Are Intellectual Property Rules the “New Protectionism” or are they the Necessary Policies to Promote Innovation in the Knowledge Based Economy?

Protectionism, the fostering or developing domestic industries by protecting them from foreign competition through duties or quotas imposed on importations has existed in many different forms, ranging from mercantilist practices in the sixteenth century to dirigiste and isolationist economics of the twentieth century. Today the level of protectionism has declined as a result of organisations such at the WTO and the EU fostering common approaches to trade and policy developments. However, despite this countries will still attempt to use new and existing levers of influence to strengthen their international positions and their domestic companies. One emerging form of modern protectionism is the strengthening of intellectual property, the ownership of ideas and control over the tangible or virtual representation of those ideas. Encouraged by developed economies such as the United States and the EU, intellectual property rules benefit their policies, as the new rules extend the length of exclusivity that companies or individuals have over new ideas. Despite claims that the structure encourages new research and innovation the rules favour larger companies and liberal economies compared to smaller companies and less developed economies.

In many developed countries following the Second World War the overriding principle was to have an industrial policy, usually heavily reliant on the public sector in order to encourage the development of ‘national champions’, companies with enough expertise and scale to be able to compete well on the international markets. These values had been reflected in the protectionist measures which some countries had employed, such as France giving generous loans and subsidies to key industries. However, the growing web of trade agreements, such as the Treaty of Rome in 1957, which put restrictions on subsidies left France “saddled with huge coal, steel, shipbuilding and automobile companies that were absorbing public funds but which had substantial overcapacity and could not produce as cheaply overseas.”[1] This resulted in France increasing its pressure on its European neighbours in the 1990s to increase its level of standards in many areas in order to reduce their competitive advantage as a result of lower producing standards and a firmer policy on agricultural imports to the EU to protect its agricultural base.

The WTO’s Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), a binding international agreement that sets new universal standards on how countries grant and protect intellectual property (IP) helped to change the global climate of patents and the right to access information.

The Previous System

Prior to the strengthening of the patent system, “society looked to high technology for a model of how to innovate, not the only or necessarily the best model of how to innovate, not the only or necessarily the best model, but a model that certainly worked. The model was based firmly on the notion that innovation was dependent on the free flow of information.”[2]

This was part of the belief that information should be disseminated as much as possible, as even though the free rider takes the benefit of information without having to pay for it society gains, as the producer of information does not lose the information. This emphasis places the innovator above the inventor, as the benefit to society of a new breakthrough being used widely is greater from society’s point of view than if an inventor solely made use of it. For example, Drahos, and Mayne considered that the more producers who know how to produce a therapeutic drug the better, as the producers would have to compete on price in order to sell it. [3]

There have been varying uses of free riding throughout economic history, with countries ranging from Switzerland and the United States not having patent law until the 19^th century to some countries which still maintain some degrees of free riding. [4] This is because free riding enables countries to ‘imitate’ in order to catch-up with other countries economically. For Trebilcock and Howse there is “nothing suspect or unreasonable with the preference of many developing countries for a relatively lax system of intellectual property rights.” [5] One example of the was Japan, which practised an imitation policy highly successfully after the Second World War.

As matters of intellectual property originally tended to relate only to domestic innovations the institutions tended to reflect national preferences. For example, Canada was able to develop a highly successful generic drugs industry in order to guarantee value for money healthcare for its citizens as a result of promoting competition in the pharmaceutical industry.

Also, as R&D often was publicly funded it permitted for greater cooperation between countries on major scientific projects, as the benefits of findings were likely to benefit all.

Calls for Greater IP Protection
Since the 1980s traditional industrial policy, whereby governments subsidized various industrial sectors to promote national economic development, had been severely criticized. Its practice became “increasingly less viable both for reasons of budgetary restraints and for fear of trade counterveil measures by other countries.” [6] This combined with the growing popularity of libertarianism and the belief in the free market over public investment created louder concerns for reform of intellectual property rules, particularly from the business community. However, Doern feels that the decline of traditional industrial policy and the emergence of trade related policies are traceable with hindsight but they do not yield a simple casual path for intellectual property for IP institutions.[7]

This relationship between society and businesses has altered since the 1980s, with the intellectual property balance being tilted in favour of businesses in order to allow growth. A major argument from the business community was that there was a new need to protect inventors. It is argued that today’s inventors are different from yesterdays, as the time and cost necessary to make new discoveries was greater than in the past and that, consequentially they required a greater return to justify and further encourage research. As a consequence patents, a form of subsidy to inventors from society in exchange for new knowledge was extended.

