IPRs' Economics

In California Management Review's last issue, Costello & Costello have done a very good job trying to develop a theoretical framework for the determinants of the level of definition of intellectual property rights (IPRs) over resources. Their model is based on the assumption that IPRs are defined to the extent that the benefits of definition exceeds the cost of definition.

The authors build the cost-benefit structure of IPR's definition based on five major economic attributes:

1. Capture costs and rent dissipation created by non-exclusivity (non-excludability);

2. Exchange and policing costs;

3. Cost of reduced ivestment created by non-exclusivity;

4. Exchange value of resource;

5. Social costs of exclusivity.

Costello & Costello's framework indicates that stricter enforcement of IPRs may not always be in the best interests of the firm. They conclude that knowledge-based resources' enforcement efforts diminish in result of its particular economic attributes.

COSTELLO, Ayse O. and Costello, Thomas G., "Defining Property Rights: The Case of Knowledge-Based Resources". California Management Review, Berkley (CA), vol. 47, no. 3, Spring 2005.

Technology changes, economic laws do not

The assertion above, contained in the introduction of Varian & Shapiro's book "Information Rules" (1999), is the tone of The Economist's survey on the new economy of September 21st, 2000. The report called "Untangling e-conomics" (look at the right sidebar on Documents & Reports) describes the economic benefits of new information technologies, but poses questions to the more optimistic observers in regard of its magnitude and impact on economic growth.

The Soft Revolution

Paul Romer is one of the major precursors of the new growth theory. Intangible assets underlie Romer's ideas. They are what he calls software. The title of this post replicate Romer's marvelous essay on the ideas behind the new growth theory. In this paper, Romer starts with an astonishing question: If the quantity of raw materials on earth has not changed over time, how could it be that we have more total wealth per person than we have ever had before?

Romer argues that the answer to this increase in wealth lies on human's capacity to rearrange things to make then more useful and valuable. This paper is worth reading for those who want to understand the role of intangibles on economic and corporate growth! See: "The Soft Revolution". In: Journal of Applied Corporate Finance, Summer 1998.

Toward a New Economic Approach

In the 1990s, Americans' savings rate fell badly, but their wealth increased at an astonishing pace. What underlies this economic paradox?

This question was posed by Leonard Nakamura in his 4Q 2001 PhilyFed Business Review article. Nakamura concludes that the divergence between saving and wealth gains derive from capital gain's treatment in the U.S. national income accounts. As U.S. corporations retained more of their earnings in the form of intangible investments, dividend payments slumped together with investor's wealth (only dividends and interest payments are accountable for investment income, capital gains are excluded). Nakamura's study also elaborates on the importance and magnitude of intangible investments in the U.S. economy and their potential impact on national accounts.

Nakamura's wonderful body of work on the intangible economy is a necessary first step for those who wish to understand intangibles' role in today's economy and businesses. A fundamental reference is his work on U.S. intangible investments (download it!), where he presents preliminary direct and indirect empirical evidence that U.S. private firms currently invest at least USD 1 trillion annually in intangibles, almost the same amount as in plant and equipment.

We provide a link to Leonard Nakamura's homepage in the right sidebar, where you can download most of his work related to intangibles' impact in the U.S. economy.

IPR LIMITS III

For a deeper understanding on IPR’s social benefits and costs, look up the recent work of Paul A. David and the discussion elaborated in David & Foray’s article. Below, we provide a link to David´s World Bank presentation.

DAVID, P. A. and Foray, D., “Economic Fundamentals of the Knowledge Society”. Policy Futures in Education – An e-Journal, Special Issue: “Education and the Knowledge Economy”, January 2003.

DASGUPTA, P. and David, P.A., “Towards a New Economics of Science”. Research Policy, no. 23, 1994, pp. 487-521.

DAVID, P. A., “The Digital Technology Boomerang: New Intellectual Property Rights Threaten Global”. Open Science, [Presented to World Bank ABCDE-Europe 2000, Paris, 26-28 June.], 2000.

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IPR LIMITS II

In last week's Veja magazine (Revista Veja, ano 38, no. 36, Ed. Abril, p. 69), André Petry criticized the Brazilian government hesitancy to require compulsory licensing on AIDS drugs, specifically for Merck's Efavirenz and Abbott's Kaletra. Petry denounces these laboratories' drug price proposals and market practices. In spite of Health National Counsel's decision, taken on August 11th, to recommend the immediate compulsory licensing of Kaletra and another two AIDS drugs, the Health Ministry did not took any step further. These drugs are responsible for 65% of the full medication costs. If they were produced in Brazil, the government would save up around USD 85 million a year.

For Petry, the motive behind Brazilian government's attitude reflects the fear of US government's commercial retaliation...

IPR LIMITS I

On his last month's comment at the Project Syndicate site (www.project-syndicate.org), Prof. Joseph E. Stiglitz analyzed WIPO's Intellectual Property regime proposal for developing countries (look for WIPO's document on the right sidebar). He highlighted the important shift towards the interests of the developing world provided by WIPO's General Assembly since last October. Stiglitz query the social benefits of Intellectual Property Rights (IPR) in developing countries, arguing that the cost/benefit structure of IPR is different in industrialized and non-developed countries.

Prof. Stiglitz's argument is based on the following assumptions:

1. Although IPR spells innovation and creativity, it slows down the diffusion and use of ideas;

2. Faster innovation sometimes do not offset the costs of the monopoly power created by IPRs;

3. Competition in innovation not always lead to a succession of firms. In fact, a monopolist, once established, may be hard to dislodge;

4. The creation of any product requires many ideas, and sorting out their relative contribution to the outcome – let alone which ones are really new – can be nearly impossible.

Stiglitz concludes that the appropriate intellectual property regime for a developing country is different from that for an advanced industrial country. There has been a lot of controversy in the extent of World Trade Organization (WTO) negotiations regarding IPR's issues. Industrialized nations are continuously pushing non-developed countries to accept TRIPs standard agreement under international trade negotiations. As Stiglitz assigns, the incentive structure of IPR is different for each country. Shouldn't the IPR regime also be different?

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