Table of Contents Abstract Preface Business Models, Incentives, and the Role of Intellectual Property The Current and Future Role of Intellectual Property in Modern Developed Economies Common Themes in the Development of an Intellectual Property Regime A Developmental Paradigm Paradigm in Practice: Current Examples from Developed and Developing Nations United States South Korea India China Conclusion Preface
Before diving into the topic of intellectual property (IP), and the role that it plays in the development of individual industries and countries, it will be helpful to define the scope of the paper and clearly state the assumptions on which this discussion proceeds. The arguments in this paper are made from the paradigm that IP policy is an economic tool used to shape the incentives for individual and corporate behavior in the marketplace. In other words, there is no moral impetus for the notion that an individual or an entity is entitled to a disproportionally greater profit, by way of monopoly, from an original idea or novel combination of knowledge that they have formulated. As articulated in the United States Constitution these rights are a means to "promote science and the useful arts," an economic argument.
It is necessary to clearly acknowledge the potential for various non-economic factors to influence large scale economic behavior, especially internationally across different cultures and economic systems. A complete understanding of the topic should include data driven insights from fields such as sociology, psychology, and behavioral economics to shed light on the limitations of classical economic theory. This type of analysis is beyond the scope of this essay.
This essay focuses on exploring the range of incentives, both intentional and unintentional, that are created by the interaction of the key moving parts of an IP regime. These major parts are identified as the type of protection offered, (i.e. patent, copyright and trademark), the scope of this protection, the subject matter to which this protection is extended, and the mechanism and degree to which these protections are enforced. To demonstrate the relationship between IPR and the incentives that they produce, two prominent modern industries will be analyzed. The analytical framework will then be expanded to include additional factors relevant to the development of economies and international trade. After constructing a basic paradigm for the relationship between IP policy and various stages of economic development, this model is applied to the developmental histories of two advanced modern economies, the United States in the west and South Korea in the east. This model will be applied to the developing countries of China and India, highlighting major mile stones and analyzing current events in the context of the established paradigm.
Business Models, Incentives, and the Role of Intellectual Property
The concept of IP has played a prominent role in the development of modern high technology industries and knowledge based economies. (1) A classic example of this relationship can be found in the pharmaceutical industry of the west. (2) It is no coincidence that in 2010 the top ten pharmaceutical companies by revenue (3) were based in the United States (US) or Europe, regions where strong intellectual property rights (IPR) covering pharmaceutical drugs exist. (4) The business model and structure of the pharmaceutical industry is the quintessential example of one that depends on strong IP protection in order to remain viable. (5)
The cost of delivering a new drug to market is widely debated (6), taking into account the cost of drug failures, the figures range from around $1 billion up to $4 billion dollars. (7) However, the cost of copying these drugs once they are developed can be as low as half a million dollars. (8) At a discount of 80-85% to reproduce a drug once it has been invented, (9) there would simply not be any private entities willing to invest in developing innovator products without being assured some form of market exclusivity. (10)
This exclusivity has traditionally come in the form of patents granted by a governmental agency and enforced through the judicial system. (11) While this paradigm has been copied around the world it is not necessarily the only way to achieve this. (12) For example, regulatory channels can be used to grant exclusivity for regulated products. (13) In the US the Food and Drug Administration (FDA) often grants a monopoly under the 505(b)(2) (14) regulatory approval pathway using the statutory authority granted by the Hatch-Waxman Act. (15) These types of mechanisms should not be overlooked when considering an IPR structure, since they can allow for a more precise engineering of policy to maximize the fit with a particular industry while maximizing public policy objectives. (16)
The laws regulating intellectual property are almost always slower to change then the industries they govern. (17) This reality, stemming from the typical bureaucratic and judicial vehicles for reform, has the potential to produce suboptimal economic incentives and inefficiencies in the market during the lag period. (18) Consequently as both the developed and developing world both struggle to find pro-growth economic policies, the effects of IPR on the high technology sectors with the promise of delivering this growth, is a worthwhile topic of discussion. (19)
Traditionally countries have had few industry specific IPR regulations beyond basic patentable subject matter restrictions. (20) However, the types of incentives necessary to create desired outcomes vary widely depending on the fundamental structure of the industry. (21) Strong IPR, with long periods of exclusivity, are best justified when trying to encourage investments in industries for which developing new products require a large investment, over a long period of time, involve high risks, and are considerably less expensive to copy once developed. (22) Conversely, industries in which products can be developed quickly with minimal investment, and copying or reverse engineering of the final product is not necessarily cost effective, are likely to be industries in which strong IPR are not as important to incentivize investment in developmental activities. (23)
These descriptions mirror the business models of the pharmaceutical industry, juxtaposed by the software and electronics industry. (24) In the latter industries, the time and resources spent on development is decreasing, incremental innovation is increasing as product lifecycles shorten, and inventors are successfully implementing alter native development models such as open innovation (25) that do not rely on traditional IPR. (26) In the electronics industry, companies often save money from copying or reverse engineering competitor products, the same way generic pharmaceutical companies copy drugs, however the fundamental incentives may not be the same. (27) Short product lifecycles mean in the amount of time it takes to successfully reverse engineer an electronics product and bring it to market, the product may be obsolete. (28) In this industry non-patent IPR like de sign copyright and trademark can be more important. (29) Hardware makers like Apple for example are able to achieve gross margins approaching 90%, while their competitors struggle to achieve margins of 30% (30) for functionally identical products, presumably because of a strong brand name and attractive design features. (31)
In the US a software application for a mobile device is often eligible for patent protection as well as copyright protection. (32) Under this regime these relatively simple software applications, developed in as quickly as a weekend for as little as $100033, and complex biologic drugs, developed over the course of a decade for the cost of $1 Billion or more, are offered the same length of statutory protection. (34) They are also both subject to many of the same fees, standards, and procedures for obtaining and enforcing the patent. (35) Without fined tuned IPR these extremes in business models and industry structure increase the chances of introducing unintended inefficiencies into the marketplace. (36)
This is also a case where the same standards for IPR, in different industries, can produce different incentives. (37) In the pharmaceutical industry, the resources and time spent obtaining a patent are negligible in comparison to that spent developing the product. (38) A patent is a small...