intellectual property: balancing incentives with ...€¦ · agreement on trade-related...

Intellectual property rights can promotedevelopment—One of the most fundamental changes in globalcommercial policy set out by the UruguayRound of trade negotiations was the commit-ment by all World Trade Organization (WTO)Members to adhere to the requirements of theAgreement on Trade-Related Intellectual Prop-erty Rights (TRIPS). TRIPS defines minimumstandards of protection for intellectual propertyrights (IPRs) and their enforcement. IPRs seekto balance the incentives necessary to encour-age future innovations (such as the ability to re-coup the costs and risks of development, andstill earn a profit) against the desire to providewide access to those products in a competitivemarket. Because the overwhelming majority of intellectual property—new inventions, pro-prietary commercial information, digital enter-tainment products, software, trade names, andthe like—is created in the industrialized coun-tries, TRIPS decidedly shifted the global rules of the game in favor of those countries. None-theless, TRIPS may lead to several long-runbenefits for countries that take advantage of itsstandards in an appropriate and flexible man-ner, while complementing those standards withbroader development and competition regimes.

—but should be appropriate to localcapacities and benefits—Developing countries went along with the TRIPSagreement for a variety of reasons, ranging fromthe hope of additional access to agriculturaland apparel markets in rich nations, to an ex-

pectation that stronger IPRs would encourageadditional technology transfer and innova-tion. However, the promise of long-term ben-efits seems uncertain and costly to achieve inmany nations, especially the poorest coun-tries. In addition, the administrative costs andproblems with higher prices for medicines andkey technological inputs loom large in theminds of policy makers in developing coun-tries. Many are pushing for significant revi-sion of the agreement.

There are reasons to believe that the en-forcement of IPRs has a positive net impact on growth prospects. On the domestic level,growth is spurred by higher rates of innova-tion—although this tends to be fairly insignifi-cant until countries move into the middle-income bracket. Nonetheless, across the rangeof income levels, IPRs are associated withgreater trade and foreign direct investment(FDI) flows, which in turn translate into fasterrates of economic growth.

—so the poorest countries may requireassistance and time—The most appropriate level of IPRs enforce-ment therefore varies by income level. In par-ticular, poorer countries—which are less ableto absorb the associated costs, and least likelyto benefit from domestic innovation—mayfind it advantageous to stage implementationof some aspects of IPRs. Since industrial coun-tries are the main beneficiaries of IPRs, andgiven the challenges facing developing coun-tries, the former may find it in their interest to

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Intellectual Property: BalancingIncentives with Competitive Access

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provide assistance to the poorest countries forthe implementation of TRIPS.

—and they also may require special consideration in the case of essential medicinesThe least-developed countries face critical needsfor access to new drugs and vaccines that maybe developed for treating human immunode-ficiency virus/acquired immune deficiency syn-drome (HIV/AIDS), malaria, tuberculosis, andother diseases. Patent protection will raise in-centives marginally for drug firms to invent suchtreatments but could also support considerablyhigher prices. A mechanism needs to be foundto reward innovation in this area while provid-ing new medicines to poor countries at low cost.

Intellectual property rights and development

RationaleAt their most basic level, intellectual propertyrights exist to strike a balance between theneeds of society to encourage innovation andcommercialization of new technologies, prod-ucts, and artistic and literary works, on the onehand, and to promote use of those items, onthe other. Intellectual property takes severalforms (box 5.1). The need for intellectual prop-erty protection arises from the fundamentalcharacteristics of information. It is often costlyto develop new technologies and products,requiring considerable investment in researchand development (R&D) with uncertain pay-offs. The investment extends further to thecosts of bringing new ideas to the marketplace.

These costs must be recovered through atemporary ability to set prices above marginalcosts of production. If an intellectual creation ispotentially valuable but easily copied and usedby others, there will be free riding by competi-tive rivals. Such behavior would quickly drivethe price to marginal production cost and pre-vent the inventor from recouping investmentcosts, thereby discouraging innovation. Societyhas a dynamic interest in limiting free riding to

benefit from the introduction of new productsand technologies. This goal is achieved by theexclusive market positions afforded by IPRs.

At the same time, society has an interest inpromoting widespread access to new productsand information. Countries therefore limit thescope and duration of protected exclusivity inorder to place goods into the public domainafter an adequate expected return has beenearned. There is an obvious tension betweeninvention and dissemination.

Despite the inherent difficulty of measure-ment,1 a growing body of empirical work sug-gests that IPRs, as represented by legislatedpatent rights, influence international eco-nomic activity and growth performance.2

Like other economic policies, IPRs are cho-sen by governments in response to competinginterests. Thus the strength of intellectualproperty protection depends on economic andsocial circumstances, which in turn affect per-ceptions of the appropriate tradeoff betweeninvention and dissemination. Historically,countries have adopted stronger IPRs onlywhen domestic interests in their favor becamesufficiently strong to decide policy. This is fur-ther supported by the wide variation in stan-dards across countries. The stronger the capa-bilities of a nation’s enterprises to developdistinctive products and new technologies, thegreater the preferences of consumers for qual-ity guarantees among similar products; thewider the markets in which artists wish to selltheir music and literature, and the easier it is tomisappropriate the returns to invention throughimitation, the more pronounced will be inter-ests in protection.

Enforcement of rights increases with income—Several stylized facts emerge from the litera-ture about the level of development and IPRs.First, countries with a high ratio of R&D ingross domestic product (GDP) or a high pro-portion of scientists and engineers in the laborforce have markedly stronger patent rightsthan others. Clearly such countries desire toprotect returns to inventive activity.

G L O B A L E C O N O M I C P R O S P E C T S

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I N T E L L E C T U A L P R O P E R T Y

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At the broadest level, intellectual property has tra-ditionally been divided into industrial property,

or inventions and identifying marks that are usefulfor industry and commerce, and artistic and literaryproperty, or works of culture. This distinction re-flected a perception that cultural creations differedfundamentally from functional commercial inven-tions. However, this distinction has blurred consider-ably in the age of information technology and digitalproducts.

There are four primary forms of industrial prop-erty rights. First, a patent awards an inventor theright to prevent others from making, selling, or usingthe protected product or process without authoriza-tion for a fixed period of time within a country. Inreturn, society requires that the application be pub-lished in sufficient detail to reveal how the technologyworks, thereby increasing the stock of public knowl-edge. The minimum period of protection requiredunder TRIPS is 20 years from the date an applicationis filed. Many countries recognize utility models orpetty patents, which award rights of shorter durationto small, incremental innovations requiring someinvestment in design and development.

A second form is industrial designs whichprotect the aesthetic aspects of a useful commercialarticle. TRIPS requires that designs be protected fora minimum of 10 years.

A third mechanism includes trademarks andservice marks, which protect rights to use a distinc-tive mark or name to identify a product, service, orfirm. The fundamental objective of these marks is toreduce consumer search costs and remove consumerconfusion over product quality and origin.

A related device is geographical indications,which certify that such products as wines, spirits,and foodstuffs were made in a particular place andembody quality characteristics of that location.

Artistic, musical, and literary works are pro-tected by copyrights, which grant exclusive rights tothe particular expression of the work for a period of time, typically the life of the creator plus 50 years(70 years in the United States and the EuropeanUnion). Copyrights cover only expressions ratherthan ideas, and therefore provide thinner protectionthan patents. Rights extend to the duplication, dis-play, performance, translation, and adaptation of the

Box 5.1 An overview of intellectual property rightsworks. The primary limitation on copyright protec-tion stems from the fair-use doctrine, which definesconditions under which copying for noncommercialpurposes is permitted.

TRIPS requires that computer programs beprotected, at least by copyrights, under the principlethat software code is a literary expression. However,countries may vary in the degree to which reverseengineering of computer programs is permitted underthe fair-use doctrine.

Because computer programs may constitute acommercially useful process, a number of developedcountries permit firms to patent them. This policy ispushing patent protection more deeply into newareas, including methods of doing business on theInternet. A similar evolution explains the tendencytoward awarding patents for biotechnologicalresearch tools.

For some technologies sui generis, or special,protection regimes exist. One is the design of inte-grated computer circuits. These are more than literaryexpressions, but the inventive step is often minimal,suggesting a compromise between patent and copy-right. Indeed, a 10-year protection term is providedand requires only novelty in expression. Another isplant breeders’ rights (PBRs), which permit develop-ers of new, distinctive, and genetically stable seed va-rieties to control their marketing and use for a fixedterm. Many countries limit these rights by permittingan exception for farmers to use seeds for subsequentreplanting, and for researchers to study the seeds.

