INTELLECTUAL PROPERTY RIGHTS AND GLOBAL IMITATION CHAINS:
THE NORTH-SOUTH-EAST MODEL

Caner DEMİR

(corresponding author)

Kırklareli University,

Department of Economics

Kırklareli-TURKEY

Aykut LENGER

Ege University,

Department of Economics

Izmir-TURKEY

ABSTRACT

This study investigates the effects of intellectual property protection on economies by proposing a three-pole global economy model. The main proposition of the study is that the classical two-pole approach (North-South) does not reflect the technological heterogeneity and conflicts within the developing world. Therefore, a three-pole world economy model which consists of the following regions has been designed; an innovator, an imitator and an innovator-imitator. The simulation results reveal firstly, northern region benefits from tighter IPR in any case; secondly, stronger protection of IPR certainly exerts negative effects in the South while it brings benefits eastern region in some aspects.

Keywords:Intellectual Property Rights, Imitation, Developing Countries.

JEL classification:O34, O39, O19

  1. INTRODUCTION

The effect of intellectual property rights (IPR) protections on economic development is still a controversial issue. Since IPR has started to be protected, it has been still doubtful whether countries with different development levels could benefit from these rights. Moreover, by indicating the unnecessity of IPR, some perspectives suggest that enabling the free-flow of knowledge will lead to acceleration of the knowledge spillover which is a very important mechanism in the modern economic growth theory (i.e. Boldrin and Levine, 2004; Boldrin and Levine, 2006; Banerjee and Chatterjee, 2010; etc.).

Even though the related literatureis still in doubt about it, the mainstream global policy on IPR is in the direction of harmonization of IPR for all countries. This study propounds that it is unfeasible to expect all the countries could benefit from tighter IPR policies. The main motivation of this idea is that the development level differentials are important determinants of getting benefit from IPR and these differences bring out many structural inabilities of less developed countries. At the present, we do know that most of the developing countries have some research and development (R&D) sectors and try to innovate new products while someothers have not similar possibilities. Therefore, a three-pole world economy which decomposes the developing worldinto two regions has been designed in this study.

In today’s world, while some developing countries have relatively advanced research and development (R&D) sectors and innovate new ideas and goods, some others still do not have enough capacity to carry out these kinds of innovative activities.In an attempt to represent the international differences in development levels and technological capacities, the model of this study has been based on the North-South model, which has a broad range of usage in the development economics and international economics literature. However, due to the differences in technological capacities, the present study has taken the North-South framework a step further and designed a three-pole world economy which has been denominated as the North-South-East Model. According to this setup, the North represents technologically advanced countries, the South represents technologically backward countries and the East represents countries which have accomplished some technological improvements compared to the South.

As a touchstone study in this literature, Helpman (1993) has built a North-South model in which the North is an innovator and the South is an imitator. Helpman (1993)’s study, which makes use of the structure of Grossman and Helpman (1991) has paved a substantial way for further research within this literature (i.e. Mondal and Gupta, 2006; Grinols and Lin, 2006; Parello, 2008; Akiyama and Furukawa, 2009; Branstetterand Saggi; 2011 etc.). The structure of Helpman (1993) was very useful with regards to presentation of the IPR-oriented relations between developed and developing worlds. However, due to its simplifier description on the characteristics of the regions, this functional structure has laid itself open to criticism. Because innovation is not limited to the North but it exists also in the South even if on a smaller scale. Then, some follower studies have made a modification on Helpman (1993) and assumed that the southern region which represents the developing countries have also innovation process in addition to the imitation(i.e. Lai, 1998; Lai and Qiu, 2003; Grossman and Lai, 2004; He andMaskus, 2012 etc.). Indeed the late economic history of 20th century shows the technological development success of some developing countries such as Asian Tigers.

These types of countries have started to innovate new products and proved the difficulty of assuming the southern region is composed of only imitation.Even today, it is impossible to consider all developing countries technologically equal. Some of them make innovation while some others cannot move beyond imitation. The theoretical contribution which has been mentioned above is quite substantial when it is considered with this recent historical fact. On the other hand, imitation background and learning by doing processes in the past have formed a basis for innovation success of these developing countries. In other words, the imitators of the past have become the innovators of the present.

The model of the present study has taken inspiration from the inference of Kim and Lapan (2008), which asserts that the relations between developing countries is more complex than mentioned in the literature and emphasizes the heterogeneity within developing world. According to this, besides the conflict of interest between northern and southern regions, there exists a conflict of interest within developing world as well.

