Do Intellectual Property Rights Promote Economic Development?

The World Trade Organization defines intellectual property as “the rights given to persons over the creations of their minds.” These rights are typically enforced through legal protections such as patents, copyrights, and trademarks, which allow innovators to “earn recognition or financial benefit from what they create. Codifying these rights in law gives would-be inventors confidence that they will financially benefit from their creations, which incentivizes technological advancement and “safeguards all American ingenuity” by creating a legal framework that facilitates cooperation and knowledge sharing.

Because of the benefits they provide to inventors, intellectual property rights (IPRs) protections touch almost every sector of the economy. In 2019, over 41% of the United States’ economic output and about a third of its jobs came from IP-intensive industries, up from 34.8% and 27.7% respectively in 2010. As intellectual property becomes more ingrained in the United States’ economy, understanding the economic impact of robust IPR protections is critical to sustained economic growth. In this case study you will learn about different types of intellectual property protections, as well as arguments for and against their economic necessity. You will then use data from the DemCap Analytics (DCA) tool to determine whether strong intellectual property rights contribute to economic growth. 

There are various legal instruments that individuals and companies can use to protect their intellectual property. All are enforceable protections that allow innovators to be fairly compensated for their creations. While the list below is not exhaustive, it details several of the most common types of IPR protections. 

• Patents: A patent, typically issued by government organizations like the United States’ Patent & Trademark Office (USPTO), confers ownership of an invention for a limited period of time (typically 20 years). The owner of a patent can exclude any party from using their invention. Alternatively, the patent owner can charge a licensing fee that gives licensees the right to use their invention.
• Copyrights: Copyrights give the creator of an original work, such as a film, book, play, or television show, the exclusive rights to perform and distribute their work. Like patents, copyrights are granted for a limited time and entitle their owners to a licensing fee from those who want to use their work.
• Trademarks: A trademark is “any word, phrase, symbol, design, or a combination of these things” that identifies a company’s goods or services. Trademarks prevent competitors from impersonating a brand and informs consumers about the true source of the product they are using. Trademarks do not prevent others from using trademarked words or phrases generally: they only apply to how those words or phrases are used with the trademarked goods or service (i.e. within the same industry).
• Trade Secrets: Trade secrets are non-public information such as designs, instruments, patterns, or formulas “by which a business can obtain an economic advantage over competitors or customers.” Unlike the other types of IPRs, trade secrets are not protected by the USPTO through a formal process (i.e. there is no application or registration involved). To recover trade secrets, businesses must prove that they made a “reasonable effort” to keep the information secret and that it couldn’t be legitimately obtained by other parties.

The main theoretical benefit of IPRs is that they solve a market failure caused when free riding discourages innovative behavior. Creating new products and technologies takes time and money. Research and development expenditures across the United States economy were $789 billion in 2021, and they were projected to increase to $886 billion by 2022. Companies happily stomach these costs because they get exclusive rights to whatever innovations they create. These rights can easily be monetized, either through direct sales or licensing fees. 

However, in the absence of IPRs, there would be nothing to stop imitators from profiting off innovations that they did not create. If these copycats can sit on their hands, wait for someone else to do the hard work of coming up with a new innovative product, and then sell their own version of that product, then they have little incentive to invest in R&D activities themselves. Innovative companies would gain little advantage over competitors because of their R&D activities, so they might lower their research spending accordingly. 

This theoretical relationship between weak IPRs and innovation seems to hold in practice. Lily Fang and colleagues study the effect of IPR protections on newly privatized Chinese companies and find that a one standard deviation increase in local IPR protections was associated with a fourfold increase in patent stock. This means that companies in cities that actively enforce IPRs were filing significantly more patents, suggesting a marked increase in innovative behavior in cities with strong intellectual property laws.

By promoting innovative behavior through IPRs, economies position themselves for success. Investors and innovators stand to benefit from an economy that protects intellectual property, so strong IPR can attract capital and talented inventors. Both of these should improve economic outcomes. A study by the Federal Reserve Bank of St. Louis shows that economies with robust IPR protections have significantly higher GDP per capita. Similarly, a study by Abdul Sattar and Tahir Mahmood found that property rights contribute significantly to economic growth, and that these results were stronger in middle and high income countries than in low-income countries.

Another economic benefit of IP-reliant industries is that they compensate their workers better. A 2019 report by the USPTO found that workers in IP-intensive industries earned $1517 a week on average, compared to $947 a week for workers in non-IP-intensive industries. IP-industry workers are also more likely to be enrolled in employee-sponsored health insurance and retirement plans. The share of jobs in IP-intensive industries has been steadily increasing over the past several decades. If these trends continue, then we would expect more workers to benefit from these high wages and generous benefits.

Not all assessments of IPRs’ impact on economic growth and innovation are positive. Many critics cite the epidemic of so-called ‘patent trolls’ in the tech sector as an example of how exploiting IPRs can actually deter innovation. Patent trolls are companies that purchase patents, typically from “companies down on their luck who are looking to monetize what resources they have left.” Since patent offices typically lack the domain-specific knowledge necessary to gauge whether a concept is new or novel, oftentimes they issue patents that are overly broad that cover rudimentary types of coding. Patent trolls hoard these patents without creating any software themselves, and earn money by threatening litigation against other firms for copyright infringement unless they pay a licensing fee. 

This sort of patent parasitism can be a huge drain on the economy. Patent trolls “generated $29 billion in direct costs from defendants and licensees” in 2011. These costs are primarily “dead weight,” as only 25% of these funds go to research or innovation while at least that much goes to funding further litigation. These costs disproportionately hit smaller startup firms earning <$100 million, 41% of whom reported “significant operational impacts” from patent troll lawsuits. When firms have to stomach these unnecessary costs, they often pare back their own investments in research and development to offset the losses. Indeed, a study by United for Patent Reform found that companies who settle with patent trolls or lose to them in court decreased their R&D budgets by an average of over $160 million over the next two years. So IPRs, which were designed to promote innovation, may actually be suppressing it by allowing litigious trolls to drain money from innovative companies without creating anything themselves.