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IP, the Economy – and What’s at Risk

Jun 14, 2012 Written by  David Benjamin, Guest Contributor

G20 Issues in FocusMexico hosts the 2012 G20 Summit, beginning June 16th and 17th with the B20 (Business 20) Summit, then continuing into the leaders' summit on June 18th and 19th. This article is one of a series examining the issues on the G20's agenda.

In the past decade, the emergence of two momentous yet opposing trends are challenging the world’s knowledge-based economy, and portray an alarming future economic and employment scenario that will be radically different than it is today.

First, intellectual capital is increasingly becoming our most important resource, rapidly replacing land, energy, and raw materials in the production equation. As The Economist put it in October 2005, as much as 75 percent of the value of publicly traded companies comes from intangible assets, up from around 40 percent in the early 1980s. And a new report from the U.S. Department of Commerce shows that 75 IP-intensive industries together directly and indirectly employed 40 million workers with average weekly wages that are 42 percent higher than those of non-IP-intensive industries. According to the report, IP-intensive industries represent about 35 percent of U.S. GDP. Clearly, entire industries and millions of employees are depending more and more on the creation and protection of intellectual property.

Second, as companies seek to deliver products and services to the marketplace, they are investing more and more in “intellectual capital”. The problem is that intellectual property is vulnerable to theft – namely through counterfeiting and piracy.

These trends question whether the global economy can continue to absorb massive losses due to IP theft, counterfeiting, and piracy, in terms of lost economic growth, GDP, and employment.

In order for governments to more fully understand the consequences, it is important to look into what is at risk from this global spread of intellectual property theft. Intellectual Property (IP) is an important component of the overall health of the economy – and that much is at risk.

The OECD estimated in 2009, for example, that global cross-border trade in physical counterfeits alone represented a US$250 billion problem. When in-country counterfeiting and piracy and on-line infringements are figured in, the number reaches nearly US$1 trillion. In addition, research done by Frontier Economics for ICC’s Business Against Counterfeiting and Piracy (BASCAP) group showed that the G20 governments alone incur an additional €100 billion in indirect costs from counterfeiting and piracy, in lost tax revenues, higher welfare spending, health, and other costs of sickness and death caused by unsafe counterfeit products, and economic and other costs of IP crime.

Intellectual Property Protection Benefits the Economy

Perhaps first and foremost, the development and protection of intellectual property (IP) goes hand-in-hand with economic activity, employment, and growth in developing as well as developed countries. Notably, industrial sectors that rely on IPR protection are substantial contributors to the economy. For example, in G8 countries, copyright-based industries and interdependent sectors alone account for approximately 4 to 11 percent of GDP and 3 to 8 percent of all employment. Copyright-related industries also generate substantial GDP and employment contributions in developing countries – 2 to 6 percent of GDP and 3 to 11 percent of employment in 14 developing countries and regions studied by WIPO in Latin America, Asia, and elsewhere. Brands goods industries account for approximately 7 percent of GDP in Spain and Germany, and over 14 percent of all manufacturing in the UK. Moreover, many IPR-reliant sectors show disproportionate growth despite trends of declining prices, and are strategically important in the economy.

IPR attracts foreign direct investment (FDI) and promotes R&D and technology transfer in developing countries, driving development and economic growth.

The OECD has found that the strength of a country’s patent rights is positively correlated to inward FDI, holding other factors constant. This relationship holds for all groups of countries – developed, developing and least developed. OECD economists have found that a 1 percent increase in a country’s patent protection correlates to a 2.8 percent increase in FDI, and a 1 percent improvement in trademark and copyright protection increases FDI by 3.8 percent and 6.8 percent, respectively. Similarly, other studies have shown that weak IPRs are significant barriers to international technology licensing, weak IPRs reduce investment in the computer software sector, weak IPRs reduce direct investment in the pharmaceutical sector, and at least 25 percent of American, German, and Japanese high-tech firms refused to invest directly or through joint ventures in developing countries with weak IPRs.

Intellectual Property Protection Promotes Innovation

As policy makers search for the magic formula to stimulate economic growth, it has become increasingly clear that innovation – both in the form of new technologies and fresh ideas – is the key driver of future productivity growth. And, not surprisingly, effective IP protection increases the needed research and development and innovation. For example, patents have a positive impact on R&D spend in most industries, especially pharmaceutical products, where the absence of patents has been show to decrease R&D by 25-35 percent. Moreover, firms can earn substantially more from innovations that are protected by IPR, in turn injecting more into R&D. IPR also attracts venture-capital investment for R&D and for the commercialisation of innovative products and services.

Intellectual Property Protection Helps Small and Medium Enterprises

The SME sector is vital to our world economy and the role of SMEs is increasingly viewed as that of a powerhouse of employment, innovation, and entrepreneurial spirit.

SMEs are increasingly important contributors to innovation and creativity. In fact, SME investment in R&D in the U.S. grew by nearly 300 percent in between 1985 and 1995, while large firm R&D expenditure grew by only about 20 percent. Moreover, SMEs’ return on R&D investment can often exceed that of large firms, and SMEs in the U.S. and other countries have been found to contribute approximately 2.4 times more innovations per employees than do large firms.

Notably, SMEs that use IPR report higher growth, income and employment than those that do not. At least 10 percent more of surveyed SMEs in the information and communication technology (ICT) sector that used IPR reported growth during the previous 12 months in each of the areas of turnover, market share, and employment than those that had not used IPR, whereas 61 percent of firms that had used IPR reported turnover growth versus 51 percent among firms that had not used IPR.

Intellectual Property Protection Benefits Consumers and Society

There is no question that IPR supports development of a continuous stream of innovative, competitive products and services that benefit consumers. Copyrights underlie the continuous stream of new music and films, ever-improving business and games software, books, magazines, newspapers and other published material, photography, and many other related activities including publishing, performing, broadcasting and other media for developing and delivering all of these to consumers. Patents underlie many of the products and services that society relies on for health, energy, communication, transportation and many other human and commercial needs. Products and processes that depend on patents are developed in such diverse industries as the aerospace, automotive, energy, biotechnology, pharmaceutical, chemical, and information and communication technology sectors, and related transportation and distribution sectors. Trademarks support an even wider array of products and services that consumers want and depend on, from clothing and computers to foods and footwear, educational and entertainment products, services, scientific products, and even sporting activities.

With the world awash in counterfeit and pirated products, G20 efforts to stabilize the economy and stimulate economic growth, trade, and employment must include the critical role that intellectual property protection plays in driving innovation, development, and jobs.

The massive infiltration of counterfeit and pirated goods creates an enormous drain on the global economy – crowding out billions in legitimate economic activity and facilitating an "underground economy" that deprives governments of revenues for vital public services, forces higher burdens on tax payers, dislocates hundreds of thousands of legitimate jobs and exposes consumers to dangerous and ineffective products. For business, these effects lead to greater risk, lower returns on investment, less job creation and in the extreme, market exit.

David Benjamin is the Senior Vice President for Anti-Piracy at Universal Music and Co-Chair of Business Action to Stop Counterfeiting and Piracy (BASCAP).

The official G20 Mexico 2012 logo is courtesy of the G20 Mexico committee (cc).

This article was originally published in the special annual G20-B20 Summit 2012 edition. Published with permission.

Tagged under G20    B20    business    intellectual property    Department of Commerce    trade    infringement    capital    foreign direct investment    trademark    copyright    R&D    research    development    protection    SMEs    economy   

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