Yu , p. He argues that while this increased protection had no direct effect on growth, inevitably some sectors and regions would see economic growth after but not causally related to the change. Observers then wrongly attributed this growth to the direct effect of IP and called for even greater levels of IP protection. Our theory generalizes and adds precision to Yu's suggestion. It holds that IP as written in formal laws — rather than how these laws operate in practice — has less of a direct role in influencing growth than thought.
Instead, a group of foreign investors, believing even if falsely that IP always drives growth, invest in countries that adopt these laws without necessarily engaging the IP system itself e. In the end, the result is the same: actors' faith in the growth effects of increased IP protection drives investment and thus leads to growth despite the absence of direct causality.
An examination of the literature on IP, innovation, and growth suggests a plurality of views concerning the effects of IP on innovation. Hall and Harhoff , p.
A corollary is that there is no one optimum domestic level of IP protection across all countries; rather, the literature suggests that a country ought to vary its IP protection depending on its entire and fluid innovation ecosystem, including the factors just set out. Acknowledging that domestic optima for IP protection vary according to circumstance does not explain which elements in the ecosystem are most relevant in setting domestic IP protection. Hudson and Minea , p.
Sweet and Eterovic Magio , p. Kim et al. In these countries, higher levels of IP protection can act as an incentive for entrepreneurial activity by: 1 encouraging development of new products or processes with some assurance of a return on resources invested in the effort; 2 creating an incentive to take an innovation from others and finding an application within the economy; or 3 creating an environment increasing the likelihood that an entrepreneur will recognize an opportunity not seen by others and market it in a creative way.
IP rights: [P]romote investments in knowledge creation and business innovation by establishing exclusive rights to use and sell newly developed technologies, goods, and services. Absent these rights, competitive rivals could appropriate economically valuable information without compensation.
Under such circumstances, firms would be less willing to incur the costs of investing in research and commercialization activities. Maskus a , p.
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Neither, however, does the empirical literature. We summarize some of the leading recent studies on the effectiveness of the IP system in encouraging economic growth, both directly and indirectly, in Appendix A. Negative: Hudson and Minea Lerner Negative: Kim et al. Positive: Falvey et al. Nevertheless, even when one takes these differences into account, some further explanation is needed, given the stark contrast in results.
We suggest four possibilities for this disparity. First, some studies may simply be wrong or incomplete. This may be because the models they used, the theories deployed, the indicators selected, or the data collected are inappropriate or outdated. Second, and relatedly, there simply may not have been enough studies conducted to develop a clear pattern of what is happening. Third, as theory predicts that the outcome of IP protection on growth will depend on other factors, we may be observing the effects of an unknown underlying effect.
The differing results we see in the studies above arise, on this theory, from the inclusion of indicators unrelated to belief and the failure to include those that relate to it. If this turns out to be the case, then: [T]he main impediment to improving patent systems many not lie in gaining new insights, but in the political economy of patent systems and the vested, often diverging interests that many stakeholders have in the existing system.
By examining the effects of IP protection across the gamut of developing countries over a long enough period of time, we smooth out difficulties posed by such factors as volatility and business cycles in individual economies. This index, while building on the learning of previous indexes, overcomes their limitations. Since , the Global Competiveness Index World Economic Forum includes a measure of the level of IP protection, but this is based on individual opinions, rather than specific elements of IP systems, and is limited in its time coverage.
The index we introduce measures the adoption of IP rules that go beyond the minimum standards set by TRIPs and that are specific to the more onerous US demands for increased IP protection. It is thus sensitive to changes in levels of IP protection since The higher a country scores, the more it has aligned its IP rules with those of the US. We collected data for each year from to , coinciding with the initial coming into force of the TRIPs agreement.
The IP Index covers all developing countries with a population of more than one million and for which data was available.
These results, as well as the complete list of indicators, coding values, descriptive statistics, and data sources, are available in the appendices. All of the regressions that we used in our statistical models made use of fixed effects on both country and year estimation, which is an approach to analyzing panel data that better enables controlling for unobserved heterogeneity that varies across individual countries but remains constant across time periods.
Doing so allows for our model to better isolate key relationships that may be masked by the presence of individual idiosyncrasies e. We examined two routes through which the literature proposes that IP affects growth. The first is that stronger levels of IP protection facilitate the transfer of high technology goods into developing countries, thus increasing the stock of knowledge and raising productivity growth, ultimately leading to overall economic growth. The second is that stronger levels of IP protection encourage domestic innovation, which in turn increases the technological ability of developing countries, creating growth.
