1.1.1 Statistical Overview

Begin with a simple look at primary data on within-country income distributions across a large sample of countries at varying levels of development. The most common measure is the Gini coefficient, constructed to capture how unequally income is distributed across households. The coefficient runs, in principle, from zero (which means that all households have an identical share of national income) to 100 (which means that just one household captures all the income). The higher the Gini coefficient, the less equal the income distribution.Footnote ⁶ Historically, such coefficients were infrequently and intermittently estimated for different countries, making statistical analysis difficult. However, a current project has compiled and published annual Gini coefficients for many countries to facilitate cross-country comparisons.Footnote ⁷

Table 1.1 shows the evolution of these measures from 1990 to 2015 for a selection of ninety-seven countries with data broken into income groups identified by the World Bank as of 1999. Two Gini coefficients are reported: the Gini Market, which is the coefficient based on incomes before taxes and transfers, and the Gini Disposable, which is the coefficient after such transfers are made. The difference between them indicates how much the income-transfer system in each country offsets (or reinforces) inequities established by the markets. Listed are simple averages within each country group and weighted averages, with the weights based on within-group populations. The countries are listed in Appendix Table A1.1.

These data suggest that there has been a steady but modest increase in inequality when all countries are averaged equally. Among the high-income countries (HICs), the average coefficient rose by two points using after-transfer income (around 7 percent) and by nearly four points using market incomes (almost 9 percent). The other income groups with rising coefficients were the lower-income countries (LICs) and lower-middle-income countries (LMICs). Interestingly, there was little net change in inequality in the upper-middle-income countries (UMICs) over the period. Presumably, this reflected a balance between higher inequality from technological change and lower inequality from the ability of lower-wage workers to gain from exporting labor-intensive goods, among other factors.

Unweighted averages can be misleading, however, as measures of inequality faced by large aggregations of households. The growth in the population-weighted average coefficients was considerably larger (though it declined in the UMICs), largely because of the significant increases in the United States (HI) and China (LMI). As shown, these two behemoths saw exceptionally large increases in both pretransfer and posttransfer household income inequality during this period of rapid globalization and technical change. In this context, those nations bear a significant share of the observed inequality.

It should be noted that the Gini coefficient may not be an accurate measure of rising inequality if that process is skewed toward higher incomes of the richest households. The way such coefficients are calculated gives small weights to households at the extremes (because there are not many in those ranges) and high weights to those in the middle ranges (where there are many). In consequence, if the top earners gain a disproportionate share of income within the distribution, the Gini may not go up by much, despite the rising disparities. Thus, Table 1.2 lists the pretax and pretransfer income shares (including capital gains) of the top 10 percent of households in a smaller sample of countries.Footnote ⁸ This measure offers readier evidence of rising inequality at the top, except for the LICs, where the highest households already captured more than 50 percent of income in 1990. The highest earners gained 3.7 points of income shares in the HICs, 7 points in the UMICs, and 4.6 points in the LMICs. Again, the United States and China were the largest contributors to these trends, with the top share in China rising by a remarkable 11 percentage points.

These figures show that there has been a marked rise in income disparities in the last thirty years, though some of that increase is concentrated in specific large countries. The question for this chapter is the degree to which stronger IP rights may be a factor. This is an exceptionally difficult question to answer statistically for many reasons that will be brought out in the text. For now, however, Table 1.3 demonstrates that there has been a marked increase in the strength of legalized patent rights over the same period. Listed are changes in the average Ginarte–Park (GP) index of patent strength across another subsample of our main sample.Footnote ⁹ This index notes whether a country has a law or regulation offering various elements of patent scope across five categories: coverage, membership in international conventions, patent duration, the possibility of losing patent rights, and enforcement. These component scores are added, and the final index ranges, in principle, from zero to five.Footnote ¹⁰

As seen in Table 1.3, the average index grew in all income groups during this period, reflecting a combination of unilateral reforms, adherence to standards required in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of the World Trade Organization (WTO), additional standards negotiated within regional trade agreements, and other factors. At the beginning of the period, the HICs already had strong protection on this measure and did not have to change their patent laws much over the period.Footnote ¹¹ The eye-opening feature is the substantial increase in protection in emerging and developing countries (EDCs). The index doubled in the UMICs and nearly tripled in the LMICs while growing sharply even in the LICs. As described elsewhere, the period since 1990 ushered in the most remarkable transformation of global IP policies in history (Maskus, Reference Maskus2012).

An obvious question for this chapter is, how well did the IP reforms track changes in income inequality? Did countries with relatively stronger increases in the patent index see greater increases in inequality, at least as measured by the Gini coefficients? The evidence provided in Table 1.4 suggests the answer is “not much.” The right-most panel depicts a growing but weakly positive correlation between the GP index and the market-based Gini coefficients in the HICs, consistent with higher inequality in more strongly protected jurisdictions. However, the correlation is negative in those countries using the posttransfer Gini measures, suggesting that whatever contribution IP may have made to inequality was more than offset by redistribution policies. A similar process may exist in the UMICs. Otherwise, there is little evidence of any relationship between measured patent rights and household income inequality.

1.1.2 Econometric Analyses

Computing simple correlations does little to sort out potential relationships and says nothing about any causal impact of IP protection on inequality. The standardized database of Gini coefficients offers some scope for econometric analysis, however, and two studies have estimated the impact of IP protection on inequality using such data. Because these studies paint a consistent picture, it is worth reviewing their findings before asking if they are reliable.

The first paper was by Adams (Reference Adams2008), who sought to fit IP rights empirically into a selection of determinants of inequality. The author acquired Gini coefficients from the World Bank for intermittent years between 1985 and 2001 for a sample of sixty-two developing countries and regressed them on various independent variables that were lagged to try to reduce reverse causality problems. Specifically, the model related the Gini coefficients to various macroeconomic globalization and policy variables, including trade openness, the degree of incoming foreign direct investment (FDI), the GP index as a measure of IP rights, secondary education rates, government consumption, a measure of institutional quality, and GDP per capita. The estimation found a consistently positive and significant effect of the GP index on subsequent inequality, with the primary coefficient suggesting that a one-unit increase (e.g., from two to three) in the patent index would increase the average Gini coefficient by around 1.2 points, in a scale between 0 and 100. A stronger institutional environment tends to reduce inequality, indicating that if a country plans to strengthen its patents and is concerned about impacts on income distribution, it may wish to complement that policy with a more secure set of rules governing investment.

A second study was by Saini and Mehra (Reference Saini and Mehra2018). The question they posed was whether strengthened IP rights in the post-TRIPS era had affected income inequality, using a sample of sixty-five developing and developed countries over the period 1995–2009. These authors used the Gini coefficients from the Standardized World Income Inequality Database (reviewed earlier) as the dependent variable in a panel regression highly similar to that in Adams (Reference Adams2008). Specifically, using five-year averages of most data, they regressed the posttransfer Gini measures on the GP index, openness to imports, inward FDI, GDP growth, and an indicator of political stability. The patent index interacted with the economic growth measure to assess whether faster-growing economies had a larger or smaller effect of IP on inequality. Similarly, it interacted with a dummy variable for developed countries to see if that relationship varied among poorer countries. They estimated a random-effects model because of the wide heterogeneity in country characteristics in conjunction with the higher dimensionality of countries than time periods.

Remarkably, the findings were completely at odds with Adam’s (Reference Adams2008) findings. In particular, the authors estimated that increases in the GP index tended to reduce the average Gini coefficient in developing countries, suggesting that stronger patent protection reduced income inequality. The authors speculated that this outcome reflected that stronger IP rights tend to attract more inward technology transfer, which could raise the relative wages of lower-skilled workers in labor-abundant countries. The coefficient on the interaction term of the patent index and GDP per capita was significantly positive, implying that the inequality reduction was lower in rich nations. Indeed, the relationship could be positive for countries above a threshold income level, implying higher inequality with strengthened patent rights in developed economies. They interpreted this outcome to suggest that stronger patent laws may induce innovation in the latter group of countries, with rents to that activity favoring those with more technical and managerial skills. Unfortunately, the authors did not attempt to subject these broad conclusions to further empirical testing.

These results are intriguing because, for now, they stand as the only cross-country estimates available of the potential impacts of IP protection on internal income distribution. However, they find distinctly opposite impacts, suggesting that the correlation between the legal determinants of patent scope and inequality, as measured by Gini coefficients, is ambiguous. Its estimation may depend on the data used and the specifications set out.

Moreover, such results are not likely to be reliably robust for further study, given the nature of the analysis. Using national macroeconomic data to assess complex relationships is fraught with risks and subject to fragile interpretations, as shown in prominent debates over the macroeconomic sources of economic growth.Footnote ¹² Both studies rely on reduced-form specifications that do not emerge from any particular theory other than what may seem to be common sense, and neither worries about general equilibrium and feedback effects among the different variables employed. Their regressions are subject to omitted variable bias, meaning that both inequality and IP rights could be driven higher by excluded variables, leading to spurious positive correlations. Similarly, the GP index is highly correlated with other measures of institutional quality and property rights, raising questions about whether it is really IP or something else that may raise inequality.

All of which suggest that further analysis is needed to sharpen predictions and improve confidence in such estimates. The remarkable element is that so little sound empirical analysis of the underlying questions exists. For that purpose, cross-national macroeconomic studies are unlikely to provide much utility. Rather, the emphasis must be placed on clear theoretical approaches that make detectable predictions about the microeconomic aspects of IP rights and inequality, measured perhaps through wage differentials between skilled and unskilled workers. A literature of this kind is now emerging, as described in the next section.

1.2.1 IP Protection and Effects on Inequality

These are reasonable propositions, even if the mechanisms involved are understudied. They find some explanation and support in scarce theoretical and empirical studies. For example, Chu (Reference Chu2010) studied the impact of stronger patent scope on economic growth and inequality in a single-economy model. The theoretical foundation is the “quality ladders” model, in which a continuous innovation process generates products of increasing quality that displace those previously at the top of the ladder.Footnote ¹³ The canonical model assumes individuals share identical and homothetic preferences, implying that income distribution does not matter for innovation and growth, nor is it affected by growth outcomes. Chu extended the model to an environment where households have different wealth profiles. How much to work in the labor market depends on savings and consumption decisions. His model is limited in assuming the distribution of assets among rich and poor households is unchanged in all steady-state equilibrium growth paths.

In this environment, a policy raising the scope of patents increases wealth and income inequality by raising R&D, which enhances the growth rate and raises the interest rate. In turn, asset returns rise, disproportionately favoring the rich, who own more assets. Furthermore (and somewhat counterintuitively), because the higher interest rate raises savings and reduces consumption, it induces households to spend more time at work. This factor also generates relatively higher income for the rich, further expanding income inequality. However, because consumption is reduced by relatively less among the poor, the outcome of stronger patents may be reduced consumption inequality. The author noted that these results are consistent with macroeconomic data in the United States in the 1980s and 1990s when there was a sharp rise in wealth and income inequality but a much smaller rise in consumption inequality. Because this model is highly stylized and does not fit detailed data, it is impossible to determine how much stronger patent scope in this era contributed to inequality via this mechanism. Still, it offers an interesting mechanism for further study.

The paper just described posits a heterogeneous and unchanging asset distribution between rich and poor, without explaining why households might vary that way while arguing that investment returns drive changes in inequality. It does not consider the skill bias of patent-induced innovation. A model doing so is set out by Pan et al. (Reference Pan, Li and Zou2015). The model is based on the idea of “directed technological change,” also a fundamental model in modern growth theory.Footnote ¹⁴ This approach argues that investments in new technology depend on numerous factors, including relative factor costs. In skill-abundant countries, such as the United States, such investments tend to reduce demand for low-skilled labor (which is expensive relative to other countries) and raise demand for high-skilled labor. This R&D-skill complementarity, found clearly in information technologies, is one basis for the predominance of SBTC.

In the model by Pan et al., R&D investments predominantly seek new technical solutions in higher-skilled industries, raising the demand for skills and, in turn, increasing wage inequality. Patents may be gained in new technologies complementary to either low-skilled or high-skilled workers. The key assumption is that skill-intensive industries increase returns to scale, lowering costs and raising productivity as output expands. Thus, in countries with abundant skills, it is optimal to scale a patent policy to favor the latter. The optimal patent policy then favors broader breadth to encourage scale economies. The result is a “skill-biased patent policy,” which raises wage inequality. It also imparts a clear bias between countries: Skill-abundant nations prefer broader patents, and labor-abundant nations prefer narrower protection. This paper offers no empirical analysis, so it cannot assess the validity of its key assumptions or the contribution of patent policy to growth and inequality. Again, however, it offers a useful perspective on which to build further analysis.

If theory suggests that strong IP protection supports wage inequality based on skills, entrepreneurship, or other worker characteristics, an empirical analysis should gravitate toward considering micro data on wage gaps across regions or within firms. This approach is natural because a patent exists at the firm level in specific locations, suggesting that carefully specified analysis could trace the impacts of patenting on wage inequality within the enterprise.

Two recent papers of note take this approach. First, Aghion et al. (Reference Aghion, Akcigit, Bergueard, Blundell and Hemous2019) analyzed state-level panel data in the United States to study whether “top income inequality” is caused to some degree by innovation. Top income inequality refers to increases in the income shares of the top 1 percent of households. The paper sets out a model of endogenous innovation by incumbents (who own patents and enjoy monopoly markups) and entrants (who innovate to gain patents). Innovation by either group raises the income shares of entrepreneurs and generates more top income inequality. But only investments by entrants increase social mobility, meaning the ability to enter the top income level. Entry may be blocked through high innovation costs, including extant patents. Such blockages slow mobility into the top tier. Regrettably, the model does not explicitly consider the role of stronger patent scope. Presumably, it has offsetting effects. On the one hand, patents should raise the returns on innovation and increase the top income shares. On the other, blocking entry should reduce the inequality associated with more rapid entry into entrepreneurship.

These predictions were tested using state-level panel data from 1975 to 2010. They gathered data on the top 1 percent and top 10 percent of income shares in all fifty states plus Washington, DC. Top income shares rose in every state, from an unweighted average of 8 percent in 1975 to a peak of 21 percent in 2007, before falling during the financial crisis. Moreover, there was increased variability across states, with the highest shares going toward states with stronger patent profiles. Additional data suggested that income from entrepreneurship (patent rents in the model) was disproportionately high in the top income group in such states.Footnote ¹⁵ The income figures were combined with state-level patenting data from the U.S. Patent and Trademark Office, including patent citations to construct quality measures. The cross-state variation in patenting was markedly high, generating scope for identification. The authors regressed the top income shares across states on lagged patents and patent quality, controlling for business conditions, the prevalence of the financial sector, state GDP, and population, plus state and year fixed effects. In ordinary least squares (OLS) regression, they found consistently positive and significant effects of patents and patent quality on the top 1 percent of incomes.

