Katonomics 17: IP, incentives and growth

It is simply not possible, from the portrait on her website, to know the size of Doctor Nicola Searle, resident Katonomist of this Cyber-Parish. However, her first subject this week is growth -- something which both humans and felines generally experience without the need for any incentives (this week's second subject). The economics of incentive-led growth (or is it the growth of incentive-led economics?) sounds like the sort of thing that gets written into the first couple of sentences of every a Ministerial speech on the value of intellectual property, so it's good for readers of this weblog to have a least some passing knowledge of what the juxtaposition of those terms means to a real economist.  Anyway, this is what Doctor Nic prescribes for the IPKat's patient readers:

"If IP is about creating an incentive to innovate, and we desire innovation because it increases economic growth and development, then what is the relationship between IP and economic growth?  This is a fairly important question.  After all, the Google quote behind the Hargreaves review implies that IP is a barrier to innovation.  On the flip side, we have arguments that strengthening IP systems will lead to growth as in the case of the patent box or enforcement of copyright.

This relationship between growth and IP could be positive or negative (or the relationship doesn’t exist, but that doesn’t make for a very good post).  Readers will forgive a Katonomist for indulging in graphs to illustrate the potential relationship (adapted from here). 

If the relationship is positive, then economic growth increases as IP increases in strength or enforcement.  Likewise, a decrease in IP strength will result in a decrease in economic growth.  This is the main argument behind the economic incentive theory of IP – stronger IP encourages more innovation which leads to more growth.   As my Nyan Cat-inspired graph shows, a stronger IP regime results in higher growth.

German and Austrian economists Schafer and Schneider develop a model which predicts this positive relationship in the context of international development.  They argue that when developing countries increase their IP enforcement to that of the developed countries, their growth rates increase.

In contrast, if the relationship is negative, then increasing IP regime strength results in a decrease in economic growth.  This supports the Google quote that the UK IP system inhibits innovation by encumbering R&D and preventing competition.  Weaker IP would allow for a freer environment and greater diffusion of innovation.  It might also decrease incentives for more strategic types of IP use (such as NPEs) which do not contribute to innovation.  The cat goes down.

Boldrin and Levine argue along these lines in their book using historical cases where increased IP strength did not increase innovation and growth.  They also point out that most studies merely prove that increases in patent strength simply increases patenting.

A third, magical option is a combination of the two where there exists an optimal level of IP strength.  Too strong and you inhibit innovation.  Too weak and the incentives to innovate don’t work.  This optimal level of IP protection (indicated by the goldfish) balances these competing forces and serves to enable economic growth and development.

American based Davis and Sener argue this upside-down-U shape relationship between IP enforcement and innovation.

That is the theory.  What does the evidence say? 

The gold standard in economic evidence of IP strength is the Park and Ginarte index.  Their index, created in 1997 and updated in 2008, measures the strength of IP protection in countries by looking at patent coverage, membership in international organisations, provisions for loss of protection, enforcement mechanisms and duration. For example, in the 1997 version, the UK scored a 3.26 out of a possible 5 and Brazil scored 1.52.  In 2008, the UK scored 4.54 and Brazil, having joined TRIPS, scored 3.59. 

In their 1997 work, Park and Ginarte found that stronger IP enforcement had a positive impact on R&D in developed countries but not in developing countries.   They point that this could be a bit of a chicken-and-egg problem – as R&D grows and becomes more profitable, development of IP systems also grows. Another possibility is that R&D activity in developing countries is largely imitative and therefore not potentially patentable.

Additional work also supports the positive relationship between IP strength and growth. Americans McLennan and Le use software piracy as a proxy for the level of IP strength in a country and find that stronger IP is associated with higher growth rates.  Likewise, UK and China-based economists Chu, Leung and Tang argue that increased patent protection in the US reduced the volatility of growth. 

Other researchers find that relationship is not positive. Harvard economist Lerner  examines UK patent filing around the world.  He does not find a relationship between strengthened IP policy and innovation.  However, he notes that the measurements available are relatively crude and the time frame of analysis may be too short.  Nonetheless, he describes the lack of the relationship between stronger patent protection and domestic patenting as striking. 

An American-based Schneider finds, using patent data as a proxy for innovation, that increased IPR enforcement leads to more innovation in developed countries but less in developing countries. She, like Lerner, notes that there are challenges to the data and, in particular, to data surrounding IPR as its effect on growth is indirect.

It is not easy to study the relationship between IP and growth. Separating IP regime strength from other factors such as institutional strength, innovative capacity and social norms is difficult. Measuring innovation has long plagued researchers.  The studies reported here focus on patent with little evidence for the relationship between other types of IPR and growth.  What if the evidence shows correlation and not causation?

The inconclusive evidence is potentially consistent with an inverted-U shaped relationship between IP and growth.  Somehow, we have to find the balance between the tragedy of the commons, where property rights improve outcomes, and the tragedy of the anti-commons, where property rights encumber progress.  Are all IP debates about the location of the goldfish?"

Goldfish recipes, for those who eat fish and for those who don't.