Saturday, October 25, 2014
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Intellectual Property and Economic Development

WASHINGTON, DC – In his recent State of the Union address, US President Barack Obama reiterated his ambition to complete the Trans-Pacific Partnership, a proposed trade agreement among the US and 11 Pacific countries. Meanwhile, the European Union and China are pressing to close their own deals in Asia and elsewhere. If these proliferating trade pacts are to spur virtuous cycles of growth for developing countries, they must not only reduce trade barriers; they must also build the institutional framework of a modern economy, including robust intellectual property (IP) rights.

Some activists and government officials get the relationship between strong IP protection and economic growth backwards, claiming that IP rights are an obstacle to development, and thus should not be enforced until after countries achieve high-income status. This attitude is particularly prevalent in India, which recently put trade negotiations with the EU on hold, and it was central to the failure of the Doha Round of global trade talks. As Indian Commerce Minister Anand Sharma put it, “inherent flexibilities must be provided to developing countries.”

But the bottom line is that the ideas protected by IP rights are the dynamo of growth for developed and developing countries alike. Instead of diluting IP rights, developing countries like India should recognize that strengthening IP protection is a prerequisite for attracting the foreign investment that they need to help their economies grow, create jobs, and improve their citizens’ capacity to consume.

Today, IP accounts for much of the value at large companies. One study found that in 2009, across a variety of industries in the US, intellectual capital – patents, copyrights, databases, brands, and organizational knowledge – held a 44% share of firms’ overall market value. Such companies have little desire to put their IP at risk of erosion or outright theft; they want to do business where they know that their IP is safe.

Developing countries have a lot to gain from attracting multinational firms. Such companies bring technologically advanced imports and new management techniques that foster growth in domestic firms, while spurring industrial modernization. They also spawn new local companies that serve as suppliers, thereby boosting employment, augmenting workers’ skills, improving productivity, and increasing government revenue.

Currently, India attracts a mere 2.7% of global spending on research and development; China, with its stronger IP rights, attracts close to 18%; and the US brings in 31%. United Nations data show that India’s stock of foreign direct investment (FDI) was equivalent to just 11.8% of its GDP from 2010 to 2012 – far lower than the developing-economy average of roughly 30%.

According to a new study by the economists Robert Shapiro and Aparna Mathur, if India achieved Chinese levels of IP protection, its annual FDI inflows would increase by 33% annually. In the pharmaceutical sector – which is particularly vulnerable to IP infringement – a stronger IP regime could increase FDI inflows from $1.5 billion this year to $8.3 billion in 2020, with pharmaceutical R&D doubling to $1.3 billion over the same period. The increased FDI would create 18,000 new jobs in the pharmaceutical industry.

If India could transform its IP regime to resemble the US system, which is more robust than China’s, the benefits would be even greater. Inward FDI could increase by as much as 83% annually by 2020; in the pharmaceutical industry alone, FDI could reach as much as $77 billion, with R&D rising to $4.2 billion and 44,000 new jobs being created.

The Indian government’s ongoing assault on pharmaceutical IP makes these findings even more significant. Over the last two years, India has invalidated or otherwise attacked patents on 15 drugs produced by international firms in order to make way for local champions, claiming that exclusivity enables companies to charge high prices that harm consumers. Allowing local producers to copy patented medicines, officials assert, will bring down prices and expand access.

But drug patents and prices are not the main – or even a major – obstacle to patients’ access to medical care in India. The bigger issue, as the IMS consultancy found last year, is the shortage of doctors, clinics, and hospitals, especially in rural areas. Even the public clinics and hospitals that do exist are often rendered useless by high rates of absenteeism by doctors. Medicine, however affordable, is of no value if no one is available to prescribe or administer it.

Furthermore, Indians lack access to insurance programs, particularly for outpatient care. This, coupled with the lack of a public safety net, makes health problems a leading source of economic hardship, even for middle-class families. Far from improving citizens’ access to health care, weak IP protections are exacerbating India’s formidable health-care challenges.

It is time for India’s leaders to recognize the positive role that IP can play in fostering growth and improving citizens’ wellbeing. It is equally important for trade negotiators worldwide to reject the notion that IP protection is a luxury that only rich countries can afford. The reality is that IP protection is an economic engine that developing-country citizens should not have to forego.

