Institutional design for china s innovation system implications for intellectual property rights
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INSTITUTIONAL DESIGN FOR CHINA’S INNOVATION SYSTEM: Implications for Intellectual Property Rights. China March, 2007 Joseph E. Stiglitz. The role of intellectual property. Part of society’s innovation system To provide incentives to innovate

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INSTITUTIONAL DESIGN FOR CHINA’S INNOVATION SYSTEM: Implications for Intellectual Property Rights

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Institutional design for china s innovation system implications for intellectual property rights

INSTITUTIONAL DESIGN FOR CHINA’S INNOVATION SYSTEM:Implications for Intellectual Property Rights

China

March, 2007

Joseph E. Stiglitz


The role of intellectual property

The role of intellectual property

  • Part of society’s innovation system

  • To provide incentives to innovate

    • By allowing innovator to restrict use of that knowledge

    • Thereby obtaining a return on his investment in knowledge

  • There are other parts of society’s innovation system

    There are other ways of financing and producing research

    • Universities, government supported research labs

    • Open source movement

    • Financial returns are only part of incentive system of scientists

    • In many areas of research (basic science) patents play small role

      There are other ways of providing returns on knowledge than patents

    • Trade secrets, first mover advantage

      There could be still other ways of providing incentives

    • Prizes


Key question

Key question

  • The role of the patent system within this broader innovation system

  • The design of the patent/ipr regime

    • What can be patented, breadth of patent, standard of novelty, etc.

    • Procedures for granting patents/challenging patents

    • Rules for patent enforcement

    • Responsibilities as well as rights—requirements for disclosure

    • Restrictions—not to engage in abusive anti-competitive behavior; compulsory licenses

  • How these questions are answered can affect the efficiency of the economy and its innovativeness

    • There are large costs to the current patent system

    • Are there reforms which would improve its efficiency?


China s innovation system

China’s Innovation System

  • These questions are especially important for China today

  • One of China’s main challenges is closing the knowledge gap, that separates it from more advanced industrial countries

    • In spite of huge progress, gap remains large

    • The wrong IPR regime could make it more difficult to close the knowledge gap


Institutional design for china s innovation system implications for intellectual property rights

  • One of central elements in 11th five year plan is the design of institutions for China’s distinctive market economy

  • Western system has been highly productive

    • Based on strong government support of basic research

    • But also highly distorted

      • Expenditures on marketing/advertising vs. research; direction of research (me-too drugs and life style drugs vs. life-saving drugs; life-saving drugs for rich vs. life-saving drugs for poor)

      • Monopoly system associated with patents means knowledge is not used efficiently

        • And in some cases has actually retarded innovation


Institutional design for china s innovation system implications for intellectual property rights

  • What is needed is a development oriented intellectual property regime, designed for China’s stage of development

    • As in other areas, one size fits all policies don’t work

    • America’s IP system is not good for America

    • And is even more poorly suited for China

    • China needs an innovation system that focuses on economizing on resources

      • Innovation system in West focuses on economizing on labor

      • Can result in high levels of unemployment

  • Part of broader institutional infrastructure for the innovation system


Innovation system illustrates several general themes

Innovation system illustrates several general themes

  • Institutional structures that are appropriate for one country may not be the best for another

    • One size fits all doesn’t work

    • Differences in circumstances, history

    • Differences in objectives

  • This is true of property rights system (including intellectual property rights)

    • Even formulation needs to be changed

    • Responsibilities as well as rights

    • Key role of restrictions

    • These are social constructions that need to be adapted to the circumstances, history, and objectives of each country


Knowledge as a public good

Knowledge as a public good

  • Fundamental problem is that knowledge is a public good

    • In fact, it’s a global public good

  • no marginal cost associated with use

  • intellectual property circumscribes its use and thus necessarily causes an inefficiency


But not only does ip create a distortion by restricting the use of knowledge

But not only does IP create a distortion by restricting the use of knowledge

  • They create an even worse distortion—a (temporary) monopoly power

    • Social costs of distortion especially high in the case of life-saving drugs

    • IPR is often used to leverage (further) monopoly power (Microsoft)

      • Long history--automobile

  • Ordinarily, property rights are argued for as a means of achieving economic efficiency

    • Intellectual property rights, by contrast, result in a static inefficiency, justified by the dynamic incentives

    • Any method of raising funds has a social cost, but patent system is not “optimal” way of raising money (not optimal tax)


Institutional design for china s innovation system implications for intellectual property rights

  • Recent advances in industrial organization suggest that costs may be far higher than previously thought

    • Schumpeter was wrong about temporary nature of monopoly

    • Monopoly power once established can easily be perpetuated

    • Particularly evident in case of network externalities, switching costs (including “learning”)

  • And that benefits may be lower than previously thought

    • Incentives for R & D may be less

    • Distortions in the direction of research


Further costs

Further costs

  • High administrative costs (patent suits)

  • High levels of uncertainty

    • Intrinsic uncertainty of research

    • Compounded by risk of patent infringement

      • Risk of litigation


Losses of dynamic efficiency

Losses of dynamic efficiency

  • Question—can one obtain dynamic benefits at lower static costs?

