The Correlation between the Level of Patent Protection and International Trade

Abstract

Intellectual outputs are available on a non-exclusive basis and are non-rivalrous in use. Therefore, it is difficult for producers of intellectual outputs to appropriate the returns on their investments and cover the costs without intellectual property rights (IPRs). In addition, the market for intellectual outputs would fail, or would deliver an inefficient output supply, without IPRs. Intellectual outputs are traded in both domestic and foreign markets and hence risks of imitation exist at home and abroad. Hence, the trade to regions with weak IPRs might be weak. Importantly, weak IPRs lead to less innovation and production, which decreases export potential. This paper reviews the existing theoretical and empirical evidence on the effects of IPRs on international trade and delivers a number of important insights. First, economic theory is ambiguous in terms of the effects of IPRs: on the one hand, the market expansion effect predicts a positive relationship between stronger IPRs and exports; on the other hand, the market power effect predicts a negative relationship between the stronger IPRs and exports. Second, empirical evidence reveals a positive association between stronger IPRs (patent rights) and exports. This is especially the case for large developing countries with significant capacities for imitation. Third, stronger IPRs have differential effects across industries. Fourth, the impact of intellectual property on international trade depends on the local market demand, the economic sector, the structure of trade barriers, the specific intellectual property rights measured, a country’s innovative potential (such as its adaptive capacity), the educational level of its workforce, the structure and funding of research and development (R&D), the quality of infrastructure, government policies and regulations, the market structure, the management of assets and the institutions involved. Thus, there are complex interactions that should be considered between absorptive capacities, intellectual property rights and trade. Finally, the paper argues that intellectual property rights are an important part of international trade agreements and will remain important in the future.