To control for the endogeneity of patents, they included each state’s representation on Congressional Appropriations Committees and other factors as instrumental variables. These regressions reported similar impacts of patents on top income shares. In particular, in the preferred specification, they found that a 1 percent rise in patents per capita raised a state’s top income share by 0.17 percent. That is, patenting alone could explain 17 percent of the rise in the top-level income proportion across states. This effect was even greater in high-patent states such as California. Put differently, if a state were to move from the bottom quartile of patents to the top quartile in 2000, the coefficients would imply an increase in its top income share of about 1.5 percentage points, a substantial increase. The authors argued that this calculation underestimated because it failed to account for the possibility that a successful inventor in a low-patent state would likely move to a high-patent state and other factors. Their results were robust to using other measures of top income inequality.

A second study of note is by Bhattacharya et al. (Reference Bhattacharya, Chakraborty and Chatterjee2022). Briefly, these authors took advantage of implementing a new Indian patent law between 2002 and 2005 to analyze whether the gap between manager wages and other wages within firms varied by whether those firms had patents before and after the legal implementation. They found strong evidence of an increase in these wage gaps, which was more pronounced in high-technology sectors. This evidence shows that firms do transfer patent rents disproportionately to skilled and managerial workers within firms, tending to raise wage inequality.

Studies using such microeconomic data are instructive and suggest that patenting and patent reforms can contribute to income and wage inequality through expected channels. The literature would benefit from considerably more such analyses, using other databases across countries, industries, and firms. It would be equally useful to quantify, with microdata, how patents and patent laws contribute to growing intra-industry market concentration and monopoly power within and across countries and how those rents have been distributed.

1.2.2 Alternative Perspectives

Even less studied by economists is the novel idea that inequality itself may be a determinant of innovation and the growth effects of IP protection. Put differently, while IP may generate higher growth and inequality, causation may also run from inequality to innovation and growth.Footnote ¹⁶ Mendez (Reference Mendez2002) noted that in an economy with a dual labor market, where some workers are paid efficient wages and others competitive wages, even neutral technological change can further increase wage inequality, as can globalization.

Newer literature is emerging and needs much fuller development. However, two papers illustrate how certain mechanisms could link inequality and innovation. First, Weinhold and Nair-Reichert (Reference Weinhold and Nair-Reichert2009) asked whether income inequality differences help explain innovation performance across countries.Footnote ¹⁷ There are two potential mechanisms identified. First, countries with large and growing middle classes (and therefore more limited inequality) should see political pressure raised for stronger governance institutions, including IP rights, which could increase innovation. Second, a larger middle class may offer more entrants into sufficiently skilled labor categories that raise the supply of innovation while increasing the demand for innovation through preferences for new goods. There are multiple relationships here to sort out through data analysis.

For this purpose, they used patenting data from the World Intellectual Property Organization (WIPO) database as measures of innovation, distinguishing between resident patent applications and foreign patent applications within each country.Footnote ¹⁸ They regress patenting on the size of each country’s middle class and the GP index as a measure of patent strength, instrumenting the latter with various structural and geographic factors. The argument is that if the income distribution affects innovation only through institutional reforms (the first channel), it should not significantly affect the regression when IP rights are included. However, if it influences innovation directly through supply and demand factors (the second channel), it should be independently significant. Further, its effects should vary between domestic patents (with a positive impact) and foreign patents (with little or no impact). They estimate a cross-section model, averaging national data from 1994 to 2000, leaving just fifty-three observations across countries. Most regressions found a positive and significant coefficient on the instrumented GP variable in explaining domestic patent applications, supporting the institutional channel. More importantly, they found consistently positive and significant estimates of the size of a country’s middle-income class on resident patenting, suggesting that more income equality is pro-innovation. In contrast, these variables had little effect on foreign patenting, which depended more on population, market size, and other macroeconomic factors.

This result is interesting but suffers from the usual concerns about cross-country econometric analysis with national data. The paper could be usefully extended, at least through industry patenting data, in which comparisons are made between the technological orientation of industries. It would also be useful to see if explicit measures of income inequality would demonstrate negative impacts on innovation through the identified channels.

A second paper, by Kiedaisch (Reference Kiedaisch2021), offers a theoretical model aimed at the related but deeper question of whether the impact of IP rights on economic growth depends on the level of economic inequality. The author studied this possibility in a “product variety” model of endogenous growth.Footnote ¹⁹ In this model, innovators seek to develop new varieties of existing products across industries, responding to the idea that consumers prefer diverse choices and will pay a premium for such decisions. The economy’s growth rate depends on the pace of new product development. Kiedaisch introduces inequality into the model by assuming that rich and poor consumers have different preferences. Specifically, richer households both consume a greater number of varieties and prefer more innovative or complex goods. Thus, in the model, the pace and nature of innovation in a country depend on income distribution. Along a balanced growth path, countries with more unequal distributions in the sense of relatively more rich people would have longer patent duration to incentivize more new products. In this sense, inequality increases expected growth.

The model has many more dimensions but, importantly for this chapter, establishes a theoretical mechanism that helps explain why countries with relatively larger rich groups (or more concentration of income and wealth at the top) prefer stronger IP protection, which in turn implies faster economic growth. The model has not yet been subjected to empirical analysis but doing so would be instructive. For example, while it seems intuitive and consistent with the casual observation that higher top incomes should push for stronger IP rights, the idea that such economies should grow faster clashes with the recent convergence in incomes between rich and emerging countries. Presumably, there is more to inequality across countries than can be explained in a single-country approach, as discussed in the following section.

1.3.1 Stylized Facts

To put this claim in perspective, consider the simple data in Table 1.5. These figures show, over certain subperiods and the full period, average annual growth in real GDP per capita, measured in 2017 U.S. dollars at purchasing power parity (PPP) exchange rates.Footnote ²⁰ Such exchange rates are appropriate for focusing on changes in actual living standards.Footnote ²¹ Again, the data are broken down into income groups, but now using the 2020 classifications established by the World Bank. In particular, China is now considered a UMIC, and India is an LMIC. This updated breakdown is more appropriate for analyzing income convergence. The comprehensive samples, rather than limited to those nations with available Gini coefficients as above, paint a complete picture. Finally, they are weighted by consistently measured GDP totals, capturing actual growth experiences in the income groupings more accurately.

It is readily seen in Table 1.5 that the HICs saw their growth rates fall from 2.3 percent in the 1990s to 1.3 percent in the following decade, before the stagnation following the financial crisis of 2008–2010. The 1990s were a period of slow growth for both the LICs and LMICs, though both saw substantial increases in growth in the 2000s. For both the LMICs and UMICs, the 2000s were a period of extremely rapid growth in real consumption standards. This was a period of great convergence in real incomes between EMCs and the HICs.Footnote ²² Over the entire period, the UMICs grew their consumption abilities sharply compared with the HICs, resulting in marked reductions in poverty and improvements in health and education status.Footnote ²³ In contrast, the LICs remained in relative stagnation.

There are, therefore, the following stylized facts. From 1990 to the present, the UMICs and LMICs considerably expanded their legal IP rights, as shown in Table 1.3, while experiencing significantly faster economic growth than the rich world. The LICs also adopted stronger laws, though these remained well behind those of the other groups while stagnating in relative terms. In short, the period was one of both extensive IP reforms and notable “conditional convergence” in living standards. Again, it would be difficult to argue and not credible to demonstrate with macroeconomic data that the former caused the latter. This is because many other factors could have driven both upward, with no necessary relationship between IP protection and growth.Footnote ²⁴

While that claim is largely correct, it is misleading in at least one important context. Economic logic and evidence both suggest that, at a microeconomic level, IP reforms in EDCs have attracted more technology flows, raising productivity. The next two subsections develop that argument. At this point, it is important to note that higher real incomes in EDCs do not necessarily imply more equal internal income distributions, as the gains may have been acquired largely by the already well-off. Put differently, the growth impacts of IP reforms may not trickle down into widespread income gains.

1.3.2 The Economics of IP Rights and Technology Development

How can IP reforms in EDCs raise domestic incomes, at least in the aggregate? The economics literature has emphasized three factors. First is the possibility that stronger home patent rights may directly raise domestic innovation.Footnote ²⁵ This question lies outside the scope of this chapter, and, in any case, the linkages from innovation to inequality remain unexplored in those countries.Footnote ²⁶ Briefly, the literature suggests that strengthening domestic IP rights can stimulate innovation, typically measured by future patent applications at home or abroad. This conclusion, however, must be strongly conditioned. It holds largely for higher-income emerging economies with, among other things, large domestic markets, adequate supplies of human capital, robust market competition, and sound policy governance. Countries lacking in such dimensions do not become markedly more innovative after patent reforms, highlighting the complexity of effective innovation systems. Specifically, there is little evidence that formal innovation is responsive to patent reforms in the poorest countries simply because the promise of domestic patents is a small incentive in weak economic environments. A corollary is that stronger patent rights likely do not diminish formal domestic innovation in poor countries, a frequently heard concern. Regrettably, there is no systematic evidence about how IP reforms may influence informal (unmeasured) innovation or competition through local imitation in poor countries. It is likely that domestic firms engaged in imitation and counterfeit production may be forced out of the market after significant reforms. Still, shortcomings in economic surveys have defied the systematic linkage of firm exits with IP policy. This remains a significant shortcoming in the economics literature.

A further important qualification is that even in dynamic emerging economies, undertaking extensive upgrades of IP protection may not be advisable in the medium term. The reason is that local firms in those countries, while undertaking R&D programs and exhibiting some innovativeness, may still rely on imitative technical change, often borrowing foreign technologies and making minor adaptations. In this regard, significant IP reforms may discourage local innovation and economic development by securing, often on behalf of foreign inventors, strong exclusionary rights that raise the costs of imitative and adaptive innovation (Kim et al., Reference Kim, Lee, Park and Choo2012).

1.3.3 Trade-Induced Innovation

Trade liberalization and skill-biased technological change are commonly thought to be the primary sources of income and wealth inequality across countries, including in the developing world. This is largely true regarding SBTC, as noted earlier. Reductions in trade and investment barriers, however, have complex impacts and may reduce inequality in developing countries. The standard reason is that integration with the global economy offers more export opportunities for industries that rely on labor-intensive production, tending to raise the real wages of low-skilled workers. At the same time, it encourages more imports of capital-intensive and skill-intensive goods, diminishing those incomes.Footnote ²⁷ Similarly, inward FDI into developing countries tends to be labor-seeking, raising local wages.

This tendency toward diminished inequality is far from certain, however. For example, current trade theory emphasizes that market opening pushes resources into the most efficient enterprises, which raises labor productivity and wages in general but could raise the wages of those with greater skills.Footnote ²⁸ Moreover, when global trade is liberalized, firms that start exporting generally must adopt globally efficient techniques, which tend to raise the relative wages of the most productive workers, who have higher skills even within occupational classes.Footnote ²⁹ This logic helps explain why exporting firms and multinational enterprises (MNEs) in manufacturing and services tend to pay significantly higher wages in EDCs than local firms, enhancing this form of cross-firm inequality.Footnote ³⁰

An exceptional form of this process emerged sharply in the 1990s and 2000s, the era of rapid growth in offshoring through vertical production networks (Baldwin, Reference Baldwin2016). The ability of multinational firms to fragment their production into lower-skilled activities (resource extraction, intermediate input production, and product assembly) and higher-skilled activities (design, marketing, R&D, and other headquarter services) and to transfer production of the former to developing markets was driven by cuts in trade costs and improvements in information and communication technologies. With lower transport costs and extremely low taxes on trade, parts and semi-finished goods could be shipped across borders multiple times in the production of final goods, a process exemplified by the proliferation of automobile production and trade within North America after the implementation of the North American Free Trade Agreement. The deployment of information and communication technologies permitted efficient inventory and shipping logistics management among nodes within production networks, greatly raising international trade in intermediate inputs.Footnote ³¹

This fragmentation led to the rapid offshoring of lower-skilled and medium-skilled jobs from the United States, Europe, and other high-wage nations to a limited group of “globalizers” among EDCs, especially China (Baldwin, Reference Baldwin2016). The harmful effects on low-skilled manufacturing and service jobs in these rich countries are widely identified as a source of inequality (Autor et al., Reference Autor, Dorn and Hanson2013). Less widely appreciated, however, is that offshoring also may serve to increase inequality in recipient countries. The reason is that the transferred jobs, while coming from the low and medium ends of the skill distribution in, say, the United States, tend to require skills and commitment to formal employment at higher ends in EDCs.Footnote ³² Thus, recent globalization, at least within vertical production networks, has been a source of growing inequality in the HICs and EDCs. Recall, however, the earlier discussion of how trade liberalization could raise the demand for low-skilled labor in EDCs through the comparative advantage channel. These counterbalancing impacts make the overall effects ambiguous.

Foreign direct investment and offshoring are important forms of trade-induced innovation because they generate new and more efficient forms of production processes in recipient countries. However, trade liberalization through tariff cuts and joining free trade agreements may also raise innovation on the part of domestic enterprises. As suggested earlier, firms must lower costs to compete with more efficient imports or develop new products to enter export markets.Footnote ³³ Both processes require investments in R&D, new capital goods, and better management techniques. Initial evidence for this spur to innovation in the wake of trade opening is in Bustos (Reference Bustos2011), who found that Argentinean firms experiencing relatively larger cuts in Brazilian tariffs after the foundation of MERCOSUR invested relatively more in upgraded technology.Footnote ³⁴ However, this happened primarily among firms at the upper reaches of productivity within Argentinean firms, not among lower-productivity and inefficient firms. A second important study is by Aghion et al. (Reference Aghion, Bergeaud, Lequien and Melitz2018), who developed a theoretical model in which greater access to export markets changes the incentives of domestic firms to innovate. Specifically, high-productivity firms have the resources to invest more in R&D and develop new products, while competition forces low-productivity enterprises to reduce innovation spending. These predictions were borne out using exporting and patenting data from French firms from 1994 to 2012.

The relationships between trade and investment liberalization and innovation are considerably more complex than suggested here. Much depends on local circumstances in each country. The broad view, however, posits that increasing global integration has encouraged more innovation, at least in developed and higher-income emerging economies. Because these innovation responses are concentrated in high-productivity enterprises, they likely have contributed to higher wage inequality across skill classes and across (and even within) firms within occupational groups. These issues will continue to attract scholarly attention for years.

It is worth noting an additional complication involving trade and IP rights. Emerging and developing countries that seek to export higher-technology products to developed countries may encounter import barriers. Many advanced economies have laws blocking imports that violate patents or trademarks in the importers. A well-known example is section 337 of the U.S. Tariff Act of 1930. Shin et al. (Reference Shin, Lee and Park2016) found evidence that the operation of such import restraints reduces the exports of more sophisticated products from emerging countries.

