Is IPR a Facilitator of, or a Barrier to, Catch-Up by Latecomers?

doi:10.1017/9781108894722.006

4 - Is IPR a Facilitator of, or a Barrier to, Catch-Up by Latecomers?

Implications for Global Inequality

from Part I - Theoretical, Empirical, and Policy Issues

Published online by Cambridge University Press: 05 December 2024

Edited by

Francis Gurry and

Daniel Benoliel: Affiliation:
University of Haifa, Israel
Peter K. Yu: Affiliation:
Texas A & M University School of Law
Francis Gurry: Affiliation:
World Intellectual Property Organization
Keun Lee: Affiliation:
Seoul National University

Book contents

Summary

Without enhancing their innovation capabilities, latecomer countries will be subject to the middle-income trap, and global inequality will not be reduced. This chapter thus discusses the roles of diverse forms of intellectual property rights (IPR) in promoting innovation among latecomers. It argues, first, that utility model or petit patents can be a useful form of IPR for recognizing and encouraging innovation by latecomers in their earlier stage of development, and, secondly, that latecomer firms in sectors involving tacit knowledge can rely on trademarks, rather than regular patents, as the main forms of IPR in their innovation and growth pathways. This chapter further discusses the negative impacts of strong IPR protection in Northern economies on the exports by Southern or catch-up economies to Northern markets. As a means to overcome this barrier, the chapter discusses the role of leapfrogging strategy, where latecomers pursue different technological trajectories from those of incumbent countries.

Keywords

economic growth global inequality innovation policy intellectual property knowledge diffusion latecomer economies middle-income trap South Korea technological catch-up technology diffusion

Information

Type: Chapter
Information: Intellectual Property, Innovation and Economic Inequality , pp. 106 - 124

DOI: https://doi.org/10.1017/9781108894722.006 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2024
Creative Commons: This content is Open Access and distributed under the terms of the Creative Commons Attribution licence CC-BY-NC-ND 4.0 https://creativecommons.org/cclicenses/

4 Is IPR a Facilitator of, or a Barrier to, Catch-Up by Latecomers? Implications for Global Inequality

Introduction

The role of intellectual property rights (IPRs) in the economic growth of countries has long been the topic of academic research and policy debates. The classical issue of the relationship between IPRs and innovation has been whether strong or weak IPR protection stimulates innovation (Awokuse and Yin, Reference Awokuse and Yin2010; Maskus and Penubarti, Reference Maskus and Penubarti1995; Smith, Reference Smith1999). While there is some evidence of the effects of strong IPRs, particularly patent rights, on economic growth, the debate is far from settled, and the evidence is mixed. Further, even if IPR protection creates incentive effects, the linkage is valid only when innovation capability exists. Otherwise, or in the context of typical developing countries where innovation capabilities are absent, innovation would not occur even with strong IPRs (Lee, Reference Lee2019). Thus, the literature has explored the possibility that IPRs could have differential effects on countries at different stages of economic development. Their importance was acknowledged in a World Bank publication (Fink and Maskus, Reference Fink and Maskus2005) and partly addressed in global intellectual property reforms (see Commission on Intellectual Property Rights, 2002). Indeed, a large volume of literature – albeit with mixed results – focused on this dynamic relationship between the protection of IPRs and economic growth at different stages, such as Kanwar and Evenson (Reference Kanwar and Evenson2003) and Falvey et al. (Reference Falvey, Foster and Greenaway2006).

More recent literature tends to shift the focus from the strength of IPR protection on economic growth at different stages to the roles of diverse forms of IPR in facilitating innovation capabilities of the lagging or latecomer economies. Kim et al. (Reference Kim, Lee, Park and Choo2012) first turned to the new issue of the impacts of the different types of IPR, rather than the strength of IPR protection, that would be appropriate for countries at different stages of economic development. Given that through adaptation, imitation, and incremental innovation, firms in developing economies can acquire knowledge and enjoy some learning-by-doing (Suthersanen, Reference Suthersanen2006), and the innovations they produce may not have the inventive step to merit a traditional patent, Kim et al. (Reference Kim, Lee, Park and Choo2012) suggested and verified the idea that the second-tier industrial property right – namely, a utility model (or petit or petty patents) – may be relevant and useful at lower level of development, serving as a stepping stone for further technological progress.

This idea of different forms of IPR at different stages of economic development is consistent with Lee (Reference Lee2019), which shows that advanced economies and latecomer economies at the middle- or lower-income stages have different growth mechanisms and that a very “narrow passage” exists between these countries. Thus, one must be careful when crossing such passages to avoid falling into the middle-income trap (MIT): a situation where middle-income economies tend to face decelerated growth and consequently fail to join the ranks of high-income economies. Several studies have verified that different countries adopt varying growth mechanisms, such that economic growth at the lower-income stages is correlated with basic political institutions and human capital. In contrast, the economic growth at the higher-income stages (upper-middle- and high-income) is correlated with innovation capabilities and tertiary education.Footnote ¹ The division of the world into two or three groups at different stages is consistent with the idea of an MIT.

