International Agreements and Development Policy

Intellectual Property and Innovation in Development

Manuel ‘Butch’ F. Montes

University of the Philippines

Econ 198 2nd Semester, SY 2020-21

Major Issues – State policies on innovation & patents

• Dominance of patent granting

• Highly flawed, expensive, inefficient, and inequitable
approach
• Patent approach has been globalized.
• Every country has to design its own technology upgrading
policy.

? Accept passively the restrictions from the global regime

? Rely on foreign investments
? Build own capability

Manuel ‘Butch’ F Montes | [Short presentation title] | 2nd Sem, SY 2020-21 | 2

Intellectual property and Innovation

1. Understanding motives for invention in designing

incentives
2. Will innovation stop if patent protection weakened or
eliminated?
3. Will global sharing of innovation stop if intellectual
protected only through national protection but not
protected under international obligation?

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Innovation as a public good

• Oral rehydration therapy | life-saving technology especially in poor

countries | diarrhea in children
• Water bottle + drinking water + modest amount of salt and sugar
• Non-rivalrous: sharing the idea with one more person reduce ability of others
to use the technology
• In this case, technology is low cost (average cost is zero)
• Public Good: Social return exceeds the private return | undersupplied
• For some, eg. oral rehydration: Social return exceeds (marginal) costs
• Other public goods | such infrastructure, public health | have non-
zero marginal and average costs
• Research costs with uncertain outcome

• Government interventions in promoting innovation in the arena of

“Impure” policies
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Patent for an dextrose application of oral rehydration

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Innovation as a public good

• Government interventions in innovation protections in the

arena of “Impure” policies
• There are known and yet “unknown” diseases (diseases like
Covid-19) that can suddenly become a threat.
• For known diseases: Risky research costs: (global) market
can be estimated in advance
• Reliance on private sector-led medical innovation often
means that diseases that affect poorer populations, even if
a large proportion of the human population are under-
researched and neglected.

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Intellectual property and Innovation

▪ Case for intellectual property

▪ Creation of intellectual property
• Social creation for social purpose (like introduction of limited
liability corporations)
• To encourage innovation by compensating the inventor
• To make sure that innovations are shared with society
▪ Should intellectual property be protected by international
obligations?

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Intellectual property and Innovation

• Patents as method for achieving social objectives

• Grant monopoly right of use to inventor
• Dutch experience
• James Watt and the steam engine
• Other approaches to monopoly-of-use Prizes, recognition,
public awards - chronometer
• Purchase by society (government) for broader use
• Create patent pools
• Compulsory licensing
• Parallel imports

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Dutch early patent law, then repeal

• January 1817 patent law | repealed 1869 | restored 1912

• Nederlandse Maatschappij ter Bevordering van Nijverheid,
the Dutch Society for the Promotion of Industry 1854
report
1. Patents are NOT the best means for securing inventors a
just reward for their effort. The committee contends that
a genius does not need monetary incentives and that
most inventions in history had occurred without patent
protection

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Dutch early patent law, then repeal

2. No need for exclusivity to enable inventors to charge

higher prices for their products, to recoup the costs for
putting new inventions on the market. Head-start profits
that inventors could make would generally suffice to
financially reward them, especially since imitators, who
must also incur costs, will usually not enter the market
unless the products prove to generate a reasonable
turnover.

For application to most recent sectors, see also Boldrin, Michele

and David K. Levine (2013) “The Case against Patents.” Journal of
Economic Perspectives, Volume 27, Number 1, Winter, 2013, pp.
3-22.

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Dutch early patent law, then repeal

3. Patent does not induces inventors to disclose their

inventions to the public as opposed to keeping them
secret. Only those who were unable to keep their
inventions secret and who faced the risk of instant
competition would seek patent protection. The benefits
of patents thus accrued too one-sidedly to inventors who
sought to eliminate competition, without giving the
public anything in return.

