Intellectual Property Rights and Growth: Is there a Threshold Effect?

Abstract

Recent WTO agreements have forced developing countries to adopt stronger intellectual property rights (IPRs). However, theoretical research is critical at best, but largely undecided, on the impact of stronger IPRs on economies at lower stages of development. This paper is particularly concerned with a critical empirical examination of the impact of human capital on the relationship between IPRs and economic growth. Using a threshold estimation technique, originally developed by Hansen, the paper discovers a threshold level of human capital (robust to many different variations) such that for countries whose human capital is below this level, tighter intellectual property rights have a negative impact on economic growth, while for countries with human capital above this level, tighter intellectual property rights are unrelated to economic growth. Thus, we find a non-linear relationship associated with this switching regression.

Keywords:

• Threshold
• intellectual property rights
• economic development
• growth

JEL CLASSIFICATIONS:

• F15
• O11
• O34
• O4

Acknowledgements

This paper includes segments of the dissertation of Stefan Ruediger. The authors thank participants at the Southern Economic Association Meeting 2007, the University of Minnesota Applied Economics Seminar Series, the University of Wisconsin Milwaukee Economics Research Seminar Series, and the Marquette University Economics Department Seminar Series for helpful comments and suggestions.

Notes

¹The within country standard deviation is 0.6911 from 1980 to 2010 for the GP index.

²See Economic Freedom of the World Annual Report 2002, Chapter 2 – correlation between GP and WEF is 0.8.

³A paper by Minier (1998) also relies on the older approach, the decision-tree approach, to examine the relation between democracy and growth. A more recent paper by Minier (2007), however, does use Hansen's (2000) threshold approach, focusing on institutions and growth. Other non-linear growth regime papers have used a variety of different techniques. Three examples are Kalaitzidakis, Mamuneas, Savvides, and Stengos (2001), Liu and Stengos (1999), and Quah, (1997).

⁴Threshold variable (HK) can be a part of x.

⁵The table of asymptotical critical values can be found in Hansen (2000, Table 1, p. 582).

⁶We do not find support for the existence of a second human capital threshold.

⁷Education quality data can be found on the webpage of the institute for education science http://ies.ed.gov/

⁸The variables persistence to grade 5, student teacher ratios, students repeating grades, number of researchers and R&D spending are part of WDI.

⁹Gruben uses trade as the source of nonlinearity and so is not as closely related to our analysis here.

¹⁰TRIPS – agreement on trade related aspects of intellectual property rights.

¹¹Data are available on the webpage http://www.freetheworld.com/

¹²However, we find a somewhat different location for our threshold GDP: only 26 countries are located below the GDP threshold, while 41 countries were located below the human capital threshold (with the exception of Ghana and Sri Lanka, all countries located below the GDP threshold are also located below the human capital threshold). Thus, for the 15 countries whose GDP is above our threshold GDP but whose human capital is below out threshold human capital, an ambiguity exists in the effect of IPR on growth. We might think of this region as a ‘threshold region’ (for lack of a better terminology) where strong results of one form or other are missing.