Developing countries have more to gain from implementing stronger protection of intellectual property rights (IPR) than is commonly believed. That is the conclusion of research by Professors Lee Branstetter and Kamal Saggi, published in the September 2011 issue of the Economic Journal.
In particular, their analysis suggests that stronger IPR regimes would make developing countries a more attractive location for investment by Northern multinationals, raise the demand for their labour forces and increase the purchasing power of Southern workers in terms of goods produced in advanced countries. Stronger IPR regimes would also increase incentives for innovation globally.
The effects of stronger IPR protection in developing countries on their industrial development, on the North-South flow of foreign direct investment (FDI) and on the global rate of innovation have been vigorously debated over the years.
This long-running debate was brought into sharp relief during the negotiations preceding the ratification of the World Trade Organisation''s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) in 1995.
Opposition to stronger IPR regimes in developing countries rests on two general arguments. First, there is concern that by enhancing the monopoly powers of innovators, stronger IPR protection may adversely affect consumer welfare.
Second, there are fears that stronger IPR protection in developing countries will hamper their ability to absorb foreign technologies without having any appreciable effect on innovation in the North.
For example, critics of stronger IPR enforcement in developing countries may argue that the rapid post-war industrialisation in East Asian countries, such as Japan and South Korea, was achieved under relatively weak IPR regimes and that a premature imposition of a strong IPR regime could retard the industrial development of today''s developing countries.
On the other side, TRIPS supporters argue that stronger IPRs worldwide will not only increase incentives for innovation but also foster industrial development in developing countries by encouraging multinationals to shift production there.
This study illuminates the debate by developing a global product cycle model in which innovation in Northern countries, imitation by Southern countries and the North-South flow of FDI respond to changes in the degree of Southern IPR protection available to Northern firms. The model provides a unified framework for assessing the arguments for and against stronger IPR regimes in developing countries.
The model has the desirable property that a strengthening of IPR protection in the South reduces the incentive of Southern firms to imitate Northern multinationals. This decline in the risk of Southern imitation has two important consequences for production and innovation.
First, the South becomes a more attractive production location for Northern firms. Second, since all Northern firms have the option to shift production to the South, an increase in the value of multinational firms increases Northern incentives for innovation.
Furthermore, the intra-regional reallocation of Southern production – from Southern imitators to Northern multinationals – that results from a strengthening of Southern IPR protection is dominated by the accompanying inter-regional reallocation of production. In other words, the South''s share of the global basket of goods increases with a strengthening of Southern IPR protection.
The analysis also provides fresh insights with respect to the effects of Southern IPR protection on prices and wages in the two regions. First, by making the South a more attractive location for production and thereby shifting aggregate labour demand from the North to the South, a strengthening of Southern IPR protection lowers the North''s relative wage.
Second, since Northern multinationals charge lower prices relative to firms that produce in the North, the increase in FDI helps lower prices. But this beneficial effect on prices is partially offset by the intra-regional reallocation of Southern production from local imitators to multinationals since a typical multinational charges a higher price than a Southern imitator.
Since prices are fixed mark-ups over marginal costs in the model, these changes in prices and nominal wages translate into clear-cut effects on real wages in the two regions: while Northern real wages decline due to stronger Southern IPR protection, Southern real wages increase.
More specifically, the purchasing power of Southern workers in terms of Northern goods increases whereas their ability to purchase goods produced by Southern imitators and multinationals remains unaffected.
''Intellectual Property Rights, Foreign Direct Investment, and Industrial Development'' by Lee Branstetter and Kamal Saggi is published in the September 2011 issue of the Economic Journal.