Promoting the role of intellectual property rights regimes in national economic development

Table of Contents

Index of Figures

Acknowledgements

1. Introduction

2. Reviewing the Literature
2.1 A Perspective on International Trade
2.2 A Perspective on Foreign Direct Investment
2.3 A Perspective on Technology Transfer
2.4 A Perspective on Intellectual Property Rights

3. How Intellectual Property Stimulates National Development
3.1 A Review of Relevant IPR Models
3.2 Integrating Existing Models

4. The Case of the Indian Pharmaceutical Industry
4.1 Evaluation of the Indian Case Using the Research Framework
4.2 Evaluation against Research Framework

5. Limitations and Future Research

6. Policy Implications

7. Conclusion

Notes

References

Index of Figures

Figure 1 - the innovation effect

Figure 2 - the diffusion effect

Figure 3 - economic growth and the protection of Intellectual Property

Figure 4 - sectoral composition of R&D

Figure 5 - IPRR-strength and the development stage

Figure 6 - suggested research framework

Acknowledgements

The work presented in this paper is based on research conducted during research seminars at the European Business School, International University Schloss Reichartshausen in Oestrich- Winkel, Germany and at the Robinson College of Business at the Georgia State University in Atlanta, GA. I would like to thank Joachim Ahrens (EBS) and Cherian S. Thachenkary (GSU) for their support and input during the research.

Furthermore, an earlier version of the work discussed in this paper has been published at a conference:

Müller, Benjamin & Thachenkary, Cherian S. (2007): The Endogeneity of Knowledge Creation and Emergence of National Intellectual Property Rights Regimes, in:Conference Proceedings of the 7th Annual Hawaii International Conference on Business(May 24.-27., 2007), Honolulu, USA, pp. 2015-2045.

I would like to specifically point out Cherian’s contribution to this conference publication and the feedback provided by him that lead to the final version presented here.

Promoting the Role of Intellectual Property Rights Regimes in National Economic Development: Supporting Imitation to foster Innovation

1. Introduction

The importance of intellectual property rights (IPR) and their legal implementation in IPR- regimes (IPRR), summarizing all distinct forms of legal protection of intellectual property (IP), has been growing constantly over the past decades. While this is especially true for business and the polity, also the academia has developed manifold perspectives to study the impact of IPR on international business and the global economy. Many studies have been focusing on the quantitative analysis of the subject, often connected to other phenomena such as foreign direct investment (FDI) or technology transfer. However, recent work in the field, such as Ramamurti (2004) and Meyer (2004), points scholars of the international business discipline (IB) also towards considering the impacts IPR can have with respect to developmental issues. The protests by anti-globalization activists during the recent G8- summit in Heiligendamm, Germany illustrate how relevant this aspect of the topic is.

The objective of this paper is to add a theoretical perspective to the current discussion about IPR and the role they can play in helping the developing world to close the development gap. Besides the recent discussion, such a contribution can help to increase the understanding of the causalities between IP and related legal institutions on one side and national development on the other. Many of the studies mentioned above are only covering data until about the middle of the last decade. Continuing and broadening the academic discourse by adding a theoretical perspective will help to investigate the impact of IPR on national development with a better understanding of how the indigenous capability of a nation to create knowledge and the emergence of a national IPRR interact and, if any, which causalities can be assumed. This will be the central research question of this paper.

The work will be presented in the following structure. Firstly the state of the discussion in the in the IB discipline will be reviewed. Recently some of the most traditional perspectives of this discipline have become increasingly concerned with developmental issues. Moreover, many of them show an overlap with the topic of IPR. From their implications the topic of IPR is investigated by looking at the theoretical foundations of how IPR interact with a national economic growth and development. Multiple frameworks are discussed and an integration of them into a consistent framework to connect the aspects the research question is introduced. Finally, observations will be made concerning the case of the development of India, in particular its pharmaceutical industry, to investigate the proposition of the approach and framework introduced here. Besides that, the findings are compared to the contribution of others concerned with this topic and commonalities, differences, and causes for the latter are discussed. From this evaluation implications are drawn for the political discussion about development and IPR. Pointing other scholars in the direction of future research opportunities concludes the paper.

2. Reviewing the Literature

The current discussion in the field of IB is not only covering the issue of IPR. Therefore any discussion of this topic needs to be put in perspective with the many other topics that IB scholars around the world are currently investigating. Ramamurti (2004) and Meyer (2004) introduce a diverse set of topics that should guide the discipline’s joint research efforts. While work in many of these fields has produced significant contributions, also new perspectives arise. Before joining one of these new perspective to which this paper wishes to contribute to, a look at the current progress in the other field seems necessary to set the stage for the research presented here. The following sections will also show how these fields interrelate with the research question.

2.1 A Perspective on International Trade

A relatively strong case with respect to international trade has been made by Ramamurti (2001; 2004). In his work he is pointing very much towards the ability of multi-national enterprises (MNEs) to also abuse their power in trade to convince national governments to establish rules friendly towards the MNEs. Besides MNEs, also national governments can use trade relations to exert substantial pressure (Shadlen et al., 2005). A case in point is the U.S. Omnibus Trade and Competitiveness Act of 1988 (Bohara et al., 2005).