While important background for this chapter, none of the prior reviews directly implicated IP rights and how they interact with globalization to affect inequality. At this stage, the best guess is indirect: To the extent that stronger IP protection has causally attracted more trade, FDI, and offshoring, it presumably has contributed to those sources of inequality within nations. And here, the evidence is clear, as developed in the next subsection.

1.3.4 Technology Transfer and Income Convergence

Massive literature is now studying how IP reforms affect international flows of technical information through high-technology trade, FDI, offshoring, and licensing. Reviewing that literature is beyond the scope of this subsection.Footnote ³⁵ Rather, the intention here is to discuss three observations about how such flows could affect international inequality, defined as divergence or convergence in international living standards, as described empirically in Table 1.5. These issues can be subtle and counterintuitive, making it important to draw lessons from economic theory and empirical work.

2.1.1 A Slow Pattern of Knowledge Internationalization?

For the past decades, only three economies – namely the United States, Japan, and Germany – accounted for the majority of scientific and technological (S&T) production (Figure 2.1). Within these two indicators, patents’ concentration is always more geographically skewed than scientific articles. Simply adding France, Italy, Switzerland, and the United Kingdom increases the concentration of patents during the second half of the past century to roughly 90 percent.

Source: Miguelez et al. (Reference Miguelez, Raffo, Chacua, Coda-Zabetta, Yin, Lissoni and Tarasconi2019). Notes: RoW = Rest of the World. See WIPO (2019), technical notes (www.wipo.int/wipr)

Figure 2.1 Evolution of (a) patenting and (b) scientific publication concentration by few economies.

These data also show that the distribution of new S&T outputs changed by the turn of the century. The growth of the Republic of Korea and China – but also the other economies grouped as a whole – has outperformed that of the United States, Japan, and Western European countries as a block. Outside of China and the Republic of Korea, fastest innovation economies are also found in Asia. In particular, India, Iran, Israel, Singapore, and Turkey stand out. The geographical spread is more noticeable in scientific outputs than technological ones. In the rest of the world, Australia, Brazil, Egypt, and South Africa gather the lion’s share of the scientific output in their respective regions. However, virtually all nontraditional regions evidence an increase in the scientific output share.

There has been, therefore, some spreading out of knowledge production. However, except for the Republic of Korea first and then China, the hierarchy of innovativeness (and income per capita) has not changed to a great extent (Kemeny, Reference Kemeny2011), as high-income countries have managed to keep their positions through sustained innovation, and innovation of higher quality and complexity (Crescenzi et al., Reference Crescenzi, Iammarino, Ioramashvili, Rodríguez-Pose and Storpe2019). Moreover, the entry of these new players has not necessarily translated into a reduction of geographical concentration. Indeed, among other factors, the extremely rapid emergence of a few countries, notably the Republic of Korea and China, had recently resulted in a reconcentration phenomenon (see Figure 2.2).

Figure 2.2 Innovation is more concentrated than other economic activities

Herfindahl–Hirschman index, selected innovation and economic indicators, 1980–2016.

Source: Authors based on PATSTAT, PCT, and Web of Science data. R&D and R&D personnel are retrieved from the UNESCO Institute for Statistics, while exports and GDP data from the World Development Indicators, the World Bank.

By all quantitative accounts, the production of innovation remains more concentrated than other economic activities. At the country level, this is quite apparent. Figure 2.2 reports the country concentration index – Herfindahl–Hirschman Index – for a series of internationally comparable economic indicators over time. In addition to the scientific articles and international patents already discussed in the previous section, this figure also presents indicators for trade (total exports, U.S. dollars PPP), GDP (U.S. dollars PPP), R&D investments (GERD, U.S. dollars PPP), R&D personnel (FTE), and population.

These indicators suggest quite clearly that innovation-related activities are geographically more concentrated than economic ones, such as trade and GDP. The concentration of scientific articles has been declining close to the levels observed for the concentration of GDP. By contrast, R&D expenditures have observed an increase in concentration similar to that for patents since the mid-2000s. The fact that R&D investments are more concentrated than R&D personnel implicitly indicates that R&D budgets per researcher differ substantially across countries. Typically, R&D in richer countries is far more capital intensive, which translates into higher R&D labor productivity. This is in line with the differences in innovation output concentration and also their quality.Footnote ⁶

What do the data tell us about S&T collaboration? The broad context is that the overall S&T collaboration – that is, local, national, and international altogether – is increasing. Within this increase in collaboration, the share of international scientific collaboration has also been steadily rising (WIPO, 2019). On the contrary, the share of international technological collaboration – as measured in international coinventions – exhibits a substantially lower and less stable pattern. Peaking at almost 11 percent in the 2000s, the share of international coinventorship came a long way from low single digits in the 1970s. Since the 2010s, however, the share of international coinventorship has plateaued and, lately, decreased – mostly explained by the declines in international coinventorship observed in the United States, China, France, and India.

Does knowledge flow globally? The majority of international S&T collaborations occur between and within the United States and Western Europe. The rest of the world is increasingly collaborating internationally, but when it does, it almost always selects a partner from the United States or Western Europe. Interestingly, both international S&T collaboration between other countries – that is, outside the United States and Western Europe – has been increasing for the last two decades but remains small in comparison. In the period 2011–2015, Western Europe gathered 49 percent and 41 percent of all international S&T collaboration, respectively. In the same period, the United States gathered 13 percent and 27 percent for the same indicators (WIPO, 2019). Nevertheless, over the years, the U.S. connections with China and India have become equally or more important than those between the United States and individual Western European countries. This is particularly the case for international coinventorships. Despite being quite advanced, established non-Western economies such as Japan, the Republic of Korea, and Australia, and emerging economies such as China, India, Singapore, and Brazil mostly collaborate with the United States and Western Europe. In sum, while collaboration in S&T has increased and, in turn, has contributed to knowledge diffusion – especially from more to less developed countries – it remains quite skewed, and the number of emerging countries entering the global network is still limited.

2.1.2 Within Countries, Innovation Is Unevenly Localized in a Few Regions

Be it in the traditional technologically leading countries, or the newly emerged ones, knowledge production does not take place in a spatial vacuum. The multiple sources of knowledge behind the invention, commercialization, and adoption of new products, processes, services, and social practices originate in specific locations within countries and diffuse unevenly across them.

In particular, as most economic activities, innovation benefits from economies of agglomeration (Crescenzi et al., Reference Crescenzi, Iammarino, Ioramashvili, Rodríguez-Pose and Storpe2019; WIPO, 2019: ch. 1). Scientists, technologists, entrepreneurs, students, and other actors seeking ideas, expertise, and education realize gains when they are colocated, as this increases the probability of recognizing opportunities and solving problems and of lowering all types of search costs. Innovation generated in large agglomerations tends to be of higher quality and more unconventional (Berkes and Gaetani, Reference Berkes and Gaetani2021). Firms, especially innovation-centered ones, are inevitably attracted to innovation clusters by the possibility to access a large and diverse supply of labor (especially labor markets for qualified workers) and of intermediate goods (especially knowledge-intensive ones) but also by the faster flow of ideas.Footnote ⁷ They also allow interacting and learning from peers, favoring localized knowledge spillovers (LKS) (Jaffe et al., Reference Jaffe, Trajtenberg and Henderson1993). Agglomerations are homes and hosts of multinational enterprises (MNEs) and the true beneficiaries of globalization, being centers of political influence, corporate decision-making and control, knowledge generation and exchange, skills, and jobs (Crescenzi et al., Reference Crescenzi, Iammarino, Ioramashvili, Rodríguez-Pose and Storpe2019; Feldman et al., Reference Feldman, Guy and Iammarino2021). Similarly, skilled workers, students, and entrepreneurs looking for jobs, knowledge, and business opportunities move to the same centers, giving rise to nonnegligible internal and international migration flows (Breschi et al., Reference Breschi, Lawson, Lissoni, Morrison and Salter2020). Thus, the typical innovative urban agglomeration relies heavily on the external knowledge flows channeled from the national system of innovation, the local MNC’s headquarters or subsidiaries, the international science networks, and the mobility of talented people and skilled workers (Bathelt et al., Reference Bathelt, Malmberg and Maskell2004; Lorenzen and Mudambi, Reference Lorenzen and Mudambi2013; Moreno and Miguélez, Reference Moreno and Miguélez2012).Footnote ⁸

While both the economic and geography literatures stress the importance of agglomerations for innovative activities, their identification remains an open challenge. At the beginning of the past century, Alfred Marshall already discussed why industries agglomerate and defined the industries concentrating in Birmingham, Bedfordshire, Buckinghamshire, Manchester, or Sheffield as districts (Marshall, Reference Marshall and Abridged1920). More recently, scholars have argued that innovation flourishes in dense urban areas, where knowledge spillovers can flow within and across industries (Glaeser et al., Reference Glaeser, Kallal, Scheinkman and Shleifer1992; Jacobs, Reference Jacobs1969; Porter, Reference Porter2000). Indeed, several Marshallian districts can coexist and benefit each other in an innovative large metropolitan area. These global innovation hotspots spawn new ideas and technologies faster than other locations, thanks to the agglomeration of capital, skills, entrepreneurship, and the supporting scientific institutions (Engel, Reference Engel2015; Engel and del-Palacio, Reference Engel and del-Palacio2009; WIPO, 2019: ch. 1). Porter (Reference Porter2000) defines as clusters the spatial units that concentrate geographically and thematically a whole series of private and public organizations – and the people therein – that compete and cooperate to achieve innovation. Other terminology ranges from “tech clusters” (when wishing to stress their peculiarities vis-à-vis industrial clusters; Kerr and Robert-Nicoud, Reference Kerr and Robert-Nicoud2020) to “innovation hubs” (where the emphasis is placed on cities and knowledge exchanges between them; Nijkamp and Kourtit, Reference Nijkamp and Kourtit2013) as well as “hotspots,” which is more neutral and used interchangeably with the former two. Other approaches, instead, identify “global cities” based on their population and economic activity, and then move on to quantify the innovation they produce (Barca et al., Reference Barca, McCann and Rodríguez‐Pose2012; Castellani, Reference Castellani, Cook, Johns, McDonald, Beaverstock and Pandit2018).

Figure 12 by Miguelez et al. (Reference Miguelez, Raffo, Chacua, Coda-Zabetta, Yin, Lissoni and Tarasconi2019) shows the global distribution of international patents and scientific articles by the smallest available administrative area within each country. We observe instantly in this figure that both S&T outputs are sternly skewed to a few locations in the world. Not surprisingly, these locations are mostly confined to the same regions we have been discussing earlier, namely the United States, Western Europe, and East Asia. Within the United States, the main cities on the two coasts – such as Boston, New York, and San Francisco – stand out. In East Asia, Beijing, Seoul, Shanghai, Shenzhen, and Tokyo are among the densest S&T agglomerations. Western Europe shows a more uniform geographical distribution, yet cities in France, Germany, Northern Italy, and the United Kingdom agglomerate more S&T outputs.

Yet, using administrative areas for worldwide analysis is problematic. Efforts to map innovation agglomerations, especially at the international level, should not rely on fixed spatial boundaries, such as administrative or political units (Carlino and Kerr, Reference Carlino, Kerr, Duranton, Henderson and Strange2015). This practice suffers from both a “modifiable area unit problem” (the unit size may vary across countries, thus making quantitative comparisons impossible) and a “border effect” problem (the unit boundaries may either cut across a cross-border agglomeration or – in case of large units – include two distinct agglomerations).Footnote ⁹ In this chapter, we will adopt the term “innovation-dense areas,” which will be proxied by the spatial boundaries computed in Miguelez et al. (Reference Miguelez, Raffo, Chacua, Coda-Zabetta, Yin, Lissoni and Tarasconi2019) and WIPO (2019). In a nutshell, based on the coordinates assigned to each patent and publication (based on inventors’ and scientists’ addresses), the authors apply a clustering algorithm to identify a multitude of agglomerations worldwide. These are separately identified as “global innovation hotspots” (GIHs) and “niche clusters” (NCs), though for simplicity we analyze them together under the label innovation-dense areas.

According to WIPO (2019), the United States hosts most of the main innovation-dense areas of the world (25 percent of all), followed by Germany (12.9 percent), Japan (9.4 percent), China (6.8 percent), the United Kingdom (4.9 percent), and France (4.3 percent).Footnote ¹⁰ By continent, Europe concentrates 40.5 percent of the most innovation-dense areas, followed by North America (28 percent), Asia (25 percent), Latin America (2.9 percent), Oceania (2.7 percent), and Africa (1 percent).

Figure 2.3 depicts the share of patents and publications produced in the innovation-dense areas of the United States, Japan, Germany, the United Kingdom, the Republic of Korea, China, India, and Brazil, and the population residing in these countries. Several patterns arise from analyzing the innovation-dense areas of these countries. First, in all cases, they account for a disproportionate amount of the S&T output with respect to population. Clearly, in all countries shown here, science and innovation are substantially more concentrated than population, indicating that concentration of population only partially explains the geographical concentration of innovation. Second, the most valuable S&T output – as proxied by the top ten cited patents and publications – is typically more concentrated than the rest. Third, in general, the concentration trends are stable over time. However, we observe some increases in subnational concentration in Figure 2.3. Such increases are found more often in patents than scientific articles.

Source: Miguelez et al. (Reference Miguelez, Raffo, Chacua, Coda-Zabetta, Yin, Lissoni and Tarasconi2019).

Figure 2.3 Share of patenting and scientific publishing in innovation-dense areas, by selected countries

Note: largest innovation-dense areas follow WIPO (2019), www.wipo.int/wipr.

Yet, while innovation tends to concentrate in large metropolitan areas, not all urban agglomerations concentrate on the equivalent level of innovation-related activities. Figure 2.4 displays the top thirty-five most-populated metropolitan areas in the world and their S&T outputs. Only twenty-two cities out of these are innovation-dense areas. The top-right quadrant shows that Beijing, London, Los Angeles, New York, Osaka, Paris, Seoul, and Tokyo concentrate a large amount of both patents and scientific publishing. In comparison, Shanghai is only less populated than Tokyo but has fewer patents and scientific publications than all of them. A second-tier group of innovation-dense areas include the metropolitan areas of cities such as Buenos Aires, Delhi, Istanbul, Mexico City, Moscow, São Paulo, and Tehran. Despite their large populations, they concentrate much fewer scientific publications and patents. Other densely populated cities such as Cairo, Bangkok, Kolkata, and Chongqing have only enough innovation density in some specialized scientific or technological fields. Last, in the bottom-left quadrant, Dhaka, Jakarta, Karachi, Lagos, Lima, and Manila do not have an innovation density corresponding to their highly populated metropolitan areas, despite concentrating most of their respective national S&T output. As noted, innovation is even more concentrated than general economic activity and population.

Figure 2.4 Population density does not ensure high innovation density

Patents and scientific articles in the top thirty-five largest cities, 1980–2016.

