Part I - Theoretical, Empirical, and Policy Issues

1 Intellectual Property Rights and Inequality Economic Considerations

Keith E. Maskus

Introduction

Growing economic inequality in many countries, perhaps especially in the United States, has become a central issue for scholarly analysis and policy debates. Numerous important treatises analyze the dimensions of the problem, ranging from educational inadequacies to tax and subsidy policies biased toward favoring the wealthy.¹ Concerns about the potential effects of income and wealth inequality include social stratification, a reduction in intergenerational economic mobility, diminished incentives to invest in innovation and human capital, and possibly violent political polarization. Elements of such factors loomed large in the U.S. presidential election of 2020 and similar elections elsewhere.

There are multiple and interrelated sources of inequality, which vary with national and local circumstances, making it a highly complex issue that defies straightforward categorization. Numerous determinants have been identified, including the following primary factors. First, economic globalization through trade and investment liberalization, falling trade costs, and offshoring of jobs through supply chains has placed considerable downward pressure on the real wages of lower-skilled workers in the advanced economies, exemplified most starkly in the impacts of the so-called China Shock in the United States.² Second, technological progress in automation and robotics has displaced workers performing relatively routine tasks, even if these workers are relatively skilled.³ This is just one form, among many, of “skill-biased technical changes” that have increased wage gaps between the college-educated and others in advanced economies.⁴ Third, the degree of unionization has fallen considerably in the United States and similar countries, reducing the workers’ bargaining power and wages. Fourth, market concentration has increased markedly across most industries, raising the pricing power of the largest producers and generating above-normal profits that find their way into higher wages for managers and skilled workers while supporting increases in stock valuations. This outcome is consistent with the emergence of “superstar managers” in certain countries who command exceptionally high compensation packages.⁵ Finally, at least in the United States, educational attainment has lagged the demand for technical skills, raising the relative wages of technical workers (Goldin and Katz, 2008).

Almost completely unstudied, at least by economists, have been the roles played by intellectual property (IP) protection in the emergence of inequality. It is easy to make intuitive claims about this question. For example, it is reasonable to argue that the exclusivity rights in IP raise the returns to invention, innovation, and creativity, all of which tend to be skill intensive. Moreover, patents, copyrights, and trade secrets have the potential to establish temporary but significant market power in specific industries and products, which seems correlated with rising market concentration, profit shares, and manager salaries. In these ways, strengthening IP rights ought to be a force for growing income and wealth inequality. There are offsetting factors, however. For example, to the extent that IP protection increases the rate of product innovation and encourages the diffusion of new goods and technologies, consumers benefit from greater variety and lower average prices. Such outcomes can be intricately linked to other policies, such as market opening and research and development (R&D) support. Whether these outcomes increase or decrease inequality is an empirical question about which we have little information. It is also important to note that inequality may be a determinant of innovation incentives, lending a two-way relationship between distributional disparities and support for IP rights. In brief, the entire question of how inequality interacts with IP is open for much-needed economic research.

These issues are addressed in this chapter, which proceeds as follows. The next section offers a brief overview of trends in basic data regarding inequality and IP rights across countries, followed by a review of extant empirical analysis of correlations between them. The second section elucidates the potential theoretical relationships between IP and inequality, moving from intuitive to subtle. It also considers recent microeconomic empirical studies of such questions, which are informative but far from definitive. The final section concludes with a call for additional work in this nascent area.

1.1 Basic Data Analysis

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.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.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.

Table 1.1 Gini coefficients across country groups, 1990–2015

Income group	Gini Disposable: simple average				Percent change	Gini Market: simple average
	1990	2000	2010	2015		1990	2000	2010	2015	Percent change
High (28)	28.8	30.0	30.7	30.8	6.9	42.9	45.3	46.7	46.7	8.9
Upper-Middle (12)	38.5	39.4	38	37.4	−2.9	48.2	49.8	49.4	48.6	0.8
Lower-Middle (35)	37.3	40.1	38.6	37.7	1.1	43.3	45.7	44.5	43.7	0.9
Lower (22)	40.1	42.3	42.5	42.1	5.0	45.2	46.7	46.6	46.2	2.2
All (97)	35.6	37.6	37.1	36.7	3.1	44.2	46.3	46.2	45.7	3.4
United States	34.6	35.8	37	38.2	10.4	46.6	47.7	50.7	50.9	9.2
China	32.2	38.6	43	41.1	27.6	34.7	40.8	46.7	46.9	35.2

Income group	Gini Disposable: pop-weighted average					Gini Market: pop-weighted average
	1990	2000	2010	2015	Percent change	1990	2000	2010	2015	Percent change
High (28)	30.4	31.8	33.0	33.5	10.2	43.8	45.8	48.0	48.1	9.8
Upper-Middle (12)	48.0	48.5	45.4	44.5	−7.3	54.3	54.9	52.8	51.3	−5.5
Lower-Middle (35)	34.4	39.5	41.6	40.5	17.7	37.9	42.6	45.5	45.4	19.8
Lower (22)	37.1	40.0	43.8	44.0	18.6	41.4	43.7	46.6	46.6	12.6
All (97)	35.6	39	41.2	40.8	14.6	41.3	44.5	46.9	46.7	13.1

Source: Standardized World Income Inequality Database and author’s calculations

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.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.

Table 1.2 Pretax income shares of top 10 percent

	HI (26)	UMI (8)	LMI (17)	LI (11)	ALL (62)	USA	China
1990	31.0	35.0	36.4	54.5	37.2	38.9	30.4
2000	33.7	39.7	41.3	52.9	40.0	44.0	35.6
2010	34.2	41.1	41.4	52.2	40.2	45.8	42.6
2015	34.7	42.0	41.0	50.7	40.2	47.3	41.4

Source: World Inequality Database and author’s calculations

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.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.¹⁰

Table 1.3 GP indexes across country groups, 1990–2015

Income group	GP: simple average
	1990	2000	2010	2015	Percent change
High (28)	3.26	4.27	4.32	4.31	32.2
Upper-Middle (9)	1.98	3.49	3.97	4.01	102.5
Lower-Middle (34)	1.29	2.99	3.42	3.64	182.2
Lower (18)	1.59	2.46	2.98	3.03	90.6
All (89)	2.1	3.36	3.7	3.78	80.0
Calculations use World Bank 2020 income classifications

Source: Data from Walter G. Park and author’s calculations

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.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, 2012).

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.

Table 1.4 Correlations between GP indexes and Gini coefficients, 1990–2015

Income group	GP with Gini Disposable				GP with Gini Market
	1990	2000	2010	2015	1990	2000	2010	2015
High (28)	−0.27	−0.22	−0.28	−0.08	0.14	0.35	0.31	0.42
Upper-Middle (9)	−0.1	0.09	−0.62	−0.29	0.25	0.27	−0.26	0.06
Lower-Middle (34)	0.03	−0.26	−0.49	−0.07	0.01	−0.16	−0.11	0.16
Lower (18)	0.26	0.25	0.21	0.2	0.12	0.11	0.1	0.13
All (89)	−0.44	−0.51	−0.59	−0.4	−0.03	−0.01	0.01	0.18

Source: prior databases and author’s calculations

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 (2008), 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 (2018). 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 (2008). 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 (2008) 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.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 Economic Theory and Microeconometric Analysis

As mentioned, the literature analyzing the determinants of within-country income and wealth inequality is deep and rapidly expanding. Surprisingly, IP protection has been virtually ignored in this context, except via informal and intuitive statements about raising returns to R&D investments, which filter through to higher wages for skilled and technical workers. In this context, IP rights are facilitating mechanisms for skill-biased technical change (SBTC). They are also viewed as devices for generating and protecting monopoly rents, which go disproportionately to entrepreneurs, managers, high-skilled workers, and shareholders.

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 (2010) 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.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. (2015). The model is based on the idea of “directed technological change,” also a fundamental model in modern growth theory.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. (2019) 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.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. (2022). 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.¹⁶ Mendez (2002) 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 (2009) asked whether income inequality differences help explain innovation performance across countries.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.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 (2021), 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.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 Innovation, Diffusion, and Cross-Country Inequality

The prior sections argued that the impact of IP protection on internal inequality within countries is difficult to conceptualize and demonstrate empirically, though the emerging literature is promising. It is also important to consider another form of inequality across countries. As noted, many EDCs have seen faster economic growth than the HICs over the past twenty-five years. Have IP rights played a role in this process? While this question has not been studied directly, there is considerable indirect evidence that the expansion of IP protection in EDCs has facilitated this convergence of incomes. In brief, the channel through which this happened is that stronger IP rights, in conjunction with trade liberalization, have accelerated the international diffusion of technological information and knowledge, even to the point of shifting R&D resources to select EDCs.

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.²⁰ Such exchange rates are appropriate for focusing on changes in actual living standards.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.

Table 1.5 GDP-weighted average annual growth rates in GDP per capita, 1990–2015

Income group	1990–2000	2000–2010	2010–2015	1990–2015
High (83)	2.31	1.26	0.70	1.93
Low (29)	−1.27	3.80	1.54	1.57
Lower-Middle (70)	0.96	4.96	2.01	3.88
Upper-Middle (45)	2.03	6.67	2.25	5.83
GDP per capita is in 2017 U.S. dollars, at purchasing power parity

Source: World Bank, World Development Indicators, 2020 income classification

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.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.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.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.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.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., 2012).

