TRIPS – expanded as, “The Agreement on Trade Related Aspects of Intellectual Property Rights” – was the first to include provisions for intellectual property (IP) rights within the multilateral trading system. Coming into effect in 1995, TRIPS extended 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.
The most work to do to meet the new global standards happened to be in the countries in the developing world where IP protection was notoriously weak. Advocates of TRIPS argued that the national IP reforms would promote countries’ industrial and technological development by accelerating the transfer and dissemination of technology. That, according to critics, has not happened. They contend that the importance of TRIPS in the diffusion of knowledge and innovation has been overestimated.
A recent study on “How Patent Reforms Boost Developing Countries” – instead of focusing on inflows of investment and technology transfer in the years after TRIPS came into force – 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 swelled when developing countries reformed their patent laws.
- This expansion was driven mainly by a greater number of exporters – although, over time, the growing size of exporters was more predominant.
- Subsequent to reforms, the unit prices per exporter rose.
- There was no effect on the 1st-year survival rate of new entrants into export markets.
- Exporter entry rates in the high-IP sectors grew around the time of patent reform and persisted. Moreover, exporter exit rates also increased by 9 % around the time of patent reform, and the increase was sustained. As an outcome of exporter churning, the distribution of exporters shifted towards larger and more IP-intensive firms.
How was the study designed?
The researchers, studying how “Patent Reforms Boost Developing Countries’’, assessed the impact of national patent reforms on the export characteristics and dynamics of 42 developing countries. Using product-level data from 1997 to 2014, they compared exporter characteristics in IP-intensive sectors relative to non-IP-intensive sectors. The factors included the degree of firm diversification and market concentration and the measures of exporter and destination dynamics.
What does one need to know?
The study revealed that patent reforms augmented the productive and innovative capacity of developing countries, which boosted their export performance. Previous to the TRIPS-mandated reforms, foreign firms in these countries were more interested in sales and distribution than the trade in knowledge. Robust 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. To quote the words of the researchers, “As firms learn from the operations of multinational enterprises and the local technology pools, they develop new products and create platforms for exports.”
In addition, the patent reforms also protected the local innovators against imitation and created incentives for innovation by smaller firms. Notably, 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 indicates that exports of smaller firms rose in proportion to the exports of top firms. Considering that smaller firms have lower foreign ownership, more of the benefits of export expansion stayed within the developing countries.
However, the researchers caution that stronger IP rights are not enough for young exporters who may lack business fundamentals. For example, patent reforms did not affect the first-year survival rate of new entrants into export markets. Continued success abroad requires more than protective patents. The researchers note, “Patents may provide a nudge for product development and exporting, but long-term survival is found in a firm’s own competence and strategies, not in a state’s policy.”
The other striking effect of the patent reforms is that they have been “simultaneously creative and destructive.” This is borne out by the finding that both exporter entry and exit rates in high-IP sectors increased around the time that patent laws were overhauled. And, this trend has continued ever since. However, the existing exporters tended to be smaller and have lower unit prices. So it was that, over time, the distribution of exporters shifted towards larger, more IP-intensive firms.