Academic journal article Contemporary Economic Policy

Effects of Strengthening Intellectual Property Rights in Newly Industrialized Economies: Evidence from Taiwan's 1994 Patent Reform

Academic journal article Contemporary Economic Policy

Effects of Strengthening Intellectual Property Rights in Newly Industrialized Economies: Evidence from Taiwan's 1994 Patent Reform

Article excerpt

I. INTRODUCTION

Intellectual property rights (hereafter IPR) have stimulated great attention in the arena of international economic policy in past decades. Indeed, IPR laws and their enforcement differ widely across countries due to national differences in economic development. To strengthen and harmonize these means for protecting IPR, industrial nations have placed IPR on the top agenda in bilateral, regional, or multilateral negotiations. Advanced countries often contend that stronger patent protection would be good even for developing countries through stimulating more domestic innovations, as well as by attracting more foreign direct investments. Alternatively, some developing countries argue that an extension of IPR harms their technological progress. They would like to establish weaker regimes favoring technological diffusion through imitation and acquisition from abroad. This divergence in view on the effect of strengthening IPR between developed and developing countries has widened in recent years.

Although the real effect of IPR has attracted increasing empirical studies, numerous ambiguities and uncertainties remain in the literature, suggesting the need for future empirical works. Most previous studies focus on experiences in advanced countries, and there is little effort on exploring the effect of strengthening IPR for newly industrialized economies (NIEs) or developing countries. (1) Under considerable pressure from the United States and adhering to trade-related intellectual property rights, Taiwan restructured its patent system, expanding a patent's life from 15 to 20 yr, in order to bring it in line with the requirement of World Trade Organization (WTO). Given the contemporary policy debate, this reform provides an excellent experience for investigating the effect of strengthening IPR in NIEs.

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Taiwan has transformed from imitation to innovation within the past couple of decades, by building its indigenous technological capability and raising the level of technology, particularly for the electronics industry. During a country's development process, the patent system might be an important instrument because it can encourage innovations and protect inventors. Since the late-1980s, Taiwanese firms have turned toward aggressively taking part in patenting both domestically and abroad. As shown in Figure 1, both the number of domestic and U.S. patents have grown very rapidly since the late-1980s, showing an accelerating trend. (2) The upsurge in patenting by Taiwanese firms might be driven by the change in Taiwan's legal environment, which has ushered in stronger patent laws and their enforcement. It might also be attributed to the motivation of firms' patenting, which is becoming more proactive in nature. Moreover, Yu (1998) interviewed research and development (R & D) managers of firms located in the Hsinchu Science Industrial Park (hereafter HSIP) and reported that the patent law is quite effective, relative to other mechanisms, for Taiwanese high-technology firms.

If the patent system is an effective mechanism for appropriating returns to R & D for Taiwanese firms, then has Taiwan's 1994 patent reform, which expanded a patent's life, actually induced more aggressive patenting behaviors by firms? How does a stronger patent protection in terms of patent life affect firms' patenting behavior? The theoretical literature on the policy debate surrounding patent design and enforcement initiated by Nordhaus (1972) has stimulated wide interest from economists in an attempt to identify which system is appropriate. More recent theoretical articles have used more sophisticated modeling frameworks to explore this issue, obtaining mixed results. Does extending a patent's life provide the innovator with an increased incentive to patent? It may depend on the cost of imitation (Gallini, 1992), frequency of innovation (Horowitz and Lai, 1996), spillover effect (Takalo, 1998), and randomness of innovation (Denicolo, 1999). …

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