Intellectual property protection has been an international policy concern. Owners of intellectual property face risks of imitation or piracy not only in domestic markets but also in foreign, particularly in less developed, markets. Recent global negotiations have called for higher levels of intellectual property protection and for the harmonization of standards. Advocates of these measures cite potential economic benefits ranging from greater world innovation to greater trade and direct foreign investment flows (see Butler, 1990, for a survey of issues).
This paper gauges the economic benefits of increased intellectual property protection. Specifically, it examines how patent protection affects long-run economic growth. Existing empirical and theoretical works study the importance of innovation and technology to growth, but few have empirically studied the effects of the institutions that motivate innovation and technological change, such as intellectual property laws. Studying the effects of intellectual property rights (IPRs) requires having a quantitative measure of the strength of intellectual property rights in a country. This paper constructs an index of the strength of patent protection in 60 countries and uses it to determine the role of IPRs in economic growth.
The key finding is that IPRs affect economic growth by stimulating the accumulation of factor inputs like research and development capital and physical capital. The institution of IPRs does not have any direct role in explaining international variations in growth. That is, the existence of intellectual property laws does not appear to affect directly the technical efficiency of production. Instead, the benefits to growth are from encouraging the research sector to invest and take risk.
This implies that countries not conducting innovative research or conducting a limited amount would enjoy few, if any, of the benefits of intellectual property protection because an innovation sector through which IPRs affect economic growth is absent. As an analogy, consider a town with few, if any, motor vehicles. If the town passes a law against lead emissions, the law is likely to have no appreciable effect on lowering pollution levels in the region (pollution arising instead from other sources). Similarly, countries would not experience the growth effects of IPRs unless a significant domestic research base exists or unless foreign multinationals are present that transfer research knowledge into the country. Given the costs of creating an IPR system, the low returns to providing IPRs (owing to a lack of innovation) act as a disincentive to creating such a system.
Thus, countries without an innovative R&D sector (domestic or foreign-based) are likely to attach a low priority to developing an IPR infrastructure even though having an IPR system would help attract foreign research resources and possibly lead to the creation of a domestic research sector. Furthermore, countries without a domestic research base may find it difficult to justify providing IPR protection to foreigners, who seem to be the primary beneficiaries of protection, if in the short run the consequences of IPR protection are higher prices of new technologies and limited diffusion. The growth effects might appear later, but policymakers may, depending on their discount rate, perceive that the expected present discounted value of investing in a legal infrastructure is less than current costs of investing in the system plus the foregone benefits of imitation (assuming the ability to imitate foreign technologies).
While empirical growth studies emphasize the importance of knowledge accumulation (Mankiw et al., 1992; Lichtenberg, 1992; Park, 1995), none studies the importance of assigning proprietary rights to knowledge in the growth process. On the other hand, empirical analyses of intellectual property rights (Ferrantino, 1993; Mansfield, 1986, 1994) do focus on the effects of IPRs on innovation and foreign direct investment but have not linked these effects to long-run growth. …