Source: WIPO (2019) based on PATSTAT, PCT, and Web of Science data, and top cities from The City Mayors Foundation (September 2019). Notes: Size of bubble refers to the metropolitan area population (circa 2017). Axis in logarithmic scale. Due to low scientific publication or patent values, Kinshasa and Shijiazhuang are omitted from the chart area.

Nevertheless, the lack of innovation-dense output in otherwise economically dense agglomerations is not exclusive to less developed economies. Even within high-income countries, the agglomeration of innovation activities seems to follow only partially the pattern of population and economic activity agglomeration.

2.1.3 A Concentrated Network of a Few Innovation-Dense Areas

Why does more collaboration not necessarily lead to less inequality in innovation distribution within and across countries?

The rising concentration of science and innovation production in innovation-dense areas, and the parallel global spreading out of innovation and international team formation, characterizes a globalized hub-to-hub system, which links national and regional systems of innovation and global firms through a spiky geography of knowledge creation (Crescenzi et al., Reference Crescenzi, Iammarino, Ioramashvili, Rodríguez-Pose and Storpe2019). Many of these hubs are better connected to one another than to their neighboring areas inside their countries. The collaborative scientific communities, the talented migrants, the supply chains, and the knowledge-seeking MNCs give rise to global innovation-dense “hotspots” around the world. The successful regions discussed earlier cannot rely uniquely on the local innovation ecosystem they form – whether private companies, higher-education or research institutions, etc. – but they build national and international links to complementary pools of knowledge abroad (Awate and Mudambi, Reference Awate and Mudambi2017; Bathelt et al., Reference Bathelt, Malmberg and Maskell2004; Lorenzen and Mudambi, Reference Lorenzen and Mudambi2013; Turkina and Van Assche, Reference Turkina and Van Assche2018).

Figure 17 by Miguelez et al. (Reference Miguelez, Raffo, Chacua, Coda-Zabetta, Yin, Lissoni and Tarasconi2019) depicts the global network of highly connected innovation-dense areas. As expected, this network is denser within and between a few agglomerations in the United States, the United Kingdom, Germany, France, Japan, the Republic of Korea, China, and India. The United States, Germany, Japan, and the Republic of Korea also show thick national networks.

Even in these countries hosting most of the world’s innovation output, we observe that just a few innovation-dense areas concentrate most of the international connections. A handful of cities, mostly on the two coasts of the United States, account for much of the U.S. international coinventorship. Similarly, Western European innovation agglomerations connect mostly nationally to Paris, London, Frankfurt, and Berlin. Figuratively, these European innovation hubs mediate most of the other European international connections, as if they are Europe’s international “gatekeepers.” The same pattern happens in Asia, where Tokyo, Seoul, Beijing, Shanghai, Mumbai, and Bengaluru are the key gateways for international coinventions. The same analysis for scientific outputs would cast a much denser network but with an equivalent underlying pattern of concentration of international ties in a few hubs. In sum, S&T outputs are more likely to connect international partners if produced within these already concentrated innovation hotspots. The bias is even more apparent when focusing on the most valuable S&T output (Miguelez et al., Reference Miguelez, Raffo, Chacua, Coda-Zabetta, Yin, Lissoni and Tarasconi2019).

As a result, these global networks favor a few innovation-dense areas that concentrate the knowledge flows. This is a double-edged sword: While these areas spread knowledge, they do so mostly among themselves. The resulting GINs, in turn, cement the innovation “hotspot” advantages.

2.2.1 Does the Unequal Distribution of Innovative Activity Really Matter?

Despite the global spread of knowledge production and the emergence of new local innovation giants (in both developed and developing countries), there remain high levels of within (and between) country concentration of innovation. Before diving into the role of policy, it is pertinent to ask if this is a problem that policy has to address.

In a simplified economic view, innovation and the knowledge to produce it have the characteristics of a public good (Arrow, Reference Arrow1962). Many individuals, firms, and regions can use at the same time the knowledge produced by others somewhere else, without rivaling the use by the originators. Indeed, artificial intelligence emerged from a limited number of scientific organizations in a few regions of the world, and today a large number of companies and individuals employ the underlying science for a wide variety of innovative applications around the world. A similar point can be made for mobile communications technology, which has flown to remote corners of the world.

In this sense, if innovation were a pure global public good, it would not necessarily matter where innovative activity takes place. In such a scenario, innovation would flow without attrition benefiting all regions equally. Moreover, there would be strong arguments in favor of agglomerating resources in a few regions to benefit from economies of scale, which will eventually flow to all regions in the world. The “new economic geography” (NEG) school of thought made a strong case that geographical concentration of economic activities is inevitable and even desirable. Regional concentration happens in an iterative manner, where regions progressively attract productive companies and skilled labor, which in turn makes them more attractive for new companies and workers to join the same region. The key to this school of thought is that circumstantial regional advantages in productivity can trigger divergent geographical concentration paths. This simple mechanism can explain how agglomerations emerge but also how existing ones can strengthen their position to the detriment of the outer regions (Krugman, Reference Krugman1991). In this scenario, mainstream theories predict that processes of inter-regional labor mobility, knowledge diffusion, and trickle-down effects will occur, and income convergence will follow. Thus, policy intervention to favor disadvantaged areas is not necessary (World Bank, 2009). This theoretical framework, implicitly, concerns innovation activities. too. While NEG early proponents dismissed high-tech sectors as a particular case, empirical evidence largely found that concentration is particularly salient in knowledge- and innovation-based economic activities (Audretsch and Feldman, Reference Audretsch and Feldman1996), which was largely attributed to the importance of LKS as a localization force (Jaffe et al., Reference Jaffe, Trajtenberg and Henderson1993; Krugman, Reference Krugman2010).

But several recent economic studies suggest that converging mechanisms might not be working as predicted (Hope and Limberg, Reference Hope and Limberg2022; Iammarino et al., Reference Iammarino, Rodríguez-Pose and Storper2019). If the benefits of successful innovations depend on the location of innovation, patterns of agglomeration have a direct effect on spatial economic development outcomes, and while the concentration of innovation in a few places may benefit the worldwide rate of innovation, it also hinders the innovative prospects of other areas.

If innovation is indeed “sticky,” it is not a pure public good.Footnote ¹¹ Why might this be the case? Beyond market size and talent availability, there are notable positive agglomeration externalities arising from knowledge spillovers (Jaffe et al., Reference Jaffe, Trajtenberg and Henderson1993; Krugman, Reference Krugman2010). The tacit nature of knowledge makes the colocation of innovative firms, academic centers, and talented human resources a more effective environment for these externalities to arise (Crescenzi et al., Reference Crescenzi, Iammarino, Ioramashvili, Rodríguez-Pose and Storpe2019; WIPO, 2019: ch. 1). Information may flow relatively free over the geographical space, but knowledge flows are far less fluid. Trade flows, for instance, may help diffuse routinized and codified information, but knowledge that is not economically ubiquitous generates innovative rents to specific geographical locations (Feldman et al., Reference Feldman, Guy and Iammarino2021). When the codification of knowledge is difficult – that is, knowledge is more tacit – organizations and, especially, individuals have to physically move with the knowledge embedded in themselves to realize these knowledge flows. Movement of and interactions between individuals and organizations are invariably easier in close proximity. Global networks, such as GINs, while allegedly a mechanism of knowledge diffusion, end up reinforcing concentration effects, as different types of workers are differently exposed to offshoring and outsourcing (Autor and Handel, Reference Autor and Handel2013; Gagliardi et al., Reference Gagliardi, Iammarino and Rodríguez-Pose2021). A similar pattern holds for highly skilled migrants holding science and technology jobs, who tend to concentrate in innovative cities (Coda-Zabetta et al., Reference Coda-Zabetta, Chacua, Lissoni, Miguelez, Raffo, Yin, Castellani, Perri, Scalera and Zanfei2022).

As a consequence of the above, some scholars argue that the uneven distribution of science and technology, as well as skilled labor, has translated into rising levels of income inequality (Iammarino et al., Reference Iammarino, Rodríguez-Pose and Storper2019). This phenomenon occurs both inside highly innovative superstar cities, and between them and the rest of the country – the “Left Behind Regions” (Rodríguez-Pose, Reference Rodríguez-Pose2018). Starting in many developed countries from around 1980, this process of economic divergence is known as “the great inversion” (Crescenzi et al., Reference Crescenzi, Iammarino, Ioramashvili, Rodríguez-Pose and Storpe2019; Florida, Reference Florida2017; Kemeny and Storper, Reference Kemeny and Storper2020). Moreover, superstar cities and innovation-dense areas tend to host highly skilled, nonroutinized employment but also attract low-skilled, nonroutinized jobs. In such a scenario, inter-regional migration does not occur, either because of high housing costs in superstar cities, unaffordable for medium- and low-skilled workers, or simply because “skill requirements in these superstar cities tend to be both high and specific” (Kemeny and Storper, Reference Kemeny and Storper2020: 27). Meanwhile, this technological change also reduces employment in many previously dominant manufacturing sectors through automation (Iammarino et al., Reference Iammarino, Rodríguez-Pose and Storper2019).

Another related trend is growing evidence of falling R&D productivity. Recent empirical studies indicate that current technological progress is requiring increasingly more innovation investments (Bloom et al., Reference Bloom, Jones, Van Reenen and Webb2020). This is apparent in the information and communication technology (ICT) industries, for example, where continuously achieving Moore’s law – that is, doubling the number of transistors on a computer chip every two years – requires eighteen times more researchers than it did in the early 1970s. Other industries evidence a similar pattern: Increases in life expectancy or crop yields require much more investments in medical or agricultural R&D. The innovation frontier problems to be solved seem to be increasingly complex and, thus, requiring increasingly larger research teams and specialization (Hidalgo, Reference Hidalgo2021; WIPO, 2019: ch. 2). These R&D productivity trends have subsequent negative effects on overall productivity. Some economic scholars have indeed argued that current innovations boost economic productivity to a much smaller extent than the innovations associated with the Second Industrial Revolution (Gordon, Reference Gordon2018).

How does falling R&D productivity relate to geographical inequality? Falling R&D productivity makes a strong case for pooling resources to optimize the local knowledge spillovers. It might be socially desirable to concentrate innovation resources in a few hotspots in the world, but this may generate, again, a whole set of regional imbalances to be sorted out by policymakers. Regardless of which region or country emerges as the concentration champion, any resulting concentration implies a transition period during which large transfers of resources – including human capital – from noninnovation-dense areas occur. These transitions are usually – if not always – socially costly. There are also within-region imbalances. A side effect of innovation agglomeration is the centrifugal forces pushing less innovative firms and unskilled labor to the periphery of the innovation-dense areas. This is unquestionably one of the causes behind the rising housing prices and widening income disparities in Silicon Valley and more recently in Tel Aviv (Srivastava, Reference Srivastava2018).

2.2.2 Can Diverging Innovation Paths in Economies and Regions Be Changed? Lessons from Asia

We discussed in the previous sections how the geographical concentration of innovation can be instrumental for both regional and economy-wide development outcomes. We also pointed to the social costs associated with such concentration, mainly in terms of not all countries benefiting from the spread of the knowledge economy, and inter-regional income inequality rising even in highly innovative economies. We now turn to evidence on past geographical trends and discuss if and how policy may have played a role.

The global spread of knowledge production documented earlier, the existence of GINs, and the international flows of knowledge were probably necessary but not sufficient conditions for countries to successfully ignite economic development through technological change. Indeed, national innovation strategies and policies played a critical role in making this happen (Crescenzi et al., Reference Crescenzi, Iammarino, Ioramashvili, Rodríguez-Pose and Storpe2019). The most successful examples of technological catch-up are found in Asia. The spread of knowledge production and global networks toward these countries has coincided with the emergence of strong NIS in them. In turn, public R&D spending and public incentives to private spending, among other things, may have played a role in the development of these NIS (Archibugi and Filippetti, Reference Archibugi and Filippetti2018).

In what follows, we first focus on GDP and innovation concentration across countries, where more evidence and policy discussion have consistently emerged. In terms of overall development, there is still considerable variation in GDP per capita levels and growth across countries and within regions of the world. Asia as a region has the highest income per capita outside the Western world. Latin America, Africa, and, to some extent, the Middle East observe a less remarkable evolution (Figure 2.5).

Figure 2.5 Diverging growth paths

Real GDP per capita in 2011US$ (logs), selected economies

Sources: Maddison Project Database, version 2018. Bolt et al. (Reference Bolt, Inklaar, de Jong and van Zanden2018)

More recently, the evolution in GDP per capita has correlated with the increase in S&T outputs. Since the 2000s, Asia has increased its share of total patenting from 32 percent to 48 percent and its share of total scientific publishing from 17 percent to 36 percent. This reflects the rise of China and the Republic of Korea and comes despite the relative decline of Japan’s share of patents and publications. Furthermore, considering their low starting point, most selected Asian economies have seen a remarkable increase in their share of S&T outputs in a few decades (Table 2.1). Within these economies, Turkey, Israel, India, Singapore, and Iran stand out as the largest innovating economies.

However, this does not mean that all cities from successful East Asian economies have followed the same pattern. Table 2.2 looks at the top three innovation-dense areas for selected countries in two different periods and the share of patenting and scientific publication they account for in their respective countries. First, the list of top innovation-dense areas per country barely differs in time and between patents and scientific publications, showing the stability of the concentration phenomenon. Second, in all countries shown, the share of the top three is quite high, ranging from around 20 percent up to more than 100 percent.Footnote ¹² With the exception of Chinese and Indian patenting, the share of the top three patenting and publishing hotspots decreases over time, showing that, within countries, S&T activities seem to be spreading geographically. However, overall, the concentration of S&T output remains relatively high. China and India also show some dispersion trends in scientific publications, but their top three hotspots still hold about a quarter and a third of all national scientific publications, respectively.

Did national and regional policies play a role in such divergent economic performance? At the national level, economic scholars are still quite divided. There is not even full consensus on the source of the divergent paths. Development economists enumerate, among the possible sources of diverging economic performance, insufficient capital accumulation (Young, Reference Young1995, Reference Young2000a, Reference Young2000b), a distorted size of the natural resource sector (Sachs and Warner, Reference Sachs and Warner1995), and declining terms of trade for low value-added goods (Prebisch, Reference Prebisch1962). Alternative theories give more prominence to the role of institutions in economic growth (North, Reference North1990) and their capacity to absorb new technologies (Nelson and Pack, Reference Nelson and Pack1999).

Historically, several policies to solve a suspected natural resource disadvantage and declining terms of trade have been suggested, mostly based on import substitution and state-led industrialization (e.g., Prebisch, Reference Prebisch1962; Singer, Reference Singer1950). They coincided with high sustained returns to capital investment in Asia, with the capacity of absorbing new technologies playing a crucial role (Nelson and Park, Reference Nelson and Pack1999), which in turn set the grounds for rapid capital accumulation. As a synthesis, institutional characteristics related to innovation such as education, R&D, S&T infrastructure, and science–industry linkages can go a long way in explaining why some Asian economies outperformed the rest of the developing world (Freeman, Reference Freeman1995).

