0

Intellectual Property Rights and the Economic Development of India

Silvia Lehnis

University of GroningenEconomics and Business Faculty

Duisenberg Building Zernike Campus, Nettelbosje 2, 9747 AE Groningen

Tel: +31(0)646-692796e-mail: S.C.Lehnis@student.rug.nl

Wordcount: 5,876

1

ABSTRACT

Intellectual property rights effect on the economy in developing countries is an ambiguous

and controversial topic which is not uniformly clarified by research. India’s weak intellectual

property rights regime is investigated in light of a literature review on the relationship between

intellectual property rights and economic welfare in developing countries. Specific attention is

paid to the roles of innovation and foreign direct investment. India’s current system is found to

be ideal for its present stage of development according to two recent models. Further research is

recommended to India’s industry composition and the specific economic effects IPR has on each

one.

2

Intellectual Property Rights (IPR) in developing countries is a still evolving and controversial

topic, especially as free trade gains momentum. It is increasingly apparent that there is no

universally ideal level of IPR which remains constant regardless of the country (Colino, Benito-

Osorio, Armengot, 2014). Therefore, it is an important area of study in order to understand how

economic growth can be encouraged in developing countries. The developed world is generally a

proponent of increasing intellectual property rights as it is an enabler of trade and foreign direct

investment (FDI), however whether this is actually beneficial for developing countries remains

debatable. 

Tensions exist between interest groups which are affected by IPR policy in different ways.

These groups include multinational companies, governments, and local producers and

consumers. International bodies and increased globalization put pressure on developing countries

to tighten their IPR regime in order to open the country to trade and FDI. Therefore objective

analysis is imperative to determine theoretically if increased IPR would benefit India's economy.

The effect of IPR on economic growth is complex both in theory and practice. Theoretically

increasing IPR may encourage outside investment (FDI), disperse knowledge as producers

externalise their inventions more, encourage innovation through promised protection, and

hamper learning by imitation. Each of these effects have different economic effects, some

beneficial and others harmful to a developing country. These concepts will be discussed and

applied to the case of India.

Actual effects of IPR policy also vary depending on the development stage of the country due

to the interplay of many factors such as human capital level, innovation structure, GDP per

capita, infrastructure, and politics.

3

  In this paper the intellectual property rights situation in India will be analysed through a

literature review in order to determine if an increase in IPR would actually lead to an increase of

economic welfare. India is of particular interest in this field due to its large, emerging market and

having received much criticism for its IPR policy and enforcement, in particular from the US.

Therefore, the core research question is: would India's economy benefit from an increase in

IPR? 

The main factors involved in this question can be analysed in several sub-questions. Firstly, the

relationship between IPR and innovation in developing countries will be examined, as innovation

encouragement is both key reasoning for IPR and the largest single factor effecting economic

growth. The predominant argument for increasing IPR in developing countries is the resulting

increase in FDI, which can both be a driver of economic growth. Therefore the relationship of

FDI and innovation with IPR will be investigated in terms of their effect on economic welfare.

Additionally, it is theorized that whether increasing IPR rights has a positive net economic

effect is dependent on the stage of development of the country (Chu, Cozzi, Galli, 2014). Studies

on the topic will be reviewed and discussed and the resulting factors state in India will be

assessed.

  The paper will begin with a short introduction and definition of IPR, followed by an overview

of IPR in India. Next the literature review will outline the methodology of the analysis. Then a

discussion of the relevant literature will be conducted and the emerging concepts will be

investigated in the context of India, finishing with policy recommendations and conclusion.

4

IPR DEFINITION AND DEVELOPMENT

Intellectual property rights are laws implemented which grant individuals or organisations

protection in order to profit from their creative works. These can be inventions, trade symbols,

designs and names, artistic and literary works, or a process. The rights granted prevent others

from using the intellectual property without the creators’ permission for a certain time period.

Intellectual property rights generally fall into two categories, either industrial or artistic. They are

comprised of patents, copyrights, trade secrets, and trademarks. Although specificities vary per

country, the international community has initiated some convergence. For a detailed description

of intellectual property rights, please see Appendix A.

In 1994 the Uruguay Round of the 8th multilateral trade negotiations was finalised. The

General Agreement of Tariffs and Trade (GATT) was amended and the World Trade

Organisation was created. An important part of the GATTs amendment is the Trade Related

Aspects of Intellectual Property Rights (TRIPS agreement) which governs IPR of ratifying

countries by enforcing a minimum level of both laws and enforcement policy. These agreements

are part of the WTO, which boasts 160 member states, including India. It is an organisation that

attempts to facilitate trade between nations through international trade regulations and policies.

Since the creation of the WTO it has made a substantial positive impact on global economic

welfare (Anderson, 2014). This is due to the economic gains that are available through trade due

to differing production factors and prices.

IPR IN INDIA

The concept of IPR first came to India through the British rule. The first patent law, Act VI,

was established in 1856 and was based on a British patent law. It granted privileges to inventors

5

for 14 years. When India gained independence new patent laws were put in place in 1970. These

were revised and made TRIPS compliant more recently. Prior to the TRIPS compliance changes,

existing trademark and copyright acts were generally very lax.

Once India joined the WTO it had to adopt the TRIPS agreement and implement the required

laws gradually within a certain time frame. India has since then also become a ratifying member

of the Madrid Protocol which strengthens enforcement of trademarks.