Linking international trade to issues of IPR-protection can be done via trade in knowledge- intensive or high-technology goods. Fink and Primo Braga (1999) have conducted a study of the effects of IPR on international trade. In this study they are investigating the aforementioned goods, arguing that such goods are particularly prone to issues of IPR. While they find that the overall share of knowledge-intensive or high-technology goods in international trade is rising, their study does not results in any significant findings concerning the effect of different IPRR internationally on trade flows in these goods.

IPR in a country could not only impact the international trade flows. The argument can also be made vice versa. Work by Hongxin (1992) suggests that imported technology also has an effect on the domestic technological capabilities of a country and hence stimulates the domestic entrepreneurial activity. A lot of empirical contributions have tried to argue that domestic entrepreneurial activity in a country will, over time, increase the country’s motivation to adopt IPR (Park and Ginarte, 1997; Yongmin and Thitima, 2005). This paper would like to contribute to this discussion by adding a theoretical perspective.

2.2 A Perspective on Foreign Direct Investment

Much like trade power, also FDI can be used, especially by MNEs, as a bargain to influence the political and institutional environment of a country (Ramamurti, 2001, 2004). FDI in general have long been recognized by IB-scholars to be one of the prime vehicles to promote the increasing integration of formerly distinct national markets and economies. This integration will also be done via the integration into the international trade community, institutionalized by WTO-membership, and a subsequent adherence to the respective statutes; e.g. the TRIPS-agreement.

Besides such institutional aspects, FDI in general and the IP-based development of a country can also be linked via FDI in research and development (R&D). A lot of work has been done in this field. While a considerable amount of this work, e.g. Kuemmerle (1999), focuses on the perspective of MNEs, some work also investigates the effect of the FDI-based presence of MNEs on the host country. Hejazi and Safarian (1999) have investigated this topic, arguing that an analysis of trade as a source of technological spillovers alone would not be sufficient.

Also Feinberg and Majumdar (2001) have investigated the chances of technology spillovers from the MNEs on local companies in the Indian pharmaceutical industry.

Concurring with this rationale, external source of knowledge should be considered when investigating the rise of domestic technological capabilities in a developing country.

Traditionally the channels for this are human resources, investments into infrastructure, and technology transfer (Feinberg and Majumdar, 2001). In particular the latter is a very important driver in the context of the research presented in this paper.

2.3 A Perspective on Technology Transfer

Technology transfer is an issue that relates very closely to IPR. Empirical research on U.S. companies suggests that IPRR-reforms in developing countries increase the transfer of technology, know-how, and IP to these countries (Branstetter et al., 2004). This argument also makes the link between technology transfer and IP-related issues. It suggests that only if a nation provides international investors with a sufficient legal basis to protect the IP contained in their innovations will these countries be provided with the respective innovations.

This is also an important consideration with respect to spill-over effects (Branstetter et al., 2004). These are not necessarily limited to the industry the innovation is originally placed in, but via general investment in infrastructure development, human-resource development, or economic stimulus in supplying industries can spill over to the entire economy.

2.4 A Perspective on Intellectual Property Rights

With all of the above relating to IPR, a look at this perspective seems to be central to the current discussion in IB. The basic rationale for IPR can be shown using Schumpeter’s model of dynamic competition (Schumpeter, 1911). While in Schumpeter’s time the observed temporal monopoly, arising from a relatively long product lifecycle, allowed for a sufficient protection of the IP contained in innovative products, markets seem to have developed in favor of the imitators. Costs for R&D have increased significantly and product lifecycles are shortening (Fink, 2000). This leaves the creator of original IP with a much higher risk with respect to the appropriability of his investment into innovation.

Appropriability is generally based on two factors: (1) the inherent replicability of knowledge and (2) the strength of IPR (Teece, 1998). With respect to the first factor, Arrow (1962) has pointed out that knowledge and information possess the characteristic of public goods.

Considering this characteristic of knowledge, it can be assumed that its inherent replicability is easy. As such, appropriability is very difficult to ensure by the knowledge holder. This makes it difficult to create and secure the temporal monopoly to protect the IP. In turn, the reliance on the legal institution of IPR increases for appropriability of knowledge intensive innovations.

A good example is the pharmaceutical industry, which will be looked at in greater detail later. It is generally easy to imitate new chemical entities (Fink, 2000). Where IPR are weak, knowledge and innovation are therefore found to have a very weak appropriability. Hence, the “monopoly” of the innovator is very weak and the innovator is not able to generate enough revenue to pay off his substantial investment in R&D. The generation of new knowledge would be impeded and innovation would come to a halt.

An IPRR offers more and stronger protection of knowledge and eases this problem. The appropriability increases since the needed “monopoly” is now granted by law and allows for sufficient time to exploit the economic potential of the innovation. This allows for a calculation of the anticipated additional revenues with a higher degree of certainty, i.e. lowers the risk-premium on anticipate returns, and reduces the additional cost needed to protect knowledge individually. IPR therefore offer a solution to the concerns raised above: they grant the Schumpeterian temporal monopoly, alleviate the pressure from shortening product life cycles, and allow for protection of the quasi public good knowledge. IPR are able to ensure an ongoing innovation effort by the companies in the market (Fink and Primo Braga, 1999; Preusse, 1996) and therefore ensure maximization of the national welfare position from a dynamic perspective.

As mentioned in the beginning, IPR, and in particular their role in the context of promotion the development of less developed countries, are the primary concern of the work reported on in this paper.