2.2.3 What Is the Role for Policy?

In the context of an uneven geographical distribution of innovation, the relevant question for policymakers is what type of policies can stimulate the institutional environment that better attracts external innovation – that is, technological absorption – and, in turn, better generates new technologies. Traditionally, this question was often simplified as to either favor market liberalizing policies or government interventionist ones.Footnote ¹³

When it comes to dealing with the unequal distribution of innovation and income, in both developed and developing countries, a similar trade-off arises between efficiency and equity (Iammarino et al., Reference Iammarino, Rodríguez-Pose and Storper2019). Efficiency reasons may suggest allowing market forces to generate as many agglomerations as possible, which might be the most efficient for the whole economy, with spatial equity occurring through a trickle-down process – for example, through labor mobility (Glaeser, Reference Glaeser2011; World Bank, 2009). Equity concerns may call for greater intervention to directly achieve some redistribution, even at the expense of damaging national champions and overall economic growth. The chosen approach to solving problems of between- and within-country income inequality may determine the chosen type of policies, too: spatially blind policies versus spatially based ones. Again, the former advocates for policies that apply to all locations, without accounting for space and the local context (e.g., regulations ensuring market efficiency), as spatially targeted approaches may deter growth coming from agglomerations (mostly represented by the World Bank’s (2009) report, focused on developing countries). The latter prefers policies highly contingent on context, rooted in the local community and local stakeholders (Barca et al., Reference Barca, McCann and Rodríguez‐Pose2012). One approach is based on the need for full-fledged market forces to let Schumpeter’s creative destruction of firms and sectors to take place. The other bases its logic on the existence of negative externalities hampering the development of such innovative capacity, which only government policy can overcome. Both underlying economic theories are sound, but the practical policy setups can easily differ.

Arguably, any past policy successes in boosting national technological capacity might not be as relevant in the current context. As innovation is increasingly fragmented in innovation-dense metropolitan areas, which astonishingly are more globally interconnected, a different policy toolbox may be necessary. Likewise, the increasing international interconnectivity of innovation hotspots is also the result of national and multilateral policies promoting openness and international cooperation. The institutional setup favoring openness and cooperation should not be taken for granted, as recently public perception has become more skeptical of the benefits of openness (WIPO, 2019: ch. 5).

Any reduced openness of innovation ecosystems will likely affect the rate of knowledge diffusion. Knowledge may not flow across borders as much if researchers cannot move around the world or access scientific journals and patent documents published elsewhere. Limitations to international trade can also impact innovation openness, as a substantial part of technological flows happens through imported parts and components.

However, there are also limits to how widely knowledge can be shared. In fact, we have discussed in Section 2.1 how concentrated the production of new S&T knowledge is within and across countries. Still there are mutual gains for openness, if outward knowledge flows increase economic benefits abroad without reducing the local use. But several opinions perceive innovation as a zero-sum game, where breakthrough innovation can provide a competitive advantage to regions or countries. In the long run, this perspective has little base, as both winning and losing economies will find new equilibria where they are better off. Nevertheless, there are extreme scenarios where such “zero-sum” outcomes could happen (Grossman and Helpman, Reference Grossman and Helpman1991).

In the short run, things might be different. As discussed earlier, regional differences in productivity and innovativeness can lead to divergent paths of geographical distribution within countries of incomes, technology production, high-skilled employment, and wages. Regional competitive advantages can have profound negative effects for some regions in the short run, as it takes time to reconvert human capital to new industrial needs. Indeed, in the United States, as mentioned earlier, regional divergence started to accelerate in the 1980s and 1990s, after decades of postwar convergence (Ganong and Shoag, Reference Ganong and Shoag2017). The same applies to the European context since the great recession in 2008 (Alcidi et al., Reference Alcidi, Núñez Ferrer, Di Salvo, Pilati and Musmeci2018). Moreover, such inequality is also likely to sprout within successful regions. Vibrant innovation hotspots may produce spiked salaries of highly skilled workers, putting upward pressure on local prices, especially for housing, and directly affecting the disposable income of low-skilled workers (see WIPO, 2019: chs. 1 and 5).

How to address such rising regional imbalances is probably one of the most challenging questions that regional policymakers face in current times. Counter-weighing the agglomeration forces of the main national innovation hubs might not be the best policy strategy, as it might affect the national innovation outcomes. More importantly, being realistic, it might not even be possible. Similarly, redirecting inward the international connections of the globally successful regions may not have the desired effect and risks slowing down the technological diffusion toward all hubs in the country.

The key problem might be clear, but its solutions are probably not. Labor, capital, and the companies containing these only gradually move from lingering regions to successful innovation agglomerations. Accelerating the structural transformation of economic activity might reduce imbalances, but the social impact might leave long-lasting scars. Individuals, in particular, are geographically bounded, as they may not have the capacity or willingness to move. Public and other supporting institutions – government agencies, schools, transport, etc. – are also extremely hard to transplant geographically.

Alternatively, policy can be directed to mitigate the agglomeration forces by simply financially supporting declining regions. The beneficial social contention of these policies is without question here, but the long-lasting economic results have less consensus. Yet, there are some relevant lessons worth having in mind when designing such policies (Foray, Reference Foray2015; Rodríguez-Pose, Reference Rodríguez-Pose2018). First, any regional development policy should aim at enhancing existing local advantages by investing in infrastructure, education, and technology. Second, the process of identifying existing capabilities has to rely on inputs from a broad array of local stakeholders. Regional advantages can take several forms – for example, relatively cheap land or labor, existing industrial capabilities, or reputational assets – but, by all means, they have to avoid formulaic solutions transposed from unalike regions.Footnote ¹⁴ Third, any implemented policies should be assessed regularly. By policy design, distortions will arise if the policies are successful, which inevitably imply that there will be winners and losers within the targeted region.

Is there a specific role for IP policies? History and the rather limited empirical evidence suggest that policies related to IP strengthening played a side part in the industrial development process of countries, and even more of regions.Footnote ¹⁵ What could be the channel where IP – especially patents – could affect innovation geographical concentration and spread? This is not as straightforward as many would think about it.

In most cases, IP rights have a national jurisdiction, which can be extended to other national jurisdictions. With a valid IP right within a country, right holders could use their IP to exclude the access of competitors to the technology or brand as much inside a cluster than in the neighboring areas outside the cluster. Internationally, holders can, and often do, use their IP to exclude competitors to produce in or export to protected jurisdictions. Still, there is no evidence of the reciprocal being clearly the case. Patent protection for technologies is low in many jurisdictions, yet these technologies do not diffuse to all countries and regions equally. In other words, the fact that large proportions of patented technologies do not have enforceable rights in other countries does not necessarily generate technological diffusion. This is mostly a result of the different local innovation capabilities to exploit the existing technologies, regardless of whether they are publicly available or not.

Overall, there is ample theoretical and empirical literature on how different standards of IP protection affect technology transfer, foreign direct investment (FDI), trade flows, and domestic innovation in developing economies, which Keun Lee’s chapter in this volume discusses in further detail (see Chapter 4). Two elements are however worth recalling: (i) most patent rights are not protected in poorer economies because of a lack of imitative threat, and (ii) those economies (notably China and the Republic of Korea) that successfully integrated in GINs did so through firms that pro-actively built up patent portfolios (mostly in relation to information technology), mainly to be able to export to rich country markets.

This is not to say that IP cannot be a useful policy instrument to overcome market failures related to knowledge as a public good. Indeed, all the core innovation hotspots show an intensive use of the IP system, both nationally and internationally.

It is also important to mention that IP policies always interact with other public policy tools – namely public funding of R&D activities and infrastructure – aiming at stimulating innovation activity in the private sector. Interestingly, outside the core innovation countries and regions of the world, we do observe a promising increase in scientific activity, but we fail to observe the equivalent use of the patent system. Indeed, in these peripheral regions, most of the patenting results from research produced in universities and research institutions, which are largely publicly funded. It is not always clear to what extent patented inventions are then transformed into commercialized products.

Innovation policies – and IP policies within these – that stimulate the participation of the private sector in the creation of new knowledge and technologies could go a long way toward improving the local innovation ecosystem of these economies. Embedding IP into the targeted regional capability-enhancing policies described earlier is certainly a complementary and feasible strategy. Policymakers should be actively conscious of any cumbersome IP procedures or other barriers preventing local entrepreneurs and companies from using the IP system efficiently. They should also be realistic about policy priorities, as in many cases innovation is hampered by other more pressing matters than IP.

3.1.1 The North

The proponents of strong intellectual property rights often start the international law and policy debate by underscoring the need for international harmonization and effective global and national protections for creators and inventors. A strong international intellectual property regime helps ensure the adequate protection of valuable intellectual assets, most of which reside in the Global North.Footnote ³ As stated in its preamble, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) of the World Trade Organization (WTO) lays out the “adequate standards and principles concerning the availability, scope and use of trade-related intellectual property rights.”Footnote ⁴ This Agreement further provides “effective and appropriate means for the enforcement of trade-related intellectual property rights, taking into account differences in national legal systems.”Footnote ⁵

Although the TRIPS negotiators in the Global North recognized that developing countries might not receive the same distribution of benefits, they readily asserted that strong intellectual property rights would, on balance, benefit the Global South. These rights, they claimed, would help developing countries attract foreign direct investment, increase trade flows, generate jobs and tax revenues, build up human capital, and promote technology transfer and diffusion.Footnote ⁶ To many policymakers and commentators in developed countries, the TRIPS Agreement could be analogized to painful medicine that would provide long-term gains but short-term discomfort. As Daniel Gervais recounted, during the TRIPS negotiations, developing countries “were told to overlook the distasteful aspects of introducing or increasing intellectual property protection and enforcement in exchange for longer-term economic health.”Footnote ⁷

3.1.2 The South

Unlike those in the Global North, policymakers and commentators in the Global South remain skeptical of the benefits provided by strong intellectual property rights, especially in the short term. In the early days of the WTO, many commentators expressed concern that the TRIPS Agreement would lead to a massive outflow of valuable resources from developing countries to their wealthier counterparts. As Jagdish Bhagwati emphatically declared, “TRIPS does not involve mutual gain; rather, it positions the WTO primarily as a collector of intellectual property–related rents on behalf of multinational corporations.”Footnote ⁸ Likewise, World Bank economist Michael Finger estimated that the total rent transfer from the Global North to the Global South could go as high as US$60 billion per year.Footnote ⁹ It is, therefore, no surprise that development economist Ha-Joon Chang famously observed that developed countries sought to use the international trading and intellectual property systems to “‘kick away the ladder’ by which they have climbed to the top.”Footnote ¹⁰

In the area of intellectual property enforcement, for instance, higher standards will require developing countries to divert scarce resources away from other equally important, if not more important, needs – such as the provision of clean drinking water, food, shelter, electricity, schools, and basic healthcare.Footnote ¹¹ As Keith Maskus reminded us:

Given the developing countries’ continuous socio-economic plight and their admittedly more limited benefits from the international intellectual property regime, it is understandable why these countries and their supportive intergovernmental and nongovernmental organizations have been quite vocal about the detrimental effects of the TRIPS-based international intellectual property regime,Footnote ¹³ especially after the expiration of the transition period for developing countries on December 31, 1999. It is also unsurprising to find these countries demanding continuous systemic pro-development adjustments at the WTO, the World Intellectual Property Organization (WIPO), and other international fora.Footnote ¹⁴

In November 2001, the Global South pushed for the establishment of the Doha Development Round of Trade Negotiations at the WTO. Although this round of negotiations is currently at a standstill, developing countries managed to amend the TRIPS Agreement to allow countries with insufficient or no manufacturing capacity to import generic versions of patented pharmaceuticals.Footnote ¹⁵ These countries also successfully secured repeated extensions of the transition period for least developed countries, which will last until July 1, 2034.

At WIPO, developing countries, with the support of civil society organizations, managed to establish a development agenda. Adopted in September 2007, the forty-five recommendations for the WIPO Development Agenda covered a wide range of issues, including the transfer of technology, response to the digital divide, protection of genetic resources and traditional knowledge, and preservation of the public domain.Footnote ¹⁶

Notwithstanding these pro-development efforts, developed countries’ active push for new bilateral, regional, and plurilateral agreements since the early 2000s has led to the adoption of even higher international standards for intellectual property protection and enforcement. Not only do these standards go beyond what many developing countries find suitable, but they are created through nontransparent, power-driven processes with limited voice and representation for the Global South.Footnote ¹⁷ Among the more controversial negotiations were those surrounding the Anti-Counterfeiting Trade Agreement, the Trans-Pacific Partnership (TPP) – which has now become the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – and the Regional Comprehensive Economic Partnership (RCEP).

3.1.3 The Middle

Just as the Global South has become increasingly frustrated by the Global North’s incessant demands for higher international intellectual property standards, a group of middle-income countries seemed to have found a formula for success. Since the beginning of the twenty-first century, these countries have selectively adapted international intellectual property standards, to the extent allowed by the TRIPS Agreement and acquiesced by the more powerful WTO members.Footnote ¹⁸ As a result, this group of emerging countries gradually obtained a greater share of the benefits provided by the TRIPS-based international intellectual property regime. As former WTO Director-General Roberto Azevêdo recalled:

Brazil, China, and India – together with Russia and South Africa making up the BRICS countries – are oft-cited examples. Other fast-growing emerging countries have also received similar benefits from the WTO and the TRIPS-based international intellectual property regime. In a book chapter written a decade ago, I identified the ten largest economies outside the Organisation for Economic Co-operation and Development (OECD) that had a gross national income per capita of less than US$15,000 yet some of the world’s highest volumes of high-technology exports.Footnote ²⁰ Referring to them as “middle intellectual property powers,” that chapter highlighted the considerable economic and technological improvements in the world’s fast-growing middle-income countries (see Tables 3.1 and 3.2). In addition to the BRICS countries, the ten surveyed economies included Argentina, Indonesia, Malaysia, the Philippines, and Thailand.

Based on the 2022 Global Innovation Index, five of the selected countries ranked within the world’s top fifty: China (eleventh), Malaysia (thirty-sixth), India (fortieth), Thailand (forty-third), and Russia (forty-seventh).Footnote ²¹ The rest were within the world’s top seventy-five: Brazil (fifty-fourth), the Philippines (fifty-ninth), South Africa (sixty-first), Argentina (sixty-ninth), and Indonesia (seventy-fifth). Apart from these countries, Vietnam, a fast-growing lower-middle-income country with the world’s fifteenth-largest population, also earned a top fifty spot in the index, placing at forty-eighth. Using the criteria outlined in my earlier chapter, one could certainly expand the list of “middle intellectual property powers” to include fast-growing emerging countries such as Vietnam.