The TRIPS agreement has implemented the Doha Declaration clause in 2001. This allows

nations to make exceptions for pharmaceutical drugs if it constitutes a national emergency in

order to safe-guard public health. The Supreme Court of India has once invoked this clause,

issuing a compulsory license for the first time ever on 9th March 2012 in the case of the Indian

producer Natco Pharma Ltd, for Bayer’s Nexavarto drug. This received intense criticism from

the international community due to the low percentage of the population that was affected by

advanced stage kidney and liver cancer disease, which is what the drug treats.

Since 2012 there have been 15 cases of India confronting international pharmaceutical

companies IPR. There have been several cases lost by international enterprises attempting to

secure IPR and this has discouraged FDI to some extent.

An important example of the IPR contention is the case of Novartis v. union of India in 2013.

Novartis did not receive the desired patent for Glivic, an anti-leukaemia drug, due to grounds of

failing to prove increased therapeutic effect. The requirement for some pharmaceutical or

chemical patents to prove increased therapeutic effect goes beyond the TRIPS requirements of

novelty, inventive step, and industrial applicability and thus makes India’s IPR non-TRIPS

compliant in this area.

6

The high costs of R&D investment necessary for pharmaceuticals make the industry

particularly sensitive to IPR. India’s policy is causing unease amongst international companies,

which are pushing for stronger IPR protection. Citizens and politicians of India, on the other

hand, are concerned about the price domination that pharmaceuticals would have with strong

IPR, and that citizens of India are unable to afford crucial drugs which would aid their health

and safety.

Developing countries' capacity to purchase the pharmaceuticals is often far below the

demanded price. This conflict of interests makes policies and implementation a very delicate

matter with high stakes. Yet there are also areas in which India has taken significant steps

towards strengthening its IPR.

The case of Amar Nath Sehgal v. Union of India in 2005 is an example of a strong step

towards upholding IPR. This was the first case of India upholding the moral rights of authors.

Moral rights are rights granted to the author of copyrighted work of ownership and control of the

work (http://www.businessdictionary.com/definition/moral-rights.html). Amar Nath Sehgal was

granted rights over his work which had been mutilated without his consent. This is of particular

interest, as it is unusual for a common law country to recognize moral rights and shows India’s

initiative in IPR advancements.

  The protection of Traditional Knowledge is also of particular interest, as it is fairly unique to

India. Traditional Knowledge is know-how, skills and practices which are passed down from

generation to generation and is often part of the community culture or spirit

(http://www.wipo.int/tk/en/tk/). It gives protection to communities over traditional knowledge

that India argues should be available to all mankind, and not patented for private profit. This has

been facilitated through a vast traditional knowledge digital library which is over 34 million

7

pages long. Traditional Knowledge is to be protected in order to prevent bio-piracy and

international firms from acquiring patents over age-old traditions such as Ayuverda or using

turmeric as a healing agent, as happened in one landmark case. However, Traditional Knowledge

is not yet a right which is recognized or employed by the international community. Since India

has taken vast steps to protect its traditional knowledge the subject has now received more

attention from the international community. WIPO is beginning to recognize the need for it and

negotiate international implementation. This year WIPO is discussing the details of this mandate.

Generally however, India has been a laggard in adopting IPR and has received much criticism

and pressure from the developed world for this. Especially the US has been putting pressure on

India to tighten its IPR scheme (N. Basu, 2013). In the Global Intellectual Property Center

(GIPC) index by the US Chamber of Commerce, India is listed as the very last of the 30 ranked

countries. The GIPC index scientifically measures the availability and enforceability of IP laws

with a 30 point system. Interestingly the 7th GIPC conference will be held in Mumbai, India, on

the 7th January 2015. The GIPC highlights specific problematic issues of India’s current IPR

policy in its 2014 report. This can be reviewed in Appendix B

(http://www.theglobalipcenter.com/wp-content/themes/gipc/map-index/assets/pdf/

Index_Map_Index_2ndEdition.pdf).

8

LITERATURE REVIEW

This paper is based on a literature review of the topic of IPR in India and the effect this has on

the economic welfare of the country. Several academic databases, such as EBSCO, were used as

the source of finding literature on the topic. Articles were selected based on their credibility,

relation to the subject, and recentness. The literary research and theory development of recent

articles was also investigated, which resulted in highlighting key literature on the subject. This

was explored in more detail, and the theory development over the years was established.

To begin with, articles on the relationship between IPR and economic welfare were analysed,

and the underlying concepts and determinants in the relationship became apparent. The two

predominant factors FDI and innovation, emerged, which are influential factors in the theory of

IPR and which directly impact economic development. These factors were researched further to

find the specific hypothesized relationship in a developing country.

The effect of IPR is found to differ depending on the countries stage of development, therefore

this too is taken into consideration, and further articles are studied in this area.

DISCUSSION

The impact of IPR on economic welfare is a complex and intricate subject, for which no 'one-

size-fits all' can be suggested. The level of IPR implementation in developing countries is of

particular interest, due to the trade-off of benefiting from imitation learning (‘learning by doing’)

or from increased FDI and domestic innovation. IPR may therefore increase or decrease welfare,

as it both blocks imitator goods, effects innovation and FDI.

9

When considering the impact of IPR on economic development, one first must establish the

economic reasoning for IPR. Rights are given to individuals or organisations for a limited time in

order to strike a balance between willingness to put inventions on the market and to create access

to them. This enables both 'private gain and public welfare' and encourages invention and

innovation (Gould and Gruben, 1996). Innovation is a key determinant of economic growth and

an important factor for policy implications (Colino et al. 2014). Therefore when discussing IPR a

key factor involved is innovation. 