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.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.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.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.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, 2016). 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.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, 2016). 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., 2013). 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.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.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 (2011), who found that Argentinean firms experiencing relatively larger cuts in Brazilian tariffs after the foundation of MERCOSUR invested relatively more in upgraded technology.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. (2018), 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. (2016) 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.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.

1.3.4.1 Product-Cycle Dynamics

The first point is that divergence or convergence over time is a dynamic question requiring extended analysis. To some degree, cross-country income movements depend on relative trends in factor endowments. Emerging countries with high saving and investment rates, strong human capital and skills growth, and sound economic infrastructure and governance grow faster than others, including developed countries. This is a large part of the story in China and the rest of East Asia in recent decades. However, resource accumulation alone tends to run into diminishing returns, slowing down convergence after a time.

Sustained relative income growth requires continued increases in productivity from technological change, which, broadly put, can be driven by continuous domestic innovation or technology acquisition from abroad. Economists frequently study these processes through the lens of the dynamic product-cycle model, in which countries reside in an innovative North and an imitative South.³⁶ The simplest notion is that firms in the North develop new products or technologies, on which they have a temporary monopoly so long as the technical knowledge is not copied in the South. As soon as new technology is copied, however, production shifts to the South, and the product is exported back to the North, where firms devote resources to the next stages of innovation. What emerges is a continuous cycle of Northern innovation and Southern imitation, the primary form of technology diffusion.

From the standpoint of global income distribution, the relative rates of innovation and diffusion matter.³⁷ An exogenous rise in the rate of innovation generates a broader swath of Northern monopoly rents, which are paid as higher wages there. In contrast, an exogenous rise in the rate of imitation weakens those monopolies and transfers production more rapidly to the South, raising wages there. The key variable in such models, the ratio of Northern to Southern wages, rises with innovation and falls with imitation. If innovation is sufficiently slow and imitation sufficiently fast, this ratio could approach unity, implying full income convergence. It is evident that IP rights play a straightforward role in this dynamic. Stronger IP in the North expands innovation and protects wages there. Stronger IP in the South raises imitation costs, slowing imitation and reducing wages there. Unambiguously, then, increases in global IP protection would worsen international income inequality in the basic model.

It is fair to say that this simple proposition lies at the heart of concerns in developing countries and among development economists about the potential impacts of IP reforms associated with TRIPS at the WTO.³⁸ This view formed the essence of the first model translating the product-cycle dynamics into an endogenous growth framework through purposeful innovation and technology transfer, set out by Helpman (1993). He developed a “quality ladders” model, in which Northern innovation could be displaced by Southern imitation, resulting in instantaneous technology transfer and narrowing the North–South wage gap. In this framework, stronger IP protection in the South would sustain Northern technological monopolies for longer periods, leading to reduced rates of both imitation and innovation and limiting economic growth. This prediction suggested the policy harmonization demanded by TRIPS would be a dynamic mistake.

This result inspired lengthy literature extending the endogenous product-cycle model and IP rights in important directions. Most prominently, subsequent models by Lai (1998), Glass and Saggi (2002), and Yang and Maskus (2001) posited that there are two channels of technology diffusion from North to South: imitation and purposeful information transfers through FDI and licensing. Investment is sensitive to IP protection, especially in high-technology manufacturing and services, because multinational firms feel more confident that they can transfer advanced information and know-how without losing them to local imitation. Licensing should expand with IP protection for similar reasons and because enforceable domestic patent rights can reduce the costs of reaching mutually acceptable contracts. In turn, FDI and licensing flows increase Northern profits and speed up technology diffusion, raising Southern wages.

Moreover, liberating Northern labor from production permitted more resources to be devoted to innovation. Depending on model parameters, innovation may rise or fall while technology transfer is enhanced. In this context, stronger IP protection in the South has offsetting effects: It slows down uncompensated imitation but enhances market-oriented technology transfer through FDI and licensing. The impact on the North–South income gap depends on circumstances.

In consequence, how IP reforms affect income divergence or convergence is an empirical question. To date, there are no solid econometric studies of this issue for reasons already mentioned. However, there is substantial and consistent evidence that broader patent scope tends to attract more FDI, licensing, and offshoring to those EDCs that can deploy such information effectively into domestic production.³⁹ The implication is that stronger IP protection, at least in those countries, has accelerated technology transfer and encouraged income convergence by shifting employment abroad from the HICs. Thus, the extensive global IP enhancement period since TRIPS has almost surely reduced relative wages between the rich countries and the emerging countries through enhanced technology transfer. This conclusion may come as a surprise to rich-country politicians who enthusiastically support such reforms. The extent to which such reforms may be credited with this outcome, as opposed to other economic factors, is unclear but surely significant.

Again, it should be noted that this convergence is conditional: There is scant evidence of it in the LICs after their IP reforms. The best conclusion here is that IP rights are insufficient to attract greater technology flows. Countries need to complement those reforms with stronger investment climates, reduced corruption, better human capital, and the like.

1.3.4.2 The Property Rights Approach to Offshoring

There is a second theoretical framework in which stronger IP rights in the South can increase the incomes of local workers and input suppliers. The so-called property rights approach posits that foreign investors and domestic network partners, particularly in an international outsourcing context, operate as principals (the multinational) and agents (the local contractor).⁴⁰ The parent firm and the local input contractor must bargain over how they will share the profits from production within the network. The contractor pays lower wages than the parent firm in its location, which is the incentive for offshoring. However, once the contract is signed, the supplier might choose to save costs through shirking, which is more likely if the parent firm cannot enforce its contract. The cheating may be through not producing the required volumes, but it also could involve stealing know-how or diluting the parent firm’s trademark and reputation. It follows that stronger IP rights in the supplier’s country would diminish the likelihood of shirking, making outsourcing more likely.

The empirical prediction is that countries with a reasonable ability to produce high-quality inputs are more likely to be invited into a production network if their governments offer enforceable contract rights, including in IP. Again, the evidence suggests that this is the case, for outsourcing locations at different stages of production, other things equal, are sensitive to local IP rights. This also applies to the recent emergence of R&D networks across countries within multinational firms.⁴¹ Again, the implication is that EDCs with transparent IP rights are more likely to become nodes in vertical networks, a force for international wage convergence.

These broad perspectives may be usefully qualified. For example, the R&D spending of MNEs on local affiliates abroad may be either asset-exploiting or asset-augmenting, as discussed by Dunning and Narula (1995). The former case involves local R&D to adapt existing technologies to conditions in recipient markets, tending to lock in competitive advantages of the foreign firm and potentially reducing convergence. Patel and Vega (1999) studied patenting trends in the United States of major global firms, finding evidence that firms generally engaged in local R&D in technological areas where they were strong at home.

In the latter case, local R&D is devoted to acquiring new knowledge-based assets or creating new technologies that may support domestic production and even exports of novel goods. Much of the recent growth in R&D spending by foreign multinationals in China has been asset-augmenting, taking advantage of engineering skills and other Chinese factors. This process is more likely to raise the demand for skilled workers in recipient countries, tending toward international income convergence.

The net impact of international R&D programs within multinational firms on global convergence remains unclear and worthy of additional and deeper research.

1.3.4.3 Technology Spillovers

The third important element in the convergence story is the possibility that capital imports, FDI, and outsourcing contracts entering EDCs result in what economists call productivity spillovers or technology spillovers.⁴² High-technology imports and FDI generally embody more advanced technical information and knowledge than domestic production in lagging countries.⁴³ Incorporated into domestic production, they directly raise productivity within the firm or local contractor. However, those direct gains are typically paid for. Spillover occurs when a domestic firm or customer gains greater productivity without paying for the economic value of that improvement.

There are several channels through which such productivity spillovers operate. One is direct imitation as local firms observe the operations of MNE affiliates or contractors and figure out how to implement them into their facilities. Another is the practice of skilled engineers and managers to leave employment at an affiliate and take the knowledge learned there to another firm or start-up. A third is reverse engineering of high-technology imported inputs. Perhaps most important are backward and forward spillovers. A backward spillover occurs when a domestic input producer gains higher efficiency through supplying an affiliate of a global firm. This is most likely the result of the MNEs showing how to produce a higher-quality input, which the international firm requires to meet global standards. This ability to produce better inputs becomes a spillover when the input supplier uses it to expand sales to other purchasers. A forward spillover transpires when domestic purchasers of the goods and services produced by local affiliates of MNEs gain greater efficiency, which again permits them to expand sales generally.⁴⁴

Technology spillovers gained through international trade and FDI are the primary source of measured productivity increases and economic growth in most developing countries.⁴⁵ Accordingly, the role of various policies and economic characteristics looms large in determining how rapidly such countries may grow relative to the advanced economies. In this context, IP rights again matter considerably, at least among those EDCs in a position to attract inward FDI and licensing. Here, the promise of IP rights is cross-cutting. Stronger patents and trade secrets protection should reduce the scope of uncompensated imitation, learning, and mobility of skilled labor from MNEs to domestic firms, suggesting again that IP rights could diminish growth in EDCs.

On the other hand, the greater volumes of inward technology flows associated with stronger IP protection generate more opportunities for spillovers through backward and forward linkages. Moreover, a policy might follow an intermediate track. China, for example, pursued for some years a regime in which multinationals in designated technology-oriented sectors were encouraged to invest in local joint ventures but under the expectation that the parent companies ultimately would share their key IP with their local partners.⁴⁶ Success in deploying such policies is not much in evidence elsewhere among EDCs.