Although not literally IPRs, a related area ofbusiness regulation lies in defining the boundaries ofprotection for proprietary trade secrets of rival firms.A production process or formula may be kept secretwithin the firm, but if a competitor learns the confi-dential information through legitimate reverse engi-neering, the originator has no rights to exclude itsuse. Unfair competition includes such activities asindustrial espionage, inducing employees to revealtrade secrets, and encouraging defection of technicalemployees to produce their own versions of a prod-uct based on proprietary information. However,there is considerable variability in such definitionsacross countries.

Source: World Bank staff.

Second, the evidence suggests that interestsin encouraging low-cost imitation dominatepolicy until countries move into a middle-income range with domestic inventive and ab-sorptive capabilities.3 Only at high incomelevels do patent rights become strongly pro-tective. These findings may be explained bythe nature of technological development.Least-developed countries devote virtually noresources to innovation and have little intel-lectual property to protect. As incomes andtechnical capabilities grow to intermediatelevels, some adaptive innovation emerges butcompetition flows primarily from imitation.Thus, the majority of economic interests pre-fer weak protection. As economies mature tohigher levels of technological capacity and de-mands shift toward higher-quality products,domestic firms come to favor protective IPRs.Finally, the strength of IPRs shifts upward atthe highest income levels (Evenson and West-phal 1997). Not only do legislated IPRs be-come stronger, but enforcement and compli-ance also rise with income levels.

—and with greater openness of tradeThird, countries that are more open to tradetend to have stronger patent rights. This resultsuggests that trade interacts positively withthe demand for intellectual property protec-tion and, possibly, domestic innovative efforts.Finally, the size of an economy, as measuredby absolute GDP, has no detectable correla-tion with patent rights. Thus, even in large de-veloping countries such as India and China itmay be some time before patent rights are ef-fectively enforced.

IPRs and international economic activityIn strengthening their IPRs regimes—eitherunilaterally or through adherence to TRIPS—developing countries may be able to attractgreater inflows of technology. The three chan-nels through which technology is transferredacross borders include international trade ingoods and services, foreign direct investment,and contractual licensing of technologies.

IPRs can boost trade volumes—Imports of goods and services can transfer anddiffuse technology. For example, imports ofcapital goods and technical inputs could reduceproduction costs and raise productivity. An im-portant question is whether IPRs affect suchtrade flows. Maskus and Penubarti (1995,1997) estimated changes in imports of manu-facturing goods and high-technology manufac-tures that could be induced by stronger patentrights. A patent index from Rapp and Rozek(1990) was increased by various amounts fordifferent countries to reflect roughly the com-mitments required by TRIPS. The anticipatedimpacts on trade volumes depended on the ex-tent of patent revisions, market size, and reduc-tions in the imitation threats from complyingwith TRIPS. Estimated effects on trade rangedfrom small impacts in the United States andSwitzerland, which were not required to under-take much legal revision, to substantial in-creases in imports in China, Thailand, Indone-sia, and Mexico, which must adopt strongerrights.4 Mexico updated its IPRs regime earlybecause of commitments made under NAFTA.

The study found significant impacts ofIPRs change on import volumes of developingcountries. For example, there was an antici-pated increase in manufactured imports intoMexico of $6.3 billion, amounting to 9.4 per-cent of its real manufactured imports in 1995.Thus, evidence suggests that the long-run im-pacts could be substantial. The estimated in-crease in China’s high-technology imports was$2.8 billion, or just under 2 percent of its totalimports in 1995. Note that Coe, Helpman,and Hoffmaister (1997) found that total fac-tor productivity (TFP) is enhanced in develop-ing nations through such imports. In principlethere could be a notable bonus to productivityperformance.

However, most of the largest predicted im-pacts were in nations with strong imitationcapacities, such as Argentina and Brazil. Incontrast, India and Bangladesh would experi-ence relatively weak, though positive, tradeimpacts.5


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Table 5.1 TRIPS: who gains?Estimated changes in Payments for Technology and in FDIFlows for selected countries for full application of TRIPS(millions of 2000 dollars)

U.S. receipts fromNet Unaffiliated

patent U.S.-owned Royalties andCountry rents FDI Assets License Fees

United States 19,083 n/a n/aGermany 6,768 –1,180 100Switzerland 2,000 –102 0France 3,326 n/a n/aAustralia 1,097 –279 2Ireland 18 –267 14New Zealand –2,204 –83 4Portugal –282 97 n/aGreece –7,746 51 n/aNetherlands 241 –1,503 32Spain –4,716 –341 47Japan 5,673 –2,533 783United Kingdom 2,968 –1,369 29Canada –574 –2,396 69Panama n/a 309 n/aIsrael –3,879 6 0.6Colombia n/a 1,190 n/aSouth Africa –11 25 11Rep. of Korea –15,333 270 388Mexico –2,550 3,465 148India –903 139 63Brazil –530 3,505 124Argentina n/a 721 64Chile n/a 1,062 n/aChina –5,121 687 n/aIndonesia n/a 1,966 181

Source: World Bank staff and Maskus (2000a). Figures for netpatent rents update McCalman’s (2001) coefficients applied to1995 data. Calculations for the stock of FDI assets use coeffi-cients from an econometric analysis of the impacts of patentrights on patent applications, affiliate sales, exports, and affili-ate assets, using data over 1986–94 for the foreign operationsof U.S. majority-owned manufacturing affiliates in several de-veloped and developing countries. These coefficients were ap-plied to 1994 asset stocks and updated to year 2000 dollars.Computations for royalties and license fees use coefficientsfrom an econometric analysis of the effects of patent rights on U.S. licensing volumes in manufacturing for 26 countriesin 1985, 1990, and 1995. These coefficients were applied to1995 royalty fees and updated to year 2000 dollars.

—and attract FDI inflows and licensesA primary channel of technology transfer isFDI. IPRs should have varying importanceacross sectors with respect to encouragingFDI. Investment in low-technology goods andservices should depend less on the strength ofIPRs and more on input costs and market op-portunities. Investors with technologies thatare costly to imitate also would pay little at-tention to local IPRs. However, firms with eas-ily copied products and technologies, such aspharmaceuticals and software, would be quiteconcerned about the ability of the local IPRssystem to deter imitation. Firms consideringinvesting in a local R&D facility would payparticular attention to protection of patents andtrade secrets (Mansfield 1994, 1995).

Thus, the strength of IPRs and the ability toenforce contracts could have important effectson decisions by multinational firms in certainsectors on where to invest and whether totransfer advanced technologies. Table 5.1 re-ports results from the econometric estimationof a model of FDI and patent rights (Maskus1998).6 Using the Ginarte-Park index, therewas a negative elasticity of FDI assets with re-spect to patents in high-income economies, buta strongly positive elasticity among developingeconomies. Applying these impacts to antici-pated changes in patent laws from TRIPS gen-erates the estimated impacts on asset stocks incolumn 2. Reductions in asset stocks in Japanand Canada would amount to over $2 billion,for example.7 However, FDI assets would risesignificantly in Brazil, Mexico, Chile, and In-donesia as a result of stronger patents. Indeed,the increase in the Mexican FDI assets wouldbe 2.6 percent of the 1994 stock of U.S.-ownedassets in that country, and in Brazil that wouldbe 7.4 percent. Note that these figures relatedsolely to U.S.-owned assets. If multinationalfirms headquartered in other developed nationswere to react similarly, there would be evenlarger increases in overall inward FDI stocks.

Other studies of FDI and intellectual prop-erty protection bear mixed messages. Lee andMansfield (1996) statistically related the in-

vestment decisions of U.S. multinational en-terprises to their perceptions of the weak-nesses of IPRs in a sample of developing coun-tries. They found that FDI is negativelyaffected by weak protection. Using firm-leveldata, Smarzynska (2001) discovered that for-eign investors considering operations in thecountries of Eastern Europe and the Former


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Soviet Union pay attention to patent rights. Inparticular, investment in technology-intensivesectors is deterred by weak protection; in allsectors weak protection discourages invest-ment in production facilities but does notdeter investment in distribution. Smith (2001)also found that international FDI flows arepositively related to IP protection. Using a dif-ferent econometric approach, however, Fink(1997) could not detect a significant impact of patent rights on various measures of FDIactivity by U.S. or German multinational en-terprises. Thus, there remains statistical am-biguity about the nature of the relationshipsbetween IPRs and FDI, though most studiessuggest it is positive.