Helpman (1993), in his innovator – imitator based North – South analysis, has stated that even someone benefit from tighter IPRs, probably this would not be the South. The inferences of Helpman (1993) imply that with an increase in the IPR protection the innovation of northern region may increase in some cases; while southern region is hurt by this policy in any cases. However, some of the second wave studies in this literature which have been given above have asserted that even the southern region may benefit from tighter IPR policies. Surely, this view of the second wave studies arises from their modification that assumes also southern region has an innovation mechanism. At this point, by recalling Kim and Lapan (2008), it is crucial to ask this question; “which south?”.

To deal with the question above, the model of this study examines the hypothesis which is an extended version of Helpman (1993) and tries to check over it. The modified hypothesis of the three-pole model of the present study can be defined in this way; “even someone benefit from tighter IPRs, this might be the North or possibly the East; but probably the South would be hurt by this policy.”.This hypothesis bases upon the fact that most of the developing countries still do not have enough technological capacity to innovate new products. For this reasoneven the incentive function of IPR may work for innovation sectors of developed and some developing countries, in developing countries with low technological capacity the incentives would make no sense. This situation is like making an incentive with a lot of money to someone who has never painted before expecting from him/her to paint a unique picture. In such cases the incentives are completely useless. After giving a brief information on the existing literature and the concept, let us start to define the model of study.

  1. THE MODEL

The three-pole model of this study has been demonstrated in Figure 1 and Figure 2. Figure 1 shows the innovation-imitation chains for northern goods. According to first ring of the chain system for northern goods, northern region innovates a new product and eastern region tries to imitate this product by solving the details and conducting the required reverse engineering activities. The second ring of the chain system for northern goods is about the relations between southern and eastern regions. Once eastern region has imitated the northern product, the solved details spread to the rest of the world; for this setup, to the South. The second ring is a very important key factor for this model. According to this, southern region will not access to the details of the northern product unless eastern region solves and imitates it. This assumption is quite similar with reality. Many developing countries still do not have enough capacity even to make reverse engineering activities and imitate some technological goods. These types of countries usually cannot imitate high or mid-technology goods directly. To imitate the northern products, they need for the solved details and wait for eastern region to do the necessary reverse engineering activities and finally imitate the products. On the other hand, the Figure 1 implies the east-dependent situation of southern region in respect to the imitation of northern products. Figure 2 shows the innovation-imitation chain for eastern goods; which presents a simpler relation. At this chain, there is a mechanism starting with the innovation of eastern region which represents developing countries with relatively higher technological capacity. Eastern products, as might be expected, are simpler products (i.e. low-tech products) in comparison with the northern products (i.e. high-tech products). Therefore, unlike the first chain, these products’ technology level is closer to the technology level of the South. Thus, southern imitators have sufficient ability to solve the details and directly imitate these low-tech products.

Figure 1.Interregional Innovation-Imitation Chains (Northern Products)

Figure 2.Interregional Innovation-Imitation Chains (Eastern Products)

Besides its practicality on modelling the IPR protections in a global framework, the three-pole model suggestion of this study may bring a new perspective also on investigating other global economic issues. In the related literature, David Ricardo’s North-South framework, in which Britain and Portugal represent the North and the South respectively, has been regarded as the pioneer of these types of models (Molana and Vines, 1989). From Ricardo to present, the North-South literature has made a significant progress by adapting the new conditions and the new research questions to the model. However, especially as from the last quarter of the 20th century, some south-labeled countries have transformed and showed a remarkable growth performance compared to other countries (i.e. “Growth miracles”). Even at the present time, besides some developing countries with relatively higher technological capacity, there are still a lot of developing countries with lack of technological capacity to innovate even simple, low-technology products. Thereby, the heterogeneity within the global economy is quite obvious and making the global analyses without considering the necessary discrimination will give rise to get biased and inconsistent results. The proposition of the study is to classify countries according to their development level and technological capacity and to develop policies.

The North-South literature, specific to the economics of IPR, involves many types of modelling approaches. However, due to its useful and simple structure, most studies have developed their models by grounding on Helpman (1993). In the present study, even if the fundamentals of Helpman (1993) are used, the main structure of the model is inspired bya newer study, Lorenczik and Newiak (2012). Here, let it be known that even the Lorenczik and Newiak (2012) study has grounded on Helpman (1993), and used some components and assumptions of a relatively newer model which has been built by Gustafsson and Segerstrom (2011). However, due to the differentiation in the research questions and some assumptions the model of the present study and the Lorenczik and Newiak (2012) model differ from each other.

