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Moderate IPR policy needed to drive innovation

Author  :  Yin Zhifeng     Source  :    Chinese Social Sciences Today     2016-02-22

Patents, copyrights and trademarks are generally the major forms of intellectual property.

Today, the industrial structure in China has reached a crucial phase in which innovation has become the driving factor of the country’s sustainable economic development. To foster industrial innovation, the Chinese government has promulgated a number of policies, many of which emphasize intellectual property rights (IPR) protection because it encourages investment in technological progress. IPR protection also spurs the industrialization of innovative products and promotes skill sharing within the industry.

Legislation, enforcement

In recent years, China has made progress in IPR protection both in terms of legislation and law enforcement. From 1985 to 2005, China’s score on the widely adopted Ginarte-Park Patent Index, which measures the strength of IPR-protection laws, improved from 1.33 to 4.08 on a 5-point scale. Its score on the index of IPR enforcement compiled by the Fraser Institute, rose from 4.15 in 1995 to 5.81 in 2013 with the full score of 10. A study that considers a comprehensive legislative and law enforcement index showed that the effectiveness of IPR protection laws in China had increased by 50 percent from 2000 to 2010 and enforcement improved by 55.65 percent from 1985 to 2010.

Such progress can be attributed to many factors. With a better economy and stronger research and development capacity, China has accumulated an increasing amount of intellectual property, including patents, trademarks and industrial designs. According to the statistics released by the World Intellectual Property Organization, the number of Chinese applications for patents reached nearly 930,000, the amount of trademarks applications hit 2.2 million and industrial design applications totaled more than 560,000. In all categories, China ranked first in the world. In an attempt to translate intellectual property advantage into a competitive advantage, the Chinese government has become more aware of protecting the country’s IPR. Moreover, since China opened to the world economically, the amount of imported products, foreign direct investment and acquired technologies has soared. To comply with direct or indirect demand from foreign governments or transnational companies through free trade agreements and bilateral treaties, China needs to provide a level of IPR protection that is higher than the standard prescribed by the Agreement On Trade-Related Aspects of Intellectual Property Rights (TRIPS). In addition, economic restructuring and industrial upgrading in China requires stronger IPR protection to foster the originality and breakthroughs needed to drive innovation in emerging industries.

Overly high IPR protection

From the perspective of the classical theories of IPR protection as well as the experiences of developed countries, the current fierce global competition in IPR will lead to an overly high level of IPR protection. This means that the actual protection has surmounted the optimum level. The concept of optimal IPR protection signifies that the IPR system has a dual effect. Thus, protection should strike a balance between the static loss that could result from IPR monopoly and the dynamic benefit that would be reaped from fostering innovation. Such a balance requires intellectual property protection to be moderate.

The level of IPR protection in developed countries is usually high. Relevant studies have found that the IPR protection intensity of the Organization for Economics Co-operation and Development (OECD) member countries has gone beyond the optimal value thus further protection would hamstring the total-factor productivity. Other studies show that in a developed economy, the relationship between the level of economic development and IPR intensity takes on an inverted U-shaped, i.e. the level of IPR protection tends to be overly high in countries with a strong economy. In fact, American economist Suzanne Scotchmer pointed out that developed countries need to reexamine whether IPR protection is overly intense instead of just constantly strengthening protection.

There are two reasons why IPR protection in these countries exceeds requirements. One is that with rapid economic development, cumulative and complementary innovation has become the basic pattern of modern innovation, and the result is that subsequent innovation will become increasingly dependent on old IPR resources that had previously accumulated. Excessive IPR protection would hinder later innovation, reducing the stimulating effect of IPR protection.

The second reason is that IPR protection has been frequently utilized in lawsuits to stifle competition. This means excessive IPR protection is inefficient, which also brings more uncertainty to innovation.

The patent trolls who have plagued America in recent years are examples of this. They buy patented technologies, which are used as legal weapons to charge accused infringers a licensing fee that is far beyond the patent’s actual value. The practice has seriously disrupted the effective operation of the IPR system, which exacerbates the inefficiency brought by the IPR protection monopoly. According to the statistics from some scholars, more than 5,800 companies fell victims to patent trolls, which has largely increased the risks caused by IPR infringement and suppressed the due innovative effect. Due to a lack of experience among developing countries in negotiations such as TRIPS, some of their IPR protection will become excessive out of vicious competition. Moreover, the cost needed for vigorous IPR protection would exceed the benefits of innovation.

Improving the level of IPR protection is in line with China’s realities. What is noteworthy is that in the phase when IPR protection rapidly develops, its protection will probably be overly intensive. The theoretical understanding of optimal IPR protection is not yet profound and systematic enough, which means there is a lack of theoretical guidance that could prevent the excesses of IPR protection. Also, in the context of fiscal decentralization, vicious regional competition in IPR protection will become more of a problem as the innovation-driven strategy deepens. In fact, the IPR protection level in China has obviously surpassed the lowest level required by TRIPS.

For China, the importance of avoiding superfluous IPR protection is apparent for several reasons. In terms of implementing its IPR system, China is a relative latecomer, and the current system is still immature compared with Western countries, which means it is vital to absorb the successful experiences of other countries. From the perspective of both theory and practice, those countries with relatively sophisticated IPR systems now face the possibility of overly vigorous IPR protection. So in China, such a problem needs high attention and should be avoided.

Besides, IPR protection creates the ratchet effect, which means that higher institutional expectations would be produced in the subjects of behavior after the protection level has been improved. And such effect would be strengthened worldwide under the framework of most-favored nation treatment and other mechanisms.

To avoid overdoing IPR protection, a series of actions need to be taken. Theoretical and empirical research on the intensity of protection needs to be conducted to dynamically determine the optimal level of IPR protection. Also, academia must determine the target and expected social effect of IPR protection. Moreover, the core factors and their mechanisms that would affect the IPR protection should be further determined.

The long-term effectiveness of the IPR system must be closely monitored. Policymakers and academics need to assess its effect on stimulating innovation, keep tabs on the adverse impact brought by the tactical deployment of IPR and adjust the extant IPR protection level and its operating system accordingly while curbing the abuse of IPR. Finally, an international environment appropriate for rational IPR protection must be fostered, and leaders must avoid the overly protective IPR as China deepens its connection with the world market.

 

Yin Zhifeng is from the School of Economics at the Central University of Finance and Economics.

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The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994.

It introduced intellectual property law into the international trading system for the first time and remains the most comprehensive international agreement on intellectual property to date. In 2001, developing countries, considering that developed countries were insisting on an overly narrow reading of TRIPS, initiated a round of talks that ended with the Doha Declaration. The Doha declaration is a WTO statement that clarifies the scope of TRIPS.

Specifically, TRIPS also specifies enforcement procedures, remedies, and dispute resolution procedures. Protection and enforcement of all intellectual property rights shall meet the objectives to contribute to promoting technological innovation and the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.

Since TRIPS came into force, it has been subject to criticism from developing countries, academics, and non-governmental organizations. Statements by the World Bank indicate that TRIPS has not led to a demonstrable acceleration of investment to low-income countries, though it may have done so for middle-income countries.

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