Abstract: Theory and evidence suggest that the current intellectual

property rights (IPRs) regime leads to global under-diffusion and

under-utilization of information and technology thereby limiting global

economic growth. It is argued that the current suboptimal intellectual

property regime arises out of the confusion of intellectual property with physical

property. Physical property is a rival good--this implies that two

persons may not use the good at the same time. On the other hand,

intellectual property is inherently non-rival--a second (or third) person

may use the same intellectual property without decreasing the benefits of

use to the first person. Because information and technology possess the

characteristics of a public good that is non-rival and only partially

excludable, it is argued that the market fails to allocate these

resources efficiently. The current market structure made up of few

sellers (primarily northern cone Transnational Corporations (TNCs)}

produces too little intellectual property while charging a higher than

socially optimum price. A closer to optimum solution could be implemented

if a suitable global governing body existed to assess the benefits of IPRs

and to reward the producers of information and technology independent of

the imperfectly competitive market. In addition, the author suggests a

move similar to land reform, in which existing monopolies in collateral

technologies would be gradually broken up to allow unhampered "Open

systems," and "Open Source Code" development of technology. Access to

information would be granted to all at the cost of delivery with lump-sum

payments being made by the global governing body to information providers.

It is argued that adequate incentives to produce and to innovate new

technology would exist within a regulated competitive market framework.

Developing countries would not be shut out of technological innovation for

lack of funds to purchase non-rival technologies. Northern cone

producers would enjoy an expanding global market for high tech

intermediate goods and support for tacit technologies. The rising tide of

growth in the world economy would lift all boats.

The author believes that the global patent and copyright model as it is now constituted is obsolete for several reasons:

1. Information has a much shorter useful life on the whole than

the property rights granted. This is largely due to faster

knowledge transfer through internet and other communications advances.

2. Research shows that adequate incentives exist to basic

research and innovation without the patent monopoly incentive.

3. Granting extremely long property rights in intellectual

property has no social benefit [the practice is a holdover from

the industrial age.]

4. Proprietary solutions become less desirable in a world in which

interoperability is a key requirement. [Thus the demand for open

systems.]

5, . The cost of enforcement especially in developing countries

outweighs the benefits or incentives derived from the current

global intellectual property regime.

6. The cost of compliance for technology companies also outweighs

the social benefits to be derived from the incentives provided to innovate.

7. The pace of technological development forces companies to

develop new technologies without the patent incentive.

8. Dependence on cross licensing of patents for future technology

development creates an unwanted incentive for large

corporations to merge. Mergers create a disincentive to further

technological development by limiting competition.

9. In a world where innovators build on existing technology,

patents often act as a constraint to innovation by denying

innovators access to first best solutions.

A new paradigm seems to be emerging in high tech industries that facilitates unhampered knowledge sharing. Vendors such as IBM are creating open systems whereby other manufacturers are free to adopt the technologies and standards incorporated into the system. Software vendors such as Red Hat and OSF are adopting the strategy of Open Source code —choosing to allow unhampered development and distribution of their software product.. A profit is derived not from the intellectual property per se but from the company providing support to the user community of the authored software.

The current suboptimal intellectual property regime arises out of the confusion of intellectual property with physical property. With physical property allocative efficiency is achieved by assigning ownership rights. The owner of property will see that the property is put to its highest and best use because the owner has a profit incentive to do so.

Ideally perfect competition in physical commodities forces owners to price their product at its marginal cost of production. Thus the socially optimum amount of a product will be produced. The socially optimum price will be charged according to the criteria that the social cost should equal the marginal cost (including a normal profit).

However, the social cost of producing one more unit of the same technology as one already produced is close to zero (less than the average cost of production) thus our optimizing criteria fails. The market has failed. How will producers of technology profit if they sell the technology at the economically efficient price? Should the government step in and make a lump sum payment to the inventors of new technology who make their technology available freely to everyone. The catch is that the payment must be high enough to assure that the inventors of new technology do not have sufficient incentive to retain the technology to exploit it as a "trade secret."

Charging others for the use a patentable idea, an inherently non-rival good

Is economically inefficient. Charging leads to under-diffusion to the firms who could benefit but due to uncertainties are unwilling to pay for a license. Charging also leads to under-utilization by firms who are licensed but would produce more if they did not have to pay a royalty on every unit produced.

To enjoy the widest possible field of use an idea should be costless to use since there is no opportunity cost in sharing the idea. Admittedly there are transactions costs in sharing technology due to its tacit and idiosyncratic nature but these can be dealt with separately in a market for "support." As I shall attempt to show the proprietary development patterns of the past age are not suitable to present world conditions.

