Against Intellectual Monopoly

companies involved in the voice over Internet protocol
business: they all patented something pretty similar, and they all claim that
their patent is being infringed by one of their competitors.
    The authors who find the strongest effect on innovation of increased
patent protection are Kanwar and Evenson, as well as Lo. The latter examines
the 1986 reform in Taiwan, while the former use time-series data from a
cross-section of countries to regress R&D as fraction of gross domestic
product (GDP) on various variables, including a qualitative measure of IP
protection. Both sets of results are worth examining a bit more closely than
the rest.

    Lo finds increased innovation by Taiwanese inventors as measured by
R&D expenditure and by the number of U.S. patents they were awarded.
However, given the worldwide surge in U.S. patents about this time and the
fact that the number of Taiwanese patents awarded to these same inventors
did not much increase, we cannot reliably conclude that the effect of the
1986 law was either an increase in innovation or a jump in aggregate or
sector productivity. What the reform certainly did, and Lo documents convincingly, was an increase in the number of patents awarded to Taiwanese
firms, especially in the United States, which is altogether not surprising.
Lo himself points out that the main channel through which the Taiwanese
reform had a positive effect was by fostering foreign direct investment in
Taiwan, especially in those sectors in which patents are widely used.
    This is an important point, which deserves a separate comment. In a world
in which strong patent protection in some countries coexists with weak protection in others, a country that increases patent protection should observe
an increase in the inflow of foreign investment, especially in those sectors
where patented technologies are used. Profit-maximizing entrepreneurs
always choose to operate in those legal environments where their rights
are the strongest. In the United States, for example, economists and people with common sense alike have long argued that the policy of offering
tax incentives and subsidies to companies that relocate in one state or
another is not a good policy for the United States as a whole. Nobody
denies that if you provide a company with high-enough subsidies and tax
incentives, it will probably take them and relocate to your state, at least
temporarily. The problem is that, after you do so, other states will respond
by doing the same, or more. In the ensuing equilibrium, the total amount
of investment is roughly the same as when no one was offering a subsidy,
but everyone is now paying a distorting tax to finance the subsidy. When
capital moves freely across countries, the very same logic applies to the
international determination of IP rights. In what economists call the Nash
equilibrium of this game, it is obvious that patent holders prefer to locate
in countries with strong IP laws. This increases the stock of capital in the
receiving country and reduces it everywhere else, especially in countries
with low IP protection. Hence, absent international cooperation, there is
a strong incentive for most countries to keep increasing patent protection,
even in the absence of lobbying and bribing by intellectual monopolists.
    As for the study by Kanwar and Evenson, they have data on thirty-one
countries for the period 1981-90. Using two five-year averages, they find
support for the idea that higher protection leads to higher R&D as a fraction of GDP. Their measures of IP protection do not always seem to make sense,
but this is not the proper place to engage in a statistical diatribe. There are five
levels of IP protection, and R&D as a fraction of GDP ranges from a ten-year
average of.231 percent in Jordan to 2.822 percent in Sweden. They find that
increasing protection by one level raises R&D as a fraction of GDP between
0.6 percent and 1 percent. As before, the most favorable interpretation of
this result is that countries offering higher levels of IP protection also attract
investments in those sectors in which R&D and patents are most relevant. A
less favorable interpretation of this result, instead, points out that Kanwar
and Evenson have forgotten to include a main determinant of the ratio of
R&D to GDP: that is, market size as measured by GDP. The most elementary
theory of innovation, either under competition or monopoly, shows that
the innovative