The existence of the MIT was first mentioned by Gill and Kharas (Reference Gill and Kharas2007) and has since gained popularity among scholars and international institutions (e.g., Eichengreen et al., Reference Eichengreen, Park and Shin2012, Reference Eichengreen, Park and Shin2013; Ito, Reference Ito2017; Lee, Reference Lee2013; World Bank, 2010). Whereas some scholars have rejected the existence of this trap, it is clear that many middle-income economies are struggling to achieve high-income status. The MIT is, therefore, a relevant issue.Footnote ² Numerous studies have tried to investigate the key factors responsible for this trap, such as demographic conditions, institutions, industry and trade structures, diversification, physical infrastructure, and macro-financial developments (Aiyar et al., Reference Aiyar, Duval, Puy, Wu and Longmei Zhang2013). One argument, supported by an Asian Development Bank-sponsored study (Eichengreen et al., Reference Eichengreen, Park and Shin2012, Reference Eichengreen, Park and Shin2013) and by Lee (Reference Lee2013), is that innovation capabilities are the key binding constraint for the MIT. This view is also consistent with the early statement by the World Bank (2010) that middle-income economies would tend to fall under a trap because they get caught between low-wage manufacturers and high-wage innovators; their wage rates are too high to compete with low-wage exporters, and the level of their technological capability is too low to enable them to compete with advanced countries. The importance of innovation as the cause of the MIT is consistent with the experience of a very small number of East Asian economies that have successfully transitioned into high-income economies in the past decades. Since the mid-1980s, South Korea and Taiwan transitioned from low-wage-based economies to high-end goods economies due to their growing innovation capabilities (Lee, Reference Lee2013: ch. 3).

Given this linkage between innovation capability and the MIT, it is very important to explore the role of the IPR regimes in innovation and economic growth in latecomer countries. Without enhancing innovation and the growth of these countries, global inequality will not be reduced. Thus, we first discuss the roles of diverse forms of IPR in promoting innovation among latecomers. Then we turn to the issue of the impacts of strong IPR protection in Northern, or advanced, economies on the exports by Southern, or catch-up, economies to Northern markets. This issue is also related to global inequality and specifically to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

TRIPS regulates minimum standards for domestic IPRs. Most developed economies have already surpassed the minimum TRIPS criteria (Deere, Reference Deere2009; Park, Reference Park2008). However, for developing countries (or low-technology exporters), higher global minimum IPR standards may be akin to a tax in the sense that they increase research and development (R&D) expenses for net technology borrowers who incur higher royalties and licensing fees (Glass and Saggi, Reference Glass and Saggi2002; Siebeck, Reference Siebeck1990). To meet higher IPR standards, developing country exporters face higher production costs to access global information and enter global markets (Helpman, Reference Helpman1993; Lai and Qiu, Reference Lai and Qiu2003). Moreover, as Auriol and Biancini (Reference Auriol and Biancini2010) and Odagiri et al. (Reference Odagiri, Goto, Sunami and Nelson2010) show, tighter global IPRs, particularly in developed country markets, can act as a barrier to the entry of developing country exports into developed country markets. This is particularly so if developing country products are found to be infringing or too imitative under the IPR regime of destination markets and thus cannot legally enter those markets.

Developing country exporters who enter developed country markets still face higher legal and administrative costs of procuring IPRs, such as patents, enforcing rights, and contesting IPR claims. Thus, two key burdens for developing economies exist under TRIPS. First, the domestic costs of establishing an IPR system in accordance with TRIPS have been exorbitant in the developing world (Finger, Reference Finger2002; Schneider, Reference Schneider2005).Footnote ³ Second, if any dispute arises, the global transaction costs incurred by legal fees and litigation expenditures dampen the benefits of exporting. Thus, the overall impact of the strong IPR protection in developed countries could reduce exports from developing countries, especially those trying to promote their exports by building up innovation capabilities.

This chapter concludes by discussing the possible way to overcome IPR-related barriers to catch-up by latecomer countries – namely, the roles and potentials of leapfrogging.

4.1 From the Strength of IPR Protection to Diverse Forms of IPR

4.1.1 Regular Patents versus Utility Models for Innovation in Latecomers

While patents are the most common form of IPR protection related to innovation, it is somewhat doubtful whether they are effective instruments for appropriating the returns to innovation in developing countries. In a well-known survey of U.S. firms, Cohen et al. (Reference Cohen, Nelson and Walsh2000) found that firms patent for various purposes other than merely appropriating returns. For example, possession of patent rights plays an important role in litigation (to deter threats of infringement suits or countersuits) and in cross-licensing negotiations (where firms can better gain access to rivals’ technologies if they can reciprocate with their patent rights). However, the survey found that smaller firms or inventors are less able to utilize patents for those purposes and are dissuaded from availing themselves of patent protection. Litigation costs are especially onerous for small firms since they have lower levels of output to spread the overhead costs of legal protection (e.g., legal staff).

Furthermore, smaller firms or inventors have fewer and perhaps less valuable technologies in cross-licensing negotiations. The implication for developing economies is that to the extent that a large number of their inventors are small, patents are not very effective instruments for appropriating returns or accessing technologies.Footnote ⁴ This may explain why developing economies do not engage as intensively in producing patentable innovations and why something like utility models may serve as a useful alternative for emerging innovation.

