In his recent US State of the Union address, US President Barack Obama reiterated his ambition to complete the Trans-Pacific Partnership, a proposed trade agreement among the US and 11 other Pacific countries. Meanwhile, the EU and China are pressing to close their own deals in Asia and elsewhere. If these proliferating trade pacts are to spur virtuous cycles of growth for developing countries, they must not only reduce trade barriers; they must also build the institutional framework of a modern economy, including robust intellectual property (IP) rights.
Some activists and government officials get the relationship between strong IP protection and economic growth backward, claiming that IP rights are an obstacle to development and thus should not be enforced until countries have achieved high-income status. This attitude is particularly prevalent in India, which recently put trade negotiations with the EU on hold and it was central to the failure of the Doha Round of global trade talks.
As Indian Minister of Commerce Anand Sharma put it: “Inherent flexibilities must be provided to developing countries.”
However, the ideas protected by IP rights are the dynamo of growth for developed and developing countries alike. Instead of diluting IP rights, developing countries like India should recognize that strengthening IP protection is a prerequisite for attracting the foreign investment that they need to help their economies grow, create jobs and improve their citizens’ capacity to consume.
Today, IP accounts for much of the value at large companies. One study found that in 2009, across a variety of industries in the US, intellectual capital — patents, copyrights, databases, brands and organizational knowledge — held a 44 percent share of firms’ overall market value. Such companies have little desire to put their IP at risk of erosion or outright theft; they want to do business where they know that their IP is safe.
Developing countries have a lot to gain from attracting multinational firms. Such companies bring technologically advanced imports and new management techniques that foster growth in domestic firms while spurring industrial modernization. They also spawn new local companies that serve as suppliers, thereby boosting employment, augmenting workers’ skills, improving productivity and increasing government revenue.
Currently, India attracts a mere 2.7 percent of global spending on research and development; China, with its stronger IP rights, attracts close to 18 percent and the US brings in 31 percent. UN data show that India’s stock of foreign direct investment (FDI) was equivalent to just 11.8 percent of its GDP from 2010 to 2012 — far lower than the developing-economy average of about 30 percent.
According to a new study by the economists Robert Shapiro and Aparna Mathur, if India achieved Chinese levels of IP protection, its annual FDI inflows would increase by 33 percent each year. In the pharmaceutical sector — which is particularly vulnerable to IP infringement — a stronger IP regime could increase FDI inflows from US$1.5 billion this year to US$8.3 billion in 2020, with pharmaceutical R&D doubling to US$1.3 billion over the same period. The increased FDI would create 18,000 new jobs in the pharmaceutical industry.
If India could transform its IP regime to resemble the US system, which is more robust than China’s, the benefits would be even greater. Inward FDI could increase by as much as 83 percent annually by 2020; in the pharmaceutical industry alone, FDI could reach as much as US$77 billion, with R&D rising to US$4.2 billion and 44,000 new jobs being created.