The predominant argument for IPR benefiting developing economies is the positive effect it has

on trade and foreign direct investment (FDI). Higher levels of IPR are related with increased FDI

(Iwasaki and Tokunaga, 2014) and FDI can increase economic growth both directly (Liu, Wang,

Wei, 2001) and through dispersion of technical knowledge (Dees, 1998). Therefore FDI is the

second key factor which will be discussed. Both FDI (Wei et al., 2001) and innovation are strong

drivers of economic welfare (Grossman and Helpman, 1991; Romer, 1990).

  Another critical factor to this paper, is the level of development of the country. Innovation and

FDI are interlinked with a variety of development factors. One cannot assume that the effect of a

certain level of IPR in one country will be repeated in another. Therefore how development

levels effects the relationship with IPR will also be discussed.

Innovation

Innovation is a crucial concept behind IPR. These rights are established in order to protect and

encourage innovation and thereby create economic growth by aiding entrepreneurs in procuring

profit from their inventions whilst making them available to the public.

10

In developing countries the relationship between innovation and economic growth is less

straightforward than in developed countries, partially due to the large differences between local

technologies and western ones. 

Innovation is affected in many different ways by IPR. Firstly, IPR can encourage domestic

innovation by creating incentives of economic gain from inventions. However, the country must

possess sufficient innovative capacity in order to reap these benefits. A first step in less

developed countries' innovation process is often to imitate foreign technologies and

developments. When IPR is tightened, it lessens their possibility to do so. Also, in developing

countries the citizens may not have sufficient capital to secure IPR when they are available. This

may inflict an entry barrier, hindering domestic innovation and benefiting foreign firms with

greater financial capacity. Minimal finance procurement possibilities and the necessity to focus

on meeting basic human needs, make the capacity for innovation very low in developing

countries. A high level of IPR may thus hamper developing countries’ producers and consumers,

as they find it difficult to cover the additional cost of patents, copyrights and trademarks. The

countries' specific situation is crucial in determining the effects of IPRs, because developing

countries generally lack innovative capacity necessary to harness IPR protection benefits

(Maskus, 2005). Therefore the effect of IPR on innovation in a developing country can vary

significantly and does not always result in a positive economic effect (Furukawa, 2007)

Schneider (2004) shows that the effect of IPR on the rate of innovation is positive, however

the effect is significantly stronger for developed countries than developing countries. This

highlights the need for differing policies and levels of protection. Schneider's research is in line

with more recent research which shows that the relationship is actually non-linear, and very

much influenced by the level of development (Loukil 2014).

11

Loukil's recent study (2014) shows that there is indeed a threshold-level of development

imperative for IPR to improve technological innovation. If the country's development is below

that level, then increasing IPR would negatively impact domestic technological innovation. GDP

per capita threshold and education level (which shows human capital development) are

statistically significant. The importance of human capital is also proven by Benhabib, Jess and

Spiegel (1994)

Part of this effect is explained by Kim, Park, Lee and Choo’s research which shows that patent

protection provides a significant incentive to innovate in developed countries, however there is

no significant effect in developing countries (Kim et al. 2006).

Chen and Puttitanun (2005) portray the economic effect of the trade-off relationship of

learning by imitation or creating innovative incentive in an extensive empirical study of 64

developing countries. IPRs are shown to have a positive influence on innovation in developing

countries, contrasting Kim et al.'s study. However this effect is seen as a u-shape relationship,

which was not tested for in Kim et al.'s analysis. This relationship is explained by the theory that

an initial increase in technology in a country starting from a low level of economic development

has a greater impact on their efficiency to imitate technologies than the effect on domestic

innovation. This makes it desirable for the less developed country to lower their IPR system.

However, once the country reaches a certain level of development, the domestic innovation

effect overtakes the imitation technology efficiency, making it beneficial to tighten IPR as the

country can now harness innovation to a sufficient capacity to benefit from it. Thus the optimal

level of IPR increases with development in a u-shaped manner, and there is a stage at which

lower IPR could be beneficial for the developing country. Two key factors of development

identified are GDP per capita and current IPR regime strength. Education, trade and total GDP

12

size are not found to have a significant effect (Chen, Puttitanun, 2005).  This is in line with

Loukil’s (2014) analysis, except for the factor of education. Therefore we will also examine the

level of education in India as a matter of interest which remains contestable in literature.

Iwaisako, Tanaka, and Futagmi (2011) find that in general IPR creates gains for both North and

South countries. They explore the economic role of innovation and find the dynamic effects of

increased innovation outweigh the static effects of imitator goods if the initial IPR is relatively

low and R&D subsidies are not very high (Iwasiako et. al 2011).

The main findings from the welfare analysis with regards to innovation, is that it is complex

and interwoven with many factors, with ambiguous findings throughout studies. In conclusion,

the innovation types which are most affected by IPR are technology transfers, domestic

innovation and learning by imitation. The factor of a country’s development impacts these in

significant ways. If a country can benefit from increased innovation through tightened IPR policy

depends largely on its level of development.

This evidence demonstrates that IPR can have a positive net economic effect in relation to

innovation, which is sensitive to some development factors. This suggests that in order for a

country to assess the effect on innovation from increasing IPR protection, it must consider the

current IPR level, GDP per capita, and human capital level.

