Download Relaxing intellectual property rights may increase growth

RELAXING INTELLECTUAL PROPERTY RIGHTS MAY INCREASE GROWTH
Countries that already receive a significant amount of foreign direct investment (FDI)
could relax their laws on intellectual property rights and experience greater growth as a
result, even if foreign direct investment falls. That is the main finding of research by
Mila Kashcheeva, to be presented at the Royal Economic Society’s 2012 annual
conference.
Using data from a sample of 103 countries between 1970 and 2009, the study finds that
although FDI and intellectual property rights have positive effects on economic growth
for most countries, stronger intellectual property rights mitigates the growth effect of
FDI such that there may come a point when less FDI and more lax intellectual property
rights are better for the economy.
If a country has a location advantageous for FDI and is capable of attracting a
significant amount of it even with a lax intellectual property rights regime, the benefit of
attracting additional FDI might be outweighed by the cost of reduced flow of technology.
This is because domestic firms will not be able to imitate foreign technology as easily.
These findings may help explain why there is still a lot of variation in the strength of
intellectual property law among countries, even in Europe. The author argues that this
is because ‘the benefits of IPR reform are not manifest, especially for developing
countries that rely heavily on foreign technology and lack their own innovative capacity.’
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The empirical analysis of this research suggests that if a country is able to attract a
significant amount of foreign direct investment (FDI) without appealing to the intellectual
property rights (IPR) policy tool, by relaxing IPR protection the total production in that
country might be increased.
For example, if a country has a location advantageous for FDI and is capable of
attracting a significant amount of it even with a lax IPR regime, the benefit of attracting
additional FDI due to strengthened IPR protection might be outweighed by the cost of
reduced flow of technology from all attracted foreign capital to domestic investors, as
domestic firms cannot freely imitate foreign technology when IPR protection is strong.
This may explain almost two decades after the ratification of TRIPS agreement by the
members of WTO that indented to strengthen countries’ IPR protection, there is still a
lot of variation in the strength of IPR protection among the countries, surprisingly even
in Europe. Simply because the benefits of IPR reform are not manifest, especially for
developing countries that rely heavily on foreign technology and lack their own
innovative capacity.
The predictions that follow from an extensive body of theoretical literature that has
emerged to tackle the question of welfare implications of IPR reform are ambiguous.
More recent endogenous growth models argue that the extent FDI attracted by an
economy under a certain set of conditions determines the economic impact of IPR
reform.
These models predict that the larger is the FDI channel of international technology
diffusion compared to the imitation channel, the more likely it is that stronger IPR laws
increase production in the IPR-reforming country. But both firm- and industry-level
evidence suggest that stricter IPR laws increase industrial development, especially
among multinational firms in technology-intensive industries.
This study examines whether the impact of tighter IPR on GDP and TFP growth is
different for countries with different levels of FDI, because general equilibrium
considerations might offset or even reverse the partial equilibrium effects found by the
micro literature.
Using dynamic panel data techniques and a sample of 103 countries over 1970-2009,
the study finds that although FDI and IPR have positive effects on economic growth for
most of the countries, stronger IPR mitigates the growth effect of FDI. Moreover, at the
highest observed levels of FDI, it appears that more lax IPR increases the growth rate.
The mitigating impact of IPR on the growth effect of FDI works through factor
accumulation as well as improvements in total factor productivity.
These empirical findings are consistent with the theory in terms of punctuating the
importance of the level of FDI in determining the overall effect of IPR reform. But it
might first appear that the results contradict the prediction of the endogenous growth
models that the larger is the FDI channel of technology transfer, the more likely it is that
the stronger IPR laws increase production in the IPR-reforming country.
In fact, other exogenous factors that might attract FDI are not considered by these
models. At the same time, according to these models stronger IPR protection increases
the cost of acquiring knowledge from all attracted FDI. Hence, if a country is able to
attract significant amount of FDI even without strong IPR protection, IPR reform might
hurt the overall production of that country. This result does not contradict the main
theory and is supported by the empirical findings of this paper.
ENDS
‘The role of intellectual property rights in the relation between foreign direct investment
and growth’ by Mila Kashcheeva
Contact:
Mila Kashcheeva
Email: [email protected]
+1 (864) 557-2633