The classic issue of the relationship between IPRs and innovation has been whether strong or weak IPR protection stimulates innovation (Awokuse and Yin, Reference Awokuse and Yin2010; Maskus and Penubarti, Reference Maskus and Penubarti1995; Smith, Reference Smith1999). However, without innovation capability, nothing is produced even with strong IPRs (Lee, Reference Lee2019). Thus, recent literature tends to shift the focus from the strength of protection on economic growth at different stages to the roles of diverse forms of IPR. This shift makes sense because innovation in many developing countries is of the adaptive, imitative type. Their innovations may not have the inventive step to merit a regular patent. Still, they may qualify for a second-tier industrial property right: a utility model. Through adaptation, imitation, and incremental innovation, firms in developing economies can acquire knowledge and enjoy some learning-by-doing (Suthersanen, Reference Suthersanen2006).

Both patents and utility models are exclusive rights granted for an invention, which allow rights holders to prevent others from commercially using the protected inventions without their authorization for a limited period. However, beyond this basic definition, differences exist between invention patents and utility models, based on standards of inventiveness and legal requirements.

Patents are granted for inventions that are novel, nonobvious, and capable of industrial applicability. They are typically granted for twenty years from the date of application, cover products and processes, undergo substantive examination, and are costly to obtain (involving, where applicable, filing, attorney, and translation fees). Utility models provide second-tier protection for minor inventions, such as devices, tools, and implements, particularly in the mechanical, optical, and electronic fields. Processes or methods of production are typically excluded. The duration of protection is typically six to ten years. Utility models are generally less expensive to apply for and do not require substantive examination – for novelty, nonobviousness, and industrial applicability. The inventive step requirement is low; the invention typically must exhibit a practical or functional advantage over the prior art. Since the perceived inventive step threshold for utility models is much lower than that of patents, utility models are, in practice, sought for small, marginal innovations that may not meet the patentability criteria (Beneito, Reference Beneito2006).Footnote ⁵ Thus, utility models and patents differ in that they protect different types of innovations. Patents protect innovations of relatively high inventiveness, while utility models protect those of relatively low inventiveness.

Not all countries that grant patent rights also protect utility models; those that do not include the United States and the United Kingdom. The few developed countries that protect utility models are Germany, Japan, and some European countries. Countries that protect them are largely former or current developing economies, such as Korea, Taiwan, China, and Malaysia. In some cases, utility models are the dominant form of IPR. For example, in China, utility models accounted for nearly two-thirds of the total IPRs granted, while patents accounted for 10 percent between 1985 and 1998. The share of utility models in total IPRs has declined in China since then.

Korea is also among those developing countries where utility models have been intensively exploited. In 1961, the Korean government revised its entire system of intellectual property laws and established its first autonomous IPR system, protecting both conventional and minor innovations. Since the technological capabilities of Korean firms had been lagging during the 1960s and 1970s, firms relied heavily on imported technologies and reverse engineering and adapted them for local needs (Kim, Reference Kim1997; Lee et al., Reference Lee, Park and Lim2003). This exercise enabled these firms to learn from foreign technologies. Accordingly, Korean inventors actively filed for utility model protection for their incremental innovations (Lee and Kim, Reference Lee, Kim, Odagiri, Goto, Sunami and Nelson2010); until the early 1990s, the number of utility model applications in Korea exceeded that of invention patents. In the 1970s and the early 1980s, the ratio of utility models to patents was nearly two to three. This ratio peaked at more than six to one in 1984, after which it began to decline. Although the number of patent and utility model applications was still rising, the composition started to shift.

In the mid-1980s, Korea began to have as many valuable patentable assets to protect as those that foreign companies wanted to protect within Korea. Major IPR reforms were legislated in the mid-1980s, and since 1987, there has been an abrupt rise in the strength of patent protection and enlarged scope of protection. Substance patents for pharmaceutical and chemical materials and products were newly introduced, as well as for computer software and materials. The term of patent protection was also extended from twelve years to fifteen. Finally, by 1995, patent applications exceeded the number of utility model applications. These trends correspond with the transformation of Korea from a nation with limited technological resources and capabilities to one of the leading patenting nations.

In academic and policy debates, whether in the context of developed or developing countries, the focus has been on the appropriate strength of IPRs. While TRIPS does not deal with utility models, the World Intellectual Property Organization (WIPO) has recently considered the usefulness of utility model systems for lower-income countries (Commission on Intellectual Property Rights, 2002).Footnote ⁶ However, empirical evidence on the effects of utility models on innovation and growth is scant and is based largely on anecdotal evidence. Kumar (Reference Kumar2002), for example, argued that in East Asia, utility models helped initiate a culture of patenting and innovation. The World Bank (2002) documented case studies in Brazil where utility models allowed domestic producers to adapt foreign innovations to local needs and conditions. More formal econometric evidence is provided by Maskus and McDaniel (Reference Maskus and McDaniel1999), who studied the use of utility models in Japan and found that such protection, on balance, had a positive impact on the growth of total factor productivity in Japan.