Yang and Maskus (2001) studied technol-ogy licensing. The figures in the last column oftable 5.1 update their results of estimating theimpacts of international variations in patentrights on the volume of unaffiliated royaltiesand licensing fees (a measure of arm’s lengthtechnology transfer) paid to U.S. firms. Japanhad a large absolute response, reflecting theimportance of licensing in the Japanese econ-omy. However, large impacts were also dis-covered in the Republic of Korea, Mexico,Brazil, and Indonesia. Indeed the analysis sug-gested that licensing volumes would double inMexico and India, and would go up by a fac-tor of nearly five in Indonesia.

The findings discussed here are economet-ric predictions of long-run impacts of patentreforms on imports, FDI, and market-basedtechnology transfer. The figures are not defin-itive but do support the view that strongerIPRs could have potentially significant andpositive impacts on the transfer of technologyto developing countries. This conclusion isstrongest for middle-income developing coun-tries. The results are less positive for the least-developed economies, where the potential formarket-power effects looms larger.

IPRs and innovation in developing countriesDeveloping nations also hope that strongerintellectual property protection could encour-

age domestic innovation, product development,and technical change. It is possible to structureIPR systems in ways that promote dynamiccompetition through technology adaptation,learning, and follow-on innovation. However,many developing countries have regimes thatfavor imitation of foreign products and tech-nologies and discourage domestic technicalchange. Indeed, inadequate IPRs can limit in-novation even at low levels of economic devel-opment. This is because much invention andproduct development are aimed at local mar-kets and could benefit from domestic protec-tion of patents, utility models, and trade secrets(see box 5.1). In the vast majority of cases, in-vention involves minor adaptations of existingtechnologies and products. The cumulative im-pacts of these small inventions can be critical forgrowth in knowledge and productive activity.

An example is that protection for utilitymodels (or “petty patents”)—minor adap-tations to existing technologies—improvedproductivity in some countries (Evenson andWestphal 1997). In Brazil, utility modelshelped domestic producers gain a significantshare of the farm machinery market by en-couraging adaptation of foreign technologiesto local conditions. Utility models in thePhilippines encouraged successful adaptive in-vention of rice threshers.

In another example, the Japanese patent sys-tem (JPS) affected postwar Japanese technicalprogress (Maskus and McDaniel 1999). TheJPS in place over the period 1960–93 was de-signed to encourage incremental and adaptiveinnovation and diffusion of technical knowl-edge into the economy. It stimulated large num-bers of utility model applications, which werebased in part on published prior applicationsfor invention patents. In that study utility mod-els had a strongly positive impact on real TFPgrowth over the period, because they were animportant source of technical change and infor-mation diffusion. It is interesting to note that asJapan has become a global leader in technologycreation, its patent system has shifted awayfrom encouraging diffusion and more towardprotecting fundamental technologies.


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If constructed well, IPRs also stimulate ac-quisition and dissemination of new informa-tion. Patent claims are published, allowingrival firms to use the information in them todevelop further inventions. A recent study ontrademark use in Lebanon suggests that inno-vation through product development and the entry of new firms is motivated in part bytrademark protection, even in poor nations(Maskus 2000b). Firms in the Lebanese ap-parel industry are capable of designing cloth-ing of high quality and style aimed at MiddleEastern markets. Their efforts have been frus-trated by trademark infringement in Lebanonand in neighboring countries. Firms in thefood products sector suffered from rivals pass-ing off goods under their trademarks. Theproblem has restrained attempts to build mar-kets for Lebanese foods in the Middle East andelsewhere. Related difficulties plagued innova-tive producers in the cosmetics, pharmaceuti-cals, and other sectors. Thus, product develop-ment and enterprise growth have been stifled bytrademark infringement targeted largely at do-mestic enterprises.8

Copyright protection can induce investmentsin creative activities and also stimulate innova-tion. Where protection is weak, such copyrightindustries as publishing, entertainment, andsoftware are dominated by counterfeiting ratherthan domestic creation. Thus, lower-qualitycopies are widely available, but the economy’scultural and technological development may behampered. For example, Lebanon has a smallbut vibrant film and television industry thatcould successfully export to neighboring econ-omies if those countries adopted stronger copy-right protection (Maskus 2000b). In the face ofdifficulties in expanding their markets, Chinesesoftware enterprises are now playing a role inpromoting enforcement (Maskus, Dougherty,and Mertha 1998). Finally, work in such coun-tries as Jamaica and Senegal shows that weakcopyrights and the absence of supporting insti-tutions, such as professional collection societies,significantly reduce incentives for local musi-cians to record and market their compositions(World Bank 2000).

At the same time, in many poor countries,the effectiveness of all types of intellectualproperty instruments is held back by inade-quate administration and enforcement proce-dures. These inadequacies may be due to cor-rupt and inflated bureaucracies or weaknessesin the legal system at large—frequently affect-ing also the security of real and physical prop-erty rights. Hence, a weak overall governancestructure typically poses one of the biggestchallenges to harnessing the positive contri-bution IPRs can make to the developmentprocess.

IPRs can boost growth prospectsThe analysis reviewed here suggests that se-lecting appropriate IPRs systems could boosteconomic growth. History does not providestrong guidance on this hypothesis. At differ-ent times and in different regions of the world,countries have realized high rates of growthunder varying degrees of IPRs protection.

Two recent empirical studies have consid-ered this question in a cross-country econo-metric framework. Gould and Gruben (1996)related economic growth rates across manycountries to a simple index of patent strengthand other variables. They found no strong di-rect effects of patent rights on growth, but therewas a significantly positive impact when thoserights were interacted with a measure of open-ness to trade. The impact of stronger patentlaws in open economies was to raise growthrates by 0.66 percent, on average. This suggeststhat market liberalization and IPRs jointly in-crease growth.

Park and Ginarte (1997) studied how IPRsaffect growth and investment. They found nodirect relation between patent strength andgrowth, but there was a strong and positiveimpact of patent rights on physical investmentand R&D spending, which in turn raised growthrates.

While these results are encouraging, the linkbetween IPRs and long-term economic growthremains poorly understood, and is likely to re-main controversial. More research is necessaryto provide better guidance to policymakers.


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Costs of enforcing IPRs

While developing countries may enjoylong-run gains from strengthening their

systems, the transition to stronger protectioninvolves short-run costs that are not trivial.

Administrative costsIt is costly to develop the administrative and en-forcement mechanisms necessary to support amodern system of intellectual property protec-tion. Costs include upgrading offices for regis-tering and examining patents and trademarks,and for accepting deposits of plant materials;training examiners, judges, and lawyers; im-proving courts to manage intellectual propertylitigation; and training customs officers and un-dertaking border and domestic enforcement ac-tions. The United Nations Conference on Tradeand Development (UNCTAD 1996) providedsome estimates of the administrative costs ofcomplying with TRIPS in various developingcountries. In Chile, additional fixed costs fromthis upgrade were estimated at $718,000 andannual recurrent costs at $837,000. Egyptianfixed costs would be perhaps $800,000, withadditional annual training costs of around $1million. Bangladesh anticipated one-time costsof administrative TRIPS compliance (draftinglegislation) amounting to $250,000, and over$1.1 million in annual costs for judicial work,equipment, and enforcement efforts. If trainingcosts were included it is likely that a compre-hensive upgrade of the IPRs regime in the poor-est countries could require an up-front expen-diture of $1.5 to $2 million, plus recurrent costs.Finger and Schuler (1999) report World Banksurveys finding that these costs could be farhigher.

Given other pressing needs in education,health, and policy reform it is questionablewhether the least-developed countries would bewilling to absorb these costs, or indeed whetherthey would achieve much social payoff frominvesting in them. Moreover, note that poorcountries are extremely scarce in trained admin-istrators and judges, suggesting that one of thelargest costs would be to divert scarce profes-sional and technical resources out of potentially

more productive activities. Indeed, in manypoor countries, devoting more resources to theprotection of tangible property rights, such asland, could benefit poor people more directlythan the protection of intellectual property.

Three factors could help offset these costs.First, intellectual property offices may chargefees to defray their costs. Fees should be set to meet the innovation and commercializationneeds of each country. Second, poor countriesmay petition for technical and financial as-sistance from industrial countries and fromthe World Intellectual Property Organization(WIPO) and the WTO. Unfortunately, the re-sources available are small in relation to theunderlying needs. Third, authorities may takeadvantage of cooperative international agree-ments to reduce administrative costs. Mem-bership in the Patent Cooperation Treaty, forexample, provides significant economies be-cause examiners may read the opinions madeby major patent offices about novelty and in-dustrial applicability, rather than undertake suchtechnical examinations themselves.

