How Private Property Protection Influences the Impact of Intellectual Property Rights on Economic Growth?

Abstract

Although policy-makers typically assume a positive relationship between intellectual property rights (IPRs) and economic growth, the empirical evidence on the IPR–growth relationship is rather inconclusive. We conjecture in this paper that the weak IPR–growth evidence in previous studies may be due to a neglect of the role of finance markets and private property rights. Our conjecture is motivated by the recent law-and-finance literature. We test our conjecture with a cross-section of 98 countries and find that once we modify our measure of IPRs to take into account general property rights, there is stronger evidence for a positive relationship between IPRs and economic growth. Our findings not only help explain the IPR-innovation puzzle but also have significant theoretical as well as policy implications.

Key Words:

• Intellectual property rights
• private property protection
• economic growth
• quantile regression

Jel Classification:

• O40
• O34
• K11

Acknowledgements

The authors sincerely thank Editor in Chief Kap-Young Jeong and two anonymous referees for their valuable and insightful comments. The responsibility for any remaining errors is ours. Zhang gratefully acknowledges financial support from the ShanXi Science and Technology Department [grant number 2013041028-02] (soft science project), the Taiyuan University of Science and Technology [grant number W20122002], and ShanXi Law Society [grant number SXLS(2013)B19].

Notes

1. It is important to point out that besides private property rights, many other factors can affect financial development of an economy, such as sufficient capital stock supplied by surplus unit of economic agent and the capability of financial intermediaries.

2. Hu and Png (2013) also combine the patent rights index with the Fraser index but from an enforcement perspective. They argue that “The [patent rights] index focused only on patent laws, as published, with no attention to actual enforcement” (p. 4). We do not agree with Hu and Png (2010) for two reasons. First, patent laws are generally civil, not criminal laws, and consequently patent rights should be enforced by the patent owner not the government. Second, the patent rights index does contain an enforcement category. The patent rights index is based on both statutory laws and case laws. Case laws are based on court cases and court rulings, which can reveal if and how laws are implemented. As a result, the patent rights index does take into account patent laws in practice.

3. An anonymous referee insightfully points out that from a legal point of view, IPRs and private property rights are not independent of each other, although their empirical indexes may not take such interdependence into account fully. At the same time, they need not correlated highly. In some countries, property rights, market freedom and democratic institutions may be weakly correlated. Likewise, the protection of IPRs may deviate from the way private property is protected so as to enable policy authorities to pursue strategic national objectives relating to technology (i.e. either allow imitation to promote technological catching up or protect IPRs strongly to attract inward foreign technology transfers).

4. For empirical evidence on the heterogeneity of the IPR-growth relationship across countries, see Gould and Gruben (1996), Falvey et al. (2006), Furukawa (2007), Dinopoulos and Segerstrom (2010), Branstetter and Saggi (2011) and Kim et al. (2012).

5. Five percent is suggested by Mankiw et al. 1992 and Lichtenberg (1992).

6. The Fraser index is the second component of the economic freedom of the world index (EFW; i.e. legal system and property rights), while the MF index is the fourth component of the EFW (i.e. freedom to trade internationally).

7. http://data.worldbank.org/about/country-classifications/a-short-history.

8. Developing economies were given five-year extensions to implement TRIPS.

9. Table 3 shows that the coefficients of other growth determinants (besides IPR protection) also vary with income. For instance, INITIAL is significantly negative for relatively wealthy economies (UM and H) but is insignificant for the less wealthy (L and LM), which suggests that economic convergence depends on income; market freedom (MF) is significantly positive for UM and H but is insignificant for L and LM, which implies that market freedom has differential effects on economic growth depending on the level of economic development. The variation in regression coefficient estimates of these other growth determinants across different income groups supports our research design of studying these groups separately.

10. See also Gilbert (2011).

11. One disadvantage of this approach relative to using averaged IPR and MIPR is that some countries do not have IPR and MIPR values at the beginning of the sample period. Thus, we have to drop such countries in the empirical tests, which lead to a smaller sample and lower power. This problem becomes more severe when the sample period is longer.

12. It is of interest to note that not all innovations are commercialized. Each year, hundreds of thousands of patents are granted, of which a small fraction is actually commercialized. This indirectly shows that patent rights and general property rights are two different concepts. Strong patent rights are a key factor as to why there is such high propensity to patent, yet just a small percentage of patented innovations are turned into commercial goods and services. Thus, something more is needed to incentivize and generate opportunities for commercialization.

13. This echoes the point made in Chen and Puttitanun (2005, p. 490) that “the positive effects of IPRs on domestic innovations … should be viewed as part of broader effects on entrepreneurial activities”.

14. There has been a tremendous growth in applications of quantile regression in various disciplines: economics, finance, genetics, population biology, medicine, environmental pollution studies, political science, education, demography, ecology and internet traffic. See, for instance, Koenker and Hallock (2001), Cade and Noon (2003), Yu et al. (2003), Koenker (2005), and Coad and Rao (2008).