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  1. CommentedJason Gower

    Cannot argue that IP protection is one of the most important factors for development. That said, and especially in the case of India, the question is not if, but how. This is precisely why these are emerging nations; with lower levels of corruption it is hard to imagine India not being further along today that it is; similar can be said of African, Latin American, Asian and really all emerging markets around the world. If you can solve the political question then yes, IP protection would be high on the list of must haves for further development. Unfortunately these are known problems that get to the core of the entire institutional framework of these nations. If you solve that problem then yes, growth in general would probably take off.

  2. CommentedStamatis Kavvadias

    PI strengthening is OK, as long as private industry is properly taxed and not subsidized by the government. That is, this is appropriate only for investments on self-reliant private research and innovation, and are exploitable in the destination country. If low taxation and/or subsidies are involved in an industry sector, IP rights should be shared with the public.

    Reversely, if the public has interests in specific sectors of the economy (which most definitely includes finance, communications, transportation, water and electricity supply, etc.), or the country cannot exploit specific foreign products due to other factors, both of which may be viewed as true for medicine in India, IP rights can be reasonably weakened! In this case, low taxation, or subsidies can be used to compensate for foreign investment motivation! It is the right of the sovereign to set his terms to the extend of beneficial free trade.

    Such generic arguments, as those of the author, target a populist debate, when not targeting specific arguments of the FDI targeted country.

  3. CommentedMatt Stillerman

    The TPP treaty is being negotiated in secret. Its provisions are hidden from the Congress and hidden from the citizenry. What, exactly, are they hiding from us? Are the provisions so embarrassing that they cannot be discussed in public? Is this a complete sell-out of national sovereignty and environmental protection? Who can say?

    Well, actually, some people *can* say. Among those people are the members of Mr. Hunter's own "Pharmaceutical Research and Manufacturers of America". It turns out that members of his industry have been actively engaged in the drafting of the treaty! Those provisions, I am certain, will benefit his association's members mightily, but at a huge cost to most ordinary people in this country and elsewhere. If the provisions of the treaty became public knowledge, public outcry would prevent its adoption.

    Mr. Hunter, I CHALLENGE YOU to prove me wrong by publishing the full text of the draft treaty.

  4. CommentedKir Komrik

    Thanks for the article and I appreciate your knowledge and opinion,

    I get where you are going here. U.S. GDP is increasingly becoming IP centric. The problem however, is that the United States (and some other western countries) are relying on something they probably shouldn't be for sustained growth.

    "... claiming that IP rights are an obstacle to development".

    I think I might know why they are saying this. IP is an elitists game. Elitists buy and sell it and the _real_ creators get nothing. In my industry I see this everyday. Patent laws are stacked heavily against a patent filer requiring them to spend tens of thousands on simply applying for a patent. So, no, poor countries don't care that _we_ can't profit more from this scam.

    The additional danger here is that something like 98% of the population is excluded from innovation ... which isn't necessarily obvious until you actually try it and learn how the process really works. This is because most don't have the money for the patents and, far worse, the patent guarantees nothing. You have to actually go to court and fight against tortfeasors against you when they should be jailed for violating copyright as a matter of law. If it really requires a full hearing, jail-time should be there as an option that actually gets used.

    So, what we call IP chop shops go around stealing other people's ideas then using the patent to "reduce to practice"; USPO jargon for making a good show of trying to develop the idea. But remember, these guys never came up with the idea. They just took someone else's idea (patent), stole and it and began using it. Now, the average person can't go to Court and defend this. It requires millions.

    So, in classic market behavior, an entire cottage industry has been built up around IP and _only_ when the IP has bee defended in Court, costing millions, does the value of the Patent skyrocket. So, these guys are IP chop shops. They take IP, do the reduction to practice (or pretend to), then sell the IP when it is orders of magnitude more valuable than before; simply because the little annoyance of reduction to practice is resolved already and the patent is ready to go. So, again, _of course_ developing nations don't want to have anything to do with it.

    The added destructive feature of current Patent law is that it discourages innovation unless you are quite well to do. So, while 98% of the population may only produce 5% of the good ideas, one has to wonder what have we missed in that 5%? The patent laws in this country are just as corrupt as the courts are generally and USG is totally.

    "Today, IP accounts for much of the value at large companies. "

    That's correct. We call them IP chop shops. They're all over the place.

    I suspect that if we revised patent law to be less elitist other countries might be a little more interested in IP ... just saying.

  5. CommentedAbhimanyu Arora

    Interesting and informative article. Suppose in a scenario where access to healthcare and insurance was perfect. Would drug patents and prices still be a non-issue in a country where the majority is dependent on the vagaries of monsoon and the estimated 44,000 new jobs sufficient?

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