Rent transfersPatents are overwhelmingly owned by inven-tors in the industrialized countries. For examplein Mexico in 1996, only 389 patent applica-tions came from domestic residents, while over30,000 came from foreign residents, mostly inthe United States and the EU. Brazil’s domesticapplications were just 8 percent of total appli-cations in that same year. In the poorest coun-tries virtually no patents are granted to domes-tic residents. As patent rights are strengthened,this relative imbalance could be reversed tosome degree, particularly in countries that de-velop innovation systems and inventive enter-prises. However, inventors from developed coun-tries are expected to apply for most patents forthe foreseeable future.

As patents and trade secrets are better pro-tected, imitation costs rise and the ability ofpatent holders to set higher prices and licenseand royalty fees is enhanced. Thus, one impactof TRIPS will be to transfer economic rents fromtechnology importers to technology developers.


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Suggestive evidence is provided in table 5.1.Firms own patents in various countries, thevalues of which depend on local protectionand market size. In an interesting study, Mc-Calman (2001) used an econometric model tocompute the value of these patents in 1988.World Bank staff used his methods and regres-sion coefficients to compute the values of in-ternational patents among 28 nations in 1995,using the Ginarte-Park patent index, patentapplications, and GNP levels. Note that bothpatent applications and GNP had reached farhigher levels in the later year, thereby raisingthe value of patent portfolios. To assess thechange in patent rents associated with strongerIP protection, the index for each country wasincreased to reflect obligations accepted in theTRIPS Agreement.

The figures in the first column of table 5.1show that overwhelmingly the United Stateswould gain the most income in terms of staticrent transfers, with a net inflow of some $19.1billion per year. U.S.-headquartered firmsowned numerous patents in many countriesthat were required by TRIPS to strengthentheir intellectual property protection, whileU.S. law was subject to little change. Germanywould earn an additional net income of $6.7billion on its patent portfolio. Many countrieswould experience a rising net outflow of pa-tent rents because they tend to be net technol-ogy importers. Korea would register the larg-est net outward transfer of some $15.3 billionbecause of the large rise in volume of patentsregistered there. Developing countries alsowould pay more on their patent stocks, withChina experiencing a net outward transfer ofaround $5.1 billion per year. These calcula-tions are static and ask only what the addi-tional income on existing patents would havebeen under TRIPS. They suggest that TRIPScould have a significant impact on net incomesearned from foreign patents.

Prices of patented drugsBy January 1, 2005, developing countries mustprovide patents for new pharmaceutical prod-ucts and most have already implemented pa-

tents or exclusive marketing rights. Nothing is more controversial in TRIPS. It is conceiv-able that patent protection will increase incen-tives for R&D into treatments for diseases ofparticular concern to poor countries. Howeverbecause purchasing power is so limited in thepoorest countries, there is little reason to ex-pect a significant boost in such R&D. Accord-ingly, many developing countries see little po-tential benefit from introducing patents.

In contrast, potential costs could be signif-icant. Pharmaceutical supplies in many devel-oping countries often come from domestic orimported generic competition. Such competi-tion for drugs on patents in the industrializedcountries helps sharply lower drug costs in de-veloping nations with active pharmaceuticalindustries. In the future, enterprises in thesecountries must wait until patent expiration be-fore they can compete with generic versions,or else must produce under license to patentholders. It should be noted that if firms choosenot to register patents in certain countries, thisissue will not arise.

There is some scope for stronger patents toencourage local firms to develop patentabledrugs themselves. Several Indian enterprisesclaim to be developing treatments that may be patentable abroad, although they currentlyrefuse to place them on the Indian market forfear of imitation.9 In most cases, however,local enterprises will come under pressure toclose down or form alliances with larger firms,resulting in a concentration of the industry.There is evidence that patents generate consid-erably higher prices for protected drugs thanfor copied and generic drugs (Lanjouw 1998;Fink 2001). Watal (1999) computed that sta-tic price impacts of patent coverage in Indiacould raise average patented drug prices by atleast 26 percent from a 1994 base.

In light of this possibility, developing coun-tries need to gird themselves with policies that,while consistent with TRIPS, bear potential tomoderate the price impacts of new patents. Re-cent attempts by South Africa and Brazil to pushthe boundaries of TRIPS in this regard haveproven contentious, as discussed in box 5.2.


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In response to TRIPS, South Africa and Brazil re-cently introduced new laws bearing directly on the

ability of those countries to react to price increasesthat may emerge from patents. The greatest spur tothese attempts to limit patent rights came from a de-sire to procure AIDS drugs at affordable prices inorder to manage that enormous health-care crisis.Both laws are controversial.

South African Medicines LawIn November 1997 South Africa enacted significantamendments to the Medicine and Related SubstancesControl Act. The amendments permit the healthminister to revoke pharmaceutical patent rights inSouth Africa if he deems the associated medicines tobe too expensive. They further empower the ministerto order compulsory licensing if the patentee engagesin abusive practices, defined basically as a failure tosell a drug in adequate amounts to meet demand, ora refusal to license the product on reasonable termsso that domestic firms may meet demand. They alsopermit parallel importation (imports of original orgeneric versions without the authorization of theSouth African patent holder) of drugs, and allow thehealth minister to override regulatory decisions con-cerning the safety and registration of medicines. Thelaw requires pharmacists to employ generic substitu-tion (prescribe generic versions of patented drugs)unless the doctor or patient forbids it, sets limits onpharmacy markup rates, and bans in-kind induce-ments from drug manufacturers to physicians.

While it may be a heavy dose of regulation,South Africa’s law is probably consistent with TRIPS(Abbott 2000). While some legal scholars claim thatpatent rights necessarily extend to an ability to pre-clude parallel imports, the bulk of opinion is thatArticle Six of TRIPS provides full latitude for eachcountry to choose its own policy on exhaustion. Be-yond this issue, Article 31 of TRIPS provides amplegrounds under which compulsory licenses may be is-sued, subject to certain conditions (Watal 2001). Inparticular, licensing may be compelled where aprospective user has failed to achieve a license fromthe patent holder on reasonable commercial termswithin a reasonable period of time, so long asmarket-based compensation is paid. Compulsory

Box 5.2 Pharmaceutical policies and the limits of TRIPS

licenses may be issued without observing even theseconstraints in cases of national emergency. Finally,the price-control provisions of the South Africanamendments do not seem to be restrained by TRIPS,which does not address domestic health regulation.

Brazilian Industrial Property LawBrazil passed an industrial property law (Law No.9,279) that came into effect in 1997. The law up-dated most aspects of Brazil’s industrial propertyregime to comply with TRIPS. It provides patents forpharmaceutical products as required. However, itpermits the issuance of compulsory licenses in caseswhere patent holders choose to supply the marketthrough imports rather than local production. Thatis, Brazil’s law does not recognize imports as amethod for meeting its “working requirements” onthe Brazilian market. The legislation explicitly de-fines “failure to be worked” as “failure to manufac-ture or incomplete manufacture the product” or“failure to make full use of the patented process.”While the Brazilian industrial property law refers toall patents, its most aggressive use is aimed at trans-ferring production of AIDS drugs to domestic firmsand government agencies in order to reduce theirprices below those on the U.S. and European mar-kets. Media reports indicate that this active interven-tion has dramatically reduced treatment costs inBrazil.10 In combination with prevention programsand effective methods for distribution and clinicalstays, the country has limited AIDS mortality to farlower levels than those in Sub-Saharan Africa.

It remains to be seen whether Brazil’s insistenceon local production as a working requirement maybe sustained within TRIPS. Because it applies to allpatented items and not solely to medicines, the lawmay generate less sympathy among the WTO mem-bership than the South African law, despite its evi-dent value as a threat to bring down prices. In nego-tiating TRIPS, patent advocates strongly favored anend to domestic production requirements, lendingsupport to the American view on their inconsistency.


Agricultural inputs Under TRIPS, patents must be awarded toagricultural chemicals and biotechnological in-ventions, and effective protection must be pro-vided for plant breeders’ rights (PBRs). Becausefarming is the mainstay of economic activity in many developing countries, policies that in-crease costs of key agricultural inputs could bedamaging. Plant strains bioengineered for pest-and drought-resistance are of particular inter-est to many developing countries. Note thatplant patents preclude the breeder’s researchexemption and, unless explicitly allowed for inthe rules, also the farmer’s privilege to retainseeds for replanting. Experience from LatinAmerica suggests that providing PBRs whileretaining this privilege does not much disad-vantage farmers (Maskus 2000a).