Thus, the question of whether stronger or weaker IP rights raise technology spillovers ultimately is empirical, and data may be marshaled to support either conclusion. To date, there are no systematic econometric studies of this central issue in the debate over global IP requirements, a considerable missing element that should attract more study going forward. For this chapter, the lesson is that IP reforms have attracted considerably more technology transfer through formal channels to select EDCs, particularly the UMICs. It is likely that some domestic firms have suffered from this competition, either shutting down or losing market shares, but evidence on this point is scarce. For these economies, the balance of effects likely has supported income convergence toward the levels of the HICs. In contrast, IP reforms likely have not contributed to such convergence among the LICs.

Concluding Remarks

This chapter has reviewed the available economic theory and evidence about the potential impacts of IP rights on income and wealth inequality, emphasizing international comparisons. This is a critical question, particularly in light of the simultaneous increase in the scope and international application of IP rights and the growth of inequality across many countries. It is tempting in this context to assign causal importance to the former in explaining the latter.

However, an essential lesson is that establishing such causality is challenging, and systematic evidence is scarce. Cross-country macroeconomic regressions of Gini coefficients on available measures of IP protection, most readily the GP index of patent rights, suggest a correlation between inequality and IP. However, such evidence is surely fragile and should be treated with considerable caution. At the same time, micro-econometric evidence is emerging that firms engaged in more global patenting tend to have more unequal internal wages, even within occupational categories. These findings are suggestive but a long way from establishing a firm and generalizable relationship. Far more analysis is needed.

The chapter also pointed out that IP reforms may accompany trade and investment liberalization, contributing to internal inequality, especially in EDCs. However, while the channels through which globalization, involving trade, FDI, and outsourcing through production networks, can affect inequality are well understood and supported by systematic evidence, there has been almost no empirical study of how IP rights may contribute. This is surely a large gap in our understanding and needs to be rectified with additional study. However, working out the appropriate frameworks and data to achieve it will again be challenging.

Finally, there is strong evidence that IP reforms in the past twenty years have contributed significantly to increased flows of market-mediated technology transfer from technologically advanced countries to select EDCs. Because these flows embody knowledge that can raise local productivity and generate industrial transformations, IP rights likely have had an indirect but substantially positive effect on raising average incomes in recipient EDCs relative to those in rich countries. However, such flows have not increased much in poorer countries, whose incomes continue to stagnate in relative terms. This process, called conditional convergence, is a first-order outcome of the globalized IP system but remains underappreciated and insufficiently studied.

2 The Unequal Geographical Distribution of Innovative Activity Implications for Income Inequality and Innovation Policies^*

Carsten Fink , Ernest Miguelez , and Julio Raffo

Introduction

Innovation is at the core of economic development, growth, and structural change. This has been well demonstrated previously by scholars both theoretically and empirically (WIPO, 2015). Yet, it does not spur in nor flow to all corners of the world. Not all countries innovate at the same rate; within these, not all regions either. Not even in the most innovative countries is innovation equally distributed or seamlessly flows from national championing areas to the rest of the country.

To a great extent, such unequal innovation distribution mirrors the continuing wide differences in per capita incomes across and within different countries (Crescenzi et al., 2019). Indeed, many economists argue that differences in technology diffusion go a long way in explaining income differences (e.g., Comin and Mestieri, 2018). Worldwide rankings of innovation and income per capita are, however, not necessarily written in stone. Some Asian countries – and several regions within these – were able to achieve remarkable industrial development during the past forty years. Today these regions host companies that compete at the world’s technology frontier.

How has this unequal distribution of innovation evolved across and within countries? Does innovation concentrate more than other economic activities? What are the consequences of this concentration for territorial income inequality? Can policy actions do something about this? We aim to answer these questions using patent and publication data for more than forty years, and reviewing the relevant literature.

Understanding where most of innovation happens across and within countries is of foremost importance for innovation and intellectual property (IP) policymaking. Reviewing the successful technological trajectories and the less successful ones can be informative of the paths to follow. A natural question to ask is what role public policies can play in changing the technological trajectory of countries and regions. Given the many market failures associated with knowledge acquisition and knowledge diffusion, it is also pertinent to ponder what IP policy can do specifically.

This chapter is divided into two main sections. The first section reviews and describes empirically the uneven geographical distribution of innovation and its dynamics, at both the national and subnational levels. It also compares such distribution in relation to other indicators of economic activity. The second section examines the potential consequences of such unequal distribution, particularly for its possible influence on inter-regional income inequality, and discusses how inevitable they might be. In light of available evidence, it explores what the role of policy could be.

2.1 Innovation’s Uneven Geographical Distribution

During much of the past century, knowledge was produced mostly in a few wealthy countries, in particular the United States, Japan, and some Western European economies. What is often much less appreciated is how concentrated this phenomenon is, even within these wealthy nations.¹

The academic literature has investigated several reasons behind such concentration. Many have to do with the virtuous cycle of national innovation systems (NIS) (Edquist, 1997) and, within these, the cycles of the local innovation ecosystems (Asheim and Gertler, 2005). Long and stable positive economic cycles explain how the best higher-education and research institutions appear and consolidate in certain regions of the world. The same applies to the private sector, where research- and technology-intensive companies flourish in such conditions. The reverse causality also applies: The liveliest NIS of today are more likely to spur innovation and consequent economic growth of tomorrow. For many reasons, these research and development (R&D) intensive companies will prefer to perform their research operations and collaborate with knowledge-intensive partners close to their headquarters (Castellacci and Archibugi, 2008; Chaminade et al., 2016; Patel and Pavitt, 1991). The two directions of causality can generate virtuous and vicious cycles, perpetuating the differences across economies.

National interactions are only part of the successful cycles, the other part being the interactions within the network of successful locations (Crescenzi et al., 2019; WIPO, 2019: ch. 1). It is often argued that the concentration of innovation production can be compensated with a spread of knowledge flows in all directions. Advocates of knowledge spillovers and knowledge as a public good would argue that knowledge diffuses from the innovation production center to the less innovative neighboring countries and regions. However, there is a known imperfect diffusion of knowledge, as information does not diffuse as freely or as fast everywhere, nor is the ability to fully exploit information flows – that is, the absorptive capacity – equally distributed around the world.² In this sense, the choice of knowledge connections is affected by the aforementioned virtuous cycles – that is, both economic and innovative – in each of the potential locations. The motivations for these connections can be of various nature: Multinational companies (MNCs) seek knowledge strategically (Castellani and Zanfei, 2006, 2007); supply and value chains reshape their structure globally (Bathelt et al., 2004; Dunning, 1998); decentralized interpersonal networks shine where there is professional talent (Lorenzen and Mudambi, 2013); and scientists, innovators, and entrepreneurs move where there are economic and innovation opportunities (Breschi et al., 2017; Franzoni et al., 2012; Saxenian, 2002, 2006). Chaminade et al. (2016) summarize these different interactions as global innovation networks (GINs) aiming to collectively produce and disseminate new knowledge.³

Undoubtedly, innovation eventually diffuses to less innovative regions and countries (Comin and Mestieri, 2018). But the rate at which innovation flows from and to a country might be very different depending on the country’s position in the GINs. Successful companies in equally successful countries are also likely to increase their multinational activity overseas, but these countries may also attract other foreign companies. Indeed, it is not surprising that the majority of the MNCs have either spawned in the United States, Japan, or Western Europe or moved their headquarters there. Over the past century, these MNCs have increasingly operated in foreign countries and, lately, have increased their international R&D operations and the geographical diversity of their locations. Yet, many scholars argue that technology transfer to foreign economies – especially developing ones – is imperfect. Most of MNC’s overseas R&D activities in developing economies before the turn of the century were confined to market adaptation, with limited production of new knowledge (Gerybadze and Merk, 2014; Krishna et al., 2012).

Was this virtuous cycle unattainable for the rest of the world? The pattern over the past thirty years has shown us otherwise. The last part of the past century and the early years of the twenty-first century display several East Asian and other economies emerging as innovation hubs (Branstetter et al., 2014). Several factors explain this rise. MNCs increasingly redirect foreign investment to gain access to specialized knowledge (Amendolagine et al., 2019; Reddy, 1997). High-skilled professionals and talented entrepreneurs coming from these areas move and connect across the globe, building unprecedented international knowledge pipelines (Foley and Kerr, 2013; Saxenian, 2006; Useche et al., 2020). As a result, China, India, and some other economies have created over that period the environment not only to induce inward R&D activities by MNCs but also to spawn their own local stakeholders (Awate et al., 2012; Branstetter et al., 2014).⁴ Analyzing the early technological developments of Chinese clusters, Zhou and Xin (2003) found that local firms in tech clusters benefit from collaborating with MNCs, which provides them with vital technology and organizational training, in turn vastly increasing their innovative capacity.

