Yesterday I gave a presentation on IPRs, technology and growth at the Dallas round of TPP negotiations. The following blog is based on my presentation. The slides I used are here.

Policymakers and US industry groups have been arguing that TRIPS-Plus intellectual property rights will drive growth and innovation in all of the countries involved in the TPP negotiations. They often refer to studies of how IPRs work in the U.S., and assume that IPRs will have the same effects in other countries. Of course, the U.S. has characteristics that are conductive to IPR-led growth, such as a large public R&D base and a competitive advantages in IP-intensive industries. Nonetheless, policymakers and industry representatives seem to assume that IPRs will have the same effect on innovation and growth in very different countries. One recent study that has been getting a lot of attention has been the Department of Commerce report on employment and contributions to GDP by IP-intensive industries, which uses methodologies drawn from industry-funded copyright studies and WIPO guidelines. It was recently cited by the U.S. Ambassador to New Zealand, and by 33 industry leaders in a letter to USTR Ron Kirk. Each used the study to justify assertions that IPRs will drive innovation and growth in all of the TPP countries. (It should be noted that the authors of the Commerce Department report said that one shouldn’t drive policy conclusions from it.)

However, there is a large body of academic literature on the link between FDI and innovation which is has been largely ignored by U.S policymakers, and is largely absent from the debate over IPR in these negotiations. In general, academics who look at the relationship find it to be more nuanced. The links is especially questioned when it comes to developing countries. Academic literature often refers to the “costs and benefits” of strengthened intellectual property enforcement, and usually concludes that the optimum level of IPR protection will differ from nation to nation. It acknowledges that there are developmental benefits to less stringent IPR protection (like the ability to learn from imitation) and that many of today’s wealthy countries benefited from weaker IPRs earlier in their development.

A very quick sample of some of this literature follows. Then I present the main findings of a working paper I have written on the effect of TRIPS-Plus intellectual property protection passed in developing countries in order to implement FTA obligations.

UK Commission on Intellectual Property Rights. Integrating Intellectual Property Rights and Development Policy. 2002. (Link)

“…strong IP rights alone provide neither the necessary nor sufficient incentives for firms to invest in particular countries… The evidence that foreign investment is positively associated with IP protection in most developing countries is lacking.”

Robert L. Ostergard., Jr. “Policy Beyond Assumptions: Intellectual Property Rights and Economic Growth.” Chapter 2 of The Development Dilemma: The Political Economy of Intellectual Property Rights in the International System. LFB Scholarly Publishing, New York. 2003

“…no consistent evidence emerged to show that IPR contributed significantly to economic growth cross-nationally. Furthermore, when the nations are split into developed and developing countries, results to suggest otherwise did not emerge.”

Carsten Fink and Keith Maskus. “Why We Study Intellectual Property and What We Have Learned.” Chapter one of Intellectual Property and Development: Lessons from Economic Research. 2005. (Link)

“Existing research suggests that countries that strengthen their IPR are unlikely to experience a sudden boost in inflows of FDI. At the same time, the empirical evidence does point to a positive role for IPRs in stimulating formal technology transfer.”

“Developing countries should carefully assess whether the economic benefits of such rules outweigh their costs. They also need to take into account the costs of administering and enforcing a reformed IPR system”

“We still know relatively little about the way technology diffuses internationally.”

Keith Mascus. “Incorporating a Globalized Intellectual Property Rights Regime Into an Economic Development Strategy.” Ch. 15 of Intellectual Property, Growth and Trade. (ed. Mascus). Elsevier. 2008.

“Middle income countries must strike a complicated balance between promoting domestic learning and diffusion, through limited IP protection, and gaining greater access to international technologies through a strong regime… it makes little sense for these nations to adopt the strongly protectionist IP standards that exist in the U.S., the EU and other developed economies. Rather, they should take advantage of the remaining policy space provided by the TRIPS Agreement.”

“It is questionable whether the poorest countries should devote significant development resources to legal reforms and enforcement of IPR.”

Kamal Saggi. “Intellectual Property Rights and International Technology Transfer via Trade and Foreign Direct Investment. Ch. 13 of Intellectual Property, Growth and Trade. (ed. Mascus). Elsevier. 2008.

“Overall, it is fair to say that the existing empirical evidence regarding the overall technology-transfer impacts of increased IPR protection in developing countries is inconclusive at this stage. What is not yet clear is whether sufficient information flows will be induced to procure significant dynamic gains in those countries through more learning and local innovation.”