The economies of scale inherent in production with a zero cost input such as intellectual property would seem to favor large firm sizes. A large firm with a higher level of production is able to reduce fixed costs per unit better than a small firm. On the other hand a preponderance of large firms offers fewer choices for consumers and fewer paths of development.

One of the consequences of globalization is the emergence of transnational corporations (TNCs), that operate globally with the avowed purpose of maximizing wealth for shareholders who for the most part live in Northern Cone countries. TNCs own most of the world’s intellectual property including patents, copyrights, trademarks, and trade secrets. TNCs conduct most of the private research and development efforts around the world. Bertin and Wyatt present evidence to show

The consequence of this weakness in invention in developing countries is a one way trade in technology from the developed countries to the developing countries. The one way trade results frequently in balance of payments deficits for developing countries (17, 120). TNCs claim patent rights in developing countries. Thus the IPR protection in place in the developing country helps to establish the technological dominance of the TNCs. According to Bertin and Wyatt TNCs own five out of six patent applications in developing countries. Often the TNCs purpose in filing a patent application is not to do local manufacturing with the technology; but, alternatively, its purpose is to protect an import monopoly. If the TNC does produce locally it usually exacts large royalty payments from the manufacturing subsidiary or licensee repatriating the payments to its headquarters (17, 122). If the developing country sees the situation as unfair the TNC reminds the parties that the terms of trade are dictated by the market. Thus developing countries object to the expense of enforcing IPRs when enforcement does not appear to benefit their citizens directly. TNCs complain that they are losing profits because lack of enforcement has led to the unlicensed use of their patents and copyrights. As Konan et al. tell us:

Many have noted that intellectual property has the characteristics of a public good.

Machlup wrote, "the right to exclude others from the use of particular material things is necessary for their efficient use...The rights to exclude others from the use of an idea demands a justification on alltogether [sic] different grounds" (19,46). In 1962 the economist Arrow concluded that there were no grounds to exclude others from the use of ideas. Technology is information, although costly to produce. Technology is non-rival and free of opportunity cost in its use. If one allows someone else to make a copy of a blueprint or a manuscript, one is not deprived of the use of the original. Likewise the adopter does not have to pay again the costs of developing the idea. Thus, according to Arrow, technology should be free to everyone who wants it (20). Charging for the use of an idea leads to inefficient under-utilization of the idea.. If a charge is exacted existing ideas will not be diffused among firms optimally. Prospective IPR owners cannot collect royalties from all who may collaterally benefit from the technology that they create. Thus, for lack of adequate incentives, the market will supply too little intellectual property. The inventors will not consider in their decision (whether to invent or not to invent ) the various benefits that will accrue to non-owners (non-pecuniary externalities). Inventors will consider as an incentive only the economic benefits that the inventors can capture. The fact that the inventors are not able to extract all the benefits of their invention results in their choosing to produce less than the "socially" optimum amount. The under-utilization and under-production of intellectual property result from a market failure that is due to the non-pecuniary externalities that are typically associated with private production of a so-called "public" good. As Konan et al. inform us,

Some would argue that a second best solution is possible by assigning property rights over specific forms of information. When considering the debate about whether property rights should be granted in intellectual property in the form of patents, Nelson and Winter suggest that there is a tradeoff between static efficiency (holding prices at the marginal cost of production) and dynamic efficiency (maximizing gains that will result from future and continuing innovation). These authors argue that we must balance the under-utilization and lack of diffusion results in the present period against the possibility of underproduction in the future. They argue that, without the incentive patent protection offers, the system is dynamically inefficient–producing too few ideas that can be patented. Mansfield’s empirical results seem to indicate otherwise. According to his survey TNCs would continue to produce and innovate new products primarily for competitive reasons whether patent protection existed or not(22). In fact Nelson and Winters’ theoretical analysis is flawed by the implicit assumption that intellectual property is a rival good when in fact intellectual property is inherently non-rival.. Making intellectual property excludable with patent protection does not make intellectual property exactly like other goods–intellectual property retains its non-rival feature. As Konan, et al., rightly point out,

As the reader will recall Arrow argued against assigning property rights in technology. He argued that since technology is "costless to use" it should be free(20). Unfortunately, Arrow’s argument that technology should be free because it is "costless to use" ignores an important consideration. Pavitt is quick to point out this consideration,