In the following paragraphs, we make use of patent and scientific publication data to describe empirically the patterns and trends portrayed in the innovation literature earlier. We use scientific publication data from Clarivate’s Web of Science (WoS) and Science Citation Index Expanded (SCIE), and patent data from EPO’s Patstat, World Intellectual Property Organization (WIPO), and other patent data sources.⁵

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. (2019). 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, 2011), as high-income countries have managed to keep their positions through sustained innovation, and innovation of higher quality and complexity (Crescenzi et al., 2019). 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.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., 2019; 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, 2021). 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.⁷ They also allow interacting and learning from peers, favoring localized knowledge spillovers (LKS) (Jaffe et al., 1993). 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., 2019; Feldman et al., 2021). 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., 2020). 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., 2004; Lorenzen and Mudambi, 2013; Moreno and Miguélez, 2012).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, 1920). More recently, scholars have argued that innovation flourishes in dense urban areas, where knowledge spillovers can flow within and across industries (Glaeser et al., 1992; Jacobs, 1969; Porter, 2000). 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, 2015; Engel and del-Palacio, 2009; WIPO, 2019: ch. 1). Porter (2000) 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, 2020) to “innovation hubs” (where the emphasis is placed on cities and knowledge exchanges between them; Nijkamp and Kourtit, 2013) 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., 2012; Castellani, 2018).

Figure 12 by Miguelez et al. (2019) 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, 2015). 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).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. (2019) 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).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. (2019).

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., 2019). 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, 2017; Bathelt et al., 2004; Lorenzen and Mudambi, 2013; Turkina and Van Assche, 2018).

Figure 17 by Miguelez et al. (2019) 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., 2019).

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 Consequences of the Unequal Innovation Distribution and Possible Policy Actions

We have just shown that the global production of innovation is extremely concentrated in a few areas of the world. Moreover, it is even more concentrated than other economic activities. Does this concentration pose a problem? What does it mean for economic and innovation policymaking? We attempt to answer these questions in three parts. First, we rely on the economic geography literature to explore in which ways this unequal distribution of innovative activity relates to one of the biggest challenges of present times, namely growing income inequality (Piketty and Saez, 2003). In particular, we will focus our attention on the relationship between innovation concentration and territorial income inequality. Second, we discuss if this unequal distribution of innovation (and income) across and within countries is inevitable. Last, we conclude by revisiting the role of policy in the light of our discussion.

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, 1962). 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, 1991). 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, 1996), which was largely attributed to the importance of LKS as a localization force (Jaffe et al., 1993; Krugman, 2010).

But several recent economic studies suggest that converging mechanisms might not be working as predicted (Hope and Limberg, 2022; Iammarino et al., 2019). 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.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., 1993; Krugman, 2010). 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., 2019; 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., 2021). 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, 2013; Gagliardi et al., 2021). A similar pattern holds for highly skilled migrants holding science and technology jobs, who tend to concentrate in innovative cities (Coda-Zabetta et al., 2022).

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., 2019). This phenomenon occurs both inside highly innovative superstar cities, and between them and the rest of the country – the “Left Behind Regions” (Rodríguez-Pose, 2018). Starting in many developed countries from around 1980, this process of economic divergence is known as “the great inversion” (Crescenzi et al., 2019; Florida, 2017; Kemeny and Storper, 2020). 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, 2020: 27). Meanwhile, this technological change also reduces employment in many previously dominant manufacturing sectors through automation (Iammarino et al., 2019).

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., 2020). 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, 2021; 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, 2018).

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, 2018).

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., 2019). 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, 2018).

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. (2018)

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.

Table 2.1 Evolution of patenting and scientific publishing, by selected countries

	Patents							Publications
Country	1970–1979	1980–1989	1990–1999	2000–2004	2005–2009	2010–2014	2015–2017	2000–2004	2005–2009	2010–2014	2015–2017
China	0.007%	0.064%	0.275%	1.313%	4.043%	8.164%	13.671%	2.446%	4.370%	7.848%	12.011%
Rep. of Korea	0.014%	0.308%	2.579%	5.212%	7.562%	8.506%	8.368%	1.389%	2.003%	2.679%	3.157%
Malaysia	0.005%	0.007%	0.027%	0.078%	0.148%	0.169%	0.115%	0.076%	0.092%	0.181%	0.435%
India	0.031%	0.034%	0.114%	0.533%	0.997%	1.358%	1.334%	1.942%	2.033%	2.635%	3.164%
Singapore	0.005%	0.015%	0.118%	0.308%	0.358%	0.372%	0.343%	0.302%	0.428%	0.474%	0.495%
Israel	0.239%	0.312%	0.576%	0.931%	1.148%	1.083%	1.047%	0.930%	0.908%	0.763%	0.615%
Iran	0.006%	0.003%	0.005%	0.007%	0.017%	0.023%	0.053%	0.116%	0.258%	0.817%	1.555%
Turkey	0.003%	0.005%	0.017%	0.064%	0.168%	0.262%	0.363%	0.587%	0.979%	1.544%	1.671%
Syria	0.001%	0.001%	0.002%	0.002%	0.002%	0.002%	0.001%	0.009%	0.010%	0.011%	0.014%
Saudi Arabia	0.003%	0.007%	0.009%	0.014%	0.031%	0.103%	0.166%	0.165%	0.137%	0.122%	0.305%
Brazil	0.067%	0.093%	0.122%	0.169%	0.245%	0.281%	0.271%	1.110%	1.454%	1.963%	2.325%
Mexico	0.077%	0.048%	0.063%	0.091%	0.107%	0.123%	0.149%	0.442%	0.514%	0.576%	0.593%
Argentina	0.050%	0.042%	0.057%	0.059%	0.056%	0.041%	0.038%	0.461%	0.475%	0.433%	0.456%
Chile	0.006%	0.006%	0.011%	0.018%	0.033%	0.056%	0.053%	0.170%	0.196%	0.221%	0.254%
Colombia	0.007%	0.006%	0.008%	0.015%	0.021%	0.032%	0.038%	0.042%	0.053%	0.091%	0.141%
South Africa	0.224%	0.196%	0.195%	0.211%	0.167%	0.131%	0.098%	0.375%	0.329%	0.351%	0.404%
Egypt	0.002%	0.003%	0.005%	0.013%	0.026%	0.026%	0.021%	0.245%	0.266%	0.294%	0.395%
Nigeria	0.001%	0.001%	0.001%	0.002%	0.002%	0.003%	0.002%	0.081%	0.072%	0.131%	0.128%
Kenya	0.002%	0.001%	0.002%	0.004%	0.003%	0.005%	0.004%	0.040%	0.033%	0.038%	0.043%
Algeria	0.000%	0.001%	0.001%	0.003%	0.003%	0.003%	0.003%	0.029%	0.043%	0.078%	0.105%

Source: Miguelez et al. (2019).

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.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.

Table 2.2 Top innovation-dense Asian agglomerations and national concentration of S&T outputs, 1991–1995 and 2011–2015, selected economies

Country	Patents				Publications
	1991–1995	%	2011–2015	%	2001–2005	%	2011–2015	%
China	Shenzhen-Hong Kong Beijing Shanghai	48.5	Shenzhen-Hong Kong Beijing Shanghai	51.0	Beijing Shanghai Nanjing	43.9	Beijing Shanghai Nanjing	35.8
India	Bengaluru Mumbai Delhi	41.5	Bengaluru Hyderabad Delhi	46.2	Delhi Mumbai Bengaluru	27.7	Delhi Mumbai Kolkata	24.6
Iran	ND	ND	ND	ND	Tehran	57.6	Tehran	46.1
Israel	Tel Aviv Haifa Jerusalem	85.6	Tel Aviv Haifa Jerusalem	82.3	Tel Aviv Jerusalem Haifa	86.4	Tel Aviv Haifa Jerusalem	86.1
Rep. of Korea	Seoul Daejeon Icheon-si	75.8	Seoul Daejeon Beolgyo	70.3	Seoul Daejeon Busan	71.3	Seoul Daejeon Busan	69.9
Malaysia	Kuala Lumpur	61.5	Kuala Lumpur	58.0	Kuala Lumpur	51.4	Kuala Lumpur	59.4
Saudi Arabia	Dammam	42.4	Dammam	38.8	Dammam	21.0	Dammam	7.8
Singapore	Singapore	100.8	Singapore	100.3	Singapore	100.0	Singapore	100.0
Turkey	Istanbul Ankara	59.1	Istanbul Ankara	38.8	Ankara Istanbul	46.5	Ankara Istanbul	42.8

Source: Miguelez et al. (2019).

Notes: Up to three top innovation-dense agglomerations displayed per country, in case of more than one found by the algorithm. Some agglomerations may exceed the national borders (e.g., Singapore). “ND” = No data available.

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, 1995, 2000a, 2000b), a distorted size of the natural resource sector (Sachs and Warner, 1995), and declining terms of trade for low value-added goods (Prebisch, 1962). Alternative theories give more prominence to the role of institutions in economic growth (North, 1990) and their capacity to absorb new technologies (Nelson and Pack, 1999).

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, 1962; Singer, 1950). 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, 1999), 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, 1995).

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.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., 2019). 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, 2011; 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., 2012). 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, 1991).

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, 2017). The same applies to the European context since the great recession in 2008 (Alcidi et al., 2018). 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, 2015; Rodríguez-Pose, 2018). 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.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.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.

2.3 Conclusions

In this chapter, we have revisited empirically the unequal geographical distribution of innovation by exploiting rich data from international patent applications and scientific articles.

Despite some new countries – notably in Asia – joining the traditional core economies in the production of new S&T outputs, the global spread of innovation remains limited. Our analysis also shows that, within these economies, the production of innovation is unevenly concentrated in large metropolitan areas.

