Knowledge enclosures, forced specializations and investment crisis.

• Author: Belloc, Filippo
• Position: Statistical data

1. Introduction.

   At present, only relatively few innovations are pioneering, building on a single stand-alone invention. Rather, most innovations are interdependent, with each technology linked to another in the production chain (see, for example, Boldrin et al 2005). The owner of an Intellectual Property Right (IPR), therefore, has not only the right to exclude others from the use of a given technology, but he can also prevent the non-right-holders from investing (and so innovating) in the industrial activities requiring that proprietary technology. As a result, at the macro level--under a worldwide IPRs protection system--countries rich of IPRs can prevent countries poor of IPRs from using their knowledge for production, with the possible consequence of generating a "snowball dynamics" according to which IP-rich countries exploit larger investment opportunities and acquire new (proprietary) knowledge, and IP-poor countries tend to stagnate in a low-investments/low-patents equilibrium.

   In this paper we try to explore such dynamics empirically. In particular, the aim of this article is two-fold. First, we want to investigate if the amount of IPRs (specifically, patents) that a given country owns in a certain sector positively affects the investment opportunities which the same country is able to exploit in the same sector. Second, we want to measure whether the magnitude of the relationship between patenting specialization and investment specialization has increased after the 1994 international Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs). Since the TRIPs, the global definition and enforcement of IPR indeed has become much tighter. These new enclosures may initially have provoked a gold rush for the private appropriation of important fields of knowledge, but since then they may have restricted opportunities for investment at both firm and country level. They may have altered then the comparative advantages of nations by further forcing countries to invest only in those processes that do not require rights owned by other nations.

   We estimate the marginal effect of IPRs endowments and investment activity on each other by a system of simultaneous equations, using data from 26 OECD countries over the 1978-2006 period and considering countries' specialization patterns in five industries. The OECD countries considered in this study show strong heterogeneity in their sector-level patent endowments, and this makes a comparative analysis of their innovation patterns highly informative. We also disentangle the before-TRIPs and after-TRIPs periods and study how estimated coefficients vary across periods. We find that, on average, the within-country distribution of patents between industries determines the within-country distribution of investments between industries, and vice-versa, so that a country's technological development is showed to be both sector-specific and non-ergodic. Moreover, we observe a statistically significant increase of the effect of patent specialization on sectoral investment opportunities after the TRIPs.

   We contribute to the literature on countries technological development and international industrial specialization (Dixit and Stiglitz, 1977; Krugman, 1980; Helpman, 1993; Lai, 1998; Hall and Soskice, 2001) by arguing that a virtuous circle of cumulative causation between intellectual property and investments may have arisen for countries rich of IPRs (and it may have become even stronger after the TRIPs), while those poor in IPRs face the possibility of a vicious circle between investment and innovation opportunities. Whilst this restriction of investment opportunities is associated with a new sort of comparative advantage, and may lead to an increase in the level of international trade, it may also contribute to the overall depression of investment opportunities and, together with other causes, to the present crisis of the global economy.

   The paper proceeds as follows. In Section 2, we consider how a new global economy based on intellectual monopoly and forced specialization emerged after the end of the Cold War and briefly present the global patterns of innovation dynamics which we aim at investigating empirically. In Section 3 we review the related literature, comparing our argument with the standard theory of comparative advantage, as well as with the "modern theory" of the advantages of intra-industry trade. In Section 4, we introduce the theoretical underpinnings for

   our empirical study. In Section 5, we develop the econometric analysis and present the results. Section 6 concludes.

2. Motivation.

   In 1994, the creation of the World Trade Organization (WTO), with the associated TRIPs agreements, marked a structural break in the world economy and the beginning of a new era of capitalism: one of intellectual monopolies in which ideas themselves could be securely owned and become capital investments.

   The priority of ideas, which in the past had been associated with the "idealism" of Hegelian philosophy, was now a concrete reality.

   In the framework of the mainstream view expressed by Solow's (1956) model, technological knowledge was available to all countries and would eