The Midas Conundrum

ne of the central credos of international discussions of IP and development is as follows: countries that adopt higher levels of IP protection do better than those that do not. The problem is that there is no good evidence to support this. This has implications for how developing countries ought to think about IP.

To start with the creed, according to Kamil Idris, the former secretary general of the World Intellectual Property Organization, IP literally is Cinderella, “[a] drab but useful servant, consigned to the dusty and uneventful offices of corporate legal departments until the princes of globalization and technological innovation — revealing her true value — swept her to prominence and gave her an enticing new allure” (Idris 2003, 24). Similarly, the US Chamber of Commerce found, in a 2016 study, that countries with higher (that is, more like those of the United States) levels of IP protection did better than those that did not in terms of access to finance, more trained researchers, more foreign investment, more inventive activity and better technology and access to streaming services (Global Intellectual Property Center 2016). 

These, like too many other statements in the public discourse, are based on a careful weave of fiction and mendacity. They attempt to argue that because some IP protection in some countries is good, more IP protection everywhere is better.

The “more is better” story dates back at least to Ovid’s Metamorphoses in which he describes King Midas — lusting for greater riches — receiving from Bacchus the ability to turn anything he touches into gold. Midas revels in his power that, through mere touch, he is able to obtain gold. That is, until he finds himself starving and thirsty because even his food and drink turn to inedible and undrinkable gold. While Bacchus relieves the foolish king of his wish, the real world is not so generous.

The facts are quite different from the fiction. This is particularly relevant to developing countries — the subject of this essay — because they too often lack the basic physical infrastructure and educational background to be able to compete actively in the innovation economy.

While many studies find that a certain amount of IP attracts foreign investment, they also agree that this amount is moderate and not at the levels that exist in the United States or other developed countries.¹ Further, the studies contradict one another on what the appropriate level of IP protection is for any particular country.² Moreover, in developing countries, the effect of the level of IP protection on economic and social performance is non-linear. That is, a small change in the level of IP protection may have a significant — positive or negative — effect on outcomes. Some background is necessary to see why this is a problem.

IP rights have two conflicting effects. First, the positive effect: they provide an incentive — in the form of the exclusive right that prevents others from doing the same — to bring a product or service to market. This is counterbalanced by the second effect: IP rights curtail the ability of people to use, improve on and mix ideas to create the next generation of product. The ideal IP system is one in which positive effects maximally outweigh the negative effects. This ideal is impossible for a number of reasons.

First, IP is just one — and far from the most significant — factor driving innovation. In many countries, the effects of IP are drowned out by factors such as education levels, political stability, absence of corruption, clarity of law, the administration of the IP system (how long it takes to get a patent and how much it costs), the rule of law, availability of capital, openness of markets, business cycles, the competitive nature of the markets and so on. Even determining the effects of IP within a single country is next to impossible.

Second, IP works quite differently in different sectors. Information technology has, for example, a generally short lifespan, but is relatively quick to develop. Pharmaceuticals, on the other hand, take much longer to develop, but have longer staying power. Even within a single industry, there may be significant differences. In the field of human genetics, diagnostic tests are different from kits, which are different from therapies. There is no one ideal IP system that handles each field and subfield optimally. All that one can hope for is a balance that gets things more or less right more often than not for the country’s most significant innovation sectors.

Third, there is no clear way to measure innovation nor its effects on the economy. Proxies are used for both, but these are broad and often misleading. For example, most studies use the number of patents issued as a measure of innovation. Unfortunately, the factors that control the number of patents issued, as often as not, have nothing to do with the levels of innovation. These include knowledge of the patent system, the cost of the system, delays in the system, corruption of the state or courts, and the design of the patent system. For example, when Japan changed its rules regarding patents in the 1980s, it saw a tremendous increase in the number of patents, but no underlying change in the level of innovation (Sakakibara and Branstetter 2001). Even if one could identify, on a country-by-country basis, which industries were most significant, there would be no way to measure the positive and negative effects of IP precisely enough to figure out what the appropriate balance ought to be.

Thus, both theory and evidence make it clear that, far from there being a single ideal IP system, there are a multitude of imperfect systems that interact with a complex set of factors that are often significantly more important than IP. Empirical and theoretical support for the credo is less than thin.

The meagreness of the evidence is mixed with the mendacity of statistics. As Mark Twain attributed to Benjamin Disraeli: “There are three kinds of lies: lies, damned lies, and statistics.” The US Chamber of Commerce claims that there is a correlation between higher levels of IP protection and higher levels of growth (although one must take this with a grain of salt as its measures are heavily biased) (Global Intellectual Property Center 2016). But this conclusion is meaningless on its own. First, what matters is not correlation but causation. Two things may go up and down together — and in a big enough world, random but unrelated things would — but one does not cause the other. For example, there is almost a 100 percent correlation (r=0.99789126) between US spending on science, space and technology and suicides by hanging, strangulation and suffocation (Vigen, n.d.). There is no reason to believe that the two phenomena are related. The fact is that this correlation is much stronger than the one put forward by the Chamber of Commerce between any of its indicators and IP. For example, the correlation between IP protection and the growth of high technology sectors is only 80 percent. Second, even if levels of IP protection and higher levels of growth have a causal relationship, the relationship may not be that higher levels of IP protection rights cause growth, but that growth causes higher levels of IP protection.

The operating credo is that countries get richer because they have higher levels of IP protection. The author’s own findings contradict this. Countries that are richer tend to adopt IP laws that are more protective (Morin and Gold 2014). The argument is turned on its head. Countries that are richer find it in their interests to maintain higher levels of IP protection and to encourage other, less rich, countries to follow suit. The reasons why this may be so are not hard to discern. Once a country is rich and already has a vibrant innovation system (which, in countries such as the United States, were developed by having initially low levels of IP protection), it wants to lock in its lead. Thus, it adopts higher IP rules as protection against upstart companies from other jurisdictions doing the same. It is not enough that the high-income country adopts the rules, however; to fully lock in the benefits, other countries must follow suit. The effect is to hinder entry of developing countries into the club of innovators.

So far, this essay has focused on the lack of support for the governing credo operating in international debates surrounding IP. One should note, however, that international discourse is far from homogeneous. Most pointedly, the scholarly literature — at least that not funded by lobbies that benefit from higher IP — does not accept the credo and provides many reasons to disbelieve it, in whole or in part. This literature can be drawn on to examine how developing countries can best move forward to develop domestic innovation capacity.

First, simply because there is little empirical or theoretical support for the credo does not mean that developing countries can ignore it. Current studies provide empirical support for the suggestion that, to a modest degree, foreign firms do make investment decisions on the basis of their perceptions of the level of IP protection in a country. These investors do not seem to care as much about IP protection per se, given that they do not actually patent more when IP rights rise. Rather, one possibility is that firms invest on the belief that a country that protects IP at a high level will grow faster than those that do not. Whether this belief is true — and, as argued above, there is no reason to think it is — is not relevant; what is relevant is that actors act on the belief.

There is a second reason not to ignore the credo. Jean-Frédéric Morin and E. Richard Gold (2016) suggest that developing country policy makers act as if the credo were true. These policy makers, in fact, lead their countries to adopt higher levels of IP protection. They do not seem to do so because they believe that higher levels of IP protection will lead to growth but, they hypothesize, because policy makers are either rewarded for following the credo or punished for not doing so. There is a gap between what policy makers personally believe and how they act on behalf of their countries.

This suggests a second path forward: developing countries ought to adopt non-IP rules that attract investment without imposing the costs of levels of IP protection that are too high. As long as domestic policy makers do not believe in the credo (despite their actions), they can be encouraged to develop alternative ways to signal to foreign firms that it is worth investing in the country. This can be accomplished, for example, through emphasis on the rule of law, better educating their citizens in science and technology, adopting immigration and tax policies that bring in talent or creating targeted programs that link local innovators with firms in developed countries. 

In parallel, governments need to build local capacity to assist firms in understanding how to deploy IP internationally. Countries hoping that their firms scale up to world markets will need to assist those firms to develop international strategies — a core component of which is gaining IP rights elsewhere. This needs to be done early or the opportunity to acquire IP rights will be lost. Rather than focusing on domestic IP, more attention needs to be placed on obtaining IP rights in major markets.

By changing the focus from IP to a suite of domestic policies aimed at increasing domestic innovation capacity on the one hand, and at entering major markets on the other, developing countries will be best positioned to enter the innovators’ club. There is no magic shortcut to club membership; these policies are complicated and will require investments and time.