The secular trends offer some room for optimism, especially if the technologies reducing the cost and enhancing the quality of interconnectivity keep progressing. Our analysis supports in part such optimism. Innovation-related collaboration, in general, and international collaboration, in particular, are mostly increasing. The challenges observed relate to who would reap more benefits from such enhanced connectivity. Indeed, our analysis also shows that, in the current form, the global network of S&T flows is largely concentrated as well. Only a few economies, and a few hotspots within these, represent the bulk of the connections.

There is also some room for pessimism. Recent years show some increase in innovation concentration. Indicators of R&D investments and international patents – especially those highly cited or relating to high-tech or complex technologies – evidence a reconcentration pattern since the second half of the 2000s. Hopefully, this process may just be the result of a new cycle of breakthrough innovation, led by more technologically advanced countries and regions (Kemeny and Storper, 2020). If this is the case, we expect that technological diffusion – and the associated geographical innovation spread – will resume shortly. Nonetheless, it is also apparent in our analysis that only a few countries and regions will act as the main gateways to access the new technology.

Part of the unequal geographical distribution of innovation seems unsolvable by itself, as the economic benefits of agglomeration go far beyond innovation. Nevertheless, we have also documented that innovation is much more geographically skewed – both nationally and subnationally – than other economic activities. This increases the challenge faced by policymakers. National policymakers around the world are already struggling with the problems that regional disparities of income, unemployment, or infrastructure convey. More skewed innovation outputs and flows just make their tasks even harder.

Last, we give some thoughts about what policy consensus the innovation and economic geography literatures can offer. We make the case for national and regional innovation policies that are balanced and attainable. It is always a good practice to acknowledge that these policies are likely to have distributional consequences within countries and regions.

In the context of growing skepticism toward multilateralism after the Great Recession, we also discuss the benefits of openness, as it should not be taken for granted. Certain signs of globalization reversal – or slowbalization – are troubling. The increasing self-sufficiency of the largest innovation hotspots and their isolation in an exclusive innovation network could be really bad news for economies and regions aspiring to catch up technologically and, in turn, economically.

3 Intellectual Property, Global Inequality, and Subnational Policy Variations

Peter K. Yu

^*

Introduction

The North–South divide has been frequently invoked in the debate on intellectual property, innovation, and global inequality. While the Global North complained about the inadequate protection and enforcement of intellectual property rights in developing countries, the Global South lamented the unfair distribution of benefits within the international intellectual property regime.¹ Developing countries were also frustrated that they bore the brunt of globalization and the detrimental effects of strong intellectual property protection and enforcement.

The arrival of middle-income countries, in particular those with considerable and ever-growing strengths in the intellectual property area, has called into question the North–South debate. First, that debate is both dated and oversimplified. It overlooks the many complications raised by Brazil, China, India, and other fast-growing emerging countries. With increasing abilities to compete effectively against developed countries, these middle-income countries have now taken policy positions that do not always align with the Global South.² Second, by emphasizing global inequality (inequality among countries), the North–South debate steers policy and scholarly attention away from many important policy challenges posed by widening national inequality (inequality within countries). Although these challenges have received some attention from trade and development economists, they have been largely ignored in intellectual property literature.

This chapter begins by revisiting the North–South debate on intellectual property, innovation, and global inequality. It explains why the arrival of middle-income countries has called into question this old binary debate. The chapter then moves from the widely studied subject of global inequality to the underexplored topic of national inequality. Focusing on the intellectual property context, the discussion highlights the considerable subnational variations in the economic and technological conditions of middle-income countries. To combat national inequality, this chapter concludes by recommending interventions in three areas: (1) international norm-setting, (2) national policymaking, and (3) academic and policy research.

3.1 Inequality among Countries

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.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.”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.”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.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.”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.”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.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.”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.¹¹ As Keith Maskus reminded us:

A reasonable … estimate [based on figures the U.N. Conference on Trade and Development provided on setup and training costs in relation to TRIPS implementation] is that [the] average operating costs of an effective system might be perhaps $2.5 million per year for 10 years postreform in those countries that upgrade most rapidly and $1.5 million per year for 20 years in the others. These figures imply that, discounted at 3 percent per annum, the net present value of investment costs in effective enforcement in the developing world would be $4.1 billion over 20 years.¹²

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,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.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.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.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.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.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:

[I]n 1995, and earlier in the negotiations leading to the conclusion of TRIPS, the international [intellectual property] system was largely seen as a trade interest of the developed economies. Today, the picture differs dramatically. Some middle-income countries are among the major users of the global [intellectual property] system, and many other developing countries are increasingly engaged with it.¹⁹

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.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.

Table 3.1 Indicators on intellectual property and related developments in 2020

Country	Patent App., Res.	Patent App., Nonres.	TM App., Res.	TM App., Nonres.	IP Payments (US$M)	IP Receipts (US$M)	Global Innovation Index
Argentina	930	2,562	64,413	14,087	1,149	210	80
Brazil	5,280	19,058	260,774	37,159	4,062	634	62
China	1.345M	152,342	9.117M	229,248	37,871	8,583	14
India	23,141	33,630	382,294	42,289	7,241	1,254	48
Indonesia	1,309	6,851	80,545	43,242	1,530	84	85
Malaysia	989	5,839	18,414	26,872	2,388	232	33
Philippines	476	3,517	30,935	25,763	519	15	50
Russia	23,759	11,225	341,414	56,826	6,809	1,164	47
South Africa	542	6,146	22,104	14,219	1,198	126	60
Thailand	863	6,662	33,165	30,322	4,504	225	44

Note: This table draws on data provided by the World Bank and WIPO in the following areas: (1) patent applications, resident; (2) patent applications, nonresident; (3) trademark applications, direct resident; (4) trademark applications, direct nonresident; (5) charges for the use of intellectual property, payments (balance of payments, current US$); (6) charges for the use of intellectual property, receipts (balance of payments, current US$); and (7) ranking in the Global Innovation Index.

Table 3.2 Other science, technology, and education indicators in 2020

Country	High-Tech Exports (%)	High-Tech Exports (US$M)	R&D Expend. (% GDP)	Researchers in R&D (M)	Technicians in R&D (M)	S&T Journal Articles	Educ. Expend. (%)	Tertiary School (%)
Argentina	7	546	0.49†	1,211†	398†	9,730	5.0	99
Brazil	11	5,945	1.16†	888††	970††	70,292	6.0*	55
China	31	757,459	2.14†	1,307†	N/A	669,744	3.6	58
India	11	21,583	0.65†	253†	73†	149,213	4.5	29
Indonesia	8	6,409	0.23†	216†	35†	32,554	3.5	36†
Malaysia	54	92,100	1.04†	2,185†	233†	21,885	3.9	43
Philippines	67	34,896	0.16**	106**	18**	3,072	3.7	33
Russia	9	6,525	0.98†	2,784†	438†	89,967	3.7	86*
South Africa	6	1,835	0.83‡	518‡	130‡	15,885	6.2	24
Thailand	28	45,838	1.00‡	1,350‡	297‡	13,963	3.1	43

* 2019 data; ^† 2018 data; ^‡ 2017 data; ^** 2015 data; ^†† 2014 data.

Note: This table draws on World Bank data in the following areas: (1) high-technology exports (% of manufactured exports); (2) high-technology exports (current US$); (3) research and development (R&D) expenditure (% of GDP); (4) researchers in R&D (per million people); (5) technicians in R&D (per million people); (6) scientific and technical journal articles; (7) government expenditure on education, total (% of GDP); and (8) school enrollment, tertiary (% gross).

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).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.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.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 Inequality within Countries

Thus far, the debate on international intellectual property law and policy has focused primarily on global inequality. That debate has rarely gone behind territorial borders to shed light on national inequality. Since the mid-2000s, however, economists – most notably François Bourguignon, Branko Milanovic, and Thomas Piketty – have called for greater scholarly and policy attention to the ever-increasing inequalities within countries.²⁴ National inequality is important not only because it can be found in both the Global North and the Global South but also because it will influence how and how effectively we combat global inequality.²⁵

Although inequalities within high- and low-income countries remain important and have received scholarly and policy attention, this section continues to focus on middle-income countries, for at least two reasons. First, a greater focus on inequalities within these countries will make the debate’s growing complications salient. While these fast-growing middle-income countries have been slowly catching up with their developed counterparts, thereby helping to reduce global inequality, the inequalities within these countries have greatly increased. Such increase, to some extent, suggests the potential, and oft-overlooked, costs of strong intellectual property rights – the painful medicine that the Global North prescribed through the TRIPS Agreement and TRIPS-plus bilateral, regional, and plurilateral agreements.

Second, inequalities within middle-income countries will pose serious internal challenges at a point when these fast-growing countries start to align their intellectual property laws and policies more closely with those of the developed world. To respond to these challenges, policymakers may consider adjustments to strike a better domestic balance. Those adjustments not only would make the positions of these countries less coherent, but the choices and incoherences might have a significant impact on the future development of the international intellectual property regime.

For illustrative purposes, this section discusses three types of inequality within middle-income countries: geographic, sectoral, and income. While the scope and length of this chapter do not allow for a greater exploration of the relationship between intellectual property protection and national inequality – and economists have yet to provide conclusive evidence on a strong causal relationship²⁶ – this section’s observations on the three types of inequality provide useful information about the internal challenges many middle-income countries will face. Regardless of whether strong positive causality exists, those challenges will deeply affect the intellectual property policy positions taken by these countries.

3.2.1 Geographic Inequality

Thus far, the literature on international intellectual property law and policy has been filled with cross-country studies.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.