Kim et al. (Reference Kim, Lee, Park and Choo2012) first investigated the different roles of patents and utility models in the innovation and economic growth of countries at different levels of economic development. The main finding was that the relative importance of patent rights and utility model protection to innovation and growth varies by the level of technological development. Kim et al. (Reference Kim, Lee, Park and Choo2012) found that patent protection contributes to innovation and economic growth in developed countries but not in developing countries. Their framing is consistent with the view that patent protection matters to industrial activities only after countries have achieved a threshold level of indigenous innovative capacity and an extensive science and technology infrastructure (Kim, Reference Kim1997; Lall and Albaladejo, Reference Lall and Albaladejo2001). In contrast, utility model protection weakly affects innovation and growth in developed countries but allows developing economies to build their indigenous innovative capacities.

Additionally, using data from Korean firms, Kim et al. (Reference Kim, Lee, Park and Choo2012) found that when firms are technologically lagging – as in Korea before the 1990s – utility models (or minor inventions) contribute to firm growth and their capacity to produce (future) patentable inventions. Once firms become more technologically advanced – as in Korea since the 1990s – their performance has been driven less by utility model innovations and more by patentable innovations. Most importantly, the empirical analysis also shows that those firms that used to file utility model applications have evolved to file regular patents with lags of several years, providing contrast to the conventional economic model that assumes a fixed dichotomy of innovators versus imitators (Barro and Sala-i-Martin, Reference Barro and Sala-i-Martin1997; Eeckhout and Jovanovic, Reference Eeckhout and Jovanovic2002). This evidence also serves as a counter-argument against the concern that a country’s firms could be locked into minor adaptations protected by utility models.

In sum, these results indicate that different types of IPR are more appropriate for countries at different stages of economic development. Strong or weak IPR protection is not the key issue for developing countries, and what matters to innovation and growth is the strength of IPRs and the type of protection. In developing country markets, patents raise the costs of doing business and innovation. These costs tend to be more onerous for lower-income economies. In contrast, a utility model system provides an alternative way for such economies to create incentives for innovation, albeit incremental, without affecting the costs of doing business adversely while providing the technological inputs appropriate for local needs.

The experience of Korean firms and the country-level analyses suggest that the design and strength of IPR systems should be tailored to the indigenous technological capacities of firms to best provide the appropriate incentives for innovation.

4.1.2 Trademark-Based Path for Latecomer Innovation and Development

The preceding subsection discussed the patent-driven path of technological development for latecomer firms, such that developing countries are advised to adopt weaker IPR protection using utility models and then switch to regular patents later. This section asks whether there is an alternative, or nonpatent-driven, path of technological development for latecomers. In answering this question, it pays attention to the role of trademarks. Recently, trademarks have been recognized as another proxy measure of innovation, complementing or substituting patents (Allegrezza and Guarda-Rauchs, Reference Allegrezza and Guarda-Rauchs1999; Block et al., Reference Block, Fisch, Hahn and Sandner2015; Bosworth and Rogers, Reference Bosworth and Rogers2001; Flikkema et al., Reference Flikkema, deMan and Castaldi2014; Greenhalgh and Rogers, Reference Greenhalgh and Rogers2006a, Reference Greenhalgh and Rogers2006b; Malmberg, Reference Malmberg2005; Mehrazeen et al., Reference Mehrazeen, Froutan and Attaran2012; Mendonça et al., Reference Mendonça, Pereira and Godinho2004; Sandner and Block, Reference Sandner and Block2011; Schmoch, Reference Schmoch2003). Moreover, some researchers consider trademarks a market strategy for innovative firms or ventures (Block et al., Reference Block, De Vries, Schumann and Sandner2014; Desyllas and Sako, Reference Desyllas and Sako2013). While patents and utility models deal with a technological or scientific invention or improvement, trademarks are more market-based than technology-based IPRs.

A trademark encourages firms not only to make good products and adhere to a consistent level of quality but to link new products and services in the market (Block et al., Reference Block, De Vries, Schumann and Sandner2014; Helmers and Rogers, Reference Helmers and Rogers2010). Moreover, trademarks are also used to protect and appropriate the value of innovations in sectors where patents are not a viable option (De Vries et al., Reference De Vries, Nagtegaal, Veenstra, Jakobs and Blind2017). Firms that regard know-how or secrecy, which is a type of tacit knowledge, as an important protection method for innovative products are less likely to apply for patents. Thus, a product made using tacit knowledge can be protected and distinguished from competitors in the market and can establish market power through trademark registration.

Using Korean data, Kang et al. (Reference Kang, Jung and Lee2022) discuss two different paths of technological development: patent-driven and trademark-driven. They find that in some sectors – such as food, apparel, and pharmaceuticals – trademarks have been the dominant form of IPR, with a much larger number of registrations than patents from the initial stage of development to recent times. This finding contrasts with those in other sectors, such as electronics and automobiles, where patents have provided the main form of IPR during the 1990s and 2000s. This division of sectors into one path is largely determined by the nature of sectors or sectoral systems of innovation (Malerba, Reference Malerba2002, Reference Malerba2004; Malerba and Mani, Reference Malerba and Mani2009).

