Promoting innovation: An economic perspective

Against the backdrop of one of the world’s most serious and widespread economic crises, and a rapidly evolving technological and geo-economic landscape, governments and businesses around the globe are grappling with an abiding question – how to promote innovation, secure economic growth and boost development. In this interview WIPO’s Chief Economist, Carsten Fink, explores economic perspectives on the role that IP plays in promoting innovation, growth and development.

As WIPO’s first Chief Economist, what does your role involve?

Throughout history, economic development has been a key motivating factor for governments to protect intellectual property (IP) rights. This was already the case in 1474 when the Republic of Venice issued a decree by which new and inventive devices could obtain legal protection against copying from third parties. It is still the case in today’s world, in which the inputs of intangible assets (knowledge, information and ideas) have become fundamental to the production of most goods and services.

Of course, the role of the IP system has evolved over the centuries and continues to change - maybe faster than ever before. New technologies and new business models emerge to challenge established IP policies and practices. The biotechnology revolution in the life sciences and the widespread adoption of modern information and communication technologies by businesses and consumers illustrate some of these challenges. Greater economic integration, in turn, calls for new approaches to the international governance of what are still largely national IP rights.

Against this background, the role of the Chief Economist is to inform WIPO member states and the public at large about ongoing trends in the IP system and to analyze how different IP policy choices affect the economic performance of countries. Drawing on the statistical data which have long been collected by WIPO, my colleagues in the recently created Economics and Statistics Division and I seek to generate new empirical evidence on policy questions affecting member states. We also work closely with academic economists and seek to mobilize their expertise for policy-relevant IP research.

Why was it considered important for WIPO to strengthen its focus on the economics of IP?

As an economist, I would, of course, argue that such a focus was long overdue. More objectively, there is greater demand from policymakers for economic analysis now than there was two or three decades ago. Usage of the patent and trademark systems has reached historically unprecedented levels. Companies in a larger number of sectors and from a larger number of countries look to the IP system to build and sustain a competitive edge. Also, many IP-related questions have moved to the forefront of public policymaking—just observe the recent discussions on IP and climate change or Internet file-sharing. Finally, the conclusion of the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) has triggered many legislative reforms, especially in developing countries, prompting questions about their economic effects.

Looking more specifically at WIPO, the adoption of the Development Agenda in 2007 was an important milestone, resulting in stepped-up assessment and evaluation of IP policies. In addition, one of the nine Strategic Goals approved by member states in 2008 envisages WIPO becoming a “world reference source for IP information and analysis.” This Strategic Goal is also included in the Medium Term Strategic Plan covering the period 2010-2015 that was recently submitted to member states. Against these developments, it was only natural for the Organization to strengthen its focus on economic analysis.

Not surprisingly, this greater emphasis on economic analysis is not confined to WIPO. A number of IP offices have in recent years created chief economist, or similar, positions—notably the European Patent Office and the national IP offices in Australia, Canada, France, Switzerland, the United Kingdom and the United States. We recently launched an economists’ network involving all these offices and very much look forward to collaborating with them.

What initiatives are you launching?

Let me mention a few. We’ve created a Seminar Series, to which we invite economists from around the world to present their latest research to the Geneva IP community. The idea is to stimulate an economics-focused discussion on current IP policy topics—ranging from patenting of financial innovations to transaction costs and copyright. We’ve been fortunate to have had presentations from prominent economists such as Josh Lerner from Harvard Business School and Hal Varian, Google’s Chief Economist in that Series.

We’re also developing an annual analytical report that seeks to convey current economic thinking on a given IP-related topic to an audience of policymakers. This will complement our annual statistical report—World Intellectual Property Indicators—that summarizes trends in the use of IP around the world.

Finally, the WIPO Committee on Development and Intellectual Property approved, in April 2010, a three-year research project on IP and socio-economic development. I am especially excited about this project, as it will enable us to work with some of the brightest economists from around the world to improve our understanding of the IP-development nexus. Compared to most developed countries, where numerous academic researchers and think tanks study the function of the IP system, little economic research capacity exists in most developing countries, so I hope we can contribute to filling a gap with this project.

What is the current thinking about the link between IP, growth and development?