Supporters of this felt that the monopoly of longer patents is less of a problem than it would have been in the past because “as alternative strategies proliferate, there are fewer and fewer products with inelastic demand curve that allow companies to raise their prices arbitrarily to earn monopoly returns.” [8] Thus, as there is increased choice there is less opportunity for patent holders to abuse their position. However, this pure version of perfect competition fails to stand up to the light in many situations. As a result, the US Government has cut its support for research and development. What used to be a fifty - fifty split in investment has now become one third - two thirds split in research expenditures. [9]

Increasing Intellectual Property Internationally

America and later Europe have been the major standard bearers in extending IP and creating global standards globally. This was a response to create a framework to encourage international trade, through creating a stable framework for trade in goods, services and knowledge for companies. However, the framework’s unitary style and free-market language create significant disadvantages for the developing worlds and their businesses.

Until the 1980s America was content to share its innovation with the world, partly to counteract the threat of the Soviet Union but also because “Americans believed that the rest of the world would not be able to catch up with American ingenuity,” as while foreigners were copying the last generation of technology Americans would be inventing the next. [10] However, the economic growth of East Asian companies and their increasing abilities to compete both in terms of manufacturing and research has put pressure on American competitiveness.

Following bilateral agreements with Hungary, South Korea, Singapore and Taiwan the US Government learned that “while exhortation alone was ineffective, linking trade and intellectual property protection could get desired results.” [11] As a country with a $12,455,825 million GDP[12] the United States has been able to exert its influence on others using its market size to get concessions for protecting its IP. This has been used to cement its strength as the largest pharmaceutical manufacturer and computer software manufacturer in the world.

During the Uruguay Round the United States pushed for increased levels of IP, with a flat twenty year time period for all patents. This agreement occured without any African country present at the earlier rounds of negotiation, despite the importance of such a decision. It resulted in the linkage between trade and IP being tightened through amending the Trade and Tariff Act in 184 and 1988. As a result, America “is able to retaliate swiftly with trade sanctions in the event that targeted countries fail to adequately protect its intellectual property.” [13]

Effects on Businesses
The economic consequences affect all types of businesses, as agreements such as TRIPS raise the barriers to entry for all companies, making it difficult for new or smaller companies to establish themselves. However, this is especially the case for developing countries, as they tend to have less powerful businesses, especially in high knowledge industries.

In the past, companies were willing to share their technology because it did not seem to be the source of their success and could not be sold for much anyway. [14] However, as a result of lengthening the time period of IP to twenty years there is a considerable benefit to enforcing and claiming rights of patents. For example, Texas Instruments, once liberal in its cross-licensing arrangements with competitors, has become particularly litigious. Its most profitable product line is now patent royalties. For example, the company’s licence income from $30 million in 1990 to nearly $1 billion in 2000 (Rivette and Kline, 2000). [15]

Previously, businesses who developed a product would first attempt to move quickly in producing it in order to get the ‘first mover advantage’ and gain economies of scale so significant that other companies would be put off entering the market. However, as a result of the new system large companies are becoming less willing to share their inventions with others, as they have such a large period of monopoly they have a greater incentive to use their internal resources. As a result there is less dissemination of knowledge, as there is no incentive for companies because they can sit on the patent. Today, 73% of private patents were still based on knowledge generated by public sources such as universities and non-profit or government laboratories. Thurlow felt that this was enough to suggest that secretly held knowledge does not generate the next generation of technology. [16]

The flat twenty year intellectual property time period was introduced by negotiators as an expedient, as the time it would take to introduce separate industry agreements would be time consuming and perhaps preferential to certain industries. However, as a result the flat time period it has greatly distorted many markets. Simple economic logic suggests that these periods of protection “ought to vary greatly by field or sector, depending on varying cost structures, investments, and payback periods.” [17]

As a result, some industries have a greater incentive to produce patents, as the benefit of a patent exceeds the length of the monopoly period given. The table below highlights the fact that even though many patents are being issued it does not mean that the technology being developed would not have come about if the IP protection period was shorter.

Inventions that would not have been developed in the absence of patent protection (%)[18]

Pharmaceuticals 60

Chemicals 38

Petroleum 25

Machinery 17

Fabricated Metal Products 12

Electrical Equipment 11

Primary Metals 1

Office Equipment 0

Motor Vehicles 0

Rubber 0

Textiles 0

The lack of mini-patents, which would provide shorter, less expensive and less rigorous forms of protection has disadvantaged smaller companies. This results in smaller and medium sized companies being unable to compete on a level footing with larger companies.

Small companies are in a lose-lose situation in regards to IP as even if they have a patent it may not guarantee them any security. In situations where rival companies start using a technology or process smaller companies may be unable to afford or have the human resources to mount a legal challenge against the offending company.

