Innovation and Knowledge Creation in an Open Economy

INTRODUCTION

This chapter examines the extent to which innovative firms use and appreciate various forms of protection for the intellectual property that is developed as part of the innovation process. Innovation involves the development of new ideas that lead to new products or new processes. Investment in the development of new products and new processes will not be made unless the investment is profitable — unless the intellectual property that results from the investment has some private value. Unfortunately, in many cases, ideas can be easily duplicated or stolen. Without some form of protection for the knowledge assets developed by the investments in ideas that are required for innovation, innovation will not take place, or at least not in optimal quantities (See Arrow, 1962). When intellectual property is protected, an innovator is able to appropriate the benefits of innovation.

Appropriability is facilitated by various methods that are used to establish and protect intellectual property rights in knowledge assets. These property rights are protected by statutes, by common law, and by strategies that make it difficult for others to imitate or copy the innovation. In creating these rights, the political system has continuously wrestled with competing objectives—the creation of property rights that protect ideas versus the desire to diffuse information so as to facilitate the widest possible benefits from the innovation; the consequences of creating monopolies by the provision of protection for ideas against the desirability of having a competitive market structure producing goods and services.