Politico‐Historical Contingencies, Intellectual Property Rights, and Economic Performance Across Countries: A Simultaneous Equation System Perspective

• DOI: http://doi.org/10.1111/jwip.12034
• Published date: 01 July 2015
• Date: 01 July 2015

Politico-Historical Contingencies, Intellectual

Property Rights, and Economic Performance Across

Countries: A Simultaneous Equation System

Perspective

Saradindu Bhaduri, Deep Jyoti Francis, Dwarkeshwar Dutt, Vineet Kumar,

and Fayaz Ahmad Sheikh

Centre for Studies in Science Policy, Jawaharlal Nehru University

Despite attempts to harmonize intellectual property rights (IPR) across countries, significant inter-country diversity

exists in their “strength.”Our paper situates the literature on IPR in the broader literature on institutions to gain insights

into the way economic performance, and historical political contingencies shape IPR, and put these hypotheses to

empirical scrutiny using cross-country regression analysis. Such analyses are often criticized for treating institutions

as exogenous variables. We develop a simultaneous equation model to address these concerns. We find that political

treatise, institutional complementarities, and historical processes all shape strength of IPR in a country. However,

strengthening IPR, while augmenting income, does not seem to favour the cause of human development.

Keywords intellectual property rights diversity; historico–political contingencies; economic performance;

simultaneous equation system

While the importance of institutions for economic performance has been well recognized in the academic

literature, considerable amount of ambiguities still prevail on the impact of intellectual property rights on

the various aspects of economic performance. The last few decades have witnessed a major policy activism

to harmonise and strengthen IPR laws across countries, purportedly, to facilitate economic growth and

development. Concurrently, we have also seen a phenomenal growth both in the academic literature on

intellectual property rights, as well as in policy documents, criticizing the attempts to strengthen IPR,

beyond a point, on grounds of reduced innovative activities (Gallini, 2002; Furukawa, 2007), promoting

monopolies (Phelps, 2013) as well as preventing access to new medicine and health care facilities (WHO

2005), mostly based on case studies. Quite often, however, the need for robust empirical findings have

been felt to verify these claims. Besides, a few studies have also pointed out differential impact of strong

IPR across developmental stages, highlighting that the institutions, besides shaping economic

performance, may be shaped by the level of economic performance of a country (Helpman, 1993). In

other words, the relationship between institutions and economic performance is two-way, a point

emphasised also by recent theories of institutional economics. The empirical literature on IPR has,

however, remained occupied only with the one-way impact of IPR, that too on narrowly defined measures

of economic performance, which often focused either on inward foreign direct investment, or gross

domestic product.

Most studies on intellectual property rights also do not pay adequate attention to the systemic nature of

the institution of intellectual property rights, curtailing our empirical understanding on the historical

political contingencies, and institutional complementarities that shape IPR in a major way. In this context,

the empirical cross-country studies on institutions and economic performance are often criticized on a

specific methodological ground. Most of these studies implicitly assume that the relationship between

institutions and economic performance is linear, and invariant, across level of economic performance (see,

©2015 John Wiley &Sons Ltd 107

The Journal of World Intellectual Property (2015) Vol. 18, no. 3–4, pp. 107–126

doi: 10.1111/jwip.12034

for instance, Chang, 2011) leading them to use linear regression models, These models demonstrate

endogeneity bias due to the dependence of institutions’efficacy on the level of economic performance.

1

We attempt to analyses these relationships using simultaneous equation system, which takes the

endogeneity issues head on, and can put at rest the criticisms leveled against cross country regressions in

understanding the relationships between institutions and economic performance.

For our study we use the IPRI report (Hernando Desoto Fellowship program, 2010), which reveals

that despite the intense regulatory push towards harmonization in the last few decades, the strength of IPR

varies widely across countries. On a 10-point scale, the average strength was measured to be 5.13, with a

standard deviation of 1.77 and the range equals to 6.7. The next section gives a brief overview of the

literature on Institutions, institutional change and economic performance. Subsequently, we discuss the

emergence and the diffusion of the institutions of IPR, and how it has evolved along with its

complementary institutions and the various historical and political contingencies. The following section

describes the data, constructs the variables and gives methodology. We then discuss the result and draw our

basic conclusions.

Institutions, Institutional Change, and Economic Performance: A Brief Overview

“Institution”is a broad term and, ideally, seen as a complex ensemblance of knowledge, values, cognition,

and rules prevalent in a society. Hodgson (2006) views institution as “systems of established and prevalent

social rules that structure social interactions.”He points out that institutions should not be viewed only as

constraining human behaviour, they also enable human behaviour. He also criticizes unqualified use of the

categories like “formal”and “informal.”Indeed, these two types of institutions develop, evolve and attain

a complex equilibrium within the social framework in which they are embedded. As they evolve they get

socially and culturally embedded (Grief and Laitin, 2004; Jong 2011; Roland, 2004). It gives the so-called

formal institutions a historical path that reinforces their integration into that socio–cultural milieu. In this

backdrop the success and failure of the “imported”formal institutions mainly depend on the flexibility of

the prevailing system, reflecting the common cultural heritage (Zweynert, 2009). Therefore, initial

conditions and historical accidents can influence emerging institutions either by offering resistance or

adapting to it (Kingston and Caballero, 2009). Thereby, institution change demonstrates a path dependent

characteristic in the context that particular sets of formal and informal rules are formed in response to

individual learning, changing ideology and organizational development (Mantzavinos et al., 2004;

Matthews 1986; Nelson 2007; North 1990; Tsai 2006).

Limited amount of empirical studies that have been carried out in this regards show that legal (La

Porta et al., 1996, 1999) or political and financial (Shleifer and Vishny, 1997) institutions play a significant

role in economic growth and development of nations (Acemoglu, 2001; Aron, 2000; Bertocchi and

Canova, 2002; Grier 1999). Grief argues that the Commercial Revolution took place not because of

endowments or technology advancements but because of favourable political and social institutions (Grief

1992). Institutions are thus “carriers of history,”in which they demonstrate complex interdependence with

various past and present institutional structures (David, 1994). This increased acceptance of the influence

of institutions on economic performance has initiated a process of transplanting “successful institutions,”

mostly from functioning market economies to “developing”market economies. Such transfers are on the

assumption that impacts of institutions are invariant of socio–political settings (Liu, 2006). The

International Monetary Fund (IMF) and the World Bank started this process through the structural

adjustment programme in the decade of 1990s (see Kapur, 2001). Later, the process of institutional

homogenization got a concrete shape under the aegis of the World Trade Organization. A major focus of

this process has been to strengthen the institutions of property rights in general and intellectual property

rights in particular, in order to expand the scope of market across the globe.

Saradindu Bhaduri et al.A Simultaneous Equation System Perspective

©2015 John Wiley &Sons Ltd

108 The Journal of World Intellectual Property (2015) Vol. 18, no. 3–4