For instance, trademarks are more important when the innovation involves tacit knowledge that cannot be filed as a patent or when firms are more oriented toward domestic markets than world markets. While trademarks may also represent innovation, they can be filed without formal R&D activities targeting technological advances. Thus, one may reason that those sectors relying on trademarks over patents may be lagging in technological advances and are therefore more oriented toward domestic markets than international markets. We also note that patents tend to reflect more codifiable or explicit knowledge than tacit knowledge. Thus, one may reason that those trademark sectors correspond to the sectors with knowledge more tacit than codifiable. Kang et al. (Reference Kang, Jung and Lee2022) verified such correspondence in their empirical analysis.

To analyze sectoral differences in the dominant forms of IPR across sectors, Kang et al. (Reference Kang, Jung and Lee2022) have constructed firm-level data from 1971 to 2010 in Korea. They find that trademarks are dominant throughout the whole period in some sectors, whereas the dominant form of the IPR in other sectors changes to patents beginning in the 1990s. These two groups – trademarks and patents – are presented, respectively, in terms of the ratio of the number of patents to the number of trademarks.

The case of the patent-dominant group is consistent with the finding of Kim et al. (Reference Kim, Lee, Park and Choo2012), which analyzed and compared the firm-level patent and utility model data divided into different periods. Specifically, in the early stage (before 1987), the utility model provided the dominant form of IPR, which correlated with the financial performance of firms. In the later stage (after 1987), however, firms mainly switched to filing patents, reflecting an enhanced level of technological capabilities, which also translated into performance. However, Kim et al. (Reference Kim, Lee, Park and Choo2012) did not consider the impact of sectoral heterogeneity in this relationship among the different forms of IPR and the sectors’ knowledge base and performance. They failed to consider the possibility of a nonpatent-driven path of development and catch-up for latecomer firms.

Kang et al. (Reference Kang, Jung and Lee2022) consider both patents and trademarks, classify the sectors by registration patterns, and investigate the differences between the two groups. They examine the dynamic patterns of the patent- and trademark-dominant groups over the periods to find the following stylized facts. First, at the beginning of Korea’s industrial development, trademarks were the main forms of IPR in almost all sectors, as manufacturing firms typically registered trademarks more than other IPRs until the 1980s. This is consistent with the fact that until the late 1980s, the in-house R&D of firms was very low or just starting, and thus these firms had no technological innovations to patent (Chung and Lee, Reference Chung and Lee2015). Second, the division of the two groups appeared only after the mid-1990s – that is, after a certain level of technological development was achieved. Even after the mid-1990s, the firms in the trademark group continue to register more trademarks than patents. However, such registration does not necessarily mean that the firms in this group did not do any R&D. Rather, it may reflect that the R&D outcomes might not be patentable as they involve more tacit knowledge, reflecting the knowledge base of the sectors. These facts are consistent with the interpretation that the registrations of trademarks and patents are related to different sectoral knowledge base and the different levels of technological capabilities in firms in different sectors. Regressions in their study confirm that the trademark groups covered those sectors involving more tacit knowledge and domestic market orientation, which are associated with slow progress in technological capabilities. These results imply that firms facing slow technological progress in sectors driven mostly by tacit knowledge tended to rely on trademarks in their growth and focused more on domestic markets than export markets. The results are important because they imply the existence of alternative paths of economic development by latecomer firms in different sectors, aside from the patent-driven path already articulated in Kim et al. (Reference Kim, Lee, Park and Choo2012).

4.2 IPR Protection as a Barrier to Catch-Up by Latecomers

The theoretical literature thus far has identified two opposing effects of stronger IPRs in a destination country on the exports of a source country: a market-expansion effect and a market-power effect (Maskus and Penubarti, Reference Maskus and Penubarti1995). On the one hand, the exporters perceive an expansion in their market due to a reduction in imitation by local firms. The demand curve for their exports shifts out in the destination market. On the other hand, stronger IPRs in the destination country increase the exporters’ market power, reducing the elasticity of the demand they face and, thus, the volume of exports. Hence, empirical analysis is typically pursued to see which effect dominates.Footnote ⁷

However, one channel not analyzed thus far in the literature is the feedback effects of foreign IPRs and the exporter’s level of technology (LT) on the exportability of the source country – or, more specifically, on the profitability of the relevant exports. The existing literature implicitly assumes that a source country has a sufficiently high LT that strong (or weak) foreign IPRs mainly affect the incentives of exporters to increase (or decrease) the volume of their exports – that is, to weigh the market expansion and market power effects of stronger IPRs abroad. For countries where exporters do not have high LTs or innovative capacity, TRIPS-like standards in importing countries could dampen exports from these countries.Footnote ⁸

In fact, the WTO Dispute Settlement Body has overseen numerous TRIPS-related disputes; forty-three official cases have been filed since the inception of the WTO.Footnote ⁹ As of 2010, most cases (twenty-six disputes) were initiated by developed countries, primarily the United States and the European Union, and developing countries were involved in sixteen disputes.Footnote ¹⁰ Outside the WTO, firm-to-firmFootnote ¹¹ and government-to-firm disputes have also been growing rapidly. For example, as Figure 4.1 shows, the United States International Trade Commission (USITC) has overseen a quadrupling of IPR-related disputes against imports during the past two decades. Indeed, more American firms have filed complaints against IPR violations than against unfair dumping, as indicated by the falling trend in traditional trade remedies such as antidumping and countervailing duties. These developments suggest that the burden of global legal costs is quite real for exporters, especially those from developing countries.

