Patent System Mainly Serves Select Developed Country Industries, Study Says

The global patent system is intended to promote innovation and increase growth, but this might not always be the case, as it might only serve industries relying heavily on patents in advanced economies, according to a study on patents and manufacturing industries presented at the World Intellectual Property Organization this week.

The study, entitled Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, was co-authored by Ivan P.L. Png, and Albert G.Z. Hu of the National University of Singapore. Png presented the study on 30 November, in the framework of the WIPO seminar series on the economics of intellectual property.

The WIPO series [pdf] was launched last March, following the 2009 creation of a new division for economic research in WIPO. The new division “responds to increased demands for analytical input into the economic effects of IP policies on economic performance,” according to WIPO.

The study [pdf] tried to establish the efficiency of the patent system. The big question is “does it work?” said Png, not in the sense of “making Microsoft rich,” but does it work in the sense of bringing forth more innovation.

Looking at history, Png presented different approaches to patents among renowned figures. Thomas Edison, who filed 1,093 patents, was a firm believer. But Isaac Newton preached wider access, as he was reported saying, “If I have seen further it is only by standing on the shoulders of giants.” Finally, Png offered the more recent case of Ram Chandra Sharma, inventor of a prosthesis for amputees called the Jaipur foot. He reportedly said, “I would be a rich man if we had patented the Jaipur foot, but it’s enough satisfaction for me to see the joy on that girl’s face when she walks again.” The absence of a patent system would not have impacted Sharma’s innovative capacities, said Png.

One negative aspect of intellectual property is reduced access for the end consumers, mainly because of higher prices, he said. It also reduces access for other inventors as it creates more exclusive rights, with less spillover, and less opportunities for others to build on the innovations to create new ones. It is not certain that IP rights are going to increase long run welfare and it could event reduce it, he said.

“It is by no means obvious that we need intellectual property to foster innovation” and economic growth, and that makes the question of the effectiveness of intellectual property relevant, said Png.

Many business activities have flourished without intellectual property, he said, such as management and organisation, and financial products. “Huge” amounts of innovations were achieved in this latter sector as well as in large areas of technical innovations not covered by IP protection.

One of the questions of the study was “does IP work for developing countries,” said Png. He said he was told recently at the University of Bern that all Swiss chemical industry had been born out of copying the German chemical industry and that Switzerland did not have patents “for a long time.” When Switzerland was a developing country, it felt that IP did not work but only when the Swiss chemical industry became advanced did the country develop an IP system, he said. Switzerland of the late 19th century is the Vietnam, the India, the Chile, and the Nigeria of today, he said.

Several studies have been done on the subject of the effect of patents on innovation and growth. However, a large part of the literature contains the statistical problem of reverse causation, where the reasoning of stronger patent rights providing more research and development (R&D), innovation and economic growth can be challenged by the reverse reasoning of richer countries being more controlled by industries such as pharmaceuticals and software who lobby legislators to pass stronger patent laws “to make sure they get wealthier.”

According to the study presented at WIPO, studies have shown that stronger patent rights “were related to greater patenting or R&D,” but not a direct link to economic growth. The authors said all industries did not respond equally to patent rights. Patent-intensive industries such as pharmaceuticals and chemicals respond more, while non-patent-intensive industries, like furniture or food and beverages respond less or not at all to patent rights. So they focused their research on the efficiency of patents at the country and industry levels.

The authors created an effective patent rights index, combining two previous indices (including both the state of patent laws and their enforcement), and introduced the concept of patent intensity to address the need for a way of characterising industries according to their dependence on patents.

Using the US National Bureau of Economic Research patent database, and dividing the number of patents by the total of sales, the researchers “made an heroic assumption,” he said, by considering that the same patent intensity developed from US data would apply to all other countries. Their analysis showed that chemicals, pharmaceuticals and computers had a very high patent intensity.

By matching the patent rights index against the growth rate of the industry, the study showed that for more patent-intensive industries, stronger patent rights were associated with growth at the industry level. But to answer the question of whether patents were working for developing countries, the author integrated the Gross Domestic Product of countries into their calculations.

According to those calculations, it appears that the role of stronger patent rights in generating growth and value-added at the industry level is relatively greater in richer countries. This confirms that the impact of IP maybe only positive in the advanced countries and might be negative or insignificant in relatively poorer countries, Png said.

In the audience, a WIPO representative challenged the suggestion that IP might be a barrier to further innovations, arguing that this assumption does not take into account the social benefits of the patent system brought on by the disclosure of the know-how protected under the patent. The primary benefit of the patent system is to get the information out and improve on it, he said. After the patent expires, the information is out to build on but if inventions are protected by trade secrets, the information never becomes available, he added. Png answered that this would be true if the scope of patents was narrow but with the widening of the patent scope, disclosure comes as less of an advantage.

A video of the session can be downloaded here.