Intellectual Property Rights Spur Innovation…Sometimes

Innovation is promoted by local governments and international organizations alike as a primary engine of economic growth and development worldwide. The World Trade Organization, alongside numerous multinational organizations, has long cited intellectual property rights (IPR) as a key component to the enhancement of innovation. But at what level of IPR is innovation stimulated, and how is this related to a country’s economic development?

In “Innovation, Intellectual Property Rights, and Economic Development: A Unified Empirical Investigation,” published in World Development in 2013, authors John Hudson and Alexandru Minea examine a country’s initial level of intellectual property rights (IPR) and their level of economic development in a joint framework to estimate the effect of IPR on innovation. Currently, countries around the world are examining their IPR levels in the context of protecting their economic competitiveness while participating in a global economy. In examining the idea of a global standard for IPR levels, the researchers find that a universal IPR level could have a sub-optimal impact on innovation.

The authors arrived at their estimates by using an identification procedure to search for various ways that IPR affects innovation. The method allows more complex, nonlinear relationships to fully capture the interaction.They analyzed 62 developing and developed countries from 1980-2009, using five year averages to account for medium term effects and the fact that changes in IPR take time. Following previous research on IPR, the US is excluded from the data set to avoid a selection bias in favor of US innovations.

To prepare the data, the authors borrowed an international patent protection index developed by Ginarte and Park (1997), and updated by Park (2008), and used real per capita GDP to measure economic development. They caution, “It is important to emphasize that the IPR index is a constructed, not a ‘measured variable.’ … We believe it is the best measure available, but nonetheless it is important to understand its subjective nature.”

The results of the study showed “complex interplay between GDP per capita and the existing level of IPR in determining the nature of the response of innovation to a strengthening of IPR.” The authors identify an IPR range in which every country might best exist, with the caveat that each country’s situation is unique. According to the study, about one third of the world’s countries are within the set of IPR values at which no country should exist and should consider temporarily reducing their IPR levels to stimulate innovation. The authors also discourage a one-size-fits-all approach to IPR levels, and recommend considering economic development levels when designing policies. They suggest an optimal minimum standard of intellectual property rights, with each country moving toward the optimal.

Nor should the target IPR rate be static for each country, but it ought to evolve over time. The authors recommend that policymakers carefully choose the target level of IPR for each country: it could be the same in all countries, and some minimum level may achieve optimal results. Beyond a minimum standard of IPR, countries can quickly become victims of too stringent IPR laws, a deterrent to innovation. A suitable time path for reaching the target level should also be based on each country’s unique circumstances.

In conclusion, the authors recommend using GDP per capita as a measure for judging how quickly to raise each country’s IPR level, because this is more appropriate than using the same fixed schedule for every country. In the wake of this study, IPR levels will likely continue to be set relative to each country’s own ideal, or not set at all based on individual specifications, until more convincing evidence can further prove the positive impact – through increased innovation – of a more measured approach to setting target IPR goals for each country, given its economic development.

The country to country variance will continue where IPR levels will be set relative to each country’s own ideal or not set at all based on individual specifications, until more convincing evidence can further prove the positive impact of increased IPR levels on innovation and economic development.

Feature Photo: cc/(Clint)