Figure 4.1

Trend in U.S. International Trade Commission (USITC) filings on “Unfair Imports”: Increases in IPR-related litigation in the United States

Note: Year refers to September year-end (by fiscal year).

Sources: The number of antidumping and countervailing duty (AD/CVD) investigations is compiled from “AD/CVD Investigation: Federal Register History” (http://ia.ita.doc.gov/stats). The number of ITC litigations is compiled from “Section 337 Statistical Information,” USITC (www.usitc.gov/press_room/337_stats.htm) (Shin et al., 2016)

For example, South Korea is a strong exporter, but its entry into the U.S. market has been marred by patent disputes between U.S. and Korean firms since the 1980s. A noteworthy case was the ban on Samsung’s computer chip exports imposed by the USITC for violating the patent rights of Texas Instruments.Footnote ¹² Thus, due to IP-induced barriers, developing countries could lose out on opportunities provided by exports to developed country markets, given that the latter markets account for the bulk of world markets and trading opportunities. Developing country exporters may find themselves confined to the technologically low end of the market, which confers relatively smaller benefits. A more interesting aspect of this observation is that the possible negative impact of this interaction between the levels of IPR protection and technology would be greater for those developing countries that are catching up rapidly – and thus command a certain level of technological capability and are active in exporting to developed country markets – than for those developing countries with very low technological capabilities and, thus, weak export performances.

While the existing literature has not touched on the interaction between IPRs and technological capabilities and its implications for exporting, this study, following Shin et al. (Reference Shin, Lee and Park2016), explicitly considers the impact of IPRs on trade. It specifically examines the direct impact of IPRs and their indirect impact through their interaction with the exporter’s LT.

To illustrate the reasoning about interaction effects, Shin et al. (Reference Shin, Lee and Park2016) assume the following linear representation, allowing for some interaction between the source country’s LT and the destination country’s IPR level. The value of exports (E) can then be considered to take the following functional form:

E (IPR, LT, .) = αIPR + βLT + γIPR \times LT + …

(4.1)

for which we can test whether γ = 0. It is likely that β > 0; namely, that exporting is a positive function of LT. However, a priori, α and γ are ambiguous, since the effect of IPRs on exports depends upon a balancing of the market power effects and market expansion effects of IPRs. Moreover, the cross effects of IPRs and LT could in principle be either negative or positive. The key advantage of having this interaction term is that the marginal impact of IPRs on exports is no longer simply α but the sum of two terms, namely α + γLT, which represents the direct impacts (α) and the interaction impacts (γLT).

There are several possible cases to consider depending on the signs of α and γ. However, the actual regressions, as will be shown later, all indicate γ to be negative or sometimes insignificant. Thus, let us focus our discussion on this interesting and dominant case of γ < 0. In this case, it is noteworthy that for some high LT ranges, the net marginal impact of IPRs on exports can be negative, such that $∂E / ∂IPR$ = α + γLT < 0, even if the direct impact of IPRs is positive (α > 0).

This possibility implies that the impact of IPRs might vary according to how much a country exports IPR-sensitive products, which depends on the country’s LT (i.e., patents). For a developing country with a low LT, its export items have not reached that status, as the products are less sophisticated. In contrast, a small number of “emerged or newly emerging economies” – such as Korea, Taiwan, China, India, Russia, Brazil, Mexico, and several ASEAN countries (notably Malaysia) – can produce technology-intensive products; their LTs are still low in comparison to developed countries but are highest among developing countries. For them, strong IPR enforcement in destination countries may act as a barrier to exports to rich country markets.

We can also gain a similar perspective by focusing on the impacts of changes in the exporters’ LT. Raising technological capabilities is one of the most important means by which exporters can expand their exports to foreign markets. This is particularly pressing for exporters in the South. However, the net impact of an additional increase in the exporters’ LT might be small when there is a substantial negative interaction effect with the level of IPR protection in the destination countries. In other words, the marginal effects of LT on exports can be expressed as $∂E / ∂LT = β + γIPR$ , which could be negative, even with a positive direct impact (β), if γ is negative and IPR takes on a sufficiently high value. This case is a clear-cut example of the entry barrier effects of IPRs, which could frustrate the efforts of middle-income countries to try to enter developed country markets by raising the technological standard of their products through innovation. This barrier implies that one source of the so-called MIT is weak exporting by middle-income countries to developed country markets due to the latter’s high IPR standards.

When countries experience the MIT, they face a slowdown in growth as they get caught between low-wage manufacturing and high-wage innovation because their wage rates are too high to compete with low-wage exporters. Meanwhile, their level of technological capability is too low to allow them to compete with advanced countries. One way out of this trap is obviously to improve their LT. However, the negative interaction between LT and IPR implies that such efforts are impeded by the IPR protection of their destination countries.