Genetic materials and indigenousknowledgeBecause firms can attain patents in some in-dustrialized countries on products developedfrom plant and animal resources they findanywhere, incentives exist to extract such ma-terials as sources for new drugs, food prod-ucts, and cosmetics. New patents in develop-ing countries will increase such incentives.This “bioprospecting” raises several concerns.First, foreign patents have been awarded toproducts and formulas that were alreadyknown in the source countries, or were simpleimprovements, preventing those with the orig-inal know-how from marketing abroad (Duranand Michalopoulos 1999). Second, genetic ma-terials often do not bear adequate propertyrights. Plants may be extracted from publiclands or from farms and villages that cannotassert ownership or represent collective inter-ests. The resources may be acquired withoutcompensation or attention to socially optimalextraction rates.

There is much know-how in developingcountries among tribes, villagers, and other col-lective units about how to produce foodstuffs,apparel designs, and artistic works. Because theknowledge is a collective good, and therefore ofuncertain ownership, it has proven difficult to

apply standard intellectual property tools to itsprotection. Many such products and designshave found their way into international com-merce under protection in foreign countries,however, as firms abroad copy and register them.

These problems point to a shortcoming inTRIPS. That agreement makes it clear that in-ventions from genetic resources are patentableexcept in unusual circumstances. However, itis silent on the issue of how nations may reg-ulate their extraction, an issue in which IPRsare only one consideration. Similarly, it con-tains no provisions for defining and protectingrights in collective knowledge. It is importantfor the global community to work out appro-priate mechanisms for ensuring the appropri-ate valuation of resources and knowledge andfor effecting payments that both conserve thematerials and provide incentives for efficientinnovation.

IPRs policies for promotingdevelopment

Despite the significant costs, stronger intel-lectual property protection could produce

gains in the long run through greater domesticinnovative activity and cultural creation, prof-itable international exploitation of that activity,enhanced structural transformation, and in-creased technology transfer. These gains aremore likely to materialize if countries adoptstandards and supporting policy regimes thatpromote competitive processes on their markets.

IPRs standards at varying levels of development—TRIPS prevents countries from discriminatingbetween domestic and foreign firms in thetreatment of IPRs. Beyond this basic stipula-tion, however, TRIPS contains considerableflexibility in implementing and enforcing stan-dards that are conducive to development. Oneimportant principle of a pro-competitive devel-opment of IPRs policy is that the standardsadopted tilt the balance in favor of second-coming rival firms. A second principle is thatgovernments should not discourage inward


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transfer of technology and should not suffo-cate innovative efforts of domestic firms. Theessential goal is to move local entrepreneursfrom “free-riders” to “fair-followers” in Reich-man’s apt phrase.11

Table 5.2 divides developing countries intothree types and lists IPRs standards that arelikely to be most appropriate for each group.12

The first country type is low-income nations,or the least-developed countries and some coun-tries in transition, which have weak environ-ments for advanced invention but some capa-bility at small-scale innovation and culturalcreation. The second is middle-income nations,which have a strong imitative capacity and areasonable degree of human capital. Suchcountries need to encourage technology adop-tion and incremental innovation. The third ishigh-income nations, which have a strong hu-man capital stock and a growing capacity forinnovation. It is evident that as countries be-come more developed they may choose tostrengthen their IPRs. Table 5.2 is only a guide-line; individual countries may choose to pur-sue their own standards as interests require.This section analyzes possibilities for the low-income and middle-income nations.

—allowing poor countries the possibilityof exemptionsWhile countries must meet the general obliga-tions of TRIPS, there are some areas in whichpoor nations are afforded special status.Under Article 66, those least-developed coun-tries experiencing difficulties in implementinglegislation may petition the TRIPS Council fortime extensions, and there is no specified limiton the number of such petitions. While it isimportant to consider carefully the signals adelay would send to the global community,some countries may wish to take advantage ofit, particularly as regards the complex and con-troversial subject of patents.

Both low-income and middle-income coun-tries would benefit from greater flows of tech-nical and financial assistance to develop, im-plement, and enforce IPRs. Poor developingcountries also should push the developed coun-

tries to do more to encourage private technol-ogy transfer. The weakness of such action todate remains a sore point leading some ob-servers to question the balance of interests inTRIPS.

AdministrationAdministration and enforcement are costly.Authorities in low-income nations couldachieve some gains by publicized raids andconsumer awareness programs. While such ac-tions would face opposition among infringingenterprises, they would signal some commit-ment to IPRs and also encourage domesticcreative interests to become more active. Theawareness itself may be the most valuable, andauthorities could limit economic damages byimposing moderate penalties for first offenses,with the severity of the fines rising with the ex-tent of the piracy and the number of violations.

Low-income countries cannot readily affordpatent examination offices and should rely onpatent registration instead. However, authori-ties need to consult international patent officesand databases to see if applications were de-nied elsewhere. Thus, developing countrieswould benefit from the cost savings of usingforeign sources of information, such as thePatent Cooperation Treaty. Countries couldalso gain from adherence to regional examina-tion systems. Electronic access to internationalpatent and trademark registries also cuts costsof performing prior art examinations. As coun-tries grow richer and technologically more so-phisticated, the patent system could move to-ward domestic examinations.

Application and renewal fees for patentsand trademarks may be set to cover the costsof administering those regimes. It is sensible toselect fees in ways that promote desirable in-novation and use of IPRs. It is possible, for ex-ample, to set lower patent application fees forsmall and medium enterprises than for largefirms. Patent renewal fees may rise over timein order to encourage firms to let protectionlapse on less-valuable inventions. This can bean important means of pushing technologiesinto the public domain.


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General transitionperiods

Assistance

Technology transfer

AdministrationEnforcement andcustoms

Judiciary

PatentsAdministration

Standards and scope

Compulsory licenses

Working requirements

Utility models

Industrial designs

Plant breeders’ rights

Consider Article 66 extensions inpatents, trade secrets

Push for technical and financialassistance, including aninternational fund

Push for fulfillment of technologytransfer commitments

Reduce piracy and counterfeitingthrough raids and awareness

Moderate fines and civil penaltiesTrain customs officers for periodic

inspectionsUpgrade professionalism

No special IP courtTraining for judges and attorneys

Registration system

Rely on international grants dataRapid and full disclosurePost-grant oppositionDifferential fees by applicant size

Rising renewal fees

Fullest exemptions from patenteligibility

High inventive step using rigorousinternational examinations

Oral prior art consideredNarrow claimsNarrow or no doctrine of equivalentsPermit experimental use

National emergency usePublic non-commercial useAntimonopoly tool

Permit imports to satisfyLiberal definition of demand

Recognize utility models

Recognize design rightsOriginality requirementSupplement with copyrightsNonvoluntary licenses of right

Provide PBRsRecognize farmers’ privilegePermit breeders’ exemptionUPOV 1978 model with national

treatmentPublic research and extension

Push for technical and financialassistance

Reduce piracy and counterfeitingthrough raids and awareness

Stronger fines and civil penaltiesTrain customs officers for inspections

on demand

No special IP courtTraining for judges and attorneys

Registration or limited examinationsystem

Rely on international grants dataRapid and full disclosurePre-grant oppositionDifferential fees by applicant size

Rising renewal fees

Broad exemptions from patenteligibility

High inventive step

Oral prior art consideredNarrow claimsNarrow doctrine of equivalentsPermit experimental use

National emergency usePublic non-commercial useAntimonopoly tool

Permit imports to satisfy

Recognize utility models

Recognize design rightsOriginality requirementSupplement with copyrightsNon-voluntary licenses of right

Provide PBRsRecognize farmers’ privilegePermit breeders’ exemptionUPOV 1991 model

Public research and extension

Consider providing technologytransfer

Full enforcement

Deterrent penalties

Consider special IP court

Examination system

Consult international grants dataFull disclosurePre-grant oppositionMore uniform feeStructureRising renewal fees

Consider appropriate exemptions

Moderate inventive step

Oral prior art consideredBroader claimsBroader doctrine of equivalentsPermit experimental use

National emergency use

Antimonopoly tool

Limited working requirements

Recognize design rightsOriginality and noveltySupplement with copyrightsNonvoluntary licenses of right

Consider patentsLimited exemptions for farmersPermit breeders’ exemptionUPOV 1991 model or patents

Extension services

(continued)

Table 5.2 TRIPS-consistent IPRs standards: options for developing countries

Area of TRIPS Low-Income Middle-Income High-Income


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Biotechnology

Integrated circuits

Trademarks

GeographicalIndications (GI)

