Trading on IP’s Value

The Uruguay Round — eight years of multilateral trade negotiations involving 123 countries — is best known for giving rise to the World Trade Organization. But it also has the distinction of being the first time that intellectual property (IP) rights were placed on the table as a potential barrier to trade.

By the time the Round ended in 1994, participating nations signed on to the bitterly contested Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). TRIPS sets out standards and enforcement of IP rights as a condition of membership in the WTO. TRIPS compliance, for example, requires patent terms of at least 20 years for products and processes.

It was no surprise that Western countries, led by the U.S., pushed hard for greater IP rights in the global marketplace to protect key industries such as pharmaceuticals. Countries with developing economies have been sceptical, fearing stronger IP rights would simply lead to price gouging and other predatory behaviour by multinationals.

Ultimately, the argument that won the day was that by strengthening their IP rights, developing countries would boost their access to foreign innovative products and technologies and potentially benefit from technology spillovers.

Some 20 years later, the jury is out on the impact of TRIPS. Olena Ivus, a Smith School of Business researcher who has extensively studied IP rights and global trade, looked at whether stronger IP rights in developing countries led to an increase in the variety of products exported from the developed world.

“Answering this question bears directly on developing countries and their prospects for advancement in the global marketplace,” says Ivus. “The question cuts to the heart of the efficacy of TRIPS as an instrument to enhance global welfare and establish reciprocal benefits among member countries.”

For developing countries, “it matters where you are on technology ladder. The priority should be to move up that ladder”

In her study, Ivus used detailed product data on U.S. exports to 71 developing countries. The results were conclusive: stronger IP rights did indeed lead to a greater variety of exports of new products in patent-sensitive industries.

“The findings substantiate claims that ratification of TRIPS by developing countries promotes access to new foreign products and technologies,” says Ivus. Her results were published in the Journal of International Business Studies.

What might explain these results? One possibility is that with their IP rights protected in developing countries, multinationals can spend fewer resources protecting their products from imitation or reverse engineering and instead invest in innovative products geared to the local market. It could also be the result of multinationals boosting sales through new subsidiaries or arm’s length licensing.

For developing nations, however, it’s not enough to have new technology and products entering their markets. “What’s important is whether developing countries can benefit from this, not only in terms of consumption but in terms of absorbing new technology,” says Ivus. “Are there positive spillovers into domestic industries? That I don’t know.”

In the end, the developing countries that are able to enjoy the most benefits of TRIPS are those with IP-supporting institutions, such as strong educational institutions and innovative capabilities. “It matters where you are on technology ladder,” says Ivus. “The priority should be to move up that ladder.”

— Alan Morantz