The key points of the previous discussions are that (1) the possibly negative interaction effects between LT and IPR would be more significant for exports from the South to the North than for exports from the North to the South and (2) the impact of the IPRs on exports may be negative for those developing economies (the South) whose own LT is relatively high, as strong IPRs may impede the entry of exports from countries that are catching up technologically.

Shin et al. (Reference Shin, Lee and Park2016) conducted econometric estimations to verify the above. Their results confirm that the negative interaction effects between LT and IPR are significant and robust for the exports of the South to the North, compared to the exports of the North to the South. If the coefficient of the interaction term $γ$ is negative, this means that the negative interaction effect offsets the positive effects of IPR protection alone (α). It implies that the impact of a higher level of IPR protection in the North on exports from countries in the South depends on the exporters’ LT. For Southern exporters with low LTs, stronger IPRs still help promote the growth of their exports because the negative interaction effect is quantitatively too small to fully offset the positive effects of IPRs on exports. In contrast, for Southern exporters with a higher LT, the negative interaction effects are large enough to offset the positive and direct impact of IPRs.

Overall, the results confirm that IPR protection in the North may act as a barrier to the entry of Southern exports, especially those exports whose LT is relatively high. In other words, the stringent IPR protection by more advanced destination countries enables their domestic producers to exclude the products of foreign exporters whose LTs are catching up. Many cases support this empirical finding. For example, incumbent firms in the North often resort to lawsuits or WTO disputes over IPRs to edge out competitors whose technological capabilities are growing in, and threaten, their markets. As pointed out earlier, when Korea was still a developing country in the 1980s, Samsung Electronics had emerged as a rapidly growing competitor in the computer chips market. The U.S. incumbent, Texas Instruments, pursued patent infringement litigation against Samsung over ten of their patents on dynamic random access memory (DRAM). After the USITC imposed a restriction on Samsung’s exports, Samsung agreed to renew a patent licensing agreement worth more than US$1 billion as part of a settlement with Texas Instruments.Footnote ¹³

These results are in sharp contrast to the case of the North’s exports to the South, where the coefficients of the interaction term between the North’s LT and the South’s IPRs are not significant. This implies that IPR protection in the South does not interfere with Northern exporting. This asymmetry also suggests that developed country exporters are possibly the major beneficiaries of a strong IPR system, as created by TRIPS in the current world trading system, and that their own IPR regimes work as a mechanism for diminishing the ability of developing countries to access their markets by enhancing the developing economies’ LT. In other words, the stronger Northern IPR system appears to obstruct Southern exports with higher LTs.

Overall, the results suggest that strong IPRs have acted as a barrier to trade, discouraging exporting from the perspective of developing countries that are in the process of catching up in terms of their LT.

4.3 Leapfrogging as a Way to Overcome the IPR-Related Barrier to Catch-Up

The preceding section discusses how IPR protection in the North can be a barrier to innovation-based catch-up by latecomers. The next question is whether there is any way to overcome this barrier. While reform of the global IPR regime is one method and has been discussed in the literature, this chapter suggests a new alternative – namely, leapfrogging. Leapfrogging makes sense to the extent that it involves latecomers moving to new areas and products ahead of incumbents, thereby avoiding direct competition against the incumbents in the same markets (Lee, Reference Lee2019).

The origins of the leapfrogging thesis may be traced to Freeman and Soete (Reference Freeman and Soete1997) and Perez and Soete (Reference Perez, Soete, Dosi, Freeman, Nelson, Silverberg and Soete1988). Their insight is that emerging technological paradigms serve as a window of opportunity for latecomers to leapfrog: Not being locked into the old technological system, they are thus able to grab new opportunities in emerging industries. The arrival of new kinds of general-purpose technology (Helpman and Trajtenberg, Reference Helpman, Trajtenberg and Helpman1998) can also serve as a window of opportunity when there are complementary technologies. Perez and Soete (Reference Perez, Soete, Dosi, Freeman, Nelson, Silverberg and Soete1988) discussed latecomers’ leapfrogging advantages in terms of the following three aspects: entry barrier, accessibility of knowledge, and the possibility of lock-in by the incumbents.

First, since the equipment to produce new industrial goods is not yet developed, general-purpose machines should be utilized, and production volume is small. Therefore, the entry barrier associated with the economy of scale does not exist. Second, in the initial stage of new technological paradigms, the performance of the technology is not stable and not very specific to a firm. Therefore, if only human resources can access the sources of knowledge and create new additional knowledge, entry to emerging technology can be easier than during the later stage of technological evolution. Third, catching-up countries can be said to be in a relatively advantageous position as they are not locked into old technologies. In contrast, advanced countries tend to be locked into old technologies due to the sunk costs of their investment.

Lee and Lim (Reference Lee and Lim2001) fleshed out the idea of leapfrogging from the examples of the Korean industries. The concept was clarified by path-following, stage-skipping, and path-creation by latecomers in their technological development – with “path” and “stage” referring, respectively, to the trajectory of technologies and the stages in the trajectories. Lee and Lim observed that the strategies of path-creation and stage-skipping can be regarded as two variants of leapfrogging.