Copyrights

Trade secrets and test data

Maintain exemptions frompatentability

Strict standards for patent eligibilityNarrow claimsContracts for efficient and equitable

extraction

TRIPS minimum standards

Indefinite registration with risingrenewal fees

Registration contingent on use after 3 years

Fair use of descriptive termsRegister service marksDefine sector broadly for which

trademark is “well-known”Limits on protecting marks against

dissimilar goodsProtect domain names

List generic and semi-generic namesRegistration system for indications to

be protectedOppose or cancel registration of own

GI abroadPush for common WTO list for wines

and spiritsExpand TRIPS protection for relevant

products

Reduce piracy and raise awarenessTRIPS minimum periodLiberal fair use and compulsory

licenses for education, researchReverse engineering in softwareNon-voluntary licenses of right in

softwareEstablish collection societies,

contracts, infrastructureIdentify copyrightable worksCompliance with minimum standards

in WIPO treatiesRequire creativity for data

compilations

Minimum definition of unlawfuldisclosure methods

Limit employment restraints in hiring

High standard for defining” newchemical entity”

No period for excluding priorapplicant’s test data

Maintain exemptions frompatentability

Weaker standards for patent eligibilityBroader claimsContracts for efficient and equitable

extraction

TRIPS minimum standards

Indefinite registration with risingrenewal fees

Registration contingent on use after 3–5 years

Fair use of descriptive termsRegister service marksNarrower definition

Protect domain names

List generic and semi-generic namesRegistration system for indications to




products

Reduce piracyTRIPS minimum periodLiberal fair use and compulsory

licenses for education, researchReverse engineering in softwareNon-voluntary licenses of right in

softwareImprove infrastructure

Compliance with minimum standardsin WIPO treaties

Require creativity for datacompilations

Moderate definition of unlawfuldisclosure methods

Limit employment restraints in hiring

High standard for defining” newchemical entity”

Short period for excluding priorapplicant’s test data

Limited exemptions from patentability

Weaker standards for patent eligibilityBroader claims

TRIPS standards plus possible patents

Indefinite registration

Registration contingent on use after 5 years

Register service marksNarrower definition

Protect domain names

List generic and semi- generic namesRegistration system for indications to




products

Liberal fair use

Permit patents undertight criteria

Adopt WIPO treaties

Require creativity for datacompilations

Moderate definition of unlawfuldisclosure

More permissive toward employmentrestraints

Longer period for excluding priorapplicant’s test data


Table 5.2 TRIPS-consistent IPRs standards: options for developing countries (continued)

Area of TRIPS Low-Income Middle-Income High-Income

Encouraging innovationFor reasons of promoting dynamic competi-tion, developing countries should requirerapid publication of patent applications (mostof which will have been published elsewherein any case), with full disclosure of the techni-cal processes involved in producing the inven-tions, and how to reduce them to commercialpractice. This should encourage local firms toinvent around patents and use the disclosedknowledge to improve their manufacturingmethods. Countries with a registration systemshould permit active opposition after grantsare made, in order to invalidate inappropri-ately awarded patents. Those countries thatundertake examination could permit pre-grantopposition.

Developing countries could permit oralprior art to defeat claims of novelty. They couldalso provide a limited grace period in order tomaximize the inventions available in the publicdomain to domestic firms. Authorities couldalso preserve the rights of prior users of newlypatented inventions to continue to use themwith appropriate license fees.

For patents, countries could set high stan-dards for the inventive step, thereby prevent-ing routine discoveries from being patented.Regarding patent scope, it is sensible to exer-cise strict claims and discourage multiple claimsin patent applications.

Under limited circumstances governmentsmay resort to compulsory licensing to promotethe public interest in health, welfare, security,competition, and other grounds. Low-incomecountries may wish to ensure that their patentlegislation and health regulations permit theissuance of compulsory licenses in patentedmedicines under sharply defined conditions. Inaddition to being consistent with the require-ments of TRIPS, compulsory licensing shouldbe transparent and not arbitrary in order toavoid discouraging entry of foreign firms anddevelopment of new technologies by domesticfirms. Compulsory licenses are available alsoas a primary restraint on monopolistic behav-ior. Indeed, the United States has an extensiverecord of compelling licensing from technology

owners to rival firms as a remedy for anticom-petitive activity.

Protection for industrial designs can alsopromote innovation in developing countries.Providing rights to registered designs with asmall novelty requirement, for a limited timeperiod, can promote product innovation. Suchrights may be supplemented in two ways. First,designs may be protected under copyright law,even without registration. Second, countriescould experiment with systems in which, aftera shorter defined period of protection, rivalsare able to acquire licenses to use the designs intheir own work.

Protection of plant varieties remains contro-versial. When establishing PBRs, poor coun-tries would be advised to follow the UPOV1978 model,13 providing the farmers’ privilegeand a wide exemption for rival breeders to useprotected seeds to develop their own strains.There is a role for public agencies to undertakeresearch and disseminate new seed varieties.Middle-income economies are seeing develop-ment of plant breeders, and there are potentialgains from protection.

In biotechnology, lower-income economiesmay prefer to recognize narrow patent claimsand retain exemptions from patentability whereallowed by TRIPS. Countries with stronger in-dustries, such as China and Brazil, might awardstronger protection in order to promote tech-nology transfer and domestic invention.

Recognition of trademarks can promote do-mestic enterprise development. In developingcountries it is often domestic entrepreneurswho are frustrated in building their enterprisesbecause their marks are infringed by inferiorproducts. This problem raises confusion on thepart of consumers about the inherent qualityof commodities they wish to purchase. Thus,recognition of trademarks can be an importantdevelopment spur, even for poor countries.

Geographical indications may be of particu-lar interest to numerous developing countries.Again, such indications reflect the quality char-acteristics of products coming from a particu-lar location. Because many developing nationshave a comparative advantage in agricultural


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products and processed foods and beverages,significant gains could be realized from regis-tration of such place names. This is one area inwhich developing countries might be advisedto push for extended global standards.

Cultural resources—including folkloric arts,designs, and traditional remedies—could beprotected by a combination of copyright andtrademark principles. The difficulty here is thatsuch resources are often collective knowledgeand effectively in the public domain. Efforts areneeded to work out appropriate standards forprotecting such knowledge and the economicadvantages that can be earned from it.

A distinction should be made betweenstraightforward duplication of published andrecorded goods—also called piracy—and ac-cess to new information. While the former ac-tivities only yield short-run benefits, they dolittle to enhance the technological capabilitiesof copying nations.

Countries are free to determine the fair-useexceptions they will permit in the copyrightarea. Copyrighted materials may be madeavailable on a limited and noncommercial basisfor use in teaching, research, libraries, muse-ums, and charitable organizations. Indeed, thepreamble to the 1996 WIPO Copyright Treatycontains language promoting this balance ofinterests and encouraging nations to carry for-ward such limitations into the digital networkenvironment.

TRIPS requires copyright protection fordata compilations. The EU has gone well be-yond TRIPS’ standards in specifying strongprotection for databases even when theircompilation involves no creative step. Devel-oping countries should insist upon a demon-stration of creativity before recognizing suchprotection.

Recognition of the need to protect confi-dential business information can also be pro-competitive. A natural lead-time is provided tothe owners of trade secrets because rivals mustinvest in learning the technical informationthey embody. This effort can contribute to thetechnical knowledge capital of an economyand encourage follow-on innovation. Follow-

ers may prefer to acquire trade secrets by pur-chasing licenses from the originator, therebypaying some share of the invention rents andraising incentives for future inventive activity.Trade secrets are also instrumental in encour-aging technology transfer from abroad.

Poor nations would be advised to adopt theleast stringent regulations set out in the ParisConvention and perhaps also actively encour-age technology transfer. Middle-income coun-tries could establish more protective regimes,for example by imposing more stringent re-quirements on technical employees who areinduced to change employment.

Governments have some obligation to pre-vent the public disclosure of confidential testdata submitted for approval of medicines andagricultural chemicals for some period. Devel-oping countries could establish a high standardfor what constitutes a new chemical entity anddeny such protection to simple reformulationsor repackaging. For those submissions meetingthe originality test, data need to be protected,even though denying such information to rivalswould extend the time before generic competi-tion ensues.

