Download Importance of Intellectual Property in the International Marketplace

The Small Business & Entrepreneurship Council’s
21st Century Small Business Policy Series
Analysis #25
June 2006
Importance of Intellectual Property in
the International Marketplace
by Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council
Small Business & Entrepreneurship Council
1920 L Street • Suite 200 • Washington, D.C. 20036
Telephone: 202-785-0238 • Fax: 202-822-8118
Website: www.sbecouncil.org
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Importance of Intellectual Property in the International Marketplace
by Raymond J. Keating
Economics and history show that protecting intellectual property (IP) is important for
innovation and the economy.1 In fact, one can make the case that protecting IP is just as critical
as protecting tangible property.
Now, add into the mix how internationally integrated the global economy is in the
twenty-first century, and protection of IP becomes a global issue. Then consider the role of
small business and entrepreneurship in our economy, including in the realm of international
trade, and one comes to realize that global protection of IP is not just a worry for large
multinationals. So, what happens in other nations regarding IP matters to businesses of all sizes
and their employees.
Unfortunately, the IP record in many nations is quite poor, and the international challenge
of protecting IP is quite daunting. Michael Novak summed up the international problem this
way:
“In many countries … basic philosophical clarity is lacking. Moreover, even
where such clarity is achieved, the institutional and administrative requirements
for staffing a national patent and copyright office are beyond the abilities of many
nations… While most of the political debate and jostling on the subject focus on
WTO rules, enforcement proceedings, bilateral treaties, and jawboning, these are
really just manifestations of the lack of consensus on the foundations of
intellectual property. More sharply put: if developing and non-Western nations
did appreciate the importance of patents and copyright, then international
conventions and enforcement would be straightforward – as routine as
international enforcement of business contracts, tangible property, and maritime
law, where there is already consensus.”2
In a sense, it is an international struggle or battle over ideas about the manifestations of
ideas.
IP and the U.S. Economy
As a reminder as to how important intellectual property is for the U.S. economy, let’s
look at some numbers.
Stephen E. Siwek and Economists Incorporated recently did a study commissioned by
NBC Universal titled “Engines of Growth: Economic Contributions of the US Intellectual
Property Industries.” It is billed as “the first study that quantifies the economic contributions of
intellectual property (IP) industries to the U.S. economy.” What were some of the key findings:
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• IP industries “had an approximate 20% share of U.S. private industry GDP in
2003,” but were “responsible for nearly 40% of the growth achieved by all of U.S.
private industry during that year.”
• IP industries “had approximately 40% of the GDP of U.S. exportable products
and services yet contributed nearly 60% to the growth of the U.S. exportable
high-value-add products and services.”
• IP industries “are essential to the future growth of the U.S. economy. GDP 10year growth estimates would be approximately 30% lower than current
predictions without the contributions of the IP industries.”
• IP industries account for nearly 18 million workers, and pay higher wages than
most other industries.
• “For all IP industries, gross exports in 2004 exceeded $455 billion.”
That last point must not be lost. The international marketplace indeed plays a major role
in the U.S. economy. And that role has grown. For example, the growth in real total trade
(exports plus imports) accounted for 78.3% of real U.S. GDP growth from 2002 to 2005. In
2005, real total trade accounted 27.1% of real GDP. That compared to a mere 7.8% in 1960.
Given that small businesses account for 99.7% of all employer firms, employ half of all
private sector workers, create more than 50% of nonfarm private GDP, and make up 97 percent
of all exporters, it is obvious that small businesses account for and/or serve a big chunk of IP
industries.3
IP and International Economic Development
The argument actually has been put forth in certain circles that protecting IP is a bad deal
for the poor and developing nations. It’s hard to figure the economic logic behind such
assertions. Do the proponents actually believe that the best way to build an economy and lift
people out of poverty is through an economy allowing theft, rather than one that establishes
strong, clear property rights?
