Discussion Paper

No. 2015-1 | January 05, 2015
Effects of Intellectual Property Rights Protection and Integration on Economic Growth and Welfare

Abstract

The protection of intellectual property rights (IPR) and the distribution of rent are central issues in R&D-based growth models with the return to innovation serving as the engine of growth. In this paper the authors consider the strength of the intellectual property rights and franchise bargaining system to analyze how the rent/franchise fee and institutional quality affect the economic growth and social welfare. It is found that the intermediate good firm with full IPR protection charges a price equal to the marginal cost. In addition, if imitated technologies exhibit a labor spillover effect, decreasing the IPR protection will increase the rent/franchise fee. The authors also show that the growth-maximizing effects of IPR protection, the bargaining power of intermediate goods firms, and the imitation of technology are no longer equivalent to those effects on welfare-maximization since the welfare result depends on the relative degrees of the growth enhancing effect and crowding-out effect on production.

JEL Classification:

L11, O40, O30

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Cite As

Chung-hui Lai and Vey Wang (2015). Effects of Intellectual Property Rights Protection and Integration on Economic Growth and Welfare. Economics Discussion Papers, No 2015-1, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2015-1


Comments and Questions


Anonymous - Referee Report 1
January 19, 2015 - 08:37

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Chung-hui Lai and Vey Wang - Reply to Referee Report 1
January 22, 2015 - 09:02

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Anonymous - Invited Reader Comment
January 27, 2015 - 08:34

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Chung-hui Lai and Vey Wang - Reply to Reader Comment
February 02, 2015 - 08:14

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Anonymous - Invited Reader Comment
February 16, 2015 - 09:06

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Chung-hui Lai and Vey Wang - Reply to Reader Comment
February 23, 2015 - 10:07

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Anonymous - Invited Reader Comment
February 23, 2015 - 10:21

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Anonymous - Referee report 2
February 23, 2015 - 13:31

Summary of the paper
The authors examine how the distribution of franchise fees and institution quality affect economic growth and welfare in a research and development (R&D)-based growth model including a franchise system. In the real world, the franchise system prevails. For instance, franchised businesses account for a large share ...[more]

... of all retail sales in the US, and nominal sales through franchisor outlets have recently grown rapidly, as discussed by the author in the introduction. For this reason, the author addresses the issue of protection of intellectual property rights (IPR) in an R&D-based model by considering the franchise system. The author obtains some results concerning the growth and welfare effects of strengthening IPR protection.

Overall evaluation
Many studies, as mentioned in the introduction to the paper, have examined the growth and welfare effects of strengthening IPR protection in R&D-based growth models. However, no study has yet examined similar issues in an R&D-based model with a franchised system. As discussed by the author, franchised businesses account for a large share of retail sales in the US. Thus, reexamining these effects in this model will provide a contribution to the literature on IPR protection and economic growth. However, the paper as it stands has one major problem that should first be resolved, as follows.

Major Comment
The explanation given in Section 2.2 is somewhat confusing. Above Eq. (1) on p. 4, the author states that each intermediate good firm produces and sells a variety x_j = q x_m + (1–q) x_c to each final good firm. However, in Section 2.1, the author assumes that the inventor can enforce the patent in a court of law and prevent imitation with probability q, and the firm exercising the patent right monopolistically supplies the intermediate goods. Alternatively, with probability (1-q), the inventor cannot enforce the patent in court. In this case, intermediate goods are imitated and imitators supply the goods competitively. Therefore, each intermediate good firm cannot produce the same quantity. This is inconsistent with the earlier description. The author needs to clarify why each intermediate good firm produces the same amount, x_i, if this derivation is indeed correct. Otherwise, the author needs to modify the derivation hereafter under the correct setting.
In addition, if intermediate goods are protected with probability q and are imitated with probability (1-q), the paper has another problem. Firms that produce protected intermediate goods can bargain with final good firms and construct a franchise contract. However the intermediate goods that cannot be protected by patents are supplied competitively by many imitators and thus a bargain between the intermediate good and final good firms cannot be made.

The other comments
1. Almost the entire model is the same as in Wang et al. (2010), except the point that in the present paper IPR protection is imperfect. Almost all of the explanations given for the model setting are also almost identical to those in Wang et al. (2010). For this reason, the author should remove or at least shorten these parts of the paper to avoid excessive repetition of this earlier work.
2. Goh and Olivier (2003) examined the welfare effect of strengthening patent protection in an R&D-based growth model where a variety of final goods are produced using a variety of intermediate goods. Because they address a similar issue in a comparable model, the author should discuss any differences between Goh and Olivier (2003) and the present study.

Reference
Goh, A-T., and J. Olivier, (2003) “Optimal Patent Protection in a Two-Sector Economy,” International Economic Review, 43, 1191-1214.
Wang, V., C.H. Lai, L.S. Lee, and S.W. Hu, (2010) “Franchise Fee, Contract Bargaining, and Economic Growth,” Economics of Innovation and New Technology, 19, 539-552.