed)countrymight also be indexed to prices in other (developing)markets.There is thus an incentive to negotiate high prices in index countriessuch as India. Dynamic Effects of IPRs Patentsmayraise incentivesfor R&D in neglectedareasof technology.Yet it may not lead to such investmentsand might thus be said to have perverseeffects.This section looks at such perverse effectson technologicaldevelopmentand futurepossibilities for economic growth(Dolfsma2005). Overlystringentprotectionmight lead to more resources being devotedto IP management(Langford1997): technologytransfercost maywell increase.Overlystringent protectionofferedby patents(and other IPRs)mayalso lead to wastefulresearchspending such as patent racesand the constructionof patent portfolios.RichardLevinet al. (1987) andAnthonyArundel(2001) havefound thatpatentsarenot seen byfirmsas the most importantwayto appropriate benefits of their innovativeefforts:secrecy,lead the time, and complementary capabilitiesare. Certainlythis holds for smallerfirms. In a classicalstudy, Edwin Mansfield (1986) suggestedthat in most industriesfirms seek patentsmostlyfor strategicreasons. Havinga patentcan lead a firmto delayofferingproductsbasedon it, as competing firmsmaynot be able to offer alternatives (Takaloand Kanniainen2000). Althoughthe monopoly awarded a patent or any kind of IPR is neverperfect,it maywell induce a by firm to consciouslyforgo the developmentof a new technologythat would be socially more desirable-it may,for instance,develop a technologically inferiortechnologythat yields it higherprofits(Adamsand Encaoua1994).Another dynamiceffect maybe that researcheffort may shift from areaswhere IPRs are less extensive and not as strictly enforced to areaswhere they are (Langford1997). Firmsare deterredfrom tryingto invent "in the neighborhood"of patentsgrantedpreviously,includingfrom undertak-

ing follow-up inventive work (Mazzoleniand Nelson 1998; Scotchmer and Green wherethe technologyinvolvedis "complex" its develand 1990). This holds particularly opment cumulative:much researchas well as development is highly cumulative in nature.9In a patentracean incumbentmightwant to maintainits position by preempting entryratherthan developingtechnology(Harrisand Vickers1985). If an incumbent does obtain a patent it may not be a valuableone in an economic or a technicalsense (Gilbertand Newbery 1982). For complex technologieswhose developmentis highlycumulative,where economies of scale are substantial,and given additionalmeansto appropriate benefits of the innovation, the extent to which agents in developingcountriescan imitate is limited, whethertheywould like to imitateor not. In such cases,a tighteningof IPRwill actually hurt the developedcountriesas productlines will shift to or remainin these countries (Helpman 1993). Cost advantagesof production in developing countries, assuming such advantageswould benefit consumers, would favor the developed countries. A tighterIPRregimein caseof a slow imitationpacehurtsdevelopedcountriesin general, even though it maybenefit producersof the goods involved.When imitationratesare high, a tighterIPRregimewill benefit developedcountriesbut certainlynot developing countries-it is under these circumstances that the generalinterestof the two groupsof countriesconflict.10 Poolingof patentsmaybe efficient,but it certainlyalso constitutesan entrybarrier and is disadvantageous smallerfirms (Lanjouwand Schankermann2004).11 Litigafor tion costs can be so inhibitivethat individualand smallfirmpatentholdersstrikea deal with a largefirm that filed a suit even when on legalgroundsthey would have a strong case;listed firmshavelowerfiling rates(ibid.).Smallfirmshavebeen found not to pursue innovativepathswherethe threatof a lawsuit by a largerfirm is high (Lerner1995). Rent seekingmaythus have an effect not just on the applicationof new technologybut also on the kind of new technologythat firmsseek to develop. Certainly,then, there is a tension, in general,between anti-trust and IP law. law Surely,too, there is a possibletension betweenIPRand development,especiallyin the earlyphasesof economic development.

ConcludingRemarks
Developed countries stand to gain most from liberalizingthe trade in IPRswith protection levels and scopes determinedas they are in these countries, specificallyin industrieswhere imitation can be rapidand thus the benefits of diffusion are substantial. Roberto Mazzoleniand RichardNelson (1998) arguedthat the USA has pushed TRIPSmost adamantly,attributingits zealto self-interest well as an "honestbelief." as That zeal has not alwaysbeen there. The USA and other countriesthat now have developedeconomies havebeen haphazard implementingand enforcingIPRswhen in they were not yet so relatively developedthemselves.Had Japandone so with regardto