Once again, Michael Novak did a stellar job in making the case for IP protections aiding
the poor and developing nations:
“First, when their best inventors and most creative minds migrate to countries
where patent and copyright laws hold sway …, nations without such protections
suffer brain drain. Second, venture capital is desperately needed in the
developing world, but the absence of intellectual property laws scares away
venture capital – and jobs. Third, without patent and copyright protection, it is
unlikely that multinationals will set up shop in a particular country; yet
multinationals tend to bring with them more benefits, more humane treatment,
and greater opportunity than are usually found in local sweatshops. Fourth,
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without the protection of intellectual property rights, indigenous industries are
unlikely to grow into multinational income producers and large-scale employers
of the sort their nations need.”4
In April 2005, the International Intellectual Property Alliance issued a valuable survey of
findings regarding the role copyright industries play in economic development.5 The key point
was: “The general consensus among economists and scholars is that enhanced copyright
protection leads to positive economic growth. The statistical evidence suggests that economies
with stronger copyright protection experience a greater contribution to GDP from those sectors.”
It is worth highlighting a few additional points:
• “An adequate and effective copyright regime creates jobs in developing
countries, creates taxable income for the governments of those countries, and
compels foreign investment by assuring protection for the investors’ intellectual
property.”
• Economist Keith Maskus “notes that copyright protected products have
extremely high investment costs but very low copying costs, and points out the
detrimental effects of a regime that would allow piracy: ‘If other members of
society were allowed to free ride on works without compensating their creators,
the incentives to create would be severely dampened…’ Maskus offers statistical
evidence of increased international trade in goods protected by intellectual
property rights in both developed and developing countries.”
• “The strong suggestion is that strengthened IPRs [that is, intellectual property
rights] contribute to positive growth by creating more attractive [foreign direct
investment] opportunities for foreign investors and thus create a spill-over which
leads to greater domestic growth. Maskus identifies four implications of this
dynamic. First, weaker IPR regimes tend to isolate countries from technological
advances, including computer software advances protected by copyright.
Secondly, those countries with weaker protection of IPRs receive fewer spillover
benefits that new technologies would bring. Third, the technologies that are
available to such countries tend to be out of date. Finally, and perhaps most
importantly, countries with weak IPRs provide almost no incentive to their people
to create or innovate, nor do they attract new technological investment.”
(Emphasis added.)
• “In summary, Maskus’ book [Intellectual Property Rights in the Global
Economy] makes the convincing argument that strengthened IPRs, including
copyright, not only provide a framework for increasingly complicated business
transactions, but also provide strong incentives for [foreign direct investment]
which is vital to grow a domestic economy. Finally, and perhaps most
importantly, strengthened IPRs provide the impetus for local creativity,
increasing not only economic, but cultural, welfare.” (Emphasis added.)
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• A 2005 study by World Bank economist “Smarzynska Javorcik concludes that
weak IPR protection acts as a deterrent for investors. Furthermore, ‘[t]here is also
some evidence that weak IPR protection may discourage all investors, not just
those in the sensitive sectors.’ Finally, Smarzynska Javorcik finds that where
there is a ‘lack of IPR protection,’ investors are discouraged ‘from undertaking
local production and encourag[ed]. . . to focus on distribution of imported
products.’ As with the general statement about IPR protection, ‘this effect is
present in all sectors, not only those relying heavily on IPR protection.’”
• Economist Edwin Mansfield found that “IPR protection afforded by the patent
system provides a way for inventors to get back some of the benefits to society at
large that would not be theirs were there no patent system at all. Mansfield’s
findings indicate that the existence of the patent system is thought to be crucial for
innovation in both the chemical and drug industries.”
• Economists Claude E. Barfield and Mark A. Groombridge “make the
compelling point that the kinds of growth the United States has seen as a result of
the contribution of the copyright industries, will go to any country that institutes a
strong intellectual property regime.”
• “The general consensus of the academic literature is that stronger copyright
protection contributes to positive growth. This is arguably the case regardless of a
country’s level of development. Strong intellectual property rights provide
incentives for local creators to bring the products of their mind to their local
markets. By doing so, they help to lay the groundwork, in their countries, for
strong growth the likes of which have been seen in countries which have effective
regimes for IPR protection.”
IP and the Self-Employed
Another recent study zeroed in on the importance of IP rights to the self-employed.
