Abstract
This paper attempts to address the question whether intellectual property (IP) reform post-Trade-Related Intellectual Property Rights agreement significantly shifted out the technology or innovation frontier, thereby raising overall productivity in the manufacturing sector of the emerging market economy of India. We explore this question using data on a reasonably large sample of manufacturing firms, for the recent period 1994–2011. Using evidence that the reform was largely exogenously driven, we note that endogeneity problems emanate mainly from the heterogeneity of its impact, that is, from the level of IP intensity of the firms and the R&D activities of the firms. We correct for such possible endogeneity biases by estimating this heterogeneity explicitly by employing varying coefficients for conditional difference-in-differences models. Our results reveal a significant outward shift in the technical or innovation frontier, but only an insignificant increase in productivity, consequent to the IP reform. A one-unit increase in the IP index is found to be associated with a response coefficient of about 0.05 in the technical frontier index for the IP-intensive firms compared to about 0.01 in the technical frontier index for the non-IP-intensive firms, both impacts being strongly significant by themselves as well as significantly different from each other. The insignificant productivity response on account of IP reform per se could at least partly be due to firms lagging behind in the adoption of the improved best practice technology.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
The reasons for an insignificant response to stronger IPR may be varied, and while this is not the place to study them, it may help to mention that factors such as input quality, input cost, resource endowments, transactions costs and host government policies may be relevant variables (Dunning 1993).
For a perspective on how the response to a change in IPR may vary depending on the distance to the frontier for transition economies, see Della Malva and Santarelli (2014).
For an alternative analysis that uses R&D and patenting in the USA to study the R&D response in developing countries, see Dutta and Sharma (2008).
The TRIPs agreement required developing countries to make their intellectual property laws TRIPs compliant within 10 years, starting 1 January 1995. The least developed nations could implement this by end-June 2013 in general, and by end-2015 for drugs and pharmaceuticals. In contrast, developed countries had an implementation period of just 1 year, till end-1995. In addition to staggered implementation, nations could also avail of several flexibilities pertaining to, inter alia, compulsory licensing, parallel imports and research exceptions.
The issues we have studied are from the viewpoint of firms in the Indian economy. Is the IPR change that they respond to related to their own innovation and productivity decisions? That is the question we must ask in pronouncing on the exogeneity or endogeneity of IP reform, and not whether the IPR change matters to some external agents, say exporters in another country.
In addition to the patent law amendments, changes were also made in other aspects of intellectual property laws. Relevant in our context of the manufacturing sector, though less important than the patent reforms, are the Copyright (Amendment) Act 1999, the Trademarks Act 1999, the Industrial Designs Act 2000 and the Semiconductor Integrated Circuits Layout Design Act 2000.
However, it is possible that this response could be due to an increase in the use of the patent system, with no corresponding increase in innovation, with innovators who previously considered the patent system as unlikely to afford proper protection now deciding to patent following reforms.
Thus, the grant of exclusive marketing rights to Eli Lilly and Company for Cialis, Novartis for Glivec, United Phosphorous for Saaf and Wockhardt for Nadifloxacin, stymied several Indian generic manufacturers of those formulations (Mathew 2004).
Note that the original Ginarte–Park index is quinquennial, and we interpolate the figures assuming linear growth in the index, to compute the index for the intervening years. Let this annualized Ginarte–Park index be denoted \(G\). The ‘area 2’ subindex of Gwartney, Lawson and Hall is similarly interpolated before 2000, although from 2000 onwards the original index is annual. Let this annualized index be denoted \(A\). Since \(A\) lies between 1 and 10, we rescale it to lie between 0 and 1, using the linear transformation \(\left( {A\frac{2}{9} - \frac{1}{9}} \right)\). Let this rescaled index be denoted as \(A^{*}\). Adding \(G\) and \(A^{*}\) gives us our index of protection \(IPGP\).
This is distinctly superior to a random coefficient model, where the response heterogeneity across firms would be essentially random. Random heterogeneity by definition does not model and, therefore, cannot explain either what factor(s) the heterogeneity is due to (i.e. causal interpretation), nor which factor(s) it changes (i.e. descriptive interpretation). All one gets from such a random factor is a distribution of (random) treatment effects. However, if one is interested in studying heterogeneity along certain factors, then that has to be modelled as, for instance, we do.
This must be seen in the context of innovation and IPR. Even amongst the larger firms very few conduct R&D and use formal instruments of IP such as patents. This is true for developed countries as well; for instance, see Greenhalgh and Rogers (2006) for the UK.
We must add a caveat for the variable ‘salaries’, for which there were gaps for some years before 2000, for some firms. For each of these firms, the gaps were filled on the basis of a nonlinear trend estimated for that firm, using the data for the available years.
It may help to note that this is considerably larger than the sample sizes in much of the received literature cited herein.