Foreign Direct Investment

Next the relationship between IPR, FDI and economic welfare will be explored. The supposed

influx of FDI brought by tighter IPR policy is one of the most compelling arguments for

increasing IPR in developing countries. This is because companies are more confident in

investing in countries where their intellectual property cannot easily be copied or acquired,

which would put them at risk of losing their competitive advantage. The economic benefits of

13

FDI for the receiving country stem from increased capital, tax revenues, technology transfers,

human capital development and employee wages (Feldstein 2000; Iwasaki and Tokunaga, 2014)

 The relationship between IPR and FDI is not consistent in research and studies have been

contradictory in their results. (Glass and Saggi, 2002). Some reports conclude that increased

protection is strongly linked to increasing FDI (World Bank Report 1999), whereas other studies

question the relationship. Glass and Wu (2007) find these results to hinge on whether innovation

is quality improving or variety expanding. Iwaisako et al. (2011) show this analysis to be

incorrect and show that if there are positive R&D subsidy rates, then increasing IPR protection

encourages innovation, regardless of the type. This is because it gives incentive to innovate

without blocking imitator goods. Additionally, they find that increased IPR increases FDI in both

the long and the short run.

Park and Ginarte (1997) conducted an extensive study researching whether IPR had a positive

economic effect, and found that although there was no direct relationship, FDI increased with

IPR and FDI then encourages growth.

A review of the studies over time show that older studies have not found a direct relationship,

however, as measurement and data have become more precise, a causal relationship between

increased IPR and FDI influx in developing countries has been proven (Maskus 2000). This

effect varies per industry, as some, such as the pharmaceutical industry, experience a stronger

increase of FDI than others.

The causality of FDI and economic growth was explored in a case study of China. Liu, Wang,

and Wei’s research (2001) on the relationships between economic growth, foreign direct

investment and trade looks into the causality of the relationship. The results are particularly

interesting as it shows that FDI and economic growth have a bi-directional causality, inferring

14

that FDI and growth come hand in hand, not one solely causing the other. This is particularly

interesting when one is thinking of policy reasoning. FDI does cause economic growth, but it is

also the economic growth which is causing FDI. This bidirectional relationship is important to

keep in mind when tackling the question of how IPR would influence the economy.

Ozturk highlights education, technology and infrastructure as key factors in determining

whether FDI inflows provide growth (Ozturk 2007). This is in line with Borensztein, De

Gregorio, and Lee (1998) research, which concluded that the level of secondary education is a

determinant of whether FDI has a positive economic growth effect or not. Therefore we will

explore the education level in India in our analysis.

The consensus is that FDI positively effects economic growth. However whether or not FDI is

increased by a stronger IPR regime is ambiguous. There is also some evidence that the level of

development is the determinant of whether FDI has a net positive effect.

Level of Development

As soon as the relationship of IPR and economic welfare is explored in the context of

developing countries, the determining factor of development level comes into the picture. It is

increasingly apparent that certain factors influence the effect of IPR, and whether they have a

positive or negative economic effect. IPR cannot be as effective in developing countries because

their institutions are not yet developed enough to harness the benefits of innovation. Davis and

Sener show that optimal IPR policy for welfare varies across different institutional frameworks

and that for low levels of development a low IPR level can be beneficial for maximizing welfare

(Davis and Sener, 2012).

The level of patents which is the most beneficial to the country is developed in an empirical

model by Cysne and Turchick (2012), where they show that the ideal level may be higher, lower,

15

or the same as the current level. This proves that increasing IPR is not always in a country's best

interest.

Dinopoulos and Segerstrom (2010) explored a theoretical model on the welfare effect of IPR

for North (developed) and South (developing) countries. They found that increased IPR in the

South increased the rate of transfer of technology, decreased the wage gap, and stimulated

innovation in the North. Additionally they found that overall the welfare in the South increased

by stronger IPR, albeit manufacturing being minimized by stronger IPR.

The theory of IPR hinging on the level of development is expanded by Chu, Cozzi and Galli

(2014) and it is argued that less developed countries begin with a low-level of IPR as they do not

yet have a strong enough domestic innovation infrastructure, and that as development increases,

so do the IPR rights, because they then have the capability to stimulate domestic innovation. It

shows that patent rights should be developed for countries independently depending on which

stage they are at in economic development. First, countries benefit from learning through

imitation, then as they progress patent rights should be put into place in order to facilitate and

stimulate innovation, as well as attract FDI.  This is in line with the U-shape relationship

between IPR and the economy found by Chen and Puttitan (2005).

Iwaisako et al. (2011) made an important contribution to the literature on this topic through

focusing on the welfare effect. They found that other studies did not realize the true welfare

effect as they focused too much on innovation and FDI separately. Through developing a

complex empirical model the welfare effect is explored, and it is found that increasing IPR only

has a significant positive welfare effect if the current IPR level is very low.

Research using data prior the formation of the WTO studied the welfare effect of IPR in an

extensive study of 79 countries. Falvey, Foster and Greenaway (2006) found that whether IPR

16

benefitted the economy or not hinged on the level of development. Low and high income

countries are significantly correlated with growth, however for middle income countries it did

not have a significant effect. This is in line with the U-shape relationship proposed between IPR

strength and the economy (Chen and Puttinan, 2005), but contrasts the findings of Mohtadi and

Ruediger (2014), who find distinct negative correlations for low income countries’ IPR and

economic growth using recent data. This could be because of the important worldwide changes

that implementing the TRIPS agreement had, and therefore the studies are not necessarily

contradictory. Mohtadi and Ruediger use the most recent data spanning 30 years, which is

interesting as it captures both the short-term and the long-term economic effects of IPR.