Technology is complex because of the variety of inputs and knowledge bases required to produce it. Some of those same inputs and knowledge bases are needed to be used in the transfer the technology. Technology is tacit because of the impossibility of speaking or writing down all aspects of a technological development. Some aspects are encapsulated in the experience or know how of the inventors and the early adopters. The idiosyncratic aspect of most technological ideas mean that they cannot be communicated by simple copying but must be adapted to the situation in which they are used. On the basis of these points TNCs argue that they are the most efficient vehicles for the transfer of technology to developing countries. The TNC owns both the codified technology and the know-how that is encapsulated in the human capital of the firm. The TNC has mastered the complexity and the tacitness of its owned technology. The TNC can hire local experts to adapt to the idiosyncratic features of using the technology in another country. Unfortunately TNCs who make a direct investment in a developing country by setting up a subsidiary there, do not transfer technology to local firms. The more TNCs internalize technology and expand their market to capture the externalities associated with those technologies, the more barriers they erect to the imitation of technology by local firms. Imitation may be the way local firms can grow to become innovators and inventors themselves. This opportunity is lost if the local imitator is forced to cease operation because of a TNC held patent. TNCs will often demand patent protection for their owned technology before they will bring the technology into a developing country. The current TRIPs agreement requires developing countries to phase in western style protections for intellectual property. We speculate that this is being done at the insistence of the TNCs. The level of protection TNCs desire imposes enormous enforcement costs on the developing country not to mention the domestic product lost when local imitators are forced to cease their operations. As Konan et al. inform us,

Konan and her co-authors correctly point out that both producers and consumers in the intermediate and developing countries lose when firms that are good enough to imitate but not good enough to invent are shut down. They caution that producers and consumers throughout the world may lose as the constraints on imitation affect global economic growth. These authors imply that the TRIPs agreement may actually institutionalize constraints on global economic growth. We hasten to add that the TNCs probably do not object to institutionalizing constraints on global economic growth because TNCs will benefit as a result of the IPR ownership that constrains growth. TNCs as a result of their domination in IPR ownership see themselves getting ever-greater shares of whatever growth there is.

Developing countries are left with a dilemma. How do these countries gain access to technology without creating dependency relationships with the TNCs. It is well known that throughout the world "Improvements in technology have been the real force behind perpetually rising standards of living (1, 24)." It seems clear that a developing country in which technology is scarce could improve its standard of living greatly by simply adopting some of the technologies which exist in the developed countries. Adoption of existing technology by a developing country, however, is fraught with difficulties. Pack and Westfal advance three hypotheses concerning these difficulties:

These hypotheses–if demonstrated–suggest that the government in a developing country should engage in selective intervention to facilitate technology transfer while minimizing dependency relationships with the TNCs. This finding contradicts the neoclassical paradigm that suggests that the government in a developing country should encourage a market solution by adopting a neutral policy regime. Selective intervention by developing countries is a second best antidote to the informatic imperialism of northern cone TNCs.. Global reform of the intellectual property regime would constitute the first best solution. If the More Developed Countries are serious about helping the less developed countries, the most helpful thing that these countries can do is to share their technology and information.

The current market structure made up of few sellers (primarily northern cone Transnational Corporations (TNCs)} produces too little intellectual property while charging a higher than socially optimum price. A closer to optimum solution could be implemented if a suitable global governing body existed to assess the benefits of IPRs

and to reward the producers of information and technology independent of

the imperfectly competitive market. In addition, I suggest that a global governing body enforce a move similar to land reform, in which existing monopolies in collateral

technologies would be gradually broken up to allow unhampered "Open

Systems," and "Open Source Code" development of technology. Access to

information would be granted to all at the cost of delivery with lump-sum

payments being made by the global governing body to information providers

Any reforms would of course have to be phased in. The first reform I suggest is to reduce the term of copyright to 25 years with no renewal. Since information is the common heritage of mankind, TNCs should not be allowed to exploit works for 100 years (a near perpetuity). Software, literary, and scholarly works should pass more quickly into the public domain. The second reform I suggest is to break up the patent monopolies of northern cone TNCs by gradually reducing the length of patents and reducing the costs of cross-licensing existing patents. Instead of asking developing countries to adopt Northern Cone industrial property regimes, the global intellectual property regime should be revamped so as not to constrain global economic growth.

It is argued that adequate incentives to produce and to innovate new

technology exist within a competitive market framework without granting excessive patent monopolies. .Technology will progress more rapidly if there are many paths to innovating and developing that technology. Open systems expand the market for a given technology. The global market is big enough to support multiple innovations of the same technology. This is rationale behind the open systems and open source movements. Under a reformed IPR regime developing countries would not be shut out of technological innovation for lack of funds to purchase non-rival technologies. Northern cone countries could also benefit. Northern cone producers while perhaps losing market share in consumer goods would enjoy an expanding global market for high tech intermediate goods and support services for tacit technologies. The rising tide of growth in the world economy would lift all boats.

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