• Switzerland in 1854 has a thriving industry but no patent

protection

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Intellectual property and innovation

•19th century countries without patents had same rate of innovation as

those with patents
•Those without patents specialized in inventions most easily kept
secret
•Wright brothers kept secret until obtaining patents and then
monopolized – prevented innovation and widespread application for
20 years

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Intellectual property and Innovation

• Case against Patents

• No empirical evidence that patents increase innovation and
productivity
• No evidence number of patents correlated with greater
productivity

• Historically, initial “eruption” of small and large innovations

leading to the creation of new industry is seldom born out
of patent protection
• chemicals, cars, radio, TV, PCs

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Patents as Barriers to New Sectors

“If people had understood how patents would be

granted when most of today’s ideas were invented
and had taken out patents, the industry would be at a
complete standstill today.. . . A future start-up with no
patents of its own will be forced to pay whatever the
giants choose to impose” Bill Gates, 1971

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Intellectual property and Innovation

• Grant of monopoly of use

• Modern problem: modern products composed of many
different components
• Digital companies are using each other’s patented technology
• And suing each other to force to share some of their profits with
the inventing company
• Grant of monopoly as substitute for costly trade secrecy
and vs spread of ideas
• Patent only those ideas which are leaked before patent expires
• Not patent those ideas whose secret can be kept
• Info inside current patent documents hard to create
functioning device

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Patents as defensive tools

• Patent trolls – active in patent litigation

• Buying and selling patent portfolio not for application and
development
• For defense against litigation
• Barrier to entry
• Vast bulk of patents “useless” and do not represent any
innovation at all
• Firm without a product but with a patent can claim profits
from a share of the market

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Patents as Anti-Competition Tool

• Patents as dead hand of dying dominance

• Start of new industry: bring different versions of product to
market
• High elasticity of demand
• Shared interest in innovating to lower cost/increasing volume
• Shake-out -> Rent-seeking
• Sectoral maturity leads to taxing consumers, new entrants,
potential competitors –
• Does not lead to more open adaptations and further
development
• Appeal of intellectual property protection

Manuel ‘Butch’ F Montes | [Short presentation title] | 2nd Sem, SY 2020-21 | 17

Pharmaceuticals

• Monopoly pricing:
• Small increases in profits – positive impact
• In case of pharmaceuticals – rapidly rising welfare losses, human
life, from lack of access to medicine – negative impact
• Eg. Antibiotics – CIPRO, etc.
• $20 million profits
• $300 million in welfare losses in poor countries

• High cost of litigation to protect patents

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Social aspects of patent systems

• Monopoly-based design problem:

• Not being a “property right” but a “monopoly grant” patent
possessor apply initial rents in order to increase their monopoly
control
• Until all potential rents are extracted or dissipated in lobbying
and defensive costs
• Regulatory capture: consumers/users not represented /
game mainly between potential patentees and patent
office
• Lenient patent granting

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National Innovation Systems

Source: United Nations (2011) Great

Green Technological Transformation.
United Nations, Sales No. E.11.II.C.1,
New York .
https://www.un.org/development/de
sa/publications/world-economic-and-
social-survey-2011-the-great-green-
technological-transformation.html

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National Innovation Systems

• Basic research
• Universities, research institutes (eg. NIH)
• Development and demonstration
• Government institutes and private companies
• Market formation and Diffusion
• Commercialization – cheap enough for users and against
competing methods for the same activity
• Dispersion of uses in variety of sectors

1. Government role in facilitating coordination and sharing

of ideas
2. Government role in dealing with external constraints
from international intellectual property regime
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 Policy Issues

Costs, Intl. Prices, Competition

Supply International
Capacity Environment

Investment: Intl. Treaty Obligations

Private and Public
Participation in intl.
Efficiency: through rule setting and
Competition, standards
Technology,
Regulation

Economic
Policy
(Unilateral)
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Valley of death financing

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