While the intellectual property policy positions of many middle-income countries have remained close to those of other developing countries, some of these positions have begun to shift toward and align with those of their developed counterparts. Not only do the two groups of countries share similar aspirations, but some middle-income countries have also become more willing to embrace, at times reluctantly, higher intellectual property standards in international or regional negotiations.Footnote ²² Cases in point are the positions taken by Malaysia and Vietnam in the TPP negotiations and by China and the less developed members of the Association of Southeast Asian Nations (ASEAN) in the RCEP negotiations. As their economic and technological conditions continue to improve, middle-income countries will only become more active in persuading their developing country allies to support their negotiating and policy positions.

Given these rapidly changing geopolitical, economic, and policy landscapes, it is high time that we reassessed the debate on international intellectual property law and policy.Footnote ²³ Although the North–South debate has been widely used in international relations and has successfully captured the tensions and conflicts between developed and developing countries in the past few decades, that debate does not fully reflect the ongoing developments in the international intellectual property regime. As middle-income countries continue to improve both economically and technologically, and as other low-income countries move up the economic ladder to become lower-middle-income countries, the gap between the Global North and the Global South will drastically reduce. Meanwhile, the challenges confronting least developed countries, which have necessitated the repeated extensions of the TRIPS transition period, will remain. In short, the debate on intellectual property, innovation, and global inequality will become more complex than a simplistic binary North–South debate.

3.2.1 Geographic Inequality

Thus far, the literature on international intellectual property law and policy has been filled with cross-country studies.Footnote ²⁷ This nation-based focus is unsurprising, considering the need for policymakers and commentators to understand, evaluate, and appreciate the divergent policy positions adopted by the surveyed countries. Nevertheless, if policymakers and scholars are to grasp fully the internal policy challenges in each of these countries, they will have to pay greater attention to the vast subnational variations behind the countries’ territorial borders.

Although subnational data remain relatively scarce, recent years have seen national intellectual property offices becoming more active in collecting these data. To highlight the deep geographical divergences within a country, there is no better dataset than the patent data collected by the China National Intellectual Property Administration (previously the State Intellectual Property Office of China).

In 2021, Guangdong, Jiangsu, and Zhejiang – the provinces with the three largest volumes of invention patent applications – had a total of 242,551, 188,241, and 129,821, respectively (see Table 3.3). Meanwhile, Yunnan, Shanxi, and Guizhou (the eighteenth to twentieth provinces) had a total of only 10,293, 10,059, and 9,869, respectively. In the same year, the total number of invention patent grants for Guangdong, Jiangsu, and Zhejiang were 102,850, 68,813, and 56,796, respectively. By contrast, the total number for Yunnan, Shanxi, and Guizhou were 3,643, 3,915, and 2,824, respectively. For both applications and grants, the figures for the more developed provinces were more than twelve times the corresponding numbers for their less developed counterparts. Had we included in the second group those provinces and autonomous regions with fewer than 5,000 patent applications and 1,200 patent grants, such as Hainan, Xinjiang, Ningxia, Qinghai, and Tibet, these two groups would have even starker statistical contrasts.

While the data in this section focus on China, similar geographical disparities can be found in other emerging countries. For instance, Nobel Laureate Michael Spence referred to Brazil as a “dual economy,” noting the existence of “a relatively rich one whose growth is constrained by the normal forces that constrain the growth of relatively advanced economies, and a poor one where the early-stage growth dynamics … just didn’t start, owing to its separation from the modern domestic economy and the global economy.”Footnote ²⁸ Fareed Zakaria also remarked that India “might have several Silicon Valleys, but it also has three Nigerias within it – that is, more than 300 million people living on less than a dollar a day.”Footnote ²⁹ Likewise, Ruchir Sharma described South Africa as “a developed market wrapped inside an emerging market.”Footnote ³⁰

Since 2017, the Global Innovation Index report has included a top 100 ranking of the world’s science and technology clusters. Among the ten middle-income countries listed in Tables 3.1 and 3.2, the 2022 rankings recognized the following subnational clusters: Shenzhen–Hong Kong–Guangzhou (second), Beijing (third), Shanghai–Suzhou (sixth), Nanjing (thirteenth), Hangzhou (fourteenth), Wuhan (sixteenth), Xi’an (twenty-second), Taipei–Hsinchu (twenty-sixth), Chengdu (twenty-ninth), Moscow (thirty-first), Qingdao (thirty-fourth), Tianjin (thirty-seventh), Changsha (forty-first), Chongqing (forty-ninth), Hefei (fifty-fifth), Harbin (fifty-sixth), Bengaluru (sixtieth), Jinan (sixty-first), Changchun (sixty-third), Delhi (sixty-fourth), Shenyang (sixty-eighth), São Paulo (seventy-first), Dalian (seventy-second), Zhengzhou (eighty-third), Mumbai (eighty-fourth), Xiamen (ninety-first), Chennai (ninety-seventh), and Lanzhou (hundredth).Footnote ³¹

As shown by this list of science and technology clusters and the earlier discussion, middle-income countries experience considerable economic and technological variations at the subnational level, similar to the variations they encounter across nations in the North–South debate. To the extent that intellectual property reforms have contributed to improving the economic and technological conditions of middle-income countries, one cannot help but wonder whether such reforms have produced subnational winners and losers. Although the significant variations in many of these countries resemble those documented in the Global North,Footnote ³² the spatial concentration of innovative activities in a few middle-income countries, most notably China and India, has been much more uneven than what is found in Europe and the United States. As Riccardo Crescenzi and Andrés Rodríguez-Pose observed:

Since the adoption of the TRIPS Agreement, critics have frequently and heavily criticized it for ushering in a misguided “one size fits all” – or, more precisely, “supersize fits all” – approach to intellectual property norm-setting.Footnote ³⁴ Although “these critiques tend to end at the national border, with the trust and expectation that a sovereign government will ultimately strike the appropriate balance for its country,”Footnote ³⁵ policymakers and scholars should not ignore the problems a “one size fits all” approach to intellectual property norm-setting would create at the subnational level.

Just as this flawed approach fails to recognize the differing needs, interests, conditions, and priorities of over 160 WTO members, especially those in the developing world, that same approach does not sit well with the wide subnational variations found within each country, even though having uniform nationwide standards does provide some important benefits. Based on the patent statistics provided earlier in Table 3.3, it is just very difficult to imagine that a Chinese province with fewer than 10,000 patent applications and 3,000 grants per year should have the same intellectual property standards as a province that has generated more than 100,000 patent applications and 50,000 patent grants annually. Likewise, uniform nationwide standards are unlikely to work very well in India, which has little patent-based innovation “outside the … innovation hubs of Mumbai, Delhi, Bangalore, Chennai, Hyderabad or Pune.”Footnote ³⁶ Thus, policymakers should begin exploring the benefits of adopting intellectual property policies that accommodate the different economic and technological conditions at the subnational level.Footnote ³⁷

3.2.2 Sectoral Inequality

The second type of inequality that warrants scholarly and policy attention concerns the uneven sectoral developments at the subnational level. Such unevenness can be attributed to a wide variety of factors, ranging from the presence of innovation clusters to the availability of human talents and foreign investors.Footnote ³⁸

In many middle-income countries, it is not uncommon to find a few industrial sectors that are much more innovative and globally competitive than the others. For example, Embraer (Empresa Brasileira de Aeronautica) and Petrobras (Petroleo Brasileiro) have achieved notable success in Brazil.Footnote ³⁹ Likewise, the pharmaceutical and information technology sectors have performed very well in India.Footnote ⁴⁰ Similar observations can also be made about China. Based on WIPO statistics, all of the six Chinese firms that were among the world’s top twenty Patent Cooperation Treaty applicants in 2022 came from the consumer electronics or information technology sector.Footnote ⁴¹

More importantly, the uneven sectoral developments in middle-income countries can be traced back historically. When WIPO published its first World Intellectual Property Report in 2011, that report listed all the top R&D spenders among the middle-income countries in 2009.Footnote ⁴² Among the sectors in which the listed companies concentrated were aerospace, automotive, electrical, engineering and construction, Internet, machinery, mining, oil and gas, pharmaceuticals, semiconductors, and telecommunications. This list not only documented the historical developments in Brazil, China, and India – the only middle-income countries that had companies on the list – but also foreshadowed the similarly uneven sectoral developments in other newly emerging countries that seek to climb up the economic and technological ladder.

In view of the divergent sectoral developments identified in this section, one could certainly ask the same question we explored earlier in the previous section: Does it make sense to have the same intellectual property standards throughout the country? More specifically, should those standards apply equally to those industrial sectors that are globally competitive and those that are only beginning to take off?

To be sure, Article 27.1 of the TRIPS Agreement states that “patents shall be available for any inventions, whether products or processes, in all fields of technology.”Footnote ⁴³ Yet the Agreement refrains from requiring WTO members to offer the same level of protection across all areas of intellectual property rights. Incorporating by reference the Paris Convention for the Protection of Industrial Property (Paris Convention) and the Berne Convention for the Protection of Literary and Artistic Works (Berne Convention), the TRIPS Agreement recognizes the need for different forms or levels of protection in each distinct area of intellectual property right. Even within the same area, the Agreement anticipates that WTO members may need sectoral variations – or “differential treatment.” As the WTO panel observed in Canada – Patent Protection of Pharmaceutical Products:

The recognition of the need for differentiation makes good economic sense. As Paul David reminded us, “economic efficiency would … call for great subtlety and differentiation in the nature and degree of intellectual property protection provided, based on differences among industries in technological and market circumstances.”Footnote ⁴⁵

Indeed, among middle-income countries, for instance, it is common to find some countries performing much better in one intellectual property area than in others. In 2022, WIPO statistics ranked China (first), India (twelfth), Russia (twenty-third), Brazil (twenty-sixth), South Africa (thirty-fourth), Thailand (thirty-eighth), and Malaysia (thirty-ninth) within the world’s top forty based on the volume of Patent Cooperation Treaty applications filed.Footnote ⁴⁶ Of these countries, only China (third), Russia (fourteenth), India (twenty-second), Brazil (thirty-eighth), and Malaysia (fortieth) remained in the top forty when the rankings focused on international trademark applications under the Madrid Agreement Concerning the International Registration of Marks and its related protocol.Footnote ⁴⁷ Thailand and South Africa were fifty-seventh and 127th, respectively.Footnote ⁴⁸

From a policy standpoint, the differing levels of intellectual property protection needed by the varying industrial sectors may raise an additional question concerning whether those middle-income countries with highly divergent sectoral developments could ultimately develop coherent nationwide intellectual property policies.Footnote ⁴⁹ As I observed more than a decade ago, China may “prefer stronger protection of intellectual property rights in entertainment, software, semiconductors, and selected areas of biotechnology to increased protection in areas concerning pharmaceuticals, chemicals, fertilizers, seeds, and foodstuffs.”Footnote ⁵⁰ Although China has since moved up economically and technologically and has now opted for stronger protection in other areas, such as pharmaceutical and biological products,Footnote ⁵¹ its initial reluctance to strengthen protection in all fields of technologies underscores the challenge of formulating a coherent intellectual property policy that is responsive to the country’s highly uneven economic and technological developments.

3.2.3 Income Inequality

The final type of inequality that warrants scholarly and policy attention pertains to the gap in income and wealth between the rich and the poor, which is often measured using Gini coefficients.Footnote ⁵² Drawing on World Bank statistics, Table 3.4 tracks the changes in income inequality in 1995 (the year the TRIPS Agreement entered into force), 2005 (the last year the TRIPS provisions on pharmaceutical patents were allowed to take effect in developing countries), and 2015 (twenty years after the TRIPS Agreement took effect). Considering that Gini coefficients alone may not reveal the full extent of income disparities,Footnote ⁵³ this table also lists the respective figures for the income share of both the top and bottom deciles in each country.

Although the Gini coefficients of countries such as China, India, and South Africa have increased from 1995 to 2005, with the top decile getting a larger share of income, similar figures for other middle-income countries have remained stagnant or fallen. The lack of conclusive evidence on correlation in this area is understandable. While stronger intellectual property protection generated by the TRIPS Agreement reduced affordable access to intellectual property–based goods and services, thereby widening the gap between the rich and the poor, the positive benefits provided by the WTO, trade liberalization, and the entry of foreign investors reduced income inequality.

A considerable increase in income inequality following the adoption of the TRIPS Agreement would certainly be alarming. Such an increase would suggest the adverse impacts of inappropriate WTO rules in intellectual property or other areas. Even a slight increase or a limited decline can still raise questions about why the change did not correspond to the more significantly reduced economic and technological gaps between the Global North and middle-income countries. Based on these developments, one may wonder whether national inequality will become a bigger issue for the latter in the near future, considering the fast-closing gap between these two groups of countries. As Branko Milanovic reminded us:

Likewise, François Bourguignon observed:

In the intellectual property field, the growing attention on national inequality has raised questions about whether the imbalance in the existing international intellectual property regime could exacerbate inequality in income and wealth – the subject of fast-expanding scholarly inquiry.Footnote ⁵⁶ Moreover, because an intellectual property system would inevitably affect one’s ability to use new technology – which has a demonstrated impact on income inequalityFootnote ⁵⁷ – problems in the intellectual property system could create a vicious cycle that would further widen the gap between the rich and the poor within a country. Thus, when policymakers adjust intellectual property laws and policies – for example, to align them more closely with developed country standards – they will have to think deeper about the distributive effects of those adjustments as well as the preemptive or corrective measures that could be introduced to prevent further increasing income inequality.

3.3.1 International Norm-Setting

From the inception of the Paris and Berne Conventions, the international intellectual property regime has focused primarily on developments across nations. Although countries at that time were eager to develop international standards for protecting literary, artistic, and industrial property, the original conventions ended with a modest set of international minimum standards and a provision recognizing the principle of national treatment, which prohibits the discrimination against foreign authors and inventors.Footnote ⁵⁸

This nation-based focus on international norm-setting continues even today despite the adoption of much higher intellectual property standards, such as those enshrined in the TRIPS Agreement and TRIPS-plus bilateral, regional, and plurilateral agreements. Notwithstanding this continuous focus, the specific and detailed standards laid down in these agreements have greatly eroded the policy space that countries have traditionally retained to design intellectual property laws and policies.Footnote ⁵⁹ As a result, policymakers, especially those in developing countries, have great difficulty optimizing the intellectual property system based on local conditions. Should inequalities within the country arise or grow, these policymakers will have less policy space and a tougher time harnessing the intellectual property system to combat those inequalities.