Table 3.3 Volume of invention patent applications and grants on mainland China in 2021

Province	Volume of Patent Applications	Volume of Patent Grants
Guangdong Jiangsu Zhejiang Shandong Anhui Hubei Sichuan Shaanxi Hunan Henan Fujian Hebei Liaoning Jiangxi Heilongjiang Guangxi Jilin Yunnan Shanxi Guizhou Gansu Inner Mongolia Hainan Xinjiang Ningxia Qinghai Tibet	242,551 188,241 129,821 82,481 64,106 51,690 45,358 38,643 36,746 34,950 31,093 23,923 23,078 19,171 15,018 13,693 12,680 10,293 10,059 9,869 6,423 5,998 4,497 4,395 3,054 1,585 515	102,850 68,813 56,796 36,345 23,624 22,376 19,337 15,516 16,564 13,536 12,561 8,621 10,480 6,741 6,337 4,573 5,730 3,643 3,915 2,824 2,253 1,651 954 1,153 1,103 454 184

Note: This table focuses on only mainland China and excludes Hong Kong, Macau, and Taiwan. It also does not include the four municipalities under the central government’s direct administration – namely, Beijing, Chongqing, Shanghai, and Tianjin.

Sources: Patent Applications for Invention Originated from Home by Origin, China Nat’l Intell. Prop. Admin., https://english.cnipa.gov.cn/jianbao/year2021/a/a3.html (last visited May 12, 2023); Patent Grants for Invention Originated from Home by Origin, China Nat’l Intell. Prop. Admin., https://english.cnipa.gov.cn/jianbao/year2021/b/b2.html (last visited May 12, 2023).

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.”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.”²⁹ Likewise, Ruchir Sharma described South Africa as “a developed market wrapped inside an emerging market.”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).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,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:

Patent counts at the subnational level indicate that the five EU regions with the highest shares of patent applications together represent 35% of all EU patenting; for the US the corresponding figure is about 50%. By contrast, the five most innovative Indian regions cover 75% of Indian patents; in China, the five regions with the highest patent share produce almost 80% of all patent applications.³³

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.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,”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.”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.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.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.³⁹ Likewise, the pharmaceutical and information technology sectors have performed very well in India.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.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 2009.⁴² 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.”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 primary TRIPS provisions that deal with discrimination, such as the national treatment and most-favoured-nation provisions of Articles 3 and 4, do not use the term “discrimination”. They speak in more precise terms. The ordinary meaning of the word “discriminate” is potentially broader than these more specific definitions. It certainly extends beyond the concept of differential treatment. It is a normative term, pejorative in connotation, referring to results of the unjustified imposition of differentially disadvantageous treatment.⁴⁴

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.”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.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.⁴⁷ Thailand and South Africa were fifty-seventh and 127th, respectively.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.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.”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,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.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,⁵³ this table also lists the respective figures for the income share of both the top and bottom deciles in each country.

Table 3.4 Changes in income inequality from 1995 to 2015

Country	1995 Gini	2005 Gini	2015 Gini	1995 Top 10%	2005 Top 10%	2015 Top 10%	1995 Bottom 10%	2005 Bottom 10%	2015 Bottom 10%
Argentina	48.9	47.7	41.6*	37.0	34.9	29.9*	1.1	1.3	1.8*
Brazil	59.6	56.3	51.9	47.5	44.6	40.9	0.8	1.0	1.2
China	35.2**	40.9	38.6	27.3**	30.9	29.4	3.1**	2.4	2.6
India	31.7‡‡	34.4‡	35.7†	26.7‡‡	29.2‡	30.1†	3.8‡‡	3.7‡	3.5†
Indonesia	32.0‡‡	33.0	39.7	27.0‡‡	27.4	32.4	3.9‡‡	3.6	3.0
Malaysia	48.5	46.4§	41.1	37.9	35.1§	31.3	1.8	1.8§	2.3
Philippines	N/A	46.6§	44.6	N/A	36.6§	34.9	N/A	2.1§	2.3
Russia	N/A	N/A	36.6	N/A	N/A	26.8	N/A	N/A	2.2
South Africa	59.3‡‡	64.8	63.0*	46.7‡‡	54.2	50.5*	1.3‡‡	1.0	0.9*
Thailand	43.5††	42.5‡	36.0	34.9††	33.8‡	28.4	2.5††	2.5‡	3.2

^* 2014 data; ^† 2011 data; ^‡ 2004 data; ^§ 2003 data; ^** 1996 data; ^†† 1994 data; ^‡‡ 1993 data.

Note: This table draws on World Bank data in the following areas: (1) Gini index, (2) income share held by highest 10%, and (3) income share held by lowest 10%.

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:

With the increases of mean incomes in Asian countries, the gaps between countries have actually been narrowing. If this trend of economic convergence continues, not only will it lead to shrinking global inequality but it will, indirectly, also give relatively greater salience to inequalities within nations. In fifty years or so, we might return to the situation that existed in the early nineteenth century, when most of global inequality was due to income differences between rich and poor Britons, rich and poor Russians, or rich and poor Chinese, and not so much to the fact that mean incomes in the West were greater than mean incomes in Asia.⁵⁴

Likewise, François Bourguignon observed:

[A]s the rise in national inequality … seems to coincide with the recent acceleration of globalization, we have a tendency to conclude that the latter was responsible for the former, even if, paradoxically, globalization has also contributed to a drop in international inequalities. However, once we have looked at it through both national and international lenses, the relationship between globalization and inequality turns out to be more complex than it first appears.⁵⁵

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.⁵⁶ Moreover, because an intellectual property system would inevitably affect one’s ability to use new technology – which has a demonstrated impact on income inequality⁵⁷ – 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 Recommendations for Interventions

Using middle-income countries as illustrations, the previous section calls for greater scholarly and policy attention to national inequality in the intellectual property context, which has been largely underexplored when compared with global inequality. To help combat national inequality, this section recommends interventions in three areas: (1) international norm-setting, (2) national policymaking, and (3) academic and policy research. Although these interventions were developed with middle-income countries in mind, many of them will be equally relevant to high- and low-income countries.

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.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.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,”⁶⁰ the WTO panel in Canada – Patent Protection of Pharmaceutical Products made clear that “differentiation” does not always amount to “discrimination.”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.”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.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.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.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.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.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.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.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:

The problem with … using net economic gains or losses as the developing country benchmark is that gains for a developing country’s textile or agricultural producers do not directly translate into higher public or private health expenditures. Salaries for part of the workforce may increase and government tax revenues may rise, and this may indirectly help to offset pharmaceutical price increases. However, in order for the health sector not to be adversely affected, there must be some type of transfer payment, whether in the form of increased public health expenditures on pharmaceuticals, by providing health insurance benefits, or other affirmative acts. In a world of economic scarcity, the prospect that governments will act to offset increases in medicines prices with increased public health expenditures is uncertain.⁷⁰

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.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.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.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.⁷⁴

Like ex ante redistribution, ex post redistribution – through tax-and-transfer mechanisms, perhaps – could be equally effective.⁷⁵ While the provision of subsidies, grants, or tax credits to local creators and inventors⁷⁶ could raise questions about national treatment under the TRIPS Agreement if those benefits would affect the availability, acquisition, or maintenance of intellectual property rights,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.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.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,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.⁸¹ A case in point is China, which leads the world in not only international patent applications and intellectual property litigation⁸² 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.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.

Conclusion

The arrival of middle-income countries has raised intriguing questions about intellectual property, innovation, and global inequality. The success of these countries, especially those with considerable and ever-growing strengths in the intellectual property area, has shown the oversimplification of the binary North–South debate on intellectual property law and policy and its inability to capture the ongoing developments in the intellectual property field. The wide geographic, sectoral, and income inequalities within these countries have also called for greater scholarly and policy attention to subnational developments.

Focusing on the intellectual property developments within and across a group of fast-growing middle-income countries, this chapter not only documents the considerable inequalities among and within countries but also highlights the feasibility and benefits of using subnational policy variations to combat national inequality. Specifically, this chapter recommends interventions in three areas: international norm-setting, national policymaking, and academic and policy research. It is my hope that intellectual property policymakers and scholars will start paying greater attention to inequality within countries, just as they studied inequality among countries more than two decades ago.

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

Keun Lee

^*

Introduction

The role of intellectual property rights (IPRs) in the economic growth of countries has long been the topic of academic research and policy debates. The classical issue of the relationship between IPRs and innovation has been whether strong or weak IPR protection stimulates innovation (Awokuse and Yin, 2010; Maskus and Penubarti, 1995; Smith, 1999). While there is some evidence of the effects of strong IPRs, particularly patent rights, on economic growth, the debate is far from settled, and the evidence is mixed. Further, even if IPR protection creates incentive effects, the linkage is valid only when innovation capability exists. Otherwise, or in the context of typical developing countries where innovation capabilities are absent, innovation would not occur even with strong IPRs (Lee, 2019). Thus, the literature has explored the possibility that IPRs could have differential effects on countries at different stages of economic development. Their importance was acknowledged in a World Bank publication (Fink and Maskus, 2005) and partly addressed in global intellectual property reforms (see Commission on Intellectual Property Rights, 2002). Indeed, a large volume of literature – albeit with mixed results – focused on this dynamic relationship between the protection of IPRs and economic growth at different stages, such as Kanwar and Evenson (2003) and Falvey et al. (2006).