  • Worry: The patent system may even be slowing down the pace of innovation

  • Fundamental problem: rewards do not correspond to marginal social returns

    • Marginal social return is having the innovation available earlier than it otherwise would have been

      • Contrast clear in case of human genome project

    • Further distortions arise from monopoly rents

    • Much of returns can arise from “enclosing commons”

      • In this case there is a cost, but no benefit

      • Evident in controversy over bio-piracy


Why patents may slow innovation

Why patents may slow innovation

  • Knowledge is the most important input into the production of knowledge

    • Especially of concern when patents involve ‘enclosing the commons’

    • Intellectual property rights restrict access to knowledge

  • Incentives for innovation with monopoly less than in more competitive market place

    • Monopolist can increase profits by discouraging innovation by rivals and raising rivals costs (Microsoft)

  • Patent conflict (patent thickets) can impede innovation

    • Development of the commercial airplane

  • Much of R &D activity directed at circumventing or strengthening monopoly

    • Not at creating new products and lowering costs which enhance welfare

  • IMPLICATION: STRONGER INTELLECTUAL PROPERTY RIGHTS MAY NOT LEAD EVEN TO FASTER PACE OF INNOVATION


Key tasks facing innovation system

Key tasks facing Innovation system

  • Selection of projects and researchers

  • Financing

    • Knowledge is not costless, so there has to be some way of financing it

  • Risk absorption

  • Incentivizing

  • Dissemination


Key attributes in evaluating different parts of innovation system

Key attributes in evaluating different parts of innovation system

  • How well they perform these roles

  • Costs they impose on the economic system

    • Patent system’s high transactions costs

    • Transactions costs

  • Well designed innovation system will be a mixed system

    • But are we relying to heavily on the patent system?

    • And is the patent system well designed for achieving the objectives?


Critique of patent system

Critique of patent system

  • Besides large static and dynamic distortions

  • Finance

    • REVENUES FOR RESEARCH PROVIDED BY MONOPOLY PROFITS

    • DIFFERENCE BETWEEN PRICE AND MARGINAL COST CAN BE VIEWED AS A ‘TAX’

      • ONE DESIRABLE PROPERTY: ‘BENEFIT TAX’

      • BUT IN MOST OTHER ARENAS, ONLY LIMITED RELIANCE ON BENEFIT TAXES

        • INEFFICIENCY AND INEQUALITY


Bias towards excessive patenting

Bias towards excessive patenting

  • Fighting a patent creates a public good (open access)

  • While patenting knowledge makes a public good private

  • There will be underinvestment in fighting bad patents

  • Problem can be exacerbated by bad procedures


Inequities associated with ipr

INEQUITIES ASSOCIATED WITH IPR

  • KNOWLEDGE AS A GLOBAL PUBLIC GOOD

  • SHOULD BE FINANCED BY THOSE MOST ABLE TO PAY

  • IPR DOES NOT RECOGNIZE DIFFERENCES IN CIRCUMSTANCES—OTHER THAN EXTENT TO WHICH PROFITS CAN BE EXTRACTED


Legal system can lead to unfair outcomes

LEGAL SYSTEM CAN LEAD TO UNFAIR OUTCOMES

  • HIGH COSTS OF IMPLEMENTING IPR

  • INCLUDING HIGH COSTS OF CHALLENGING PATENTS

    • PUTS DEVELOPING COUNTRIES AT A DISADVANTAGE

    • EXACERBATING RISKS OF BIO-PIRACY

  • PRESSURE NOT TO ISSUE COMPULSORY LICENSES AND TO HAVE STRONG IPR REGIMES REINFORCED BY INTERNATIONAL ECONOMIC INSTITUTIONS AND ‘MARKET’


Concerns of developing countries

Concerns of developing countries

  • KNOWLEDGE AS A GLOBAL PUBLIC GOOD

    • SHOULD BE FINANCED BY THOSE MOST ABLE TO PAY

    • IPR DOES NOT RECOGNIZE DIFFERENCES IN CIRCUMSTANCES—OTHER THAN EXTENT TO WHICH PROFITS CAN BE EXTRACTED

  • CURRENT SYSTEM PROVIDES LITTLE INCENTIVES FOR R & D ON DISEASES THAT AFFLICT THEM

    • PART OF PROBLEM OF BEING POOR IS THAT YOU CAN’T PAY MUCH

  • WHAT SEPARATES DEVELOPING AND DEVELOPED COUNTRIES IS GAP IN KNOWLEDGE

    • TRIPS HAS MADE IT MORE DIFFICULT TO CLOSE THAT GAP

    • TRIPS should never have been part of WTO

  • AT THE SAME TIME, PROVIDES LITTLE PROTECTION FOR THEIR INTELLECTUAL PROPERTY (BIO-PIRACY, PROTECTION OF BIODIVERSITY)

  • DEVELOPING COUNTRIES HAVE CALLED FOR A DEVELOPMENT ORIENTED INTELLECTUAL PROPERTY REGIME

    • There is no reason to expect that the design of an IPR system which balances costs and benefits which is optimal for the U.S. would be optimal for a developing country


Prize system as an alternative

PRIZE SYSTEM AS AN ALTERNATIVE

  • Current system is a prize system

    • Prize is monopoly power

    • Monopoly power means that there are incentives to restrict use of knowledge

  • Prize associated with actuarial value of the social benefits, with licensing

    • Competitive market would ensure more efficient dissemination

    • Without waste on advertising, other anti-competitive behaviors design to enhance monopoly profits

    • Prize could be “contingent”—related to sales

    • Contingent purchase funds preserve monopoly system


Comparing alternative systems

Comparing alternative systems


Conclusions

Conclusions

  • The importance of IPR has been exaggerated

  • IPR needs to be seen as port of a portfolio of instruments

  • We need to strengthen the other elements of this portfolio

  • And to redesign IPR to increase its benefits, reduce its costs


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