Mohtadi and Ruediger (2014) find that the effect of IPR protection on economic growth

depends on the level of human capital of the country at the time, and that this relationship also

holds true of GDP levels. Education was not found to be significant in the findings of Ginarte

and Park (1997) and Maskus (2000), however it was found to be significant by a more recent

study by Loukil (2014) which focused on patents and economic welfare. This again hints

towards the influence of the TRIPS agreement in the relationship, as Loukil’s study included

recent data after the founding of the WTO.

Mohtadi and Ruediger (2014) conclude that countries with human capital below a certain

threshold experience negative economic effects from increased IPR. The human capital threshold

found in their robust empirical model is 5.88 years of school education. The model confirms this

threshold relationship holds for both human capital and GDP levels. Theoretical arguments exist

for both, and both are significant in our analysis as human capital is an important factor for

innovation and the GDP is a useful reflection of economic development levels. The human

17

capital level of India will therefore be analysed in terms of years of education later on, with

regards to this threshold.

From the discussion of relevant literature it becomes clear that increasing IPR is not always

beneficial for developing countries. We can conclude that the economic effect is ambiguous.

Some important factors for differences in studies are the timing and span of the data used. This is

due to different long-term or short-term effects of IPR on innovation and due to the

implementation of the TRIPS agreement. From the literature analysed it appears that the overall

effect of IPR is that it increases economic welfare for countries which have reached a certain

level of development, and that stronger IPR could be damaging for less developed countries.

A reoccurring finding is the non-linear form of the relationship between IPR and economic

welfare. Whether the country would benefit from tighter IPR or not, hinges on its level of

development.

The factors of development which are shown to have the greatest impact are GDP per capita,

human capital level, and the current IPR strength.

DEVELOPMENT FACTORS IN INDIA

GDP per capita and current IPR regime strength: U-shape model

Now that the theoretical implications of IPR in a developing country have been explored,

India's specific situation can now be assessed along the factors that have emerged. The u-shaped

relationship model will be examined to determine at which stage India is currently at.

Chen and Puttitanun (2005), describe the u-shape relationship between IPR strength and

development, measured by GDP per capita. The GIPC index is used to measure the strength of

the IPR regime as it is a comprehensive international comparison instrument, including 25

18

countries over a long, relevant period of time, as well as measuring both the laws and

enforcement.

Figure 1: The U-shape relationship

Source: Chen and Puttitanum’s model (2004)

This displays that countries IPR strength has a u-shaped relationship with per capita GDP. This

can be understood that as the country develops, so does its capacity for innovation. At first the

technology it acquires is more effective at imitating inventions, and then as its innovation

capacity grows, the domestic inventions influence overtakes the imitating invention, and the

government shifts to a stronger IPR regime to aid this. It is imperative for a country to match its

IPR strength with its economic development in order to achieve optimal economic growth.

The lowest point is witnessed at $854.04 GDP per capita in 1995 prices, with economies

above that level correlating with higher IPR as they reach a further stage of development. In

current dollars that translates to $1,329.54.

In order to determine whether India should increase its IPR strength for a positive economic

effect, its GDP per capita is shown and compared.

19

Figure 2: India’s GDP per capitaSource: www.worldbank.org

As can be observed, India has a GDP per capita of $1,498.90 in current US dollars in 2013 1 The

World Bank forecast also expects this to continue rising gradually over the coming years.

India’s GDP per capita is just above the threshold of $1,329.54, and its GIPC index is currently

6.24 – the very lowest in the ranking system and even lower than previous years. This has been

the cause of harsh condemnation from the international community, and the GIPC report (2014)

states that India’s IPR erosion of the past years is contradictory of its commitment to innovation.

However, when analysing the graph with relation to threshold level, the weak IPR systems can

be understood and somewhat justified. Only in 2010 did India’s GDP per capita make the leap

over the threshold level from Chen and Puttinam’s model and there has been a decrease after the

1 Due to the effect of net imports and net exports on a country’s wealth, many prefer the gross national income per capita instead, which corrects for net trade. In 2013 the GNI per capita was $1,570. Because this is quite similar to the current GDP per capita, it will not be changed or discussed further in this analysis and Chen and Puttitanum’s model’s measurement choice will be kept.

20

following year. This shows that India’s weak IPR policy is actually in line with the model for the

stage of development it is at.

The GIPC report’s argumentation is also dubious in light of a recent study confirming other

literature, which proves that a country may only benefit in terms of innovation from stronger

patent rights if it is highly developed economically (Loukil, 2014).

India’s development is in line with the U-model of IPR regime strength. The causality in this

relationship remains unproven, however the theoretical implications do support the reasoning of

weaker IPR needed at different stages in development to maximize growth. Specifically, when a

country’s imitation activities effect is still stronger than its domestic innovation effect a weaker

IPR regime is beneficial to the economy.

Criticism for India’s past IPR policy cannot be justified when one observes it in this

perspective. India is currently on the bottom of the U-shape, and only now as the GDP per capita

increases, should India begin to gradually strengthen its IPR according to this model.

Human Capital Threshold

Next India’s human capital level will be analysed in terms of the threshold found by Mohtadi

and Ruediger (2014). Literature confirms that IPR strength’s marginal effect on economic

growth changes with different levels of human capital (Mohtadi and Ruediger, 2014; Loukil

2014). Mohtadi and Ruediger show that there is a threshold level of human capital of 5.88 years

in education, above which strengthening IPR has a positive effect on economic growth and

below which tighter IPR means negative economic effects. India’s average years in education

was 4.4 years in 2013 (Human Development Report 2014). This mean has been maintained since

2010, showing that no notable improvement has been made in the average years spent in

21

education. It suggests that India’s human capital level is not developed to a level at which it

would be economically beneficial for India to strengthen its IPR regime.

