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Strong intellectual property rights key to the knowledge economy

Strong intellectual property rights key to the knowledge economy

October 2018

This article first appeared in the Jakarta Post on October 17th 2018

The global economy is undergoing a structural shift in which increasing proportions of economic growth come from knowledge-based industries. Countries that excel in product design, research and development, business know-how, marketing and branding will be the economic leaders of the future. Those reliant on manufacturing, agriculture and the export of commodities will struggle to generate growth and high-value jobs.

Consider the iPhone. Although many of the components are manufactured elsewhere, most economic value is generated in the United States where the product is researched, developed and marketed. For every iPhone sold at a retail price of US$600 in 2013, Apple took $270, according to the Organization for Economic Cooperation and Development. Korean firms supplying core components took $80 per phone while Chinese firms assembling them earned $6.5, just one percent of the total.

Due to its strong performance in innovation in sectors from information technology to biopharmaceuticals, the US continues to be an economic superpower.

Innovation is essential to economic growth. It leads to higher productivity, meaning that the same input generates a greater output. As productivity rises, more goods and services are produced. In other words, the economy grows. In the US, innovation is now responsible for up to 50 percent of annual gross domestic product growth.

The current innovation leaders are US, United Kingdom, Sweden, Switzerland and Singapore, according to the World Intellectual Property Organization’s Global Innovation Index. Businesses in these countries now invest significantly more in knowledge-based capital (software, databases, patents, copyrights, designs and industry-specific know-how) than physical assets.

China has recently understood the strategic importance of nurturing its own knowledge-based industries. It is bending every policy sinew to transform itself into a knowledge superpower. Success would see China join newer entrants to the ranks of high-income countries, such as Singapore, Taiwan and South Korea.

All these countries have one thing in common: a strong framework of protection for intellectual property.

Intellectual property rights (IPRs) are necessary for knowledge-based industries for two reasons. First, they compete by inventing the next generation of products and services rather than competing for price or scale. Second, they are characterized by high initial fixed costs (for example, research and development or design), but low marginal costs of production.

IPRs are increasingly important to a world where design, R and D, manufacturing and branding of products are globally dispersed. They allow rights-holders to locate different parts of their activities in different parts of the world with legal certainty that their valuable propriety knowledge won’t be co-opted.

A strong IPR framework is especially important for a country like Indonesia that is looking to move beyond manufacturing and commodities and embed itself more deeply in these “global value chains”.

Yet in Indonesia there is often deep skepticism.

Strengthening domestic intellectual property rights is viewed as a “cost” of trading with wealthier countries, to be resisted or watered-down. This is the dominant view in Indian policy making circles. It is, in fact, necessary to meaningfully participate in an increasingly knowledge-based global economy.

The current global controversy around drug patents is beset by this backwards thinking. Concerned by the rising costs of healthcare, Chile, Colombia, Malaysia are all moving to confiscate the patent rights of hepatitis C medicines via “compulsory licensing”. Russia is in the process of compulsory licensing a biotech medicine for the treatment of myeloma, while India has also used this tool, most recently in 2012. Indonesia has also signaled its readiness to use this tool.

Despite the short-term political attractions of compulsory licenses, they create enormous uncertainty for domestic and international investors. Why launch a new technology, undertake research and development, or build a complex high-tech manufacturing facility in a country whose government may not protect your property rights?

Those countries that are innovation leaders always resolve disputes over the price of new medical technology via transparent and predictable procurement procedures, rather than arbitrary confiscation of property rights. Compulsory licenses have never been used by an OECD country, with the tool mainly used in the mid-2000s by African countries in the grip of significant HIV crises. It is true the US and Canada in 2001 threatened a compulsory license for anthrax antidotes in response to terrorism concerns, although they never followed through.

For middle-income countries like Indonesia looking to diversify their economies and graduate to high-income status, IPRs are more important today than at any other point in history. Using compulsory licenses to achieve public health objectives is short-termist, anachronistic and counterproductive in the long run.