Cohen et al. are based on a statistically large sample of 1478 research laboratories associated with manufacturing firms in the USA. They study what instruments are actually used for appropriating the expected returns from firm innovation, with some instruments more important than others in certain industries. This allows one to distinguish between industries which use patents (i.e. \(IP\)) more intensively than others. For example, patents are considered much more effective in the drugs and pharmaceuticals industry than in many others, which is why patents are used a whole lot more in this industry, making it patent-intensive. While other mechanisms to appropriate innovation may be more important than patents, these other measures (secrecy, lead time, product complexity) are not \(IP\)-related, so that the effect of IPR would not be relevant for these other measures. However, normalization of patents by industry employment is not possible, because employment figures are not available in the Prowess database available to us.
It is well known that patent protection is important for certain industries where fixed costs are high and imitation costs are low, such as drugs and pharmaceuticals, chemicals, electronics and non-electrical machinery, whereas for other industries other factors such as scale, complexity of technology, etc. are much more important as entry barriers. This stylized fact does not appear to be country-specific, allowing us to use Cohen et al.’s patent effectiveness rankings for Indian industry as well, although these rankings may vary by firm size and time so that further detail could be useful.
The Solow method involves the oxymoronic exercise of measuring the residual of a regression of output on inputs, a component that is supposed to be randomly determined (Griliches 1998). It also requires assumptions about the production technology, and the presumption that firms are always technically efficient. Alternative measures such as the Divisia–Tornquist index require data on input prices, which are typically patchy, and may not reflect true scarcity value in the case of administered prices.
Salary data are superior to data on number of employees or even hours worked (Branstetter et al. 2011). Employee data would need to be supplemented with data on full-time and part-time employees, information that is seldom available. Data on hours worked would be better, but do not capture the ‘efficiency wages’ and morbidity/health aspects. Salaries implicitly correct for all these factors—they reflect variations in the proportions and wages of the skilled and unskilled, variations in the proportions of the full-time and part-time workers, and they reflect (though not completely) the variations in morbidity of workers across firms and over time, insofar as wages are not paid to (daily wage) workers who fail to turn up.
Data on sales, raw materials, net fixed assets and salaries were deflated by the appropriate industry-specific wholesale price indices (1993-94 = 100) brought out by the Ministry of Commerce and Industry.
For an excellent exposition of some of these ideas, see Ray (2004).
These data are missing for most firm years in our data source.
This variable could not be well defined since foreign equity in domestic firms could vary from merely positive to 100%. Further, foreign ownership data in the Prowess database were available from only 2001 onwards. For both these reasons, and the fact that it was found to be a poor explanatory variable in an earlier version of this paper, it was excluded from the analysis.
Our results could be reconfirmed by using more disaggregated data at the four-digit or five-digit levels of the National Industrial Classification, for such data would allow construction of technology frontiers at a finer industry level than is currently possible.
References
Branstetter LG, Fisman R, Foley CF (2006) Do stronger intellectual property rights increase international technology transfer? Empirical evidence from US firm-level panel data. Q J Econ 121(1):321–349
Branstetter LG, Fisman R, Foley CF, Saggi K (2011) Does intellectual property rights reform spur industrial development? J Int Econ 83(1):27–36
Chen Y, Puttitanum T (2005) Intellectual property rights and innovation in developing countries. J Dev Econ 78(2):474–493
CMIE (2012) Prowess: release 4.11. Centre for Monitoring Indian Economy. www.prowess.cmie.com. Accessed Jan 2016
Cohen WM, Nelson RR, Walsh JP (2000) Protecting their intellectual assets: appropriability conditions and why US manufacturing firms patent (or not). Working paper 7552, National Bureau of Economic Research, Cambridge, Massachusetts
Deere C (2008) The implementation game: the TRIPS agreement and the global politics of intellectual property reform in developing countries. Oxford University Press, Oxford
Deere C (2009) Developing country perspectives on intellectual property in the WTO: setting the pre-TRIPs context. In: Correa C (ed) Research handbook on intellectual property law and the WTO. Edward Elgar Publishing, Oxford, pp 1–26
Della Malva A, Santarelli E (2014) Intellectual property rights, distance to the frontier and R&D. Working paper MSI_1402, Faculty of Economics and Business, KU Leuven
Drahos P (2002) Developing countries and international intellectual property standard-setting. Study paper 8, Commission on Intellectual Property Rights, London. www.iprcommission.org. Accessed Jan 2016
Dunning JH (1993) Multinational enterprises and the global economy. Addison-Wesley Publishing Company, Wokingham