Other policies can supporttechnological progress

While the standards sketched above areimportant in promoting competition

and innovation, simply adopting a stronger setof IPRs cannot be sufficient to ensure a posi-tive outcome. Intellectual property protectionis but a component of broader business regu-lation, innovation promotion, and consumerprotection that must be conjoined in an effec-tive overall system.14

Perhaps the most important complemen-tary factor is a commitment to education,training, and skill development. The positiverole of educational attainment in economicgrowth is well established empirically. It isplausible that a positive relationship exists be-tween the strength of IPRs and the level (orgrowth) of human capital, given the results re-viewed earlier.


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Economies that are more open to tradeand FDI experience a growth premium fromstrengthening their IPRs relative to closedeconomies. Competitive markets help limit thescope of intellectual property rights to their in-tended function, which is to encourage invest-ments in new products but not to prevent fairentry. In addition, a liberal stance on inwardtrade and FDI improves a country’s access toavailable international technologies, intermedi-ate inputs, and producer services. As discussedearlier, IPRs are a factor that encourages in-ward FDI under appropriate conditions.

Making IPRs stronger invites considerationof competition rules to discipline anticompeti-tive practices. To abuse an intellectual propertyright is to try to extend its exclusive use beyondpermissible limits. Claims that a rights holderhas engaged in anticompetitive behavior arecomplex, and resolving them requires signifi-cant judicial and legal expertise. Administrativecosts may limit a country’s ability to undertakecompetition enforcement but the issue is suffi-ciently important to merit a high priority.15

IPRs need to be supplemented by programsto promote national technical change. How-ever, there are opportunity costs to the alloca-tion of scarce budgetary resources to R&Dprograms. To the extent that investment inproduct development is underprovided by theprivate market, there is a rationale for publicassistance. The limited R&D could be causedby such factors as an inadequate environmentfor risk-taking, taxation systems that fail torecognize R&D as a business cost, and miss-ing information about technological opportu-nities. Policies could aim to relax such re-straints. This could be particularly importantfor small- and medium-size enterprises, whichremain the source of much innovation in de-veloping countries.

Multilateral actions and IPRs in adevelopment round

The TRIPS Agreement ushered in a newglobal regime for protecting intellectual

property. There are numerous means by which

developing countries may benefit from thischange, at least in the long run, although thereare bound to be significant short-run costs.However in the short run, the developed coun-tries are likely to be the primary beneficiaries.Moreover the introduction of global IPRs intosuch areas as pharmaceutical products, agri-cultural inputs, biotechnology, environmentaltechnologies, and electronic databases has seri-ous development consequences that merit care-ful consideration. This situation suggests poli-cies in three general areas:

1. Collective international actions that can becombined with the new protection regimeto help achieve important public goods

2. Ways developed countries can ease the tran-sition burden for poor countries

3. Approaches to IPRs that developing coun-tries could take in the “Development Round”

International collective goodsThe new global IPRs system could affect thewillingness and ability of the internationalcommunity to find effective solutions to anumber of critical public-goods problems.Consider three of the most important issues.

First, the health status of impoverished people in the least-developed countries con-tinues to deteriorate. Beyond the debilitatingcosts diseases impose on patients, medical sys-tems, and government budgets, it has spill-over effects on other countries through expo-sure to infection and reduced productivity. Arole for public intervention exists in resolvingthe crisis.

By requiring countries to provide patentsfor new pharmaceutical products, TRIPS setsup incentives that may work at cross-pur-poses. By slowing down generic competition,patents could raise prices of new drugs in de-veloping countries and reduce the ability ofpatients to acquire drugs at reasonable cost.At the same time, the promise of wider andstronger patent protection could raise incen-tives for private pharmaceutical firms to en-gage in more R&D into the diseases of poverty.There is little private research undertaken in


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such diseases (Sachs and others 1999). This sit-uation stems from both the absence of patentprotection and the extremely low purchasingpower of patients in poor countries. TRIPSaffords a solution to the former problem butnot to the latter. Consequently, TRIPS couldraise costs without providing much incentivefor innovation.

Effectively addressing the diseases endemicto poor countries requires separation of thedynamic incentives for R&D from the needfor widespread distribution at low cost.

Any comprehensive solution to the prob-lem requires significant increases in foreignassistance from industrialized countries andfinancial support from multilateral organi-zations and private donors. These resourceswould be used for two purposes. One is toprovide an incentive to firms to engage inR&D into new and effective vaccines andmedicines. This incentive could involve pur-chasing targeted drugs at negotiated prices orpaying royalties for licenses that permit desig-nated countries to produce and distribute them.By their recent actions in the area of HIV/AIDS drugs, pharmaceutical firms have indi-cated a willingness to sell medicines cheaply,provided that exports back to developedcountries, where prices would be higher, areprevented. The other task is to fund the devel-opment of effective health-care delivery sys-tems in poor countries.

A second issue relates to incentives set up byTRIPS to extract biogenetic resources from de-veloping countries. In principle contracts couldbe devised to manage extraction of genetic ma-terials. However it is not easy to determine ap-propriate royalties when the resources are de-veloped in areas without clear rights in naturalproperty. Ownership may be collective within avillage or even undefined.

Thus contracts need to be developed thatpay attention to both private incentives andpublic objectives. A role for governments ariseshere to ensure equitable and efficient sharingof the economic rents to IPRs earned on prod-ucts from extraction of domestic resources.For example, some countries now require firms

to demonstrate that they have attained theapproval of local villages before going bio-prospecting or removing resources.

A third issue is how TRIPS affects incentivesto develop new transgenic crops throughbiotechnological research. Widespread intro-duction of new crops raises concerns aboutbiodiversity. The rapid increase in output of ge-netically modified plants attests to their advan-tages in terms of enhanced disease resistance,reduced use of chemical inputs, and higheryields. It also suggests that traditional varietiescould be pushed out of the market. IPRs pro-vide incentives for producing better crops butultimately might limit consumer choice.

It makes little economic sense to retard in-centives for developing new plants and foodproducts by restricting exploitation of IPRsbeyond their usual limitations. A more prom-ising and direct approach would be labelingprograms that permit consumers to expresspreferences for traditional crops and providemarket incentives to sustain their production.Further if the disappearance of plant varietieswere seen as potentially damaging in environ-mental terms, an argument would exist for domestic and international public agencies tostockpile such strains for purposes of keepingthem alive as a form of social insurance.

To some extent the global IPRs system is inconsistent with public interests in resourceconservation and biodiversity. For example,the United Nations Convention on BiologicalDiversity stipulates that countries have sover-eign rights over biological resources, whileTRIPS recognizes private rights to own mi-croorganisms and microbiological processes.Developing countries that are the sources ofgenetic resources and natural plant strainsneed to assess their interests in revising TRIPSto deal with this inconsistency. If Article 27 ofTRIPS (dealing with patents in life forms andprotection for plant varieties) is revised, manydeveloping countries should push for a resolu-tion of the concept of resource rights and col-lective ownership, along with the obligationsof firms that extract resources. Thus for ex-ample, countries could push to forbid patents


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on plant-based products obtained from ma-terials in international germplasm banks andother deposit institutions.

In many of these new areas, the legal andtechnical expertise needed to design carefullybalanced intellectual property and related reg-ulations is likely to exceed the capacities ofleast-developed countries and even middle-income countries. Multilateral assistance canplay an important role in ensuring that poli-cies promote development and in complement-ing direct funding for research on technologiesaddressing poor country needs.

Policy options for developed countries on TRIPSTechnology-exporting countries have a stronginterest in sustaining TRIPS. Because of systemicdifficulties among developing countries in ad-justing to the new obligations and concernsabout its implications, industrialized nationscould consider several options to make the agree-ment more directly supportive of development.

First, in recognition of extreme budgetaryand institutional difficulties, least-developedcountries should be afforded latitude in exercis-ing delays in implementation of TRIPS, espe-cially in the technically complex and controver-sial areas of pharmaceutical patents and plantprotection. Similarly, noncompliance problemsshould not be the subject of dispute resolutionunless they constitute willful departures frombasic TRIPS obligations.

Second, it should be recognized that devel-oping countries need to have lower and moreflexible IPRs standards than do their devel-oped counterparts. TRIPS provides such flexi-bility in many areas and the developing coun-tries should be afforded the opportunity tooperate at the lower limits if it is in their de-velopment interests to do so.

Third, developed countries could go a longway toward raising enthusiasm for TRIPS ifthey would actively implement their “best ef-forts” commitments to encourage technologytransfer to the least-developed countries and toprovide technical and financial assistance fordeveloping countries. While some assistance is

on offer now, it is insufficient for the major jobof reforming IPRs administration. The currentapproach, whereby grants are made to suchorganizations as WIPO and UNCTAD for un-dertaking specific projects, is inadequate givenvarious bureaucratic constraints.