This is an interesting question. Let me back up here and first ask: what do we know about why certain countries, as opposed to others, achieve high rates of economic growth at a particular point in time? It turns out that development economists do not have a simple answer to this question. There is a plausible explanation behind many success stories—for example, high savings rates in China; sustained investment in human capital in the Republic of Korea or Singapore; sound management of natural resources in the case of Norway. However, these explanations are invariably partial and many economies that have exhibited similarly good pre-conditions have failed to generate high growth rates. One thing is sure, if there were a foolproof recipe for rapid economic development, policymakers would have already cooked-up the ingredients.

This is not to say that economic policy, including IP policy, is irrelevant. We know that innovation is critical for sustained economic growth, especially for countries that have exhausted their catch-up potential by rapidly accumulating physical and human capital. We also know that companies react to the incentives created by a country’s policy framework. But it is the combination of policies in relation to country-specific circumstances that matters. From this viewpoint, it is probably unrealistic to think that there will ever be a one-line answer to the question: is IP good or bad for development? A far more relevant question is: under what circumstances can a given type of IP policy support innovation and company growth in countries at different stages of development? It is on this latter question that we hope to generate new evidence within the context of the project I just mentioned on IP and socio-economic development.

In which areas is there a pressing need for further research and why?

There are many, but let me focus on two. One of the biggest challenges facing the international IP community is the large backlog of unprocessed patent applications in many IP offices. Intuitively, we know that the increased pendency times associated with these backlogs create uncertainty. This undermines the innovation objective which is at the heart of the patent system. Yet, it is quite clear that the implications of this uncertainty differ across sectors. For small startup companies seeking venture capital financing, securing patent rights at an early stage in the research and development (R&D) process is critical. For larger companies facing longer R&D cycles, processing delays may be less significant, but competing companies are exposed to uncertainty about which technologies may become subject to patent rights. As policymakers seek to tackle the large patenting backlogs, more empirical studies are needed to better understand the effects of longer pendency times on the nature and extent of the R&D activities of companies operating in different sectors.

A second example concerns the use of IP rights beyond their acquisition. We know relatively little about this. For example, what are the circumstances under which firms exploit their IP assets in-house or license them to other companies? Similarly, what are the circumstances under which firms exploit their IP assets internationally by setting up foreign subsidiaries rather than licensing them to local companies in a foreign country? One of the biggest challenges in generating credible empirical evidence to clarify these questions is the lack of data. IP filings and grants leave a statistical trace, whereas licensing transactions between private parties typically do not. New research will invariably entail the construction of new databases built on original data collection. As policymakers seek to better understand the functioning of national and international “knowledge markets”, there is a growing need for such databases.

How useful are IP statistics and what do they tell us?

IP statistics are useful, for two reasons. First, they assist national and regional IP offices in operational planning (the same holds for WIPO in relation to the WIPO-administered filing and registration treaties). They help answer questions such as: in light of the incipient economic recovery, what level of IP filings can we expect in 2011? Given anticipated filing growth, how many patent or trademark examiners should be hired?

Second, IP statistics are one of the few metrics we have for measuring innovation, an activity that otherwise leaves little trace. Clearly, the number of patents filed or granted is an imperfect indicator of how innovative companies or national economies are. For instance, inventor surveys have documented a “skewed” distribution of patent values, with a relatively small share of patents accounting for a relatively large share of the value of all patents granted. In addition, certain forms of innovation - service innovations, say, or adaptive inventions by indigenous communities - fall outside the IP system. That said, IP statistics offer useful insights into technological trends - for example, they can indicate which countries and which companies have emerged as leaders in certain fields of technology, fuel cell technology, for example. Combined with information on company characteristics, IP statistics can also help explain the innovation process itself - such as how ideas spread geographically and over time.

Will your work as WIPO’s Chief Economist focus exclusively on patents?

No. Certainly, patent rights receive much prominence in the policy discourse on innovation. However, trademarks, geographical indications, and industrial designs pose important policy questions in their own right. These are frequently neglected in the academic community. In addition, economists have interesting things to say about the functioning of the copyright system, especially in relation to digital works.

Of course, we are still a new Division and we have to set priorities. Nonetheless, I hope that over the years, we will be able to contribute in all areas of IP.