Patent protection in the South: Is there a case for nondiscrimination?

ABSTRACT

We evaluate in terms of equilibrium world welfare the principle of national treatment (NT) in Southern patent protection. We use a variety-expansion model with R&D in North and South, and with Southern imitation targeted at both foreign and domestic innovations. In the short-run of Northern economy, NT can never dominate discrimination in the sense of generating a higher world welfare, and it tends to be dominated by discrimination. In the long-run of Northern economy, we obtain three results. First, under free trade, NT is favorable to the North while discrimination is favorable to the South. Second, if the entry cost of Northern R&D market is high and the strength of protection for Northern innovation under discrimination is not that weak, then NT is strictly dominated by discrimination, no matter whether trade barriers exist or not. Third, if trade barriers are sufficiently large, then NT dominates discrimination only when the strength of protection for Northern innovation under discrimination is weak; otherwise, NT is strictly dominated by discrimination.

KEYWORDS:

• North–South trade
• imitation
• intellectual property rights protection
• national treatment
• world welfare

JEL CLASSIFICATIONS:

• F12
• F50
• O31
• O34

Acknowledgments

The useful comments of a referee are gratefully acknowledged. The usual disclaimer certainly applies.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Though it may not be fully respected in practice, Article 3 of the Trade Related Aspects of Intellectual Property Rights (TRIPS) indeed requires countries to extend the same patent protection to all firms regardless of their national origin.

2. As the consideration of labor mobility between North and South is of independent interest and importance (see, e.g. Naghavi and Strozzi 2017, and references therein), we leave the possible extension with skilled migrations (brain drain or brain gain) to future research.

3. We impose this assumption not because Northern imitation does not exist, but because Southern imitation is practically more serious and it is usually the North that is unsatisfied with discriminatory patent protection policies enforced in the South, such as the recent trade-associated conflict between the US and China.

4. In particular, labor supply is assumed to be inelastic and hence $L_N>0$ is fixed over time.

5. This type of variety-expanding production technology has been widely used in the literature, e.g. Kwan and Lai (2003), Acemoglu, Antràs, and Helpman (2007), Furukawa (2007), Dai and Shen (2016), Dai (2018), to name a few.

6. In the North–South framework, it seems to be a common practice to assume that the North exports innovations to the South. Given the wide technology gap between developed and developing countries, such a simplification does not deviate from reality that much.

7. Throughout, we assume free trade of final good between the North and the South, and also its price in the world market is normalized to one for notational simplicity.

8. The convenience of assuming log preferences is that equilibrium consumer welfare can be written as the sum of the utility generated from initial consumption and the utility generated from consumption growth, the former of which depends on patent protection policy due to the general equilibrium consideration while the latter of which depends on patent protection policy because consumption growth rate is positively associated to the arbitrage-free rate of return of R&D. In particular, consumption growth rate only depends on the patent protection granted to domestic innovations. This is a standard feature of many R&D-driven growth models without allowing for an international capital market.

9. As pointed out by the referee, reality can be very close to steady state, but it cannot be exactly on the point of steady state. As such, the current theory predicts that both regimes achieve the same level of world welfare in reality, namely NT would have no role in shaping world welfare. This makes sense given that innovations are essentially exogenously determined here.

10. We wish to thank the referee for pointing out this perspective that induces the following formal analysis.

11. Without loss of generality, we let $\mathrm{d}t$ be sufficiently small so that it is guaranteed that ${\mu }_{SF}\mathrm{d}t\in (0,1)$, which is actually the nontrivial case that we are interested in.