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  April 30th, 2017 | Written by

How Intellectual Property Protection Incentivizes Innovation

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  • Countries with stronger IP protection have more creative output.
  • Stronger IP protection leads to job creation and GDP growth.
  • International trade agreements TPP and RCEP addressing IP protection and enforcement standards.

World Intellectual Property Day was marked last week, an important moment to consider the critical relationship between intellectual property (IP) protection and innovation. Just as we have in years past, the Information Technology and Innovation Foundation (ITIF) took a deeper look at the latest data on the strength of IP laws and the amount of innovative, creative output around the word, and found that overall, countries with stronger IP protection also have more creative output, even at varying levels of development. The results show why countries need to support efforts to ensure international rules address new and emerging IP issues in order to ensure that firms and countries are maximizing their innovative and creative potential.

ITIF compared the strength of IP laws and the effectiveness of anti-counterfeiting laws based on data from the World Economic Forum’s Global Competitiveness Report 2016-17 with creative output scores from the Global Innovation Index 2016, a report from Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO). The Global Innovation Index combines three measures of creativity. First, “intangible assets” combines measures of domestic and international trademark applications and rates of information and communication technology adoption. Second, “creative goods and services” measures trade in creative services and output by a nation’s media, printing and publishing, and entertainment industries. Finally, “online creativity” measures a nation’s top-level internet domains, as well as the number of YouTube videos uploaded and Wikipedia pages edited.

The key finding is that there is a strong positive correlation (0.74) between the strength of IP protections and countries’ score on creative outputs, based on a sample of 119 countries (only those countries which had all the necessary data). ITIF assessments in 2016 and 2014 produced similar results of 0.70 (from a sample of 127 countries) and 0.72 (from a sample of 136).

Some advocates that are opposed to IP protections claim IP only benefits high-income countries. To test whether the correlation was solely based on income, the data were divided between high-income (>$20,000 GDP per capita), middle-income ($5,000-$19,999 GDP per capita), and low-income nations (<$5,000 GDP per capita). The sample has 33 high-income countries, 37 middle-income countries, and 49 low-income countries. Similar to past years, the relationship between IP protection and creative output was strongest in high-income countries, with a correlation of 0.51, but it was still positive for both middle-income (0.19) and low-income countries (0.22). In other words, even for the poorest nations, stronger IP protection was associated with stronger creative outputs, which in turn lead to job creation and GDP growth.

As in past reports, the Global Competitiveness Report 2016-17 shows that it’s difficult for countries to score well in creative outputs without ranking highly in intellectual property protections. The average level of IP protection for the top 20 most-creative countries (5.85 out of 7) is well above the average (4.37). Delving deeper, the analysis shows that the 50 countries with above average total creative outputs also have above average intellectual property protections (5.01).

Setting New International Norms: Analyzing IP, Creative Output, and Trade Agreements
At the multilateral level, the World Intellectual Property Organization’s Copyright Treaty sets a basic framework for its 95 member-countries to enact to prevent unauthorized access to and use of creative works on the Internet, such as for computer programs and databases. Along with the Performances and Phonogram Treaty, it comprises WIPO’s “Internet Treaties,” which aim to update and supplement core international IP agreements—the Berne Convention and Rome Convention—which were adopted or last revised over 50 years ago.

This year’s analysis shows the value of the Copyright Treaty’s basic levels of digital IP protections. Our analysis included 88 of the 95 WIPO Copyright Treaty members. These nations had a level of IP protection and creative output above the average for the entire sample: 4.5 vs. 4.37, and 93.5 vs. 87.7, respectively. Meanwhile, non-members (the sample included 31) had an average level of protection and creative output well below the average: 4 vs. 4.37, and 71 vs. 87, respectively. These results show why bilateral, regional, and multilateral efforts to update the issues addressed by the Copyright Treaty and other digital IP issues should be supported. Given that this treaty was negotiated in the 1990s and came into force in 2002, there are obvious needs for further updates given changes in technology and the digital economy.

Efforts to set higher common levels of IP protection and enforcement have mainly occurred at the regional level, especially in the Asia-Pacific, with the Trans-Pacific Partnership (TPP) leading the way and the Regional Comprehensive Economic Partnership (RCEP) addressing this as well.

Unfortunately, the future of the TPP is in serious doubt given America’s withdrawal, but if the other 11 members were to decide to implement the agreement, it would hopefully include the TPP’s high-standard IP chapter. Still, the TPP’s developing-country members (Malaysia, Vietnam, and Peru) need to make significant progress to close the gap to developed-country-member levels of protection and creative output. In 2016, out 119 countries, Malaysia ranked 27th in IP protection and 42nd in output (both improvements from 109th and 34th in 2015, which had 127 countries), Vietnam ranked 92nd and 51st (up from 82nd and down from 54th), and Peru ranked 100th and 67th (slightly up from 96th and 61st).

RCEP shows an even bigger gulf between leaders and laggards. The 16 members of RCEP include developed countries with high-standard free trade agreements and IP systems (such as Australia, Singapore, and Korea), but also a broader range of developing countries that do poorly with IP protection and creative output (such as Cambodia, China, India, the Philippines, and Thailand). Developing-country members of RCEP have a below-average level of IP protection (4.05) and total creative output (72.8). In reality, this underperformance is likely much worse given Laos and Myanmar are not included in the sample due to a lack of data. The membership complicates the potential for a high-standard IP chapter. While China has made efforts to improve its domestic IP and innovation systems, it has likewise sought to steal or coerce IP from foreign firms and has failed to push for strong IP as part of past trade agreements. Other RCEP members have also not prioritized IP in their past trade agreements, so the level of ambition in RCEP is going to be much lower than TPP if these members prevail over the countries with well-developed IP systems, such as Australia, Japan, Korea, and Singapore, especially if the RCEP succumbs to the same misguided scare campaign as the TPP’s IP chapter. However, IP is just one of many divisions that could prolong, or ultimately doom, RCEP’s future.

Correlation Does Not Equal Causation, But IP is Key to Incentivizing Creativity and Innovation
Of course, correlation does not equal causation, and enacting higher levels of intellectual property protections will not always automatically lead to greater creative output. IP does not function in a void without other policy support. An OECD literature review and empirical study found that efforts to strengthen IP protections over the last two decades had a positive economic impact but that variations were due to certain complementary factors, such as human capital, legal and institutional conditions, and fiscal incentives.

This all leads back to a central point worth remembering this World Intellectual Property Day: Whether a country is trying to catch up to the technology frontier, or push it ahead, stronger intellectual property protections are crucial to incentivizing the creativity and innovation that helps make this happen. Given this, countries—at all levels of development—that want to spur innovation need to support efforts to ensure international norms reflect the modern challenges facing IP protection and enforcement and help set better, shared IP rules in order to ensure that firms and countries are maximizing their innovative and creative potential.

Nigel Cory is a trade policy analyst at the Information Technology and Innovation Foundation.