Given the significant inequalities within developing countries that have been documented in this chapter – whether at the geographic, sectoral, or income level – it is high time that policymakers explored more actively the feasibility of putting in place a system that would allow for greater subnational policy variations than what is now found in the Global North. Consider, for instance, the law and policies needed to address geographic inequality within a country. While Article 27.1 of the TRIPS Agreement states that WTO members cannot discriminate “as to the place of invention, the field of technology and whether products are imported or locally produced,”Footnote ⁶⁰ the WTO panel in Canada – Patent Protection of Pharmaceutical Products made clear that “differentiation” does not always amount to “discrimination.”Footnote ⁶¹

Moreover, although countries tend to have nationwide intellectual property standards, a scrutiny of the actual protection on the ground shows subnational variations, which widen even more when one takes judicial enforcement into consideration. Such subnational variations are common in not only the Global South but also the Global North. In the United States, for example, appellate courts continue to disagree over the protection of intellectual property rights, generating what commentators generally refer to as “circuit splits.”Footnote ⁶² A case in point is the protection offered by national trademark and unfair competition laws. Although the legal standards may be the same on paper – that is, based on the federal Lanham Act – they differ at times in practice, not to mention the differing levels of protection offered by state unfair competition laws.Footnote ⁶³

Finally, there is a growing trend for developing countries to establish “free trade zones,” “customs free zones,” or “export processing free zones” to attract foreign investors.Footnote ⁶⁴ These free zones tend to offer “relaxed regulations, limited taxes[,] … reduced oversight … [and] softened Customs control” – features that differ significantly from those in other parts of the country.Footnote ⁶⁵ Thus, even though subnational policy variations seem suspect under WTO rules at first glance, the question on the permissibility of these variations is not as straightforward when one goes deeper into how trade and intellectual property laws currently operate in practice. Indeed, the existence of free trade zones or their equivalents within the WTO framework strongly suggests the possibility for greater subnational policy variations or differentiation.

3.3.2 National Policymaking

Even if the WTO and the TRIPS-based international intellectual property regime do not prohibit subnational policy variations per se, countries may decline to adopt laws that would support such variations. For national unity, legislative convenience, practical considerations, and other reasons, countries may embrace uniform nationwide standards even when those standards do not provide benefits to every geographic region or industrial sector. Indeed, compromises in national policymaking are both common and inevitable.

Nevertheless, policymakers pushing for higher intellectual property standards should pay greater attention to mechanisms that could help strike a more appropriate balance in the domestic intellectual property system. Among the balancing mechanisms that have received wide support in the developing world are limitations and exceptions in copyright law for educational and research purposes; limitations and exceptions in patent law for research, early working, and the development of diagnostics; restrictions on patent protection for microorganisms and diagnostic, therapeutic, and surgical methods; compulsory licensing of vaccines, pharmaceuticals, and medical technologies; support for parallel importation of copyrighted, patented, and trademarked products; limits to injunctive relief; significantly reduced penalties for noncommercial infringement; and measures to prevent abuse of intellectual property rights and other anticompetitive practices.

At the institutional level, policymakers could consider adjustments to make the intellectual property system more supportive of individual creators and inventors and small and medium-sized enterprises. In Chapter 5 in this volume, Daniel Benoliel and Rochelle Dreyfuss proposed adjustments to the patent system that would promote creation and invention in the Global South.Footnote ⁶⁶ Commentators have also highlighted the pro-development potential of utility models, geographical indications, the protection of traditional knowledge and cultural expressions, and other forms of intellectual property rights.Footnote ⁶⁷ As if these proposals were not enough, a growing volume of literature now showcases the positive economic and development benefits of open innovation models as well as alternative incentive frameworks, such as grants, prizes, and advance market commitments.Footnote ⁶⁸ Some commentators have also advanced “new concepts such as ‘frugal’, ‘reverse’ or ‘trickle-up’ innovation,” which are attractive to not only developing countries but also the disadvantaged populations in developed countries.Footnote ⁶⁹

While adjustments to intellectual property laws and policies often provide the first line of reform, policymakers should also consider alternative or supplemental adjustments outside the intellectual property system. For instance, they could develop a well-functioning transfer mechanism that would allow the anticipated winners from intellectual property reforms to share benefits with the potential losers. As Frederick Abbott reminded us about the adverse public health implications of bilateral and regional trade agreements:

To prevent intellectual property reforms from increasing national inequality, policymakers could undertake two general types of complementary reforms to help redistribute benefits: ex ante and ex post.Footnote ⁷¹ Ex ante redistribution could include changes in education and healthcare policies. For example, commentators have called for expanded access to education and reduced educational inequalities.Footnote ⁷² By transferring technology and know-how, education will help create a more level playing field for disadvantaged populations. Indeed, knowledge transfer is so important that commentators have proposed intellectual property reforms to improve the educational environment.Footnote ⁷³

Another ex ante mechanism for redistributing the benefits of intellectual property reforms is in the healthcare area. Healthcare reform, including efforts to make pharmaceuticals and other health products more affordable, will increase the productivity and life expectancy of disadvantaged populations and thereby enable them to amass greater wealth. In relation to China, for instance, I have advocated reform to increase public access to healthcare products and services in anticipation of the country’s active push for the development of national champions in the pharmaceutical sector.Footnote ⁷⁴

Like ex ante redistribution, ex post redistribution – through tax-and-transfer mechanisms, perhaps – could be equally effective.Footnote ⁷⁵ While the provision of subsidies, grants, or tax credits to local creators and inventorsFootnote ⁷⁶ could raise questions about national treatment under the TRIPS Agreement if those benefits would affect the availability, acquisition, or maintenance of intellectual property rights,Footnote ⁷⁷ such provision would be deemed more acceptable if they were available to all creators and inventors – foreign and local alike. Because foreign creators and inventors in the developing world tend to be of a considerable size, the introduction of qualification thresholds in subsidies, grants, and tax credits could help ensure the careful tailoring of benefits to those in need, including local creators and inventors. Meanwhile, by offering identical benefits to similarly situated creators and inventors regardless of their country of origin, these incentive measures would arguably provide “effective equality of opportunities” – a criterion that WTO panels have used to evaluate treaty compliance.Footnote ⁷⁸

Thus far, economists have widely debated whether ex ante or ex post redistribution would be more efficient. The outcome of this analysis will likely depend on the specific conditions of the country involved. Given these diverging conditions, there may also be an additional question concerning what development goals the redistribution policies should prioritize. Fortunately, the U.N. General Assembly provided some helpful guidance when it adopted seventeen Sustainable Development Goals in December 2015 to replace the 2000 Millennium Development Goals. Sustainable Development Goal 10 specifically calls for reducing “inequality within and among countries” – the two types of inequality explored in this chapter. The goals’ supportive plan of action, Transforming Our World: The 2030 Agenda for Sustainable Development, further identified “poverty eradication, health, education and food security and nutrition” as continuing development priorities.Footnote ⁷⁹

3.3.3 Academic and Policy Research

The last set of recommended interventions concerns academic and policy research. Emanating from this chapter’s focus is a line of inquiry targeting the growing inequalities within countries and the benefits and drawbacks of greater subnational policy variations. As noted earlier, because cross-country comparisons have dominated the literature on international intellectual property law and policy, limited research has been devoted to the wide disparities within each country. Academic and policy researchers should therefore devote greater attention to inequality within countries than among countries.

A second, and related, line of inquiry pertains to the linkage between intellectual property and non–intellectual property policies, such as those relating to education, healthcare, tax, and subsidies. A greater exploration and deeper understanding of this linkage will improve our ability to use these policies to redistribute the benefits of intellectual property reforms, including the new knowledge generated from stronger intellectual property protection, from the beneficiaries in the country to the disadvantaged parts. Whether ex ante or ex post, such redistribution will help minimize national inequality.

A third line of inquiry targets specific intellectual property developments in middle-income countries. Although a fast-growing literature has covered such developments in BRICS countries,Footnote ⁸⁰ with additional country-based studies conducted on Indonesia, Malaysia, Thailand, Vietnam, and other emerging countries, there remains a dearth of scholarship on intellectual property developments across middle-income countries. Academic and policy researchers should therefore undertake more extensive research in this area.

A better understanding of developments within and across middle-income countries will likely challenge our prevailing understanding of international intellectual property law and policy, especially in relation to the North–South debate. Studying these countries may also help identify new problems and challenges in the intellectual property area. For example, many middle-income countries continue to face significant piracy and counterfeiting problems even though they have become quite innovative and now experience ever-growing intellectual property activities.Footnote ⁸¹ A case in point is China, which leads the world in not only international patent applications and intellectual property litigationFootnote ⁸² but also in the volume of pirated and counterfeit goods. Thus far, we do not have sufficient theoretical and empirical accounts to explain how countries could cope with intellectual property developments that proceed simultaneously in two diametrically opposed directions.Footnote ⁸³ Greater research on this topic, or other unique issues found in middle-income countries, could therefore help improve our ability to address problems in the international intellectual property regime.

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).

5.1.1 The Kuznets Theorem and Its Demise

Much of the intellectual framework that led to the present-day economic inequality critique emerged as the backdrop of postwar theories put forth by economists Simon Kuznets and John Maynard Keynes.Footnote ¹³ Kuznets used twentieth-century U.S. tax returns to correlate income as measured by GDP per capita with income inequality. The resulting inverted U-shaped curve demonstrated that as per capita income increases, inequality at first increases as well but eventually declines.Footnote ¹⁴ Kuznets viewed the shape of the curve optimistically and hypothesized that as economic development increases per capita income, more people are put in a position to take advantage of the opportunities presented. As a result, Kuznets theorized, inequality would decline over time and stabilize at a tolerable level.Footnote ¹⁵ The Kuznets curve became macroeconomic shorthand for confidence about the social value of economic growth and led to numerous theoretical ramifications. Most notable was Grossman and Krueger’s “environmental Kuznets curve,” which suggests a comparable relationship between income and environmental degradation.Footnote ¹⁶

Keynes presented the second theory, which is that the “economic problem” of scarcity was solvable.Footnote ¹⁷ In his view, the state had gained the capability, authority, and legitimacy to improve economic well-being. While Keynes’s main contribution was that business cycles could be managed by inducing demand through the use of public spending or low interest rates,Footnote ¹⁸ the application of his findings had broader social and political ramifications. Taken together, the optimistic views of Kuznets and Keynes implied that economic inequality would not increase. Moreover, if inequality did grow, there was no reason that a democratic political order would not be able to correct the problem.

Nonetheless, since the early 1970s, economic inequality has risen steadily.Footnote ¹⁹ During the 1990s, Klaus Deininger and Lyn Squire collected data on changes in the Gini index of income distribution in numerous countries and developed an intertemporal correlation between growth and inequality.Footnote ²⁰ They concluded that the correlation Kuznets found between economic growth and inequality is more often disproved than confirmed. Sudhir Anand and R.S.M. Kanbur,Footnote ²¹ as well as others,Footnote ²² including notably Joseph StiglitzFootnote ²³ and Thomas Piketty,Footnote ²⁴ offered comparable critiques that systematically refuted Kuznets’ findings. Concern about the optimistic view of inequality spread from economics to political philosophy, law, and public policy.Footnote ²⁵ It began to engage thinking within the international intellectual property community, as this volume demonstrates.

5.1.2 Economic Inequality, Capital, and Innovation

To date, economic inequality in the United States is still largely explained by unequal income effects. Thus, the perception is that stagnancy within the middle- and lower-income classes – their lack of consumption relative to the rich – hampers sustainable economic growth.Footnote ²⁶ The presence of wealth does not help, as the rich, under this view, are thought to have reached the point of saturation.

This conception of the problem has had a substantial influence on the literature of the economics of intellectual property. Thus, Angus Chu,Footnote ²⁷ alone and with Shin-Kun Peng,Footnote ²⁸ and Christian KiedaischFootnote ²⁹ examined the causal effect of patent policy on inequality. Similarly, Philippe Aghion and his coauthors found that “the top 1% income share in a given U.S. state in a given year, was positively and significantly correlated with the state’s degree of innovativeness,”Footnote ³⁰ and that there is a “causal effect of innovation-led growth on top incomes.”Footnote ³¹ In recent work, researchers demonstrated that intellectual property–based capital accounts entirely for the observed decline of the U.S. labor share measured by wages paid to employees. Wages are otherwise constant for traditional capital. This decline in the labor share arguably reflects the transition that the United States is undergoing to a more knowledge-based economy.Footnote ³²

The effects of intellectual property protection have also been noted. Joseph Stiglitz argued that one effect of monopoly rent regimes is that they impede access to healthcare, which creates inequality and hampers growth more generally.Footnote ³³ Keith Maskus added that an effective intellectual property regime has an impact not only on the incentive to create new knowledge and disseminate it but also on the structure of markets, prices, and distributional equity.Footnote ³⁴ In a vast panel regression analysis, Samuel Adams found that strengthening intellectual property protection has a positive and statistically significant effect on income inequality.Footnote ³⁵

Some scholars further elucidated the connection between inequality and intellectual property. One core observation related to the unique contribution of capital. As Piketty showed, capital is distributed less evenly than labor income, and this factor has a significant impact on overall household income.Footnote ³⁶ Significantly, he defined capital to include land, real estate, equipment, financial capital, and also intellectual property.Footnote ³⁷ According to Piketty, Kuznets’s predictions were wrong because he failed to take into account capital – tangible and intangible – as a central variable. To correct the problem, Piketty developed an updated Kuznets curve for a 100-year period, from 1910 to 2010. According to this curve, until 1955, the share of the top income decile in the United States changed in the same manner as shown in Kuznets’s paper. This share declined from the 1920s to the end of World War II and then leveled out until the early 1980s. However, starting in the 1980s, when deregulation and privatization policies were launched, the share of inequality increased dramatically.Footnote ³⁸ Changes in the strategies for privatizing innovation, primarily through the aggregation of thousands of patents, shifted the sole focus from the value of one patent to the size and diversity of a portfolio. These strategies regularly posed a new and more substantial threat to entry because they forced the targets of litigation to face multiple simultaneous infringement allegations, which raised the cost and difficulty of mounting a successful defense.Footnote ³⁹

Another strand of literature examined the global dimension of inequality as it interrelates with economic development in the South. During the 1980s and 1990s, there was a sharp increase in wage inequality matched by a sharp decrease in the relative demand for less skilled workers. Elias Dinopoulos and Paul Segerstrom provided the common North–North trade explanation for these results, which presumably also applies to income inequality in the South.Footnote ⁴⁰ In this view, income inequality results from trade liberalization, which enhances the benefits of upgrading skills and engaging in research and development (R&D).Footnote ⁴¹ The relationship between skilled employment and R&D activity, as well as between trade liberalization and R&D, received renewed attention during the 1990s. Studies by Alberto Alesina and Dani Rodrik, among others, found a negative correlation between inequality and economic development across the North–South divide.Footnote ⁴² Alesina and others suggest that the effect is largely caused by patterns of foreign investment. After the TRIPS Agreement came into force, developing countries were required to amend their intellectual property laws to conform to its requirements.Footnote ⁴³ This led to a proliferation of intellectual property rights, followed by an upsurge in income inequality in the South. TRIPS conformity had, in short, further increased skilled labor wages and created a wage bias in favor of skilled, relative to unskilled, labor. In this way, compliance with the TRIPS Agreement aggravated income inequality across the development divide.Footnote ⁴⁴ Because higher levels of inequality tend to generate political instability and result in policies that favor income redistribution, inequality also discouraged investment, and, in turn, further slowed economic growth.