A valid justification for expanding assis-tance is found in the asymmetric costs andbenefits from TRIPS. Intellectual property de-velopers in rich countries stand to be the pri-mary gainers from the new systems, whilethere is little promise of gains for poor coun-tries, at least for a considerable period of time.It could also be a wise investment in promot-ing compliance with TRIPS and enforcementof IPRs, which might otherwise emerge onlyslowly. Thus, developed countries could con-vert their “best efforts” promises to bindingcommitments, with benefits on both sides.

Finally, the most important action devel-oped countries could take to affirm confidencein TRIPS is to meet and expand their obliga-tions to provide greater market access for theexports of developing countries. Especially im-portant would be new attempts to reduce bar-riers to agricultural trade, which would greatlybenefit many developing nations. Moreover,agricultural liberalization would raise the in-centives of firms in developing countries to in-vest in new agricultural technologies protectedby IPRs, thereby cementing faith in TRIPS.

Developing countries and TRIPS reformThe interests of developing countries in alter-ing or extending TRIPS vary greatly because,in part, they have different levels of incomeand technological sophistication. To rebalancethe agreement in some measure toward the in-terests of the poorest countries, while allowingfor the quite diverse circumstances of coun-tries, would help promote development.

First, extending the transition periods beyond2005 for the least-developed countries wouldease their administrative burdens. Although theyhave a limited opt-out procedure as discussedearlier, a general recognition by the WTO mem-bership of needs for extensions could be benefi-cial in avoiding disputes. Such extensions should


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be accompanied by serious commitments towork toward ultimate implementation.

Second, the low-income and middle-incomecountries should weigh carefully the introduc-tion into TRIPS of significant new protectionfor IPRs that would reduce their access to in-formation and technology. Extending patents inbiotechnology to additional life forms and toplant variety protection could impose signifi-cant costs on developing countries, as wouldany attempt to globalize the highly protectivedatabase systems in place in the EuropeanUnion or under contemplation in the UnitedStates. Another form of protection to weighcarefully is patents for software and methodsfor doing business. Similarly, erecting global re-straints on parallel trade might have adversepotential competitive effects on future prices.On the other hand, many developing countrieshave economic interests in extending protectionfor geographical indications to their food prod-ucts and handicrafts. This may help to ensurethat valuable geographic indications do not be-come generic terms. Further, there are soundreasons for introducing the WIPO Copyrightand Phonograms Treaties into TRIPS obliga-tions, so long as they retain flexibility for estab-lishing liberal fair use of Internet transmissions.

Third, despite proposals to remove from pa-tent eligibility those drugs that are on, or willbe on, the WHO “Essential Drugs” list, it isunlikely that such discrimination by productwould be acceptable and, moreover, it couldsignificantly reduce incentives to develop crit-ical new drugs. A better alternative, discussedabove, is to use public funds to purchase drugsor licenses. So long as the financial offerscover anticipated R&D costs the incentives todevelop new drugs would improve.

Fourth, current TRIPS rules may not allowgovernments to grant a compulsory license toforeign firms, and may not permit firms pro-ducing under compulsory licenses to exportmuch of their production.16 This situationthreatens to raise the costs of drugs in countrieswhere domestic production capacities cannotensure adequate supply of essential medicines.A revision of the Agreement in this regard may

be necessary to permit small, poor, countriesthe right to import from foreign producers of-fering low-cost or generic products prior topatent expiration. Such a provision would pro-vide greater flexibility in addressing publichealth crises. Even if such licenses may not ac-tually be granted, the option itself would likelyincrease the bargaining power of governmentswith regard to pharmaceutical multinationals.

Fifth, many developing countries are inter-ested in establishing new forms of IPRs overcollective and traditional knowledge. Suchknowledge covers literary creations, such asoral histories, artistic works, music, designs,pharmaceutical preparations, and methods ofproduction. It is difficult to protect these itemswith traditional IPRs precisely because they aretraditional (and therefore not novel) and col-lectively known, without easily assigned prop-erty rights. Thus, development of new rights,combining elements of trademarks, copyrights,and trade secrets along with sui generis recog-nition of traditional practices, could be benefi-cial. A global principle that patents are notavailable for items that had been known to thepublic by means of oral tradition or writtendescription also would be beneficial for poorcountries. Coordinated public efforts may berequired to catalogue these pieces of tradi-tional information.

As these final comments suggest, IPRsevolve dynamically over time to meet the needsof inventors and creators in market economies.The TRIPS Agreement significantly increasedthe requirements for protecting intellectualproperty incumbent upon nations that wish tobe part of the global trading system. Whilepromising some eventual benefits, the newregime is asymmetric in its likely effects acrosscountries. Low-income economies may expectto incur net costs for some time, suggestingthat patience and assistance are needed, alongwith programs to limit potentially negative ef-fects in such areas as new medicines. The pic-ture in middle-income economies is more com-plex as they feature a mix of interests betweenintellectual property developers, users, and im-itators. Experience with the negotiation and


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implementation of TRIPS should improve theability of developing countries to participateeffectively in the further evolution of interna-tional norms.

Notes1. It is difficult to quantify the strength of IPRs be-

cause they are rules concerning conditions of dynamiccompetition rather than taxes or subsidies applied toparticular sectors. Moreover, those rules have differentimpacts under different economic circumstances.

2. This material is summarized from Maskus 2000a.3. Controlling for other influences, there is a qua-

dratic (U-shaped) statistical relationship between thestrength of patent rights and real per capita GDP.Specifically, patent rights become weaker as incomesgrow to a level of approximately $2,000 per capita in1985 international dollars ($3,000 today assuming anaverage growth rate of 2.5 percent), then become in-creasingly stronger as countries get richer.

4. China has largely met TRIPS requirements in itslegislation in anticipation of joining the WTO.

5. Smith (1999) found a similar outcome.6. The figures in column 2 of table 5.1 use coeffi-

cients developed in a four-equation simultaneous deci-sion framework, which incorporated the impacts ofpatent rights on patent applications, affiliate sales, ex-ports, and affiliate assets. The model was estimatedwith data from 1986 to 1994 for the foreign operationsof U.S. majority-owned manufacturing affiliates in sev-eral developed and developing countries. The assetsequation had a negative coefficient on patent rights,suggesting that, on average, across countries strongerpatents would diminish the local asset stock. However,there was a large positive coefficient on patents inter-acted with an indicator variable for developing coun-tries, resulting in a positive and significant net impactin those nations. This result likely means that at lowprotection levels internalization decisions encourageFDI as patents get stronger. However, as protection ex-ceeds some level there emerges a substitution effect fa-voring licensing over investment.

7. One possible explanation for this negative impactis that firms may exploit their IPRs in richer countriesrelatively more through arm’s length licensing relation-ships. Indeed, economic theory suggests that as IPRs arestrengthened, firms would choose to substitute licensingcontracts for FDI (Horstmann and Markusen 1987).

8. Similar problems exist in China (Maskus,Dougherty, and Mertha 1998). Interviews suggestedthat trademark infringement negatively affected inno-vative Chinese enterprises. Numerous cases were citedof difficulties facing Chinese producers of consumergoods. Establishing brand recognition in China requires

costly investments in marketing and distribution chan-nels; enterprises that achieved it found their trademarksapplied to counterfeit products. Such products were oflower quality and damaged the reputation of the legiti-mate enterprise. This problem deterred enterprise de-velopment and prevented interregional marketing.

9. The Economist, June 22, 2001.10. New York Times, “Look at Brazil,” January 28,

2001.11. See Reichman 1996/1997, which provides the

basis for some of the analysis in this section. See alsoWatal 2001.

12. Evenson and Westphal (1997) provide a morenuanced categorization of countries but provide littleconcrete guidance regarding IPRs.

13. UPOV refers to a series of revisions of a treatyfor the protection of plant varieties, which is known byits French acronym. The 1978 revision serves as a modelfor developing countries, but is not now available for ac-cession. The 1991 version provides stronger protectionfor breeders and is available for membership.

14. Maskus 2000a provides extensive discussion.15. The papers in Anderson and Gallini 1998 pro-

vide an excellent and comprehensive overview.16. The European Union submitted a paper to the

WTO TRIPS Council arguing that such licenses are ac-ceptable under the Agreement (“Paper Submitted bythe EU to the TRIPS Council for the Special Discussionon Intellectual Property and Access to Medicines,” 20June 2001, IP/C/W/280), but legal opinion is divided.

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