IPRs, Innovation & Diffusion Keith E. Maskus Knowledge Economy Forum V Prague, March 30, 2006

Why Protect IPRs? Society has an interest in knowledge creation and dissemination. Markets for knowledge and information are subject to failure. - Invention and creation are costly and face uncertainty. - Appropriability problems (Figure A); - Difficulties in selling information; - Problems in signaling origin and quality. IPRs are market-based solution that trade off static market power for dynamic competition. IPRs rarely create strong monopolies in competitive environments.

quantity mc mr demand price qcqc qmqm pcpc pmpm Monopoly rents Dead- weight loss FIGURE A

Objectives of a balanced system of IPRs Ex-post market power to stimulate ex-ante investment in innovation; Commercialization of new goods; Publication and diffusion of new information; Support markets for trading technology and information; Consumer guarantees of product origin; Support complex multi-actor transactions.

Potential positive impacts on development Promote technical change, both internal innovation and imported technology; Encourage broader domestic and foreign markets:  Trademarks and geographical indications have potential to spread demand across regions and countries for recognized qualities (eg, Haier in China, Arabic products in ethnic markets abroad, Chilean wines).  Quality improvements gained through backward linkages can support export growth in supplier industries. More cultural goods created:  African music;  Textile designs. More new products for developing-country markets to the extent that new products react to stronger IPRs protection.

Potential negative impacts on development Strong patents may block follow-on innovation and restrict imitative competition; Raise costs of technological inputs due to higher licensing fees and prices; Limits on generic competition in medicines:  Strong limits on use of compulsory licensing;  Lengthy periods of exclusive rights to use test data; Limit experimentation with plant varieties; Restrict fair-use access to educational, scientific, and cultural materials; Quasi-permanent shift in terms of trade.

IPR protection increases with development level

Some implications Optimal protection is not the same in all countries. Interests in IP protection go up among domestic businesses as incomes rise and technical abilities expand:  Taiwan and Korea in IT and electronics patents.  India (films) and Jamaica (music) in copyrights.  Higher-income ECA countries in trademarks and patents. TRIPS (and TRIPS-Plus) standards may be currently excessive for poor countries. Likelihood of strong enforcement in poor countries is weak in short run.

Empirical evidence on IPRs and innovation Weak prospects for promoting local invention from patent reforms:  Lerner’s historical study;  Branstetter’s work on Japan;  Declining patent registrations by Mexican companies post- reforms (now trending upward).  Rise in Korea’s patenting after lag. Strong indications that small-scale technologies and diffusion are encouraged by utility models and licensing regimes. Evidence on trademarks, geographical indications, copyrights is suggestive but anecdotal.

Main impacts may be on ITT Inward technology transactions seem to be improved by reforms in patents and trade secrets.  International trade flows;  Sensitivity of FDI and its composition;  Licensing and externalization;  Markets for technology services; Conclusions based on studies of larger, middle- income and transition economies.

The situation in ECA countries ECA countries have advantages:  Proximity to EU and EU membership for some;  Relatively larger stocks of human capital and engineering skills than developing countries;  Developing infrastructures for technology use. There is econometric evidence of positive spillovers in European transition economies from FDI associated with IPRs.

Other innovative factors matter for ITT and learning. Ability of domestic firms and laboratories to learn and adapt technology is critical. Diffusion (“spillovers”) depend positively on:  Competitive processes (easy entry);  Potential market size, including export markets;  Extent of potential backward linkages; Institutions for linking public research and market commercialization of new goods and technologies. All this makes a broad “innovation strategy” important. ECA countries need to work on defining and implementing this broad approach.

IPRs that encourage local innovation Trademark protection can encourage local firm entry and product development. Copyrights and institutions can promote domestic development of software, music and films. Protection encouraging small-scale invention (eg, utility models, design patents). Open licensing regimes. Transparent and pro-competitive regulation.

Example: Geographical indications These are some form of protected place names (range from collective marks to rigid place names) guaranteeing some portion of good is produced in an area. Can support investments in quality and marketing (Australian and Chilean wines). Important to register GIs abroad to avoid misappropriation (eg, basmati rice case).

Can current global IPRs regime work for transition economies? TRIPS is generally structured well for essential technology protection.  Minimum standards are reasonably pro-competitive and reduce uncertainty.  Countries can tailor standards and limitations to safeguard competition and social needs.  Processes for ITT should be improved over time. Countries need to embed IPRs into policy systems for innovation, competition, and development. Policy trends toward global harmonization of patent standards are of concern.

The EU system Many ECA countries are members or prospective members and must adopt EU minimum standards. EU patent requirements are relatively flexible and permit key limitations:  Restraints on software patenting;  Limits on patenting of life forms;  Access to compulsory licensing;  Others EU’s regime is rigid in database protection and geographical indications. Effective harmonization with EU regime should improve business climate and attract more inward FDI into countries with competitive characteristics.

Concluding remarks Given different development and growth trajectories, ECA nations will benefit from IPRs at different levels and time periods. Minimum and transparent standards are encouraging factors for FDI and trade. IPRs should be considered a component of overall strategies for innovation and social development.