According to the research conducted by Mohtadi and Ruediger (2014), if India were to tighten

its IPR regime at the moment, the economy would be negatively impacted due to the human

capital level not being above the threshold of 5.88 average years in education.

CONCLUSION AND POLICY RECOMMENDATIONS

IPR in developing countries is a prominent topic due to the effects of globalization,

particularly the escalation of trade and the creation of the TRIPS agreement. Research has

increasingly focused on this area in recent years, and found that the economic effect of IPR is an

extremely complex and interwoven relationship for developing countries. Findings have been

ambiguous, however a reoccurring conclusion is the non-linear relationship of IPR and the

economy. Some possible reasons for differences in literature are the recentness (including TRIPS

years or not) and the time span of the data used, as well as country factors such as industry

distribution.

The main finding from literature is that whether the economy benefits from a strong IPR

regime or not depends largely on its level of development. When the situation in India is

reviewed in perspective of the literature implications, it becomes apparent that the currently

weak IPR regime may indeed be favourable for India’s development level. This is because in

order for a country to benefit from IPR it must have sufficient innovative capacity. This implies

that the pressure from the West for India to tighten its IPR may be premature.

India’s economic development and human capital level are currently at a point that is

insufficient for the country to benefit from tighter IPR according to these models. Most likely

22

India's technologies are currently still more effective at imitating innovations rather than creating

domestic innovations. Once India has reached a further stage of development, it may

economically benefit from a stronger IPR regime.

Parties interested in a stronger IPR regime could focus on building the country’s innovation

system and improving education. This would encourage the government to strengthen IPR as the

country would be more able to harness the benefits.

Some limitations of this paper are that the issue addressed is a very broad subject to be dealt

with considering the time and word constrictions. This does not leave room for a more detailed

analysis, and therefore I would suggest that further research could be conducted on this issue.

The economic effect of IPR on the particular industries could be evaluated along with the

relative size of each industry in India. Thus a more detailed portrayal of the potential economic

effects of strengthening IPR could be achieved. Additionally, the stagnation of the average

education years could be investigated to discover factors hindering development. In future

welfare analysis of IPR in developing countries, I would suggest that a considerable time span be

used, with most recent data and to test for both threshold effect and non-linear relationship.

This paper contributes to current literature by supplying a literature review including the most

recent research on the economic effect of IPR on developing countries and applying it to India.

Using empirical models it provides a scientific analysis of India's current situation and from

which policy recommendations can be drawn in regards to economic welfare.

23

REFERENCES

Anderson, K. 2014. Contributions of the GATT/WTO to global economic welfare:

Empirical evidence. Departmental Working Papers 2014-15, The Australian National

University, Arndt-Corden Department of Economics.

Basu, N. 2013. India refutes US criticism of its FDI, IPR laws. Retrieved from:

http://www.business-standard.com/article/economy-policy/india-refutes-us-criticism-of-its-fdi-

ipr-laws-113041200474_1.html

Benhabib, Jess & Spiegel, M. 1994. The Role of Human Capital in Economic Development:

Evidence from Aggregate Cross-Country Data, Journal of Monetary Economics, 34, 143-173

Borensztein, De Gregorio, and Lee. 1998. How does foreign direct investment affect economic

growth? Journal of International Economics, 45:1, 115–135

Chen Y & Puttitanun T. 2005. Intellectual property rights and innovation in developing

countries. Journal of Development Economics. 78, 474-493.

Chu A, Cozzi G, & Galli S. 2014. Stage-Dependent Intellectual Property Rights. Journal Of

Development Economics, 106, 239-249.

Colino, A., Benito-Osorio, D., & Armengot, C, R, 2014. How much does innovation matter for

economic growth?. Management Decision, 52: 2, 313 - 325

Cysne, R. P. and Turchick D. 2012. Intellectual property rights protection and endogenous

economic growth revisited. Journal of Economic Dynamics and Control, 36:6, 851–861

Datta, A.. and Mohtadi, H. 2006. Endogenous imitation and technology absorption in a model of

north-south trade, International Economic Journal, 20, 431-459

24

Davis, L. S. and Sener, F. 2012. Private Patent protection in the theory of Schumpeterian growth.

European Economic Review. 56:7, 1446–1460

Dees S. 1998. Foreign Direct Investment in China: Determinants and Effects. Economics of

Planning, Volume 31, Issue 2-3, pp 175-194

Dinopoulos, E. and Segerstrom, P. S. 2010. Intellectual property rights, multinational firms and

economic growth. Journal of Development Economics, 92:1, 13–27.

Falvey, R., Foster, N. and Greenaway, D. 2006. Intellectual Property Rights and Economic

Growth. Review of Development Economics, 10, 700–719.

Feldstein, M. 2000. Aspects of Global Economic Integration: Outlook for the Future. NBER

Working Paper No. 7899 Cambridge University, Massechuets: National Bureau of Economic

Research.

Furukawa, Y (2007). The protection of intellectual property rights and endogenous growth: Is

stronger always better? Journal of Economic Dynamics and Control, 31:11,

3644–3670.

Furukawa, Y (2010). Intellectual property and innovation: An inverted-U relationship.

Economics Letters, 109:2, 99–101

Ginarte, J.C., Park, W.G., 1997. Determinants of patent rights: a cross-

national study. Research Policy 26, 283–301.

