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ECONOMIC FOUNDATIONS OF INTELLECTUAL PROPERTY …

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INSTITUTIONAL DESIGN FOR CHINA’S INNOVATION SYSTEM:Implications for Intellectual Property Rights
ChinaMarch, 2007Joseph E. Stiglitz
The role of intellectual property
Part of society’s innovation systemTo provide incentives to innovateBy allowing innovator to restrict use of that knowledgeThereby obtaining a return on his investment in knowledgeThere are other parts of society’s innovation systemThere are other ways offinancingandproducing researchUniversities, government supported research labsOpen source movementFinancial returns are only part of incentive system of scientistsIn many areas of research (basic science) patents play small roleThere are other ways of providing returns on knowledge than patentsTrade secrets, first mover advantageThere could be still other ways of providing incentivesPrizes
Key question
The role of the patent system within this broader innovation systemThe design of the patent/ipr regimeWhat can be patented, breadth of patent, standard of novelty, etc.Procedures for granting patents/challenging patentsRules for patent enforcementResponsibilities as well as rights—requirements for disclosureRestrictions—not to engage in abusive anti-competitive behavior; compulsory licensesHow these questions are answered can affect the efficiency of the economy and its innovativenessThere are large costs to the current patent systemAre there reforms which would improve its efficiency?
China’s Innovation System
These questions are especially important for China todayOne of China’s main challenges is closing the knowledge gap, that separates it from more advanced industrial countriesIn spite of huge progress, gap remains largeThe wrong IPR regime could make it more difficult to close the knowledge gap
One of central elements in 11th five year plan is the design of institutions for China’s distinctive market economyWestern system has been highly productiveBased on strong government support of basic researchBut also highly distortedExpenditures on marketing/advertising vs. research; direction of research (me-too drugs and life style drugs vs. life-saving drugs; life-saving drugs for rich vs. life-saving drugs for poor)Monopoly system associated with patents means knowledge is not used efficientlyAnd in some cases has actually retarded innovation
What is needed is a development oriented intellectual property regime, designed for China’s stage of developmentAs in other areas, one size fits all policies don’t workAmerica’s IP system is not good for AmericaAnd is even more poorly suited for ChinaChina needs an innovation system that focuses on economizing on resourcesInnovation system in West focuses on economizing on laborCan result in high levels of unemploymentPart of broader institutional infrastructure for the innovation system
Innovation system illustrates several general themes
Institutional structures that are appropriate for one country may not be the best for anotherOne size fits all doesn’t workDifferences in circumstances, historyDifferences in objectivesThis is true of property rights system (including intellectual property rights)Even formulation needs to be changedResponsibilities as well as rightsKey role of restrictionsThese are social constructions that need to be adapted to the circumstances, history, and objectives of each country
Knowledge as a public good
Fundamental problem is that knowledge is a public goodIn fact, it’s aglobal public goodno marginal cost associated with useintellectual property circumscribes its use and thus necessarily causes an inefficiency
But not only does IP create a distortion by restricting the use of knowledge
They create an even worse distortion—a (temporary) monopoly powerSocial costs of distortion especially high in the case of life-saving drugsIPR is often used to leverage (further) monopoly power (Microsoft)Long history--automobileOrdinarily, property rights are argued for as ameansof achieving economic efficiencyIntellectual property rights, by contrast, result in astatic inefficiency, justified by thedynamic incentivesAny method of raising funds has a social cost, but patent system is not “optimal” way of raising money (not optimal tax)
Recent advances in industrial organization suggest that costs may be far higher than previously thoughtSchumpeter was wrong about temporary nature of monopolyMonopoly power once established can easily be perpetuatedParticularly evident in case of network externalities, switching costs (including “learning”)And that benefits may be lower than previously thoughtIncentives for R & D may be lessDistortions in the direction of research
Further costs
High administrative costs (patent suits)High levels of uncertaintyIntrinsic uncertainty of researchCompounded by risk of patent infringementRisk of litigation
Losses of dynamic efficiency
Question—can one obtain dynamic benefits at lower static costs?Worry: The patent system may even be slowing down the pace of innovationFundamental problem: rewards do not correspond to marginal social returnsMarginal social return is having the innovation available earlier than it otherwise would have beenContrast clear in case of human genome projectFurther distortions arise from monopoly rentsMuch of returns can arise from “enclosing commons”In this case there is a cost, but no benefitEvident in controversy over bio-piracy
Why patents may slow innovation
Knowledge is the most important input into the production of knowledgeEspecially of concern when patents involve ‘enclosing the commons’Intellectual property rights restrict access to knowledgeIncentives for innovation with monopoly less than in more competitive market placeMonopolist can increase profits by discouraging innovation by rivals and raising rivals costs (Microsoft)Patent conflict (patent thickets) can impede innovationDevelopment of the commercial airplaneMuch of R &D activity directed at circumventing or strengthening monopolyNot at creating new products and lowering costs which enhance welfareIMPLICATION: STRONGER INTELLECTUAL PROPERTY RIGHTS MAY NOT LEADEVENTO FASTER PACE OF INNOVATION
Key tasks facing Innovation system
Selection of projects and researchersFinancingKnowledge is not costless, so there has to be some way of financing itRisk absorptionIncentivizingDissemination
Key attributes in evaluating different parts of innovation system
How well they perform these rolesCosts they impose on the economic systemPatent system’s high transactions costsTransactions costsWell designed innovation system will be a mixed systemBut are we relying to heavily on the patent system?And is the patent system well designed for achieving the objectives?