Let us start to define the model. As it has been stated up to now, the model consists of three regions;

  1. The North, which innovates only high-technology products
  2. The East, which innovates low-technology products and imitates northern high-technology products by doing reverse engineering activities.
  3. The South, which imitates both northern high-technology and eastern low-technology products.[1]

It is assumed that the labor is mobile within each region, but not between the regions. We also follow the full employment assumption and define the labor supply for each region as following; where represents the population growth rate. The , and indices here highlight northern, southern and eastern regions respectively. The housholds in each region have identical preferences and the household maximization problem defined as below;

/ (1)

Here, represents the intertemporaldiscount rate which shows the time preference (), while and represent the quantity demanded of variety and the degree of product diffentiation respectively. Thus, the elasticity of substitution between varieties is determined as . Similarly with Helpman (1993) and its followers, by solving the household maximization problem we will obtain the quantity demanded of varity as follows;

/ (2)

In the demand equation above, and represent average consumption expenditure and the price of variety . It should be noted here that the price index () in the denominator consists of the prices of each varieties and is defined as . The consumption expenditure in the model has a growth rate as , where denotes the market interest rate.

Since the new varieties are innovated only in northern and eastern regions, the fountains of the new varieties exist only in these two regions. The equations (3) and (4) show the varieties that are innovated by northern and eastern innovators ( and respectively).


/ (3)
(4)

The two-digit indices that emphasize the regional varieties ( symbols) in the right hand side of the equations show the origins and the types of the unimitated and imitated varieties. The first digit shows where the varity is produced, while the second digit shows whether it is an unimitated or imitated variety. For example, the or letters in the first digits imply the variety is produced in northern or eastern regions respectively. On the other hand, the , and letters in the second digits represent unimitated varieties, imitated northern varieties and imitated eastern varieties respectively. According to these definitions, in the right hand sides of the equations, there exist northern and eastern products that have not been imitated yet ( and), products that have been imitated by eastern imitators () and products that have been imitated by southern imitators ( ve ). As it can be understood from the equations, while eastern imitators target only northern products, southern imitators target both northern and eastern products. But remember that the South can imitate northern product only if the East has imitated them before. The limited imitative situation of the East arises from the differentiation of the regional wage rates. More clearly, to keep the model in a simple framework, in this three-pole model there exists three different wage rates and each region has only one wage rate. In such a case, it is not economically rational for eastern imitators to imitate eastern innovative products. This point is going to be explained comprehensively in next parts of the study. The total product variety of the model consists of the varieties below;

/ (5)

Now, let us define the innovation sectors of northern and eastern regions;

  • Innovation


, , , / (6)
(7)

The equation (6) and (7) show how innovation occurs in northern and eastern regions. According to this, the total number of northern varieties in global consists of northern unimitated products, northern products that have been imitated by eastern imitators and northern products that have been imitated by southern imitators; while the total number of eastern varieties in global consists of eastern unimitated products and eastern products that have been imitated by southern imitators. In these equations, denotes knowledge stock (the total number of varieties), where is the intertemporal spillover parameter and is the growth rate of the knowledge stock. Here, by operating as a denominator, causes the situation of decreasing returns to innovative activity. and represent labor devoted to R&D in northern and eastern regions respectively.On the far right hand sides of the equations imply that the number of varieties rise with the number oflabors in R&D and the total number of varieties. The parameter stands for general difficulties in the innovation process while the parameter denotes the inefficiency of the eastern innovative sectors as against the northerns. The efficiency differentiation here enables the model to reflect the technological capacity differences between the North and the East. Also these assumptions come from the model of Lorenczik and Newiak (2012) wich they base upon Jones (1995) and,GustafssonandSegerstrom (2011). After the definitions on the innovation of northern and eastern regions, now let us define the imitation sectors in the eastern and southern regions;

  • Imitation

,
,
, / (8)
(9)
(10)

The imitation equations above show the imitation productions of the imitator firms. terms denote labors that work for the imitator firms of eastern and southern regions. , and terms represent eastern imitation of northern products, southern imitation of eastern products and southern imitation of northern products respectively. and terms show the difficulty of imitation in eastern and southern regions; also known as intellectual property rights. Since northern region does not have any imitation process and this study does not focus on innovation processes, we did not define any IPR parameter for this region. Similarly with relative inefficiency difference between the northern and eastern innovation sectors, also in imitation equations an inefficiency parameter () has been defined. This assumption on southern imitation sectors is quite important to build a three-pole innovation-imitation system.