Glass and Wu, 2007. Intellectual property rights and quality improvement. Journal of

Development Economics, Volume 82:2, 393–415

25

Gould, G. M. and Gruben, W.C. 1996. The role of intellectual property rights in economic

growth. Journal of Development Economics, 48:2, 323–350

Grossman, GM and E Helpman (1991). Trade, knowledge spillovers, and growth. European

Economic Review, 35:2–3, 517–526

Grossman, GM and EL-C Lai (2004). International protection of intellectual property.

American Economic Review, 94:5, 1635–1653.

Malik, K. 2014. Human Development Report 2014. United Nations Development Programme

Iwaisako, T., Tanaka, H. and Futagmi, K. 2011. A welfare analysis of global patent protection in

a model with endogenous innovation and foreign direct investment. European Economic

Review, Volume 55:8, 1137–1151

Iwasaki, I. and Tokunaga, M. 2014. Macroeconomic Impacts of FDI in Transition Economies: A

Meta-Analysis. World Development, 61, 53-69.

Kim, Y. K., Lee K., Park, W. G. and Choo K. 2012. Appropriate intellectual property protection

and economic growth in countries at different levels of development. Research Policy, 41:2,

358–375

Liu, Wang, Wei. 2001. Causal links between foreign direct investment and trade in China. China

Economic Review, 12:2–3, 190–202

Loukil, Kamilia (2014). Non-Linear Effects of Intellectual Property Rights on Innovation:

Evidence from Developing Countries. International Journal of Business and Management

Invention, 3:10, 24-27

Maskus, K (2000). Intellectual property rights in the global economy. Peterson Institute for

International Economics, Washington DC. 

26

Maskus, K. 2005. Intellectual Property and Development: Lessons from Recent Economic

Research. 42 - 45

Mohtadi, H. and Ruediger, S. 2014. Intellectual property rights and growth: Is there a threshold

effect?, International Economic Journal, 28(1), 121-135.

Ozturk, I. 2007. Foreign Direct Investment – Growth Nexus: A Review of the Recent

Literature. International Journal of Applied Econometrics and Quantitative Studies,

4:2, 79-98.

Park, W.G., Ginarte, J.C., 1997. Intellectual property rights and economic

growth. Contemporary Economic Policy, 15, 51– 61.

Romer, P. 1990. Endogenous Technological Change. Journal of Political Economy

Vol. 98, No. 5, Part 2: The Problem of Development: A Conference of the Institute for the Study

of Free Enterprise Systems, pp. S71-S102

Saggi, K., Wu, L. Glass A. 2002. Intellectual property rights and foreign direct investment.

Journal of International Economics, 56, pp 387–410

P.H. Schneider, International trade, economic growth and intellectual property rights: a panel

data study of developed and developing countries, Journal of Development Economics, 78,

2005, 529-547.

27

Appendix A

" What are Intellectual Property Rights? Intellectual property (IP) rights are the rights awarded by society to individuals or organisations principally over creative works: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. They give the creator the right to prevent others from making unauthorised use of their property for a limited period. IP is categorised as Industrial Property (functional commercial innovations), and Artistic and Literary Property (cultural creations). Current technological developments are blurring, to some extent, this distinction, and some hybrid sui generis systems are emerging.Industrial PropertyPatents: A patent is an exclusive right awarded to an inventor to prevent others from making,selling, distributing, importing or using their invention, without license or authorisation, for afixed period of time (TRIPS stipulates 20 years minimum from filing date). In return, societyrequires that the patent applicant disclose the invention in a manner that enables others to putit into practice. This increases the body of knowledge available for further research. As well assufficient disclosure of the invention, there are three requirements (although details differ fromcountry to country) that determine the patentability of an invention: novelty (newcharacteristics which are not “prior art”),9 non-obviousness (an inventive step not obvious to oneskilled in the field), and utility (as used in the US) or industrial applicability (as used in the UK).Utility models are similar to patents, but in some countries confer rights of shorter duration tocertain kinds of small or incremental innovations.Industrial Designs: Industrial designs protect the aesthetic aspects (shape, texture, pattern,colour) of an object, rather than the technical features. TRIPS requires that an original design beeligible for protection from unauthorised use by others for a minimum of 10 years. Trademarks: Trademarks provide exclusive rights to use distinctive signs, such as symbols, colours,letters, shapes or names to identify the producer of a product, and protect its associatedreputation. In order to be eligible for protection a mark must be distinctive of the proprietor soas to identify the proprietor’s goods or services. The main purpose of a trademark is to preventcustomers from being misled or deceived. The period of protection varies, but a trademark canbe renewed indefinitely. In addition many countries provide protection against unfaircompetition, sometimes by way of preventing misrepresentations as to trade origin regardlessof registration of the trademark.Geographical Indications: Geographical Indications (GIs) identify the specific geographical originof a product, and the associated qualities, reputation or other characteristics. They usuallyconsist of the name of the place of origin. For example, food products sometimes have qualitiesthat derive from their place of production and local environmental factors. The geographicalindication prevents unauthorized parties from using a protected GI for products not from thatregion or from misleading the public as to the true origin of the product. Trade Secrets: Trade secrets consist of commercially valuable information about productionmethods, business plans, clientele, etc. They are protected as long as they remain secret by lawswhich prevent acquisition by commercially unfair means and unauthorised disclosure.Artistic and Literary PropertyCopyright: Copyright grants exclusive rights to the creators of original literary, scientific and

