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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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