patents, it might not have had its strong electronicsindustry(Mazzoleniand Nelson 1998). Had the USA done so with regardto copyrights,it might not have had its strengthin the entertainmentindustrythat it now has.12 So, what should be done to prevent the system of IPRs from being hijackedby for Raisingstandards obtainingpatents, largerfirms,particularly strategicpurposes? for aligningincentivesof patent officerswith that of the generalinterest,and makingsure incenthat incentivesto initial inventorsare more clearlyand evenlyweighed "against not enough. Narrowingthe scope of (Barton2000) are tives for follow-oninnovators" patentsis one option;shorteningthe durationof (some)patentsis another.Differentiating between patentscoveringdifferentareashas been suggestedby Bill Gates. In addition, anti-trust policyshould be as zealouslypursuedat the globallevel as IPRsareat the could focus as moment by such organizations WIPO and WTO. Such an organization in particular the effects for technologicaldevelopmentin or technologytransferto on developingcountries. Thereareother suggestions.Firstwould be to phasein a systemwhereinnovationis stimulatedby (optionally)rewarding innovators.This systemis superiorto the IPRsystem under a range of circumstances(Shavelland van Ypersele2001; Wright 1983). can ThorsteinVeblen'sspiritof workmanship be trustedto some extentto producenew and usefultechnologyeven without directmonetaryreward-theapplicationof the idea of open sourcedevelopmentprovesthis case. Directmonetaryreward decreasepeocan ple'seffortsto reacha specificgoalas much as it can stimulatethem (LeGrand2003).13 Notes
1.
2. 3. Intellectualproperty rightsinclude patents(utility,design,and plant),copyrights, tradeand marks. commondefinitionof intellectualproperty is the rightsgivento personsoverthe A rights creationsof their minds. Legalscholarsareclearon this as well. A. SamuelOddi (1987) offeredan earlydiscussionon the effectsof IPRson the prospectsfor developmentof ThirdWorld countries. Some firms,includingMerck& Co, Bristol-Myers Squibb Co, GlaxoSmithKline PLC,and Abbott Laboratories, have reducedpricesin Africaand Brazilfor medicationagainstHIV/ AIDS. These firmsmaybe genuinelyconcernedby the toll of this diseasefor these countries. They mayalso be concernedabout their reputation,as well as by threatsto producegeneric variants the drugsafterinvokinga compulsory of licenseclause.It is likelythatthese firmsare equallykeen to preventparallel aboutnationalexhaustionin import,in breachof stipulations IPlaw.The 'WTO-TRIPS agreement placessignificantrestrictions the abilityof developing on countriesto imposecompulsory licenses(Oddi 1987);the bilateral that the USA agreements has madewith severalcountriesis even more restrictive (Hubbardand Love2004). Contrast the discussionaboutHIV/AIDS drugswith the much moremooteddiscussionaboutpatents on drugsthat preventor cure anthraxor avianinfluenza.In the formercase the USA threatened to invoke the compulsorylicense clauseagainstthe Germanmanufacturer Bayerwho had the patent on the drug to cure anthrax.In the lattercase, a largernumberof predominantly developed countriesare worriedabout their populationsbeing affected.The Swiss pharmaceutical companyRoche owns the patentfor and producesTamiflu. Includingestablishment "priorart,"and bio-prospecting. of

4.

5.

6.

7.

8. 9.

10.

11.

12.

13.

This rationaleis foundedin John Locke'sargument property for rightsin general.In his view, a in her providedthat a personestablishes rightof property thatwithwhichshe "mixes labor," "enoughand as good [is] left in common for others."The later proviso has, as might be expected,provokeddiscussion. in The productof the mind is partof the self, so to speak.A resultof this is that copyrights a Europeancontext include so-called"moral" rights.These are inalienable,nontransferable. law Evenwhen a piece protectedundercopyright is sold, the new ownermaynot alterit with. out consent of the author. in This would hold particularly the case of patentsas they protectthe idea itself and not the frombeingusedwithas particular in which an ideais expressed, is the casefor copyrights, way out the permissionof and possiblepaymentto the rightsholder.Copyrightprotectiondoes tend to last longer (life of the author plus seventyyears)than the protectionpatentsoffer: twentyyearsin most cases. to The numberof patentsgrantedto developingcountries,especially countriesin Asiasuch as India and China, increasesrapidly,albeitfrom a smallbase (UNCTAD 2005). of Fromthe perspective a legalscholar,A. SamuelOddi (1987, 839) has crucially arguedthat "[platentstatutes do not distinguish,and appearto be incapableof distinguishing,those inventionsthat arepatentinducedfromthose that arenonpatentinduced."He has held that far less inventionsin developingcountriesare patent induced. Some of that imitationwill resultin the creationof new processesand new products,even if It only incrementalimprovements. is shown thatwhen the supplyof new innovationsis elastic, the best wayto induce innovationis throughcontracts not throughpatents.As Brian and are Wright(1983, 702) argued,"contracts best when the researchprocessis most like activities routinelyundertaken." In one of the few studies that can shed some empirical light on this issue, George Bittlingmayer (1988) claimedthat the settingup of a patentpool for the aircraft industry,at the behestof the U.S. government it wasdrawninto WWI,certainly as ended a paralyzing patent dispute.Bittlingmayer (248) found no evidencethat this patentpool suppressedinnovation and providedconsumerswith an inferiorproduct.'Whatis significantis that the board the overseeing patentpool justwould not allowanypatentgranted the USPTOto enterthe by pool. Given that patentstackingis an often-usedstrategy, opening up the possibilityof creating a patent pool does decreasethe possibilityof negotiationsbreakingdown (Levinet al. 1987). The United Statesdid not allowforeigners obtaincopyrights a long time (Henn 1954). to for The firstU.S. Copyright expressly Act statedthat nothing in the act should be readto "prohibit importationor vending,reprinting, publishingwithin the United Statesof anymap, or chart,book, or books,written,printedor publishedby anypersonnot a citizenof the United States,in foreignparts"(Post 1998). A similarsituationheld for patentlaw (Oddi 1987). Wright(1983,704) hasshownthatcontracts, ratherthanpatents,workbestto induceinnovation when researchers highlyresponsiveto incentives! are

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