28

artistic works. Copyright only prevents copying, not independent derivation. Copyrightprotection begins, without formalities, with the creation of the work, and lasts (as a generalrule) for the life of the creator plus 50 years (70 years in the US and EU). It prevents unauthorisedreproduction, public performance, recording, broadcasting, translation, or adaptation, andallows the collection of royalties for authorised use. Computer programs are protected bycopyrights, as software source and code have been defined as a literary expression.Sui Generis systemsIntegrated Computer Circuits: A specific sui generis form of protection for design of integratedcomputer circuits. As the inventive step is often minimal and originality is the only requirement,the minimum period of protection under TRIPS is 10 years. Plant Breeders’ Rights: Plant breeders’ rights (PBRs) are granted to breeders of new, distinct,uniform and stable plant varieties. They normally offer protection for at least fifteen years(counted from granting). Most countries have exceptions for farmers to save and replant seeds,and for the use of protected materials for further breeding. Database Protection: The EU has adopted legislation to provide sui generis protection in respect of databases, preventing unauthorised use of data compilations, even if non-original. Exclusive rights to extract or utilize all or a substantial part of the contents of the protected database are granted.“ (http://www.iprcommission.org/papers/pdfs/final_report/ciprfullfinal.pdf)

29

APPENDIX B

GIPC REPORT ON INDIA IPR“2012 Scores versus 2014India’s overall score has decreased from 25% of the total possible score (with a score of 6.24) in 2012 to 23% in 2014. This is mainly due to the introduction of new indicators to the GIPC Index and the relative weakness of the Indian IP environment with regard to IP rights available for trademark holders, patentability requirements that are outside international practices, and IP-based barriers to accessing the Indian market. Moreover, India’s overall IP environment has deteriorated particularly with regard to pharmaceutical patents, for which basic protection seems increasingly to be unavailable.Patents, Related Rights, and Limitations2. Patentability requirements: Indian patent law has in place an additional requirement to patentability that goes beyond the required novelty, inventive step, and industrial applicability requirements. Under Section 3(d) of the Indian Patent Act, there is an additional “fourth hurdle” with regard to inventive step and enhanced efficacy that limits patentability for certain types of pharmaceutical inventions and chemical compounds. Specifically, as per the Supreme Court of India’s ruling on April 1, 2013, in the Novartis Glivec case, Section 3(d) can only be fulfilled if the patent applicant can show that the subject matter of the patent application has a better therapeutic efficacy compared with the structurally closest compound as published before the patent application had been filed (regardless of whether or not a patent pplication on the earlier compound was filed in India). The Supreme Court also found in that same case that it was not in the interest of India to provide patentees with protection that goes substantially beyond what was specifically disclosed in the patent application; compounds that fall within a chemical formula of a claimed group of compounds in a patent application but that are not specifically disclosed in the patent could be regarded as not protected. This point was relevant in another case involving Roche’s Tarceva, where the generic company, Cipla, was found not to have infringed on Roche’s patented product even though the active ingredient is the same. This approach to patentability requirements is inconsistent with the TRIPS Agreement, which specifies three basic patentability requirements .4. Pharmaceutical-related patent enforcement and resolution mechanism: India does not provide mechanisms that enable patent issues to be adjudicated before marketing approval of a generic or biosimilar product.Copyrights, Related Rights, and Limitations10. Availability of frameworks that promote cooperativeaction against online piracy: Indian law is not clear as to the availability and requirements of a notice and takedown system. Specifically, the 2000 Information Technology Act, 2008 amendments, and the 2011 Information Technology (Intermediaries Guidelines) Rules appear to be in conflict with the 2012 Copyright Act amendments. The former puts forward relatively clear guidelines and requirements of expeditious removal of infringing material; the latter, conversely, only requires removal for a period of 21 days, with a court order required for any further action.11. Scope of limitations and exceptions to copyrights and

30

related rights: The 2012 Copyright Act amendments have broadened India’s exceptions in a manner that seems to be incompatible with the Berne three-step test, specifically the expansion of the private-use exception to “private and personal” use.12. Digital rights management legislation: The 2012 Copyright Act amendments included measures relating to DRM; however, these measures allow broad exceptions and do not cover the import and distribution of circumvention equipment.GIPC international IP indexTrade Secrets and Market Access20. Barriers to market access: India has in place a number of policies making market access contingent on the sharing or divulging of intellectual property. For example, through its 2012 decision in the Nexavar compulsory licensing case, the Controller General of Patents, Designs, and Trademarks set a precedent of requiring foreign innovators to manufacture in India as a condition of “working the patent” in order to avoid forced licensing of their inventions to third parties. Separately, in a draft policy being considered by the Indian government, there is a requirement of government purchase of ICT equipment that indigenous IP be used; this policy is currently being reconsidered but has not been completely withdrawn.Enforcement23. Civil and procedural remedies and 25. Criminal standards including minimum imprisonment and minimum fines: India does provide rudimentary civil and procedural remedies and criminal standards under its Copyright, Trade Marks, and Patent acts. However, the availability and enforcement of these remedies and criminal sanctions remains weak.26. Effective border measures: Under the 2007 Notification 47 from the India Department of Revenue, deputy and assistant customs commissioners may suspend the clearance of goods when there are reasonable grounds to believe that the goods in question infringe IP rights. With regard to goods in transit, the regulations do not distinguish between goods in transit and other goods. However, the 2012 Copyright Act amendments explicitly exclude goods in transit from being treated as prohibited goods.Membership and Ratification of International TreatiesIndia is not a contracting party to any of the international treaties included in the GIPC Index, nor has India concluded an FTA with substantial IP provisions since acceding to the TRIPS Agreement. Current negotiations with the European Union on an FTA are not likely to be concluded before the beginning of 2014.”