More recent literature tends to shift the focus from the strength of IPR protection on economic growth at different stages to the roles of diverse forms of IPR in facilitating innovation capabilities of the lagging or latecomer economies. Kim et al. (2012) first turned to the new issue of the impacts of the different types of IPR, rather than the strength of IPR protection, that would be appropriate for countries at different stages of economic development. Given that through adaptation, imitation, and incremental innovation, firms in developing economies can acquire knowledge and enjoy some learning-by-doing (Suthersanen, 2006), and the innovations they produce may not have the inventive step to merit a traditional patent, Kim et al. (2012) suggested and verified the idea that the second-tier industrial property right – namely, a utility model (or petit or petty patents) – may be relevant and useful at lower level of development, serving as a stepping stone for further technological progress.

This idea of different forms of IPR at different stages of economic development is consistent with Lee (2019), which shows that advanced economies and latecomer economies at the middle- or lower-income stages have different growth mechanisms and that a very “narrow passage” exists between these countries. Thus, one must be careful when crossing such passages to avoid falling into the middle-income trap (MIT): a situation where middle-income economies tend to face decelerated growth and consequently fail to join the ranks of high-income economies. Several studies have verified that different countries adopt varying growth mechanisms, such that economic growth at the lower-income stages is correlated with basic political institutions and human capital. In contrast, the economic growth at the higher-income stages (upper-middle- and high-income) is correlated with innovation capabilities and tertiary education.¹ The division of the world into two or three groups at different stages is consistent with the idea of an MIT.

The existence of the MIT was first mentioned by Gill and Kharas (2007) and has since gained popularity among scholars and international institutions (e.g., Eichengreen et al., 2012, 2013; Ito, 2017; Lee, 2013; World Bank, 2010). Whereas some scholars have rejected the existence of this trap, it is clear that many middle-income economies are struggling to achieve high-income status. The MIT is, therefore, a relevant issue.² Numerous studies have tried to investigate the key factors responsible for this trap, such as demographic conditions, institutions, industry and trade structures, diversification, physical infrastructure, and macro-financial developments (Aiyar et al., 2013). One argument, supported by an Asian Development Bank-sponsored study (Eichengreen et al., 2012, 2013) and by Lee (2013), is that innovation capabilities are the key binding constraint for the MIT. This view is also consistent with the early statement by the World Bank (2010) that middle-income economies would tend to fall under a trap because they get caught between low-wage manufacturers and high-wage innovators; their wage rates are too high to compete with low-wage exporters, and the level of their technological capability is too low to enable them to compete with advanced countries. The importance of innovation as the cause of the MIT is consistent with the experience of a very small number of East Asian economies that have successfully transitioned into high-income economies in the past decades. Since the mid-1980s, South Korea and Taiwan transitioned from low-wage-based economies to high-end goods economies due to their growing innovation capabilities (Lee, 2013: ch. 3).

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

TRIPS regulates minimum standards for domestic IPRs. Most developed economies have already surpassed the minimum TRIPS criteria (Deere, 2009; Park, 2008). However, for developing countries (or low-technology exporters), higher global minimum IPR standards may be akin to a tax in the sense that they increase research and development (R&D) expenses for net technology borrowers who incur higher royalties and licensing fees (Glass and Saggi, 2002; Siebeck, 1990). To meet higher IPR standards, developing country exporters face higher production costs to access global information and enter global markets (Helpman, 1993; Lai and Qiu, 2003). Moreover, as Auriol and Biancini (2010) and Odagiri et al. (2010) show, tighter global IPRs, particularly in developed country markets, can act as a barrier to the entry of developing country exports into developed country markets. This is particularly so if developing country products are found to be infringing or too imitative under the IPR regime of destination markets and thus cannot legally enter those markets.

Developing country exporters who enter developed country markets still face higher legal and administrative costs of procuring IPRs, such as patents, enforcing rights, and contesting IPR claims. Thus, two key burdens for developing economies exist under TRIPS. First, the domestic costs of establishing an IPR system in accordance with TRIPS have been exorbitant in the developing world (Finger, 2002; Schneider, 2005).³ Second, if any dispute arises, the global transaction costs incurred by legal fees and litigation expenditures dampen the benefits of exporting. Thus, the overall impact of the strong IPR protection in developed countries could reduce exports from developing countries, especially those trying to promote their exports by building up innovation capabilities.

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

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

4.1.1 Regular Patents versus Utility Models for Innovation in Latecomers

While patents are the most common form of IPR protection related to innovation, it is somewhat doubtful whether they are effective instruments for appropriating the returns to innovation in developing countries. In a well-known survey of U.S. firms, Cohen et al. (2000) 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.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, 2010; Maskus and Penubarti, 1995; Smith, 1999). However, without innovation capability, nothing is produced even with strong IPRs (Lee, 2019). 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, 2006).

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, 2006).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, 1997; Lee et al., 2003). 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, 2010); 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).⁶ However, empirical evidence on the effects of utility models on innovation and growth is scant and is based largely on anecdotal evidence. Kumar (2002), 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 (1999), 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. (2012) 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. (2012) 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, 1997; Lall and Albaladejo, 2001). 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. (2012) 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, 1997; Eeckhout and Jovanovic, 2002). 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, 1999; Block et al., 2015; Bosworth and Rogers, 2001; Flikkema et al., 2014; Greenhalgh and Rogers, 2006a, 2006b; Malmberg, 2005; Mehrazeen et al., 2012; Mendonça et al., 2004; Sandner and Block, 2011; Schmoch, 2003). Moreover, some researchers consider trademarks a market strategy for innovative firms or ventures (Block et al., 2014; Desyllas and Sako, 2013). 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., 2014; Helmers and Rogers, 2010). 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., 2017). 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. (2022) 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, 2002, 2004; Malerba and Mani, 2009).

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. (2022) verified such correspondence in their empirical analysis.

To analyze sectoral differences in the dominant forms of IPR across sectors, Kang et al. (2022) 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. (2012), 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. (2012) 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. (2022) 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, 2015). 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. (2012).

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

The theoretical literature thus far has identified two opposing effects of stronger IPRs in a destination country on the exports of a source country: a market-expansion effect and a market-power effect (Maskus and Penubarti, 1995). On the one hand, the exporters perceive an expansion in their market due to a reduction in imitation by local firms. The demand curve for their exports shifts out in the destination market. On the other hand, stronger IPRs in the destination country increase the exporters’ market power, reducing the elasticity of the demand they face and, thus, the volume of exports. Hence, empirical analysis is typically pursued to see which effect dominates.⁷

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

In fact, the WTO Dispute Settlement Body has overseen numerous TRIPS-related disputes; forty-three official cases have been filed since the inception of the WTO.⁹ As of 2010, most cases (twenty-six disputes) were initiated by developed countries, primarily the United States and the European Union, and developing countries were involved in sixteen disputes.¹⁰ Outside the WTO, firm-to-firm¹¹ and government-to-firm disputes have also been growing rapidly. For example, as Figure 4.1 shows, the United States International Trade Commission (USITC) has overseen a quadrupling of IPR-related disputes against imports during the past two decades. Indeed, more American firms have filed complaints against IPR violations than against unfair dumping, as indicated by the falling trend in traditional trade remedies such as antidumping and countervailing duties. These developments suggest that the burden of global legal costs is quite real for exporters, especially those from developing countries.

Figure 4.1 Trend in U.S. International Trade Commission (USITC) filings on “Unfair Imports”: Increases in IPR-related litigation in the United States

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

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

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

While the existing literature has not touched on the interaction between IPRs and technological capabilities and its implications for exporting, this study, following Shin et al. (2016), explicitly considers the impact of IPRs on trade. It specifically examines the direct impact of IPRs and their indirect impact through their interaction with the exporter’s LT.

To illustrate the reasoning about interaction effects, Shin et al. (2016) assume the following linear representation, allowing for some interaction between the source country’s LT and the destination country’s IPR level. The value of exports (E) can then be considered to take the following functional form:

$\text{E}\left(\text{IPR, LT, }\text{.}\right)\text{= αIPR +}\text{βLT}\text{+ γIPR}\times \text{LT + …}$(4.1)

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

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

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

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

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

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

Shin et al. (2016) conducted econometric estimations to verify the above. Their results confirm that the negative interaction effects between LT and IPR are significant and robust for the exports of the South to the North, compared to the exports of the North to the South. If the coefficient of the interaction term $\gamma$ is negative, this means that the negative interaction effect offsets the positive effects of IPR protection alone (α). It implies that the impact of a higher level of IPR protection in the North on exports from countries in the South depends on the exporters’ LT. For Southern exporters with low LTs, stronger IPRs still help promote the growth of their exports because the negative interaction effect is quantitatively too small to fully offset the positive effects of IPRs on exports. In contrast, for Southern exporters with a higher LT, the negative interaction effects are large enough to offset the positive and direct impact of IPRs.

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

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

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

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

The preceding section discusses how IPR protection in the North can be a barrier to innovation-based catch-up by latecomers. The next question is whether there is any way to overcome this barrier. While reform of the global IPR regime is one method and has been discussed in the literature, this chapter suggests a new alternative – namely, leapfrogging. Leapfrogging makes sense to the extent that it involves latecomers moving to new areas and products ahead of incumbents, thereby avoiding direct competition against the incumbents in the same markets (Lee, 2019).