Many assume that a strong system of intellectual property rights actually hurts the selfemployed, assuming that the bulk of the self-employed are not innovators. Economists Andrew
Burke, from the University of Cranfield in the United Kingdom and the Max Plank Institute of
Economics in Germany, and Stuart Fraser, from the University of Warwick in the U.K.,
examined the issue in a paper titled “The Impact of Intellectual Property Rights on SelfEmployed Entrepreneurship: An International Analysis.”
So, what did Burke and Fraser conclude?
• “Cumulatively, the analysis indicates that a well developed IPR regime has a net
positive effect on the self-employed sector.”
• They found “a positive effect of international IPR conventions and agreements.
Contrary to some of the most vocal objections to the TRIPS [Trade-Related
Intellectual Property Rights] Agreement we find that rather than undermine the
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self-employed enterprise base it actually boosts it. We also note that there appear
to be spillover effects from industry specific conventions to self-employment rates
and that these are positively related to the strength of commitment to IPRs
inherent in these conventions.”
• They “also found that democracies boost self-employment rates which is what
one would expect in terms of the political conditions necessary to promote free
enterprise thought and expression.”
• The authors concluded “that the most fundamental tenets of IPR laws, namely
the existence of the laws themselves, their specificity and strength, and a
democratic society in which to accommodate them are three very positive drivers
of self-employment.”
Where Are the IP Problems?
Despite the overwhelming economic and historical evidence emphasizing the need for
and benefits of strong intellectual property rights, so many nations fall woefully short. By doing
so, they not only create problems for U.S. enterprises seeking greater opportunity in the
international marketplace, but create serious obstacles to investment, economic development,
innovation and entrepreneurship among their own people.
The Office of the U.S. Trade Representative (USTR) publishes an annual “Special 301”
report looking at intellectual property rights protection around the globe – in 87 countries.6 The
2006 report noted that more than half of these nations came up short – with 48 countries
“designated in the categories of Priority Watch List, Watch List, or Section 306 Monitoring.” As
explained in the report, “Placement of a trading partner on the Priority Watch List or Watch List
indicates that particular problems exist in that country with respect to IPR protection,
enforcement, or market access for persons relying on intellectual property. Countries placed on
the Priority Watch List are the focus of increased bilateral attention concerning the problem
areas. Additionally, under Section 306, USTR monitors a country’s compliance with bilateral
intellectual property agreements that are the basis for resolving an investigation under Section
301. USTR may apply sanctions if a country fails to satisfactorily implement an agreement.”
Nations on USTR 2006 Priority Watch List
China
Indonesia
Russia
Israel
Argentina
Lebanon
Belize
Turkey
Brazil
Ukraine
Egypt
Venezuela
India
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Nations on USTR 2006 Watch List
Bahamas
Latvia
Belarus
Lithuania
Bolivia
Malaysia
Bulgaria
Mexico
Canada
Pakistan
Chile
Peru
Colombia
Philippines
Costa Rica
Poland
Croatia
Republic of Korea
Dominican Republic
Romania
Ecuador
Saudi Arabia
European Union
Taiwan
Guatemala
Tajikistan
Hungary
Thailand
Italy
Turkmenistan
Jamaica
Uzbekistan
Kuwait
Vietnam
Nations Under USTR Section 306 Monitoring
Paraguay
The USTR’s report details the particular IP challenges in each of the above noted nations.
However, all the news was not bad. The USTR noted that four nations were removed
from the Watch List this year due to “progress on IPR issues this past year” – Azerbaijan,
Kazakhstan, the Slovak Republic, and Uruguay.