Observations that are valid for intellectual property generally can be especially acute for the international patent system, where there are several dimensions to the inequality problem. First, there is a gap in patent ownership between developed and developing countries. Although data gathered by the World Intellectual Property Organization (WIPO) suggest that the divide in the distribution of ownership is gradually narrowing, it is doing so only for the more technologically sophisticated developing countries. Another problem relates to patent commercialization.Footnote ⁴⁵ With regard to the volume of licensing and royalty revenues, most developing countries appear to be drastically marginalized.Footnote ⁴⁶ An additional, and perhaps most important, issue is social surplus. As a general matter, patent owners cannot capture the full value of their advances; some benefit is enjoyed by consumers who acquire the product at a price below that which they would be willing to pay. Furthermore, innovations often have spillover R&D effects: They can prompt collateral developments and lead to follow-on inventions that do not fall within the scope of the original patents.Footnote ⁴⁷ When patents are not granted and inventions are not commercialized in a particular country, the citizens of that country cannot experience these positive externalities. Thus, the divide in patent activity also depresses the social surplus available to the South.Footnote ⁴⁸

5.2.1 Access

The access problem is well recognized in the context of patented products and public health, where the ability of the South to enjoy the benefits of progress in the life sciences is limited by the TRIPS Agreement, TRIPS-plus provisions found in subsequent free trade agreements (FTAs) and various side agreements, as well as procedures certifying implementation.Footnote ⁵⁰ The effect of giving right holders more control over the availability of their advances is illustrated by Ellen’t Hoen’s work documenting the problem of distributing medicines to those stricken with HIV/AIDSFootnote ⁵¹ and by Amy Kapczynski’s and Ana Santos Rutschman’s studies of the delivery of vaccines.Footnote ⁵² Carlos Correa has more generally explored the impact of intellectual property on health in developing countries.Footnote ⁵³

To a considerable extent, changes have been made to deal with this dimension of the access problem. As initially drafted, the TRIPS Agreement provided for transition periods,Footnote ⁵⁴ recognized the right of member states to enact exceptions and limitations and to issue compulsory licenses,Footnote ⁵⁵ and permitted parallel importation.Footnote ⁵⁶ When these provisions proved inadequate, World Trade Organization (WTO) members issued ministerial declarations emphasizing the right to protect health and added (or extended) transition periods several times. The WTO also supplemented the TRIPS Agreement with a provision allowing for the use of compulsory licensing to manufacture pharmaceuticals on behalf of a country that cannot produce sufficient supply for itself.Footnote ⁵⁷ Newer bilateral investment agreements and FTAs are now similarly negotiated to take account of access issues, especially in the health sphere.Footnote ⁵⁸

Less appreciated is the connection between access and innovation capacity – that is, the ways in which patent protection limits the ability of inventors to engage in follow-on innovation, including advances that deal with the technological needs of the South. Thus, while the problem of patents impeding R&D in the North has been addressed, particularly regarding patents on fundamental science and abstract ideas,Footnote ⁵⁹ scant attention has been paid to the ways in which patents inhibit research aimed at producing “good enough” technologies, by the poor for the poor.Footnote ⁶⁰ Such technologies include appliances that work without a steady supply of electricity, farm machinery that operates in challenging environments, and food that meets local taste and nutritional needs and grows under local conditions.Footnote ⁶¹

Experience with seed patenting illustrates the point. At one time, protection for seeds was highly limited; farmers were free not only to save seeds for replanting but also to experiment and develop new plant varieties. Indeed, much of this work took place at public institutions, including land-grant colleges and the U.S. Department of Agriculture, which freely disseminated their inventions.Footnote ⁶² The advent of patent and patent-like protection for seeds may well have spurred new agricultural developments.Footnote ⁶³ However, the availability of exclusive rights has also led to higher prices for farmers (and presumably consumers) and concentrated the industry. Furthermore, because these rights are largely held by patent holders in the North, the availability of protection has exacerbated the general problem of inequality.Footnote ⁶⁴ Significantly here, these rights have also imposed obstacles to breeding plants that grow well under conditions unique to developing countries or that meet their special needs.Footnote ⁶⁵ These are generally not markets rich enough to appeal to patent holders. Nonetheless, the patents can block needed development.

An example is the effort to deal with vitamin A deficiency, which caused morbidity and blindness in much of the South, through the development of a rice rich in this nutrient. Scientists interested in breeding so-called Golden Rice were, however, confronted with multiple patents that complicated their research and potentially barred commercialization.Footnote ⁶⁶ While the Golden Rice problem was solved through public–private partnerships, similar problems have been experienced in achieving other advances, such as farm machinery addressing the climate and soil conditions in poor countries; not all of these problems have proved amenable to the Golden Rice solution.Footnote ⁶⁷ In addition, in many countries that could benefit from Golden Rice, there were no patents to block dissemination. However, as patenting spreads even to small markets through mechanisms such as the Patent Cooperation Treaty and regional agreements such as the European Patent Convention, and as FTAs require the enactment of stronger protection than required by the TRIPS Agreement, R&D and commercialization are likely to encounter more obstacles in the future.Footnote ⁶⁸ We may be seeing such problems at the time of this writing, in connection with developing cures and vaccines for the COVID-19 pandemic.Footnote ⁶⁹

5.2.2 Incentives

The incentives problem is no less worrisome. The number of patents is increasing, as are technical publications and Internet disclosures.Footnote ⁷⁰ Especially as the world moves to an absolute standard of novelty,Footnote ⁷¹ these disclosures function as prior art. They can render an invention nonnovel or obvious (noninventive) even when they are not, as a practical matter, available in the South. Moreover, because the standards for disclosure and obviousness depend on the person of ordinary skill in the art, these materials can block patents despite being insufficient to teach those with little absorptive capacity how to benefit from the invention or improve upon it. While local working requirements might remedy the absorption problem by providing opportunities for locals to learn by doing, international agreements have, over time, diminished their availability.Footnote ⁷² Indeed, the TRIPS Agreement arguably abolished their use.Footnote ⁷³

Another problem was noted earlier: Developed countries have an important advantage on the demand side. Because the wealthy are willing to pay for technologically advanced products, the patent system offers rich opportunities for returns on “high tech” investment. A strong middle class is likewise beneficial, for its combined purchasing power similarly creates the potential for significant rewards from inventing even standardized products. Developing countries lack these advantages. Thus, the potential reward is likely to be too small to encourage patent holders in the North to exploit their patents and build on or adapt them for use in the South, or even to undertake the cost of negotiating licenses to allow others to do so.Footnote ⁷⁴

To make matters worse, solutions to the access problem work at cross-purposes with solutions to the incentives problem. For example, the TRIPS Agreement and subsequent Ministerial Declarations or Decisions dealt with access by creating a series of defenses to infringement. Recently, guarantees provided by international investment agreements have also been relaxed.Footnote ⁷⁵ NGOs, intergovernmental organizations, and activists have supplemented these responses with advice on how to meet TRIPS obligations with minimal levels of protection,Footnote ⁷⁶ as well as through the propagation of counter-norms that emphasize the right of everyone to, for example, “share in scientific advancement and its benefits.”Footnote ⁷⁷ While that effort may go a long way to solving the first problem, it exacerbates the second one in that these measures further reduce the potential rewards available under the patent system.

5.3.1 Nature of the Exclusivity

While patent law is the primary regime for protecting technical innovations, it is not the only mechanism. Plants, for example, can be protected by the International Union for the Protection of New Varieties of Plants (UPOV) system;Footnote ⁷⁸ many countries have, among other approaches, long recognized petit patents, patents of importation, patents of improvement, certificates of addition, and utility models.Footnote ⁷⁹ Even today, countries are considering or experimenting with new forms of protection, including commercialization patents,Footnote ⁸⁰ supplementary protection certificates (SPCs),Footnote ⁸¹ and data and market exclusivities.Footnote ⁸²

A nation interested in encouraging technological development with exclusive rights should consider each of these alternatives. As described in more detail later in the chapter, modifying the patent system is one approach. It could be altered by changing the landscape for determining novelty and nonobviousness; it could also be designed to recalibrate incentives automatically as domestic inventors increase in technological sophistication. The patent alternative offers a potentially substantial benefit. It has the advantage of socializing actors within the regime to the predominant form of protection internationally. Thus, in addition to incentivizing innovation, it would help create a class of local investors, examiners, and patent lawyers, as well as new jobs and training opportunities. However, patent regimes require a country to devote resources and personnel to an examination system, and they require innovators to expend efforts on patent prosecution. Other types of exclusivity require less of the system and its participants because they can be based on mere registration. Although rights under these regimes typically last fewer years and include more exceptions and thus return less of a reward, they may nonetheless be sufficient to spur local innovation.

A close study of the behavior of “Tiger” countries and their Asian predecessor, Japan, suggests that reliance on subpatent exclusivities is more prevalent than might be imagined and that it has proved to be a critical factor in moving countries to the technological frontier. As Nagesh Kumar’s work showed, strong intellectual property rights adversely affect the absorption of knowledge spillovers; countries that started with “soft” regimes that favored local inventors prospered.Footnote ⁸³ For example, prior to the TRIPS Agreement, Japan explicitly designed its patent policy to favor domestic inventors and encourage the absorption of spillovers from foreign activities. It, along with Korea and Taiwan, encouraged a patenting culture with a utility model and industrial design system that allowed and motivated local inventors to modify inventions made elsewhere. Until Japan developed technological capacities on par with those of developed economies, it used longer pendency periods for foreign inventors coupled with efforts to narrow foreign claims. It also adopted other techniques to cut down on foreign patenting in favor of domestic applicants. Korea tolerated lax enforcement (and multiple complaints from the United States) to facilitate duplicative imitation that eventually led to a strong technological sector. In sum, Kumar stated:

Systems such as these not only provide a better match between protection and technological capacity, but they are also fully consistent with the TRIPS Agreement. That Agreement requires patent protection only for advances that meet the standards of novelty and nonobviousness. And as can be seen by its incorporation of the Paris Convention’s reference to “patents of importation, patents of improvement and certificates of addition, etc.,”Footnote ⁸⁵ the TRIPS Agreement envisions other forms of protection as well.

5.3.2 Landscape of Prior Art

Countries that wish to focus exclusively on patenting could make changes to that system in order to increase their technological capacity. As suggested earlier, one problem developing countries face is that the move to an absolute standard of novelty for patent protection allows the North to shower its art (patented or not) on the South and undermine patent incentives to engage in follow-on innovation. The TRIPS Agreement does not define novelty; instead, it gives members a degree of flexibility to interpret the term for themselves.Footnote ⁸⁶ Thus, members could break the novelty trap by defining novelty relatively and consider as prior art only that which is accessible locally. Thus, a country could include in prior art only inventions that are practiced locally or protected by domestic patents (or published in a locally accessible publication). Those who import (or reinvent) knowledge that is only accessible abroad, or adapt that knowledge to the local market, could then take advantage of the domestic patent system and earn returns on their efforts. At the same time, the fear of local patenting might encourage foreign originators to engage in activities that qualify their advances as prior art. Either way, more inventions would be available locally, presumably at a price set by local demand (or by the collective demand of all the countries that altered the landscape in this way).Footnote ⁸⁷ Indeed, a country could go further and limit the landscape of prior art to inventions actually practiced locally.

To create even more space for local inventors to operate, the bar of the inventive step could also be lowered. Instead of measuring the knowledge of a person of ordinary skill by global standards, the inquiry could be limited to the inventive capacity of domestic scientists. That would permit a local inventor to acquire protection for adaptations of foreign inventions even when the changes are ones that the North might consider too modest to merit protection. In fact, this is the approach taken to the diversity of technological sophistication among technological sectors. As Dan Burk and Mark Lemley noted, when a new technology emerges, the knowledge in the area is low, and it is easier to acquire protection. The ease with which patents can be obtained encourages more innovators to enter the field; as the sector matures, more is required to obtain protection.Footnote ⁸⁸ In the same way, measuring technological capacity locally would encourage more inventive activity and ultimately lead to an increasingly sophisticated pool of domestic innovators.

5.3.3 Beneficiaries

Under the TRIPS Agreement, a member state is required to offer to the nationals of other member states “treatment no less favorable than that it accords its own nationals with regard to the protection of intellectual property.”Footnote ⁸⁹ It must also give most-favored-nation status to the nationals of other members of the Agreement.Footnote ⁹⁰ Accordingly, a nation that restructures its system of TRIPS-protected rights must provide the same rights to the nationals of other WTO member states.

Countries that comply with this obligation by offering the same protection to foreigners and locals might benefit from encouraging innovation in ways that meet local needs.Footnote ⁹¹ That would improve the domestic availability of the fruits of technological advancement. But if foreigners are more technically adept than locals, they could crowd out domestic innovators. Accordingly, the system would not significantly improve the country’s own technological capacity. Locals would pay higher prices for protected innovations without enjoying the benefit of encouraging domestic technological growth. Countries may therefore wish to limit these new (or newly configured) rights to their own innovators. Such an effort is not entirely unprecedented: As noted earlier, Japan slowed examination for foreign inventors, thus improving the chances for domestic innovators to obtain patent rights.

One approach for dealing with the incompatibility of this approach with the TRIPS Agreement’s bar on discrimination may be to limit the exclusivities available under the new regime to nationals from any country that is categorized as developing – for example, to those with a GDP below a certain level. This would avoid a complaint of de jure discrimination because nationals of any country that fits the category would qualify for protection. However, a de facto claim is another matter: A WTO panel found that when the qualification for protection is too tightly associated with nationality, it can constitute discrimination.Footnote ⁹² Yet the observed persistence of technological inequality suggests that the concept of nondiscrimination requires reconceptualization. As the U.N. Conference on Trade and Development (UNCTAD) once cautioned, “equality of treatment only makes sense when the parties involved are in a general way equal; when they are not, equality of treatment simply gives the stronger party unlimited freedom to utilize his power at the expense of the weaker party.”Footnote ⁹³ The nondiscrimination provision of the General Agreement on Tariffs and Trade applies to goods only when they are alike.Footnote ⁹⁴ We join Henning Grosse Ruse-Khan in urging that under the TRIPS Agreement, the same analysis should apply to nationality. Thus, a member state should be permitted to differentiate among nationals when they are from countries that are different along a significant axis, such as wealth or technological capacity.Footnote ⁹⁵