Intellectual property rights and international R&D competition

Uses a model of repeated patent races to examine the incentives for intellectual property protection, and the effects of such protection both locally and on a country's trading partners. A partial equilibrium analysis is conducted in the context of international R&D competition between two countries both sufficiently technologically advanced to engage in innovative activities. The idea is to capture the situation of a middle income country commenting in an innovative race with an industrialised country where strong IPR protection is already in place.

The paper demonstrates that weak IPRs are maintained in some countries not because imitation is a more desirable activity than innovation, as is often believed, but because of the time inconsistency problem intrinsic in IPR protection. While ex ante a government had an incentive to impose strong protection to promote innovation, protection is only enforced ex post, after a discovery is made. At this point the government has an incentive to weaken protection to maximise profits in those product lines where local innovation has been unsuccessful. Given that firms are rational, they will make their investment decision based on these expectations, and the equilibrium that will ensue will be one with weak IPR protection, fewer local firms innovating, and relatively lower welfare. Low protection will also lower welfare for the country's trading partner.

One way this problem may be solved is through country partnership in a super national international organisation, such as WTO, that forces governments to commit to strong protection. The commitment equilibrium will be one of strong protection, maximum number of innovating firms and maximised welfare. Commitment will also increase welfare in the country's trading partner. In the absence of a super national commitment system, unilateral punishment may serve as an efficient enforcement mechanism for the country's trading partner. While effective, unilateral reaction often proves quite costly, and is in general frowned upon by the international community in that is can degenerate into mutually detrimental trade wars.

Future research: This paper concentrates on the interaction between a middle income country (a country with non-negligible innovative potential) and a more developed economy already committed to strong IPR protection. One could extend the analysis to the more general case of two countries, outcomes could obtain where reputational considerations are sufficient for both to maintain strong protection, or where instead a commitment mechanism is necessary in one or both countries. Alternatively a system of bilateral retaliation could serve as a double enforcement mechanism to maintain strong IPR protection in the global economy.

[Adapted from the author]