In 1997, the Harvard Business Review wrote: “For more than a century, the world’s wealthiest human being has been associated with oil. Now, he’s a knowledge worker.” This reality has, if anything, only gotten more pronounced.
As the tide of innovation continues to sweep industries and economies up the technological ladder, the primacy of ideas as a legitimate source of business value has only increased. And, as with any valuable resource, businesses are quick to guard them with aggressive vigilance, leading to a progressive privatization of ideas. Today, intellectual property accounts for a significant portion of the value of large corporations – one study by the US Department of Commerce in 2012 found that intellectual capital in the US was worth more than $5 trillion a year, and comprises 34.8% of total United States GDP.
Still, the trend shows no signs of slowing down. Disagreements over intellectual property rights continue to feature prominently in international policy discourse. Most notable are the debates during the Doha Development Round over the preclusion of generic HIV/AIDs medication in Africa by pharmaceutical companies’ patenting rules, or the profound eloquence of Trump tweets about forced technology transfers implicit in China’s foreign investment policies.
In all fairness, both of these claims hold water, as do many more about loopholes which exist in our global intellectual property rights (IPR) regime. The point of this article, then, is to shed some light on these issues.
The Economics of Ideas
To understand the current issues facing global IPR policies, we must first understand the inherently paradoxical nature of knowledge in our economy.
Knowledge is a public good – once an idea or concept is discovered/created, it is both difficult to constrain its distribution and costs nothing to distribute infinitely. As a result, economic theory tells us that the market for knowledge fails by chronically undersupplying despite the fact that greater knowledge production is beneficial to everyone.
In fact, the rate of diffusion of knowledge has only gotten faster with globalization and the gradual equalization of technological capabilities between countries. A good example is the noticeable compression of product life cycles; as proposed by economist Raymond Vernon; such that the shifting of production overseas and the rise of credible competing products happen at a much more rapid pace.
The solution is to enforce the proprietorship of ideas through intellectual property rights. If individuals and companies can be guaranteed the ownership of their ideas through patents, licenses and copyrights, then the original market failure no longer exists. Claims to ideas become defensible, and in turn, an actual incentive to invest in research and innovation comes into being.
IPR are therefore of monumental importance in stimulating productivity growth for our economies, and it comes as no surprise that we’ve known this for a while.
The first piece of global IPR architecture was instituted in 1883 as the Paris Convention for the Protection of Industrial Property. Since then, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) negotiated in 1994 at the WTO, which provides minimum standards for national IP laws, and the World Intellectual Property Organization, which serves as a platform for IPR debate in the UN, have come into force along with various attendant agreements.
The paradox arises because, though such policies create an incentive to innovate, they can ironically hinder innovation as companies use patents as ‘legal thickets’ to bar competitors from entering.
A study by Boston University in 2011 concluded that, from 1990-2010, lawsuits by patent trolls comprised more than three-fifths of all IP infringement cases in the US, costing an estimated $500 billion. As far back as 1997, Texas Instruments earned more than $1.5 billion in fees through an aggressive licensing program; in some years its licensing fees have exceeded its operating income.
Rather than being a stimulant for innovation, IPR laws have unfortunately come to encourage rent-seeking activities and the monopolization of knowledge. In a time where productivity growth has been slowing for more than 50 years, some economists believe that reforming the IPR system, effectively democratizing innovation, is the only way forward.
As a result of the concentration of intellectual capital in developed economies, much of the criticism levelled on the inadequacies of the global IPR system fall on these economies and their companies. In most cases, this seems to be rightfully so, but this does not absolve developing economies from perpetuating issues with the global IPR system either.
One topic that has heavily escalated recently is the claim that intellectual property violations in China are one of the largest reasons for the US’ trade deficit with China. The widely accepted fact that a trade deficit is not necessarily bad aside, many of these claims are overstated.
A study by the Santa Clara University and global law firm Rouse found that, from 2006-2011, the success rates for foreign firms filing for patent defence in Chinese courts was approximately 80%. Beijing’s IP courts also acted with greater judicial efficiency – cases were on average concluded within 125 days, compared to 18 months in Europe and more than 2 years in the US.
No doubt, problems still remain; products originating from China and Hong Kong still constitute over 85 percent of the value of all infringing and counterfeit items seized by U.S. Customs, totalling a value of over $1.2 billion. But painting a picture of China as a haven for grotesque violations of intellectual property ignore the commendable headway that the country has made to reduce counterfeit trade, pirating of software and unfair arbitration.
The one claim that stands out most, though, is that both explicitly and implicitly, the terms of foreign investment policy in China coerce foreign companies to effectively hand over key technologies or trade secrets to Chinese companies in return for market access.
At this point it is important to point out that technology transfers are not in and of themselves bad – the very idea of product life cycles is premised on technology transfers, which are a natural feature of decentralizing production overseas, and a widely recognized channel for developed and developing economies to equalize their technological differences.
The issue lies in the claims towards Chinese IPR mercantilism, exploiting their monopoly of the global market share to force companies to transfer technology over without providing them with appropriate compensation or limiting their asset ownership through joint ventures with Chinese companies that prevent majority stakes, giving Chinese companies an unfair edge over foreign firms.
This is obviously harmful, and in 2017 a report by the US Trade Representative concluded that Chinese theft of US IP costs the nation between $225-$600 billion annually. The very breadth of the estimate should raise some eyebrows, but even if we take the figures with a pinch of salt, it is no small amount. Anecdotal evidence at least confirms the existence of the unsavoury business practices.
Of course, the blame extends beyond China. IPR are notoriously underenforced in many developing economies, and the fact that China is ranked 25th (out of 50) in the US International IP Index says a lot about the state of IP laws elsewhere in the developing world. Neither is the concern over IPR violations restricted to the US. In 2014, a study by UK Trade & Investment found that 1 in 4 businesses were deterred from foreign markets due to the risk of IP theft.
An Untenable Status Quo
So, tensions exist on both sides; for developed economies it is the issue of excessive patenting and inadequate flexibility with economic and ethical concerns for sustainability, while for developing economies the lack of proper IPR enforcement and forced technology transfers creating friction with investing nations and possibly disincentivizing technology-equalizing foreign investment. In both cases, an imperfect IPR regime impedes the long-term of innovation and ultimately, economic growth.
A solution, it seems, requires a mix of both reform and better enforcement. Perhaps a more flexible patenting system that avoids its current ‘one-size-fits-all’ orientation which allocates equal weighting to all patentable ideas, and instead discriminates between long and short terms and public and commercial products, would solve many existing issues. Others have proposed a global patents market that enforces compulsory licensing to both provide compensation and increase accessibility. Developing economies, on their part, would have to improve legal systems to handle violations more fairly and efficiently.
The challenge would be to resist blunt measures like tariffs which try to hammer more countries into an already untenable policy architecture. Unfortunately, this may already be the case.