Strengthening IP Protections Through Trade Agreements and International Leadership
For good measure, progress is being made through free trade agreements (FTAs):
“The United States is pleased that recently concluded FTAs, including the
Bahrain FTA, Oman FTA, the Peru Trade Promotion Agreement, the Colombia
Trade promotion Agreement, and the Central America-Dominican Republic Free
trade Agreement (CAFTA-DR) (with Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the Dominican Republic), will strengthen the
protection of IPR in those countries. The United States also is seeking high levels
of IPR protection and enforcement in the FTAs that are currently under
negotiation with Panama, Thailand, the Southern Africa Customs Union, Ecuador,
the United Arab Emirates, and in the ongoing negotiation of a Free Trade Area of
the Americas. The United States will also seek strong IPR protection and
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enforcement in the recently announced FTA negotiations with the Republic of
Korea and Malaysia. Another opportunity the United States uses to strengthen the
protection and enforcement of intellectual property is the increasing number of
trade and investment framework agreement (TIFA) negotiations with several
countries in regions such as the Middle East and Asia.”
In a February 2004 speech on intellectual property, then-Federal Reserve Chairman Alan
Greenspan noted: “Rationalizing the differences between intellectual property rights as defined
and enforced in the United States and those of our trading partners has emerged as a seminal
issue in our trade negotiations.”
U.S. entrepreneurs and businesses, elected officials and other policymakers face a
considerable challenge in gaining substantive intellectual property rights protections and
enforcement in the international marketplace. Many former communist countries, for example,
must still work to overcome historical and ideological biases against the very concept of private
property, with an additional leap necessary to extend that idea to intellectual property. Other
nations must work to remedy cultural biases against property rights.
The U.S., to its credit, has taken a global leadership role on the issue of intellectual
property. The overall emphasis noted above in terms of trade agreements is supported by nutsand-bolts efforts in key areas. In a recent conversation, Scott LaGanga, executive director of the
Property Rights Alliance, highlighted the combination of efforts at work through various federal
departments. He pointed out that the USTR notes where changes are needed abroad, along with
greater negotiating capacity and more staffers on the ground in targeted countries at Commerce.
There is an embassy education program on property rights at State, and increased emphasis on
the topic by Secretary Rice. The Department of Justice is working for greater enforcement
through legal systems, and the U.S. Patent and Trademark Office has stepped up international
patent efforts. LaGanga noted that in general the U.S. has given far greater priority to IP than
other leading nations, and that has been noted in international circles.
Much of this integrated federal emphasis was laid out in an April 2006 publication from
the Bush Administration’s Office of IP Coordinator titled “Strategy for Targeting Organized
Piracy: Accomplishments and Initiatives.” It noted efforts by the departments of Commerce,
Homeland Security, Justice and State, the USTR, and the Food and Drug Administration,
including a variety of education, security, law enforcement, diplomatic/international, and
legislative undertakings.
Recent major criminal prosecutions have covered the theft of computer software and
games, music, and movies, and the production and trafficking of counterfeit prescription drugs
and luxury items.
Internationally, the report noted stepped up IP efforts through the G8, the Asia Pacific
Economic Cooperation forum, new free trade agreements, the Organization for Economic
Cooperation and Development, the Security and Prosperity Partnership with Canada and Mexico,
and bilateral work with Japan, China, Russia, Canada, France, Germany, Hong Kong, Korea,
Mexico, Singapore, and the United Kingdom.
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In the end, the desire for greater prosperity should win the day. No economy will
generate the levels of investment and entrepreneurship needed for substantial economic
development and income gains without rigorous protection of property – both tangible property
and intellectual property. Nor will they reap the full rewards possible when it comes to
international trade. Property rights are foundational for economic success.
1
See the Small Business & Entrepreneurship Council’s February 2006 report “Innovation and Intellectual Property:
The Economics and the History” at www.sbecouncil.org.
2
Michael Novak, The Fire of Invention: Civil Society and the Future of the Corporation (Lantham, MD: Rowman &
Littlefield Publishers, Inc., 1997), pp. 70-71.
3
Small business data from the Small Business Administration’s Office of Advocacy “Frequently Asked Questions”
publication.
4
Michael Novak, The Fire of Invention: Civil Society and the Future of the Corporation (Lantham, MD: Rowman &
Littlefield Publishers, Inc., 1997), pp. 82.
5
International Intellectual Property Alliance, “Initial Survey of the Contribution of the Copyright Industries to
Economic Development,” April 2005.
6
U.S. Trade Representative, “2006 Special 301 Report.”
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