How Patent Reforms Boost Developing Countries

The Agreement on Trade Related Aspects of Intellectual Property Rights, better known as TRIPS, was the first to include provisions for intellectual property (IP) rights within the multilateral trading system. TRIPS, which took effect in 1995, expanded access to patent protection, broadened the types of inventions that were patentable (notably medicines and biotech), and increased the duration of protection, among other provisions.

Countries in the developing world—where IP protection was notoriously weak—had the most work to do to meet the new global standards. Proponents of TRIPS argued that national IP reforms would promote countries’ industrial and technological development by accelerating the transfer and dissemination of technology. That, say critics, has not happened. They argue the importance of TRIPS in the diffusion of knowledge and innovation has been overestimated.

Instead of focusing on inflows of investment and technology transfer in the years after TRIPS came into force, this study examined the impact of patent reforms on the outward orientation of developing countries and the foundations of their export growth. 

What did the study find? 

• The total value of high-IP exports expanded when developing countries reformed their patent laws. 

• This expansion was driven primarily by a greater number of exporters, although, over time, the growing size of exporters was more predominant. 

• Following reforms, the unit prices per exporter rose.

• There was no effect on the first-year survival rate of new entrants into export markets. 

• Exporter entry rates in the high-IP sectors rose around the time of patent reform and persisted. Exporter exit rates also increased—by 9 per cent around the time of patent reform—and the increase was sustained. As a result of exporter churning, the distribution of exporters shifted towards larger and more IP-intensive firms.

How was the study designed?

The researchers evaluated the impact of national patent reforms on the export characteristics and dynamics of 42 developing countries. They compared exporter characteristics in IP-intensive sectors relative to non-IP-intensive sectors using product-level data from 1997 to 2014. Factors included the degree of firm diversification and market concentration and the measures of exporter and destination dynamics. 

What do I need to know?

The study showed that patent reforms boosted the productive and innovative capacity of developing countries, which enhanced their export performance. Before the TRIPS-mandated reforms, foreign firms in these countries were more interested in sales and distribution than the trade in knowledge. Stronger patent protection encouraged technology transfers from abroad in the form of technology licensing, joint ventures with local firms and foreign direct investment—all of which increased production efficiency and enabled product development. “As firms learn from the operations of multinational enterprises and the local technology pools,” the researchers write, “they develop new products and create platforms for exports.”

Patent reforms also protected local innovators against imitation and created incentives for innovation by smaller firms. Significantly, the researchers found that, in the developing countries studied, the share of the top exporters in total export value did not change after new patent laws were adopted. This implies that exports of smaller firms rose in proportion to the exports of top firms. Given that smaller firms have lower foreign ownership, more of the benefits of export expansion stayed within the developing countries.

The researchers caution, though, that stronger IP rights are not enough for young exporters who may lack business fundamentals. Patent reforms, for example, did not affect the first-year survival rate of new entrants into export markets. Sustained success abroad requires more than protective patents. “Patents may provide a nudge for product development and exporting,” the researchers note, “but long-term survival is found in a firm’s own competence and strategies, not in a state’s policy.”

The other interesting effect of patent reforms is they have been “simultaneously creative and destructive.” Both exporter entry and exit rates in high-IP sectors rose around the time that patent laws were overhauled. The trend has continued ever since. But exiting exporters tended to be smaller and have lower unit prices. So, over time, the distribution of exporters shifted towards larger, more IP-intensive firms. 

One of the study’s authors, Olena Ivus of Smith School of Business, has extensively studied IP rights and global trade. In previous research, she found that stronger IP rights in developing countries led to a greater variety of imports of new products in patent-sensitive industries. With this study, it appears that developing countries are absorbing the new technology and building a foundation for export industries.

Study Title: Patent reforms and exporter behaviour: Firm-level evidence from developing countries

Authors: Olena Ivus (Smith School of Business) and Walter Park (American University)

Published: Journal of The Japanese and International Economies (51 (2019) 129–147)