Critique of patent system
Besides large static and dynamic distortionsFinanceREVENUES FOR RESEARCH PROVIDED BY MONOPOLY PROFITSDIFFERENCE BETWEEN PRICE AND MARGINAL COST CAN BE VIEWED AS A ‘TAX’ONE DESIRABLE PROPERTY: ‘BENEFIT TAX’BUT IN MOST OTHER ARENAS, ONLY LIMITED RELIANCE ON BENEFIT TAXESINEFFICIENCY AND INEQUALITY
Bias towards excessive patenting
Fighting a patent creates a public good (open access)While patenting knowledge makes a public good privateThere will be underinvestment in fighting bad patentsProblem can be exacerbated by bad procedures
INEQUITIES ASSOCIATED WITH IPR
KNOWLEDGE AS A GLOBAL PUBLIC GOODSHOULD BE FINANCED BY THOSE MOST ABLE TO PAYIPR DOES NOT RECOGNIZE DIFFERENCES IN CIRCUMSTANCES—OTHER THAN EXTENT TO WHICH PROFITS CAN BE EXTRACTED
LEGAL SYSTEM CAN LEAD TO UNFAIR OUTCOMES
HIGH COSTS OF IMPLEMENTING IPRINCLUDING HIGH COSTS OF CHALLENGING PATENTSPUTS DEVELOPING COUNTRIES AT A DISADVANTAGEEXACERBATING RISKS OF BIO-PIRACYPRESSURE NOT TO ISSUE COMPULSORY LICENSES AND TO HAVE STRONG IPR REGIMES REINFORCED BY INTERNATIONAL ECONOMIC INSTITUTIONS AND ‘MARKET’
Concerns of developing countries
KNOWLEDGE AS A GLOBAL PUBLIC GOODSHOULD BE FINANCED BY THOSE MOST ABLE TO PAYIPR DOES NOT RECOGNIZE DIFFERENCES IN CIRCUMSTANCES—OTHER THAN EXTENT TO WHICH PROFITS CAN BE EXTRACTEDCURRENT SYSTEM PROVIDES LITTLE INCENTIVES FOR R & D ON DISEASES THAT AFFLICT THEMPART OF PROBLEM OF BEING POOR IS THAT YOU CAN’T PAY MUCHWHAT SEPARATES DEVELOPING AND DEVELOPED COUNTRIES IS GAP IN KNOWLEDGETRIPS HAS MADE IT MORE DIFFICULT TO CLOSE THAT GAPTRIPS should never have been part of WTOAT THE SAME TIME, PROVIDES LITTLE PROTECTION FOR THEIR INTELLECTUAL PROPERTY (BIO-PIRACY, PROTECTION OF BIODIVERSITY)DEVELOPING COUNTRIES HAVE CALLED FOR A DEVELOPMENT ORIENTED INTELLECTUAL PROPERTY REGIMEThere is no reason to expect that the design of an IPR system which balances costs and benefits which is optimal for the U.S. would be optimal for a developing country
PRIZE SYSTEM AS AN ALTERNATIVE
Current system is a prize systemPrize is monopoly powerMonopoly power means that there are incentives to restrict use of knowledgePrize associated with actuarial value of the social benefits, with licensingCompetitive market would ensure more efficient disseminationWithout waste on advertising, other anti-competitive behaviors design to enhance monopoly profitsPrize could be “contingent”—related to salesContingent purchase funds preserve monopoly system
Comparing alternative systems
Conclusions
The importance of IPR has been exaggeratedIPR needs to be seen as port of a portfolio of instrumentsWe need to strengthen the other elements of this portfolioAnd to redesign IPR to increase its benefits, reduce its costs

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ECONOMIC FOUNDATIONS OF INTELLECTUAL PROPERTY …