Thus, it can be argued that a broadly defined leapfrogging into emerging and new technologies during paradigm shifts or when new generations of innovations emerge can be a solution for overcoming the IPR-related barrier. It is so because, during the transition period, technologies and innovations tend to remain in the public domain or academia, rather than protected by patents, and there might be no dominant IPR holders. Second, leapfrogging can be a solution because it often involves the latecomers not following the same technological trajectory as the incumbents, thereby avoiding IPR disputes with the incumbents. In general, this means that the latecomer must eventually transition from imitation to innovation. In this regard, an interesting case can be Huawei, a leading information technology firm in China.

One study used patent citation data to investigate the catch-up of Huawei in China with Ericsson in Sweden and found that Huawei relied on Ericsson as a knowledge source in its early days but subsequently reduced such reliance and increased its self-citation ratio to become more independent (Joo et al., Reference Joo, Chul and Lee2016). This finding is similar to the pattern between a follower – Samsung – and an incumbent – Sony – as analyzed using the method in Joo and Lee (Reference Joo and Lee2010). The investigation of mutual citations (direct dependence), common citations (indirect reliance), and self-citations strongly indicates that Huawei has caught up with or overtaken Ericsson by taking a different path rather than by continuing to follow Ericsson’s path. Moreover, unlike Ericsson, Huawei developed its technologies by relying on recent technologies, which resulted in a patent folio with short citation lags (which means that its technologies have a short cycle). Huawei also relied heavily on scientific knowledge (so-called nonpatent literature), which is a public good that is free from IPR disputes with the incumbents. The citations to nonpatent literature and the patent folio with short citation lags imply that Huawei has extensively explored basic research and maintained up-to-date technologies to accomplish a technological catch-up, thereby avoiding another patent dispute with incumbent firms.

Overall, examining successful catch-ups (or overtaking cases) in East Asia suggests that exploring a technological path that differs from that of forerunners presents a viable catch-up strategy for latecomers and, in this sense, a “necessary” condition for overtaking. However, this strategy is not a sufficient condition (meaning that it does not always guarantee successful catching up) as it involves a higher risk (than going along a straight but jammed road) and may result in failure or accidents along the road.

Footnotes

^* For two rounds of feedback and comments, the author would like to thank the reviewers and his coeditors, as well as the participants at the workshop held in Haifa, Israel.

¹ Lee and Kim (Reference Lee and Kim2009) provide some examples.

² A study by the World Bank (2012: 12) finds that only 12 out of 101 middle-income economies have reached the status of high-income economy since 1960.

³ For example, Schneider (Reference Schneider2005) finds this implication in her empirical results. She also argues that strong domestic IPRs may hurt innovation in developing countries, since their innovations are imitative or adaptive in nature.

⁴ Mazzoleni and Nelson (Reference Mazzoleni and Nelson1998) also discuss how strong, broad patents in less-developed countries could impede the development of indigenous manufacturing capabilities by creating entry barriers. The idea that latecomers do not always have to develop high-level innovations contrasts with the argument of the vintage capital model technologies that everybody targets frontier technologies (Gilchrist and Williams, Reference Gilchrist and Williams2001).

⁵ For example, utility models are granted to devices embodying a creative idea applicable to the shape, structure, or other technological aspects of a product, such as an improved device capable of reducing the amount of water used to flush a toilet, or a bottle cork remover capable of operating faster than known devices. These devices are not patentable but are inventive enough for utility model protection.

⁶ See World Intellectual Property Organization (2022a, 2022b).

⁷ See Maskus and Penubarti (Reference Maskus and Penubarti1995); Smith (Reference Smith1999); Taylor (Reference Taylor1993).

⁸ The previous studies present mostly the perspective of developed countries (i.e., countries with high LT) on the adequacy of IPR protection for their exports in destination markets. For example, Maskus and Penubarti (Reference Maskus and Penubarti1995) and Smith (Reference Smith1999) estimate the sensitivity of U.S. exports (or exports of OECD economies) to the level of IPRs across export markets using industry data. They conclude that weak IPR levels are a barrier to U.S. (or OECD) exports.

⁹ See World Trade Organization (2022).

¹⁰ According to Lee (Reference Lee2019: 46–47), unlike the cases against developed countries, all cases (ten as of 2010) targeting developing countries either were settled out of the court or ruled against developing countries. Firms in developing countries tend to prefer out-of-court settlements or summary judgments due to concerns about litigation and legal costs.

¹¹ Within the United States, firm-to-firm IPR-related disputes have drastically increased by over 100 percent in the past two decades, and patent-related cases have increased by about 150 percent – from 1,224 cases in 1988 to 2,909 cases in 2008 (Administration Office of the U.S. Courts, 2010).

¹² For details, see Lee and Kim (Reference Lee, Kim, Odagiri, Goto, Sunami and Nelson2010).

¹³ For details, see Lee and Kim (Reference Lee, Kim, Odagiri, Goto, Sunami and Nelson2010) in Odagiri et al. (Reference Odagiri, Goto, Sunami and Nelson2010).

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