Considering that the vast majority of countries studied fall into the lower and upper middle income class, we introduced a further refinement that designated countries as above or below the median GDP per capita for their income classification in a given year i. Each refined category was then run through our models individually to see how the relationships changed across income levels. In order to examine both the effects of increased IP protection on growth and to specifically investigate the two pathways suggested by the literature — that is, increased technology transfer and greater inventive activity — we introduced three variables.
The economic impact of intellectual property rights: An overview and guide
We include within this variable the total of manufactured imports, machinery and transport equipment, parts and components for electrical and electronic goods, chemicals and related products, and electronics excluding parts and components according to United Nations Conference on Trade and Development UNCTAD statistics.
We transformed the import data logarithmically to account for skew. While Kim et al. Consistent with the literature Furman et al. We selected filings at the USPTO so as to provide a consistent comparison between countries as opposed to more ad hoc and often changing practices in individual countries, and to accommodate patent propensity across countries Furman et al.
Put simply, the presence of a mediator variable provides insight into how a given relationship occurs. If we can show, for example, that Log IP Imports mediates the relationship between IP I ndex the predictor variable and GDP Per Capita the dependent variable , this would provide consistency with the theory that IP leads to growth by increasing IP imports that, in turn, cause economic growth.
A similar situation would occur between IP, domestic inventive activity, and growth. According to Holmbeck , p.
"The Economic Structure of Intellectual Property Law" by Richard A. Posner and William M. Landes
We lagged IP I ndex by two years to further emphasize directionality, as lagging further would unduly restrict our dataset and introduce additional confounding factors. In each regression, we included five standard control variables, approximating the various elements of growth set out by the Mankiw et al.
However, there does not appear to be a proxy for human capital with more complete data, particularly for the developing world. A version of our model that does not control for tertiary enrolment, and thus with more observations included, gave results consistent with those below and can be found in Appendix B. The corresponding file and description have been added in the Supporting information section of the article.
The estimation equations are as follows, with the tilde accent referring to variables that have been demeaned using the within transformation:. In order to control for multicollinearity, we standardized all variables to have a mean of 0 and a standard deviation of 1, allowing us to examine the relative effect that each variable has on the relationships studied. Some social scientists have criticized the coefficient standardization method because standard deviation is a characteristic of the sample and not the real population under study Allison Because the variables in question here have been almost completely sampled across nearly all developing countries and over a long time period this is not a significant concern and thus we can more confidently rely on standardization.
We excluded income classes in the tables for which we obtained insignificant results in a given route from subsequent regressions in that route. We did this to simplify presentation of the results, as finding a mediator effect in that income class would be impossible. Note that results consistent with finding a mediator effect are presented in bold, while those inconsistent with such a finding are italicized.
Our results are consistent not only with the proposition that higher levels of IP protection, as measured by the IP Index, correlate with economic growth, but that the two pathways — that increasing levels of IP protection lead to greater levels of technology transfer and also result in higher domestic inventive activity — hold true.
When we turn to the two routes through which theory predicts IP acts, we find similar results. That is, while we find support for both causal mechanisms, the more important effect of IP is on foreign actors who decide to transfer technology to the country rather than on domestic actors engaging in innovative activities themselves. Our results contrast with those of previous studies in several ways.
Appendix A provides a detailed comparison with those studies. We highlight here a couple of significant differences. The literature suggests possible explanations for these observations. In our view, however, these alternatives only seem to add to the general confusion in the literature, rather than resolve it. Instead, we see these results as consistent with the suggestion that the mechanisms of technology transfer and of domestic inventive activity may not, in fact, be linked at all.
We will discuss this further, but our argument is that growth through the former route is more heavily based on belief than that of the latter.
A problem inherent in all IP indexes, including the one we introduced above, is that none measure the actual functional level of IP protection, but only the perceived level of protection, which may be quite different. There are two reasons for this. As IP legislation is written in a broad and inclusive manner, it necessarily leaves interpretation of often vague standards to courts and tribunals.
Thus, it is IP offices, courts, and tribunals, not legislation, that usually determine the meaning of such fundamental concepts as invention, novelty, inventive step and industrial application in patent law, originality in copyright law, and confusion in trademark law. An index based on the law as written in legislation — for convenience, formal IP — will be incomplete at best and misleading at worst Arora , p.
Even if one could overcome this exclusive reliance on formal IP — Sherwood only succeeds by heavily restricting his sample in time and space and by using idiosyncratic measures that cannot be replicated — there remains significant uncertainty. Consider, for example, two countries possessing identical laws allowing for the grant of compulsory licenses.