“Developing countries need not only to obtain foreign technologies but also to learn how to use them to their fullest potential. In this context, it is useful to make a distinction between the initial introduction of a technology into a country and its subsequent diffusion within the domestic economy.”

Alexander Koff, Laura Baughman, Joseph Francois and Christine McDaniel. “Study on the Economic Impact of ‘TRIPS-Plus’ Free Trade Agreements.” International Intellectual Property Institute and the U.S. Patent and Trademark Office. August 2011.

TRIPS-Plus IPRs viewed as “important, but not essential” for attracting investment. Many other factors matter (taxes, human capital, clustering, etc).

Many countries had recently changed laws to comply with TRIPS, so changes for FTAs had a smaller effect on investment.

The way in which the obligations were implemented was important. It is not wise to simply impose one legal framework on top of another. Implementation of FTAs requires taking specific nations’ legal systems into account.

At the IPR and Innovation panel yesterday, I also presented my working paper that examines the effects of laws that were implemented to meet the requirements of FTA with the U.S.

The first step was to determine when FTA obligations became “implemented” through changes in laws and enforcement practices. The easy part was examining laws passed – the World Intellectual Property Organization maintains a database on IPR laws that shows when countries amended their existing laws or passed new ones to implement trade obligations. The less straightforward part was gauging enforcement. USTR publishes two reports each year with information on IPRs in various countries – the National Trade Estimates of Foreign Trade Barriers and the Special 301 Report. These reports are notoriously vague and based heavily on input from industries seeking tougher IPR protection. But you can see in some cases that enforcement is changing in some countries. For my study, the countries were considered to have implemented FTAs when they had both passed implementing legislation, and when USTR reports signaled increased enforcement of the laws.

I used World Bank firm-level data on foreign direct investment and licensing before and the implementation of IPR obligations. The World Bank “Enterprise” surveys provide firm-level data that is comparable across countries and time periods. The countries surveyed are low- and middle-income countries.

I found three countries for which there was World Bank firm-level data before and after the implementation of IPRs needed to comply with FTAs – Guatemala, Peru, and Nicaragua. Each of these countries were surveyed in 2006 and 2010. Each of them implemented their FTA sometime in between.

When interviewing the firms, the interviewers identify the main industry of each firm, allowing researchers to isolate the data for specific industries. So I hoped to look at the IP-intensive industries that had been isolated by Nam Pham in a U.S. study – these were chemicals (which includes pharmaceuticals, computers and electronics, transportation equipment, medical equipment, refined petroleum products, and software. However, the firms interviewed in Guatemala, Peru and Nicaragua rarely self identified as belonging to these industries. The lack of representation of the IP-intensive industries in these developing countries is the first sign that IP and innovation may work differently there than in the U.S. The exception was the chemical industry, for which there were firms in each country and in each time period.

FDI: After the implementation of IPR obligations, there was no statistically significant increase in foreign direct investment. The variable shown below is the percentage of firms in a sample of which foreign investors have a 10% or greater ownership stake (the OECD definition).

2006 2010 Change Guatemala 11.13 12.9 1.77 t=0.99 Peru 12.03 11.71 -0.03 t=-0.13 Nicaragua 9.03 11.08 2.04 t=0.75

When you break the data down to the industry level, and isolate the IP-intensive industries, you find a significant increase in FDI in the Nicaraguan chemical industry, but in all other cases there is either no significant increase, or there is no data.

Licensing: The Enterprise survey does report an increase in technology licensing after the implementation of stronger IPRs. The table below shows the percentage of surveyed firms that reported using technology licensed from foreign firms. There was a significant change at the macro level in each country, but the direction of the relationship is inconsistent. Peruvian and Nicaraguan firms increased their use of foreign-licensed technology, but Guatemalan firms decreased their use of it.

2006 2010 Change Guatemala 23.64 15.58 -8.06*** t=-2.64 Peru 10.56 14.47 3.92** t=1.81 Nicaragua 6.84 12.8 5.96** t=2.07

Use of foreign-licensed technology by firms in the chemical manufacturing industries increased significantly in Nicaragua. It increased in the Guatemala chemical industry, but due to a high variance and small sample size, the increase is statistically insignificant. There was no change in Peru. And once again, there was very little data from firms in other industries.

In general, the results show that stronger IPRs were not correlated with changes in FDI. They were correlated with changes in licensing, but not always in the direction one would expect. The data does not show that stronger IPRs required by FTAs drove significant amounts of tech transfer in these three countries.