The Importance of Intellectual Property Rights

Most rational people know the importance of defending their property. If you acquired property in a legal manner you would expect there to be some type of recourse if someone disposed of it illegally. In a world with no property rights or loosely enforced property rights there is no economic incentive to protect, improve or even acquire property.

With increased investment in an economy, income per capita increases, higher per capita incomes lead to greater levels of saving, which in turn leads to greater levels of investment thus completing the virtuous cycle. Therefore, it is imperative to protect property rights so that this investment in the economy can occur and grow.

Similarly, intellectual property rights (IPR) play a key role in the ability of rights holders to capitalise on their innovations. But what exactly is intellectual property (IP)? The World Intellectual Property Organisation refers to IP as creations of the mind, for example, inventions, literary and artistic work, and symbols, names, images and designs used in commerce. IP is omnipresent and surrounds us in nearly everything we do during the course of our everyday lives.

The intangible nature of IP should not detract from its importance to society. One of the major benefits of this intangible nature is that IP has a tremendous ability to reach a vast number of people at one time. More specifically, IP does not have the same characteristics as tangible property. For example, the shirt that I am wearing precludes anyone else from wearing it. However, the use of IP, such as a software programme, by one person does not reduce its availability to others.

Given the intangible nature of IP, innovators face a challenge to appropriate the economic benefits of their ideas. In order to overcome this problem, governments grant intellectual property rights (IPR) to assist innovators and provide incentives for innovation and IP dissemination. Last week an Intellectual Property Rights Indaba was co-hosted by the Free Market Foundation (FMF) and International Policy Network (IPN). The indaba covered fundamental aspects of intellectual property rights and focused on three major fields: software, health care and music.

The keynote address was delivered by Douglas Lippoldt, Senior Economist & Policy Analyst at the Organisation for Economic Co-operation and Development. According to Lippoldt, “Technological development is the tool to accomplish greater economic development”. In order to develop technologies and increase the capacity of technologies within the economy it is essential that technology is well protected so that there is an economic incentive to develop and/or ‘import’ new technologies.

Lippoldt also stated, “A significant number of countries, both developing and developed, have substantially strengthened their IPR’s environment”. Lippoldt demonstrated that there is a statistically significant positive relationship between IPRs, foreign direct investment, trade, research and development and patent applications. In other words by strengthening IPR one can reasonably expect FDI, trade, R&D and patent applications to increase.

Lippoldt cautioned, “IPRs are just one factor, amongst others, that influence innovation”. IPRs are not a silver bullet policy solution – they account for just a portion of the variation in the economic indicators. Successful implementation of IPR regimes depends on complementary factors such as the quality of legal institutions, markets and infrastructure. Simply put, the efficacy of intellectual property reform is ultimately subject to the environment in which IPRs operate.

According to the 2008 International Property Rights Index (IPRI), which covers 115 countries around the globe and represents 96 per cent of world’s GDP, South Africa ranks 23rd. The index shows that the countries ranked in the top 20 per cent are 9 times wealthier than countries ranked in the bottom 20 per cent. More importantly, the index demonstrates the positive and statistically significant relationship between property rights and gross domestic product (GDP) per capita. More specifically, a one point increase in the IPRI score predicts a USD7,616 increase in GDP per capita.

The index also shows that low-rated countries with improving IPRs prosper, whereas high-rated countries with declining IPRs stagnate. For SA this means that the hard work we have done to achieve our position is not over. We need to constantly improve, or else we risk slipping down the ranks. Given the importance of protecting property rights it is surprising that the SA government is reconsidering something like the Expropriation Bill, which threatens to undermine the rights to all manner of private property. At this point is worth reiterating that if property is not protected, or if property rights are loosely enforced, there would be no economic incentive to invest, improve or even to acquire property if it can simply be expropriated.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and may not be shared by the members of the Foundation.

FMF Feature Article / 2 December 2008 - Policy Bulletin / 15 September 2009