The origins of the leapfrogging thesis may be traced to Freeman and Soete (1997) and Perez and Soete (1988). Their insight is that emerging technological paradigms serve as a window of opportunity for latecomers to leapfrog: Not being locked into the old technological system, they are thus able to grab new opportunities in emerging industries. The arrival of new kinds of general-purpose technology (Helpman and Trajtenberg, 1998) can also serve as a window of opportunity when there are complementary technologies. Perez and Soete (1988) discussed latecomers’ leapfrogging advantages in terms of the following three aspects: entry barrier, accessibility of knowledge, and the possibility of lock-in by the incumbents.

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

Lee and Lim (2001) fleshed out the idea of leapfrogging from the examples of the Korean industries. The concept was clarified by path-following, stage-skipping, and path-creation by latecomers in their technological development – with “path” and “stage” referring, respectively, to the trajectory of technologies and the stages in the trajectories. Lee and Lim observed that the strategies of path-creation and stage-skipping can be regarded as two variants of leapfrogging.

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

One study used patent citation data to investigate the catch-up of Huawei in China with Ericsson in Sweden and found that Huawei relied on Ericsson as a knowledge source in its early days but subsequently reduced such reliance and increased its self-citation ratio to become more independent (Joo et al., 2016). This finding is similar to the pattern between a follower – Samsung – and an incumbent – Sony – as analyzed using the method in Joo and Lee (2010). The investigation of mutual citations (direct dependence), common citations (indirect reliance), and self-citations strongly indicates that Huawei has caught up with or overtaken Ericsson by taking a different path rather than by continuing to follow Ericsson’s path. Moreover, unlike Ericsson, Huawei developed its technologies by relying on recent technologies, which resulted in a patent folio with short citation lags (which means that its technologies have a short cycle). Huawei also relied heavily on scientific knowledge (so-called nonpatent literature), which is a public good that is free from IPR disputes with the incumbents. The citations to nonpatent literature and the patent folio with short citation lags imply that Huawei has extensively explored basic research and maintained up-to-date technologies to accomplish a technological catch-up, thereby avoiding another patent dispute with incumbent firms.

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

5 Patents and Economic Inequality

Daniel Benoliel

^* and Rochelle C. Dreyfuss

Introduction

The needs of the Global South (or South) are proving to be far more complex and difficult to ameliorate than anticipated when the World Trade Organization was established amid promises of enhancing social welfare.¹ In particular, inequality among member states has persisted despite the optimistic projections made during the Uruguay Round negotiations. This is an issue of concern to intellectual property scholars because economic theory suggests that technology policy is a key contributor.² That is, it appears that strong patent protection and the returns on investment available to those who innovate lead to advances that increase productivity. For example, in their book The Second Machine Age, Erik Brynjolfsson and Andrew MacAfee found an exponential rise of digital technologies automating jobs, offering capital owners and innovators an accumulative stake of productivity.³ With that increase, there is a concomitant growth in income for the innovators themselves, as well as both income and other benefits that accrue to the countries where these inventors reside.⁴ Developed countries are in a superior position in this regard, not only because their technical capabilities are at the technological forefront. As economists such as Stanley Engerman and Raymond Sokoloff have demonstrated, they are also advantaged by the presence of wealthy individuals and a large middle class with a strong appetite for technological advances, which helps to spur innovation from the demand side.⁵

The situation can be very different in developing countries. Reflecting their limited market and institutional capacity to innovate, or to adapt and improve upon existing technologies,⁶ many developing countries are characterized by low incomes resulting from low average productivity. There are, however, a few developing countries – such as Brazil, China, India, and Malaysia – that have achieved relatively advanced levels of technological capability.⁷ Significantly, these countries have primarily relied on an explicit policy of copying foreign technologies.⁸ Rather than attempting to expand the global frontier – which, as the World Bank has found, is likely beyond their past (and often present) abilities⁹ – these nations advance the adoption and adaptation of preexisting technologies.¹⁰ In short, they engage, at least partly, in what Jerome Reichman has termed “fair following.”¹¹ In a prescient article, written as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) went into force, Reichman suggested that fair following creates domestic training and educational opportunities, plugs local personnel into global information networks, and gives rise to conditions conducive to growth in technological capacity.¹² Twenty-five years of experience with the TRIPS Agreement suggests that Reichman and the countries that followed his vision were right. Many lessons can be drawn from their practices, as we discuss, given the concern over economic inequality.

The first section of this chapter identifies the roles that innovation and international intellectual property protection play within the theory of economic inequality. The second section focuses on the impact of international patent law and demonstrates how the demands of the North for ever-stronger patent and patent-like protection exacerbate the problem of technological inequality. The third section suggests ways in which the patent system could be restructured to better enable local inventors to avail themselves of the global knowledge base and enhance the incentives available to innovators who fulfill the needs of the South. In our view, reducing intellectual property–based inequality in the ways we outline is a key step toward mitigating the problem of income inequality.

5.1 Inequality Economics and the Role of Intellectual Property

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.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.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.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.¹⁶

Keynes presented the second theory, which is that the “economic problem” of scarcity was solvable.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,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.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.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,²¹ as well as others,²² including notably Joseph Stiglitz²³ and Thomas Piketty,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.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.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,²⁷ alone and with Shin-Kun Peng,²⁸ and Christian Kiedaisch²⁹ 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,”³⁰ and that there is a “causal effect of innovation-led growth on top incomes.”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.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.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.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.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.³⁶ Significantly, he defined capital to include land, real estate, equipment, financial capital, and also intellectual property.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.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.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.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).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.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.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.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.⁴⁵ With regard to the volume of licensing and royalty revenues, most developing countries appear to be drastically marginalized.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.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.⁴⁸

5.2 Patented Law as a Source of Economic Inequality

It is not only the availability of patented technology that plays a role in inequality. Patent law itself contains features that contribute to the loss of social welfare predominantly in the South. Two factors stand out. First, patent rights wall off segments of the world’s knowledge base. Exclusivity can prevent others from making incremental improvements or adaptations, including advances that meet the needs of the poor but which the patent holder refuses to fulfill. Second, the patent system fails to deliver incentives to invest in inventions of interest to the South because the knowledge base – whether accessible or not – nonetheless constitutes prior art. As a result of this so-called novelty trap, the developer of advances that fulfill the demands of the South is unlikely to acquire the protection that would allow it to earn a return on investment.⁴⁹

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.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/AIDS⁵¹ and by Amy Kapczynski’s and Ana Santos Rutschman’s studies of the delivery of vaccines.⁵² Carlos Correa has more generally explored the impact of intellectual property on health in developing countries.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,⁵⁴ recognized the right of member states to enact exceptions and limitations and to issue compulsory licenses,⁵⁵ and permitted parallel importation.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.⁵⁷ Newer bilateral investment agreements and FTAs are now similarly negotiated to take account of access issues, especially in the health sphere.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,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.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.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.⁶² The advent of patent and patent-like protection for seeds may well have spurred new agricultural developments.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.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.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.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.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.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.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.⁷⁰ Especially as the world moves to an absolute standard of novelty,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.⁷² Indeed, the TRIPS Agreement arguably abolished their use.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.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.⁷⁵ NGOs, intergovernmental organizations, and activists have supplemented these responses with advice on how to meet TRIPS obligations with minimal levels of protection,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.”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 Reforming the Patent System

In our view, a more fruitful approach to remedying economic inequality is to directly attack the systematic ways in which the international regime throws obstacles in the road toward technological self-sufficiency. We offer a menu of approaches that a country should consider (individually or in the aggregate) in revising its laws to promote innovation geared to local capabilities and domestic conditions. These include choosing an exclusivity regime appropriate to its technological and legal situation, structuring the landscape of prior art to facilitate access to the world’s knowledge base, and choosing the right beneficiaries for protection. We discuss the choices available in each category as well as their compliance with international obligations.

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;⁷⁸ many countries have, among other approaches, long recognized petit patents, patents of importation, patents of improvement, certificates of addition, and utility models.⁷⁹ Even today, countries are considering or experimenting with new forms of protection, including commercialization patents,⁸⁰ supplementary protection certificates (SPCs),⁸¹ and data and market exclusivities.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.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:

[T]he east Asian countries, viz. Japan, Korea and Taiwan have absorbed substantial amount of technological learning under weak IPR [intellectual property right] protection regime during the early phases. These patent regimes facilitated the absorption of innovation and knowledge generated abroad by their indigenous firms. They have also encouraged incremental innovations on the foreign inventions by domestic enterprises and developed a patent culture through utility models and design patents. As the local technological capabilities matured and the domestic industry sought stronger protection for guarding their own inventions, the IPR regime was strengthened …⁸⁴

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.,”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.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).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.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.”⁸⁹ It must also give most-favored-nation status to the nationals of other members of the Agreement.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.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.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.”⁹³ The nondiscrimination provision of the General Agreement on Tariffs and Trade applies to goods only when they are alike.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.⁹⁵

Conclusion

Economic research has demonstrated an intimate connection between technological capacity, income, and inequality. As a result, reducing economic inequality requires an examination of the factors that lead to technological disparities among nations. While these differences have multiple causes, patent law is an important explanatory factor. As the experience of emerging economies shows, greater use of exclusivities that are less technologically demanding than patent rights may ameliorate these problems. However, restructuring the patent system to alter the landscape of prior art and calibrate the inventive step to domestic capabilities is also worthy of consideration. This chapter suggests the use of a relative novelty standard that includes in the prior art only locally available technology and a standard of inventiveness that takes into account the capacity of domestic innovators.