Dutta A, Sharma S (2008) Intellectual property rights and innovation in developing countries: evidence from India. Working paper 47524, World Bank, Washington, DC
Falvey R, Foster N (2006) The role of intellectual property rights in technology transfer and economic growth: theory and evidence. United Nations Industrial Development Organization, Vienna
Fosfuri A (2002) Country risk and international flows of technology: evidence from the chemical industry. Working paper 02-25, Departamento de Economia de la Empresa, Universidad Carlos III de Madrid, Madrid
Ganguli P (1999) Towards TRIPs compliance in India: the patents amendment act 1999 and implications. World Pat Inf 21(4):279–287
Ginarte JC, Park WG (1997) Determinants of patent rights: a cross-national study. Res Policy 26(3):283–301
Greenhalgh C, Rogers M (2006) The value of innovation: the interaction of competition, R&D and IP. Res Policy 35(4):562–580
Griliches Z (1998) Introduction. In: Griliches Z (ed) R&D and productivity: the econometric evidence. University of Chicago Press, Chicago
Gwartney J, Lawson R, Hall J (2014) Economic freedom of the world: 2014 annual report. The Fraser Institute. https://www.fraserinstitute.org/economic-freedom/dataset?geozone=world&page=dataset&min-year=2&max-year=0&filter=0. Accessed 15 Jan 2019
Ivus O (2010) Do stronger patent rights raise high-tech exports to the developing world? J Int Econ 81(1):38–47
Javorcik BS (2004) Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. Am Econ Rev 94(3):605–627
Lerner J (2002) 150 years of patent protection. Am Econ Rev 92(2):221–225
Maithani N, Vyas P (2009) Exclusive marketing rights revisited in India. http://www.mondaq.com/india/x/73894/Patent/Exclusive+Marketing+Rights+Revisited+In+India. Accessed 15 Jan 2019
Mathew J (2004) Eli Lilly to sue local firms for selling Cialis clones. Times News Network, September 7. http://lists.essential.org/pipermail/ip-health/2004-September/006907.html. Accessed 10 Mar 2017
O’Donnell CJ (2011) DPIN 3.0: a program for decomposing productivity index numbers. Centre for Efficiency and Productivity Analysis, University of Queensland, Brisbane
Park WG (2008) International patent protection: 1960–2005. Res Policy 37(4):761–766
Park WG, Lippoldt D (2005) International licensing and the strengthening of intellectual property rights in developing countries during the 1990s. OECD Econ Stud 40(1):7–48
Qian Y (2007) Do national patent laws stimulate domestic innovation in a global patenting environment? A cross-country analysis of pharmaceutical patent protection 1978–2002. Rev Econ Stat 89(3):436–453
Ray S (2004) Data envelopment analysis: theory and techniques for economics and operations research. Cambridge University Press, Cambridge
Sakakibara M, Branstetter LG (2001) Do stronger patents induce more innovation? Evidence from the 1988 Japanese patent law reform. RAND J Econ 2(1):77–100
Spennemann C (2007) Commentary: the implementation game—developing countries, the TRIPS agreement, and the global politics of intellectual property. Paper presented at South Centre’s fifth south innovation perspectives series seminar, Geneva, December 5
Sperlich Y (2015) From power transition to economic integration theory: a review of the BRICS literature. Working paper series 15-10-1, Geneva School of Economics and Management, University of Geneva, Geneva
The BRICS Report (2012) The BRICS report: a study of Brazil, Russia, India, China and South Africa with special focus on synergies and complementarities. Oxford University Press, New Delhi
The Economist (2010) The BRICs: the trillion-dollar club. 395(8678): 59–61, April 17, 2010
Thorpe P (2002) Study on the implementation of the TRIPS agreement by developing countries. Study paper no. 7, Commission on Intellectual Property Rights, London. http://www.iprcommission.org/papers/pdfs/study_papers/sp7_thorpe_study.pdf. Accessed 15 Jan 2019
Topalova P, Khandelwal A (2011) Trade liberalization and firm productivity: the case of India. Rev Econ Stat 93(3):995–1009
Watal J (2001) Intellectual property rights in the WTO and developing countries. Oxford University Press, Delhi
Yang G, Maskus KE (2001) Intellectual property rights and licensing: an econometric investigation. Weltwirtschaftliches Archiv 137(1):58–79
Acknowledgements
We gratefully acknowledge inputs from Rene Belderbos, Peter Berck, Aditya Bhattacharjea, Julie Berry Cullen, Christopher O’Donnell, Bronwyn Hall, Huub Meijers, Jeff Perloff, seminar participants at Maastricht University, Nordic Conference in Development Economics, Asia–Pacific Innovation Conference and South Asian University. Furthermore, the comments of the three anonymous referees and the editors helped immensely in improving this paper.
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
The authors declare that they have no conflict of interest.
Data and computer code availability
The data employed in this study have been extracted from the ‘Prowess’ database sold by the Centre for Monitoring Indian Economy and are hence not publicly available. How other researchers can obtain the data and the information needed to proceed from the raw data to the results of the paper (including code) is available from the corresponding author upon request.
Additional information
Publisher’s Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Kanwar, S., Sperlich, S. Innovation, productivity and intellectual property reform in an emerging market economy: evidence from India. Empir Econ 59, 933–950 (2020). https://doi.org/10.1007/s00181-019-01707-3
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-019-01707-3