In Tuesday’s post on China’s industrial policy I mentioned the country’s lack of enforcement of Intellectual Property Rights (IPR) as a feature of its development. The US in particular, but also other rich countries, have complained about this for many years.
IPR policy, such as the creation of patents, is intended to encourage innovation by allowing firms to reap profits from the creation of new knowledge and therefore provide them with incentives to innovate. This sounds like a good thing. But managing an IPR regime requires careful judgement. If new ideas are protected for only a short period, firms may not have sufficient monetary incentives to innovate; if they are protected for too long, competition will be stifled and the diffusion of the innovation across the relevant sector or economy, as rival firms compete for a share of the market by copying or adapting it, will be slowed.
Badly designed IPR regimes can therefore slow growth in economy-wide productivity. Innovating firms often have an incentive to lobby policymakers to introduce lengthy and comprehensive patent protection, to their benefit, but to the detriment of the economy and society as a whole.
As Joseph Stiglitz has argued, knowledge is a quasi-public good: it is non-excludable (if I use it, this does not prevent others from using it), but we rely on the private sector to produce and finance much innovation. IPR regimes are market-based, whereas much knowledge is generated by a range of non-market institutions which make up a country’s ‘innovation system’. These might include government, think tanks, firms and universities. Markets are only a part of this system.
The creation of new ideas and knowledge is also to some degree a collective endeavour. New ideas build on old ones and can involve a range of actors and institutions who contribute to each innovation. So there is a need for debate over who should benefit from the potential success of the latter. Where should the returns from innovation flow?
Developing countries have a history of violating IPR, but this has generally helped their development. Here is Arthur Kroeber of research firm Gavekal Dragonomics in his excellent book China’s Economy (2016, p.62-3):
“Tolerance for copying and IPR theft is a tactic commonly used by technologically backward nations to catch up on the technological frontier. The development of the European porcelain industry in the early eighteenth century depended substantially on reports by Jesuit missionaries on Chinese ceramic techniques, which the Chinese state considered trade secrets. Theft of tea plants whose export was prohibited by China enabled the British to establish a tea industry in India. In the early nineteenth century, the United States was cavalier in its treatment of European intellectual property, and its first great textile complex in Lowell, Massachusetts, was founded essentially on industrial espionage. After World War II, Japan, South Korea, and Taiwan relied in part on reverse engineering and copying of Western technologies, in violation of Western patent rules. Before China became the main target, the US government engaged in constant IPR skirmishes with Japanese and Taiwanese firms. The point is not that IPR violations are morally defensible, but simply that they are routine and last until a country has enough IPR of its own to decide that protection produces more benefit than stealing. This shift occurred in the United States in the mid-nineteenth century and in the East Asian states in the 1980s and 1990s. It has begun in China with the establishment of specialized IPR courts and the use of criminal penalties for some violations.”
This is as it should be. The process of catching up involves a period of emulation or learning to use already existing technologies by emerging firms in poor countries. If they are effectively prevented from doing so, their development will be handicapped. A strict IPR regime at home or abroad can therefore slow this learning process.
The agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) has been severely criticized by developing countries and academics such as Stiglitz as potentially stifling learning processes in late developers. Many have argued that IPR regimes should differ between advanced and developing countries, to create space for the latter to catch up. The former should also be mindful of their own development history.
Indeed, the nature of the IPR regime tends to alter as a particular country develops. Lax enforcement is initially widespread when firms and sectors are engaged in learning and emulation and are catching up with advanced countries. As they become richer and start to innovate themselves, there is greater pressure for stricter IPR enforcement.
But firms in rich countries pushing for stricter enforcement may often need to be resisted by policymakers in order to promote competition and enhance social welfare. As mentioned already, getting the policy right requires careful judgement.
As a final illustration here are Thomas David and André Mach on the experience of the Swiss chemical industry from the edited volume Institutional Change and Economic Development (2007, p.233-4):
“By excluding from patentability all invention in the chemical field, the patent law of 1888 was thus able to conciliate the antagonist interests of Swiss industrialists. It was only in 1907 that a patent law worth its name came into being, even if a number of exclusions from patentability still existed. The new law was introduced for several reasons. Germany still placed a great amount of political and economic pressure on its successful Swiss chemical competitor. The German chemical industry claimed that the latter’s success was largely due to imitation – some spoke of ‘practices of robber barons’. The changing attitude of the large chemical firms was also responsible for the introduction of the 1907 patent law. Their development made them more and more dependent on innovations through their own activities of R&D and less on imitation, on learning by doing. In these conditions, a patent law became important for the Basle industry. In a few decades, the accusations of piracy were forgotten, and the Swiss chemical industry became known for the quality of its products.”