Patents do not confer any wealth. The amount spent on securing and enforcing patents does not add any value to an idea. With cases lasting four years or more, costs can go from between $2 million and $10 million per case, resulting in companies spending as much time in the courts as they are in the laboratories. [19]

Jorde and Teece argue that ‘legal scholarship and judicial action (in the US) have been slow to recognise the primary importance of innovation to the competitive process. [20] For example, corporate patent attorneys have started scrutinizing their companies’ patent portfolios and have become more reluctant to give R&D managers the go-ahead on a new idea or business for fear of duplicating a patented product. [21]

The law community suggests that anti-trust cases will help clarify any misunderstandings through test cases. However, any judges decision will merely reflect previous judgements and will be unable to take account of any economic or political realities of agreements regarding IP.

Effects on Developing Countries
As a result of longer periods of agreements and tougher enforcement of IP protection there has been an increase of foreign technology transfer as a consequence of companies being less concerned about their technology being copied. However, it is difficult to envisage whether this would have happened regardless. The main concern is that the developing world has had a system imposed on it that forces it to pay the developed world for technology that it morally should be discounting the effects of patents.

As mentioned previously, most countries have gone through stages at which they ‘free ride’, borrowing technology from abroad and using it to develop the economic infrastructure until there is domestic pressure to protect domestic innovators. Agreements such as TRIPS have removed this path which had previously allowed countries such as Japan and America to become prosperous, widening the gap for many countries to economically reform.

For example, the United States has 3676 scientists and engineers in R&D per million compared to Rwanda’s 35 scientists and engineers in R&D per million. [22] It is unlikely that a company would seriously consider relocating to Rwanda just because it was offering a fifty year period of IP protection. Consequentially, it seems unfair to burden a country with regulations and demands that it will struggle to comply with and affect it greatly.

This is especially so given the fact that the patent infrastructure is based more on the developed worlds needs for consumerism, with emphasis on cheap entertainment goods rather than poorer countries needs to cheap medicine for malaria.

No case is this more apparent than the pharmaceutical industry which has now become purely business orientated and seemingly unable to make moral or investment decisions. Take for example the pharmaceutical industries shock at South Africa’s attempts to introduce cheap drugs to deal with the AIDS crisis merely because it would be seen as the thin edge of a wedge of reduced prices or generic goods for other countries.

The pharmaceutical industry has every right to attempt to be profitable. However, the infrastructure put in place appears to knowingly put in place a system whereby the industry maximises its costly investment in developing and testing drugs on both the developed and developing countries of the world. In the case of poor countries inability to develop new drugs for themselves or generic drugs legally this would be a case of abuse of control and overly protectionist policies of developed nations.

Similarly, its market decision making results in greater resources being devoted to solving the crisis of hair loss over the crisis of HIV because developed countries will provide a more profitable marketplace.

Conclusion

The benefits of agreements such as TRIPS seem to be highly one way, reinforcing the dominant position of countries such as the United States and economies such at the EU. Measures to encourage research are helping to create a situation where inventors are given too great a control over the innovation process. This seems to benefit predominantly Western and East Asian companies without offering poorer companies the benefits beyond the chance of increased foreign investment if they toe the line. The lack of power is highlighted by industries such as pharmaceuticals being able to set the level of investment and price on goods without any form of accountability. However, intellectual property is not the ‘new protectionism’, as new battle lines such as over how we reduce the growth of carbon emissions are creating more current forms of government competition. Despite this, the new rules are a major disadvantage that works against the least well off in the developing world.

By Jonathan McHugh

First written in May 2007

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[1] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175

[2] S. MacDonald Exploring the hidden costs of patents p.26

[3] P Drahos and R. Mayne Global Intellectual Property Rights: Knowledge, Access and Development (London: Palgrave, 2002) p4

[4] P Drahos and R. Mayne Global Intellectual Property Rights: Knowledge, Access and Development (London: Palgrave, 2002) p4

[5] B. Doern Global Change and Intellectual Property Agencies (Pinter) 1999 p. 7

[6] The Canadian Intellectual Property Office p61

[7] B. Doern Global Change and Intellectual Property Agencies (Pinter) 1999 p. 35

[9] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[10] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[11] S. Sell Power and Ideas North South Politics of International Property and Antitrust (State University of New York Press) 1998 p. 183

[12] International Monetary Fund, (World Economic Outlook Database) September 2006;

[13] S. Sell Power and Ideas North South Politics of International Property and Antitrust (State University of New York Press) 1998 p. 183

[14] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[15] S. MacDonald Exploring the hidden costs of patents p.29

[16] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[17] The Canadian Intellectual Property Office p. 121

[18] The Canadian Intellectual Property Office p62

[19] S. MacDonald Exploring the hidden costs of patents p.29

[20] Cited from The Canadian Intellectual Property Office p. 63

[21] S. MacDonald Exploring the hidden costs of patents p.32

[22] P Drahos and R. Mayne Global Intellectual Property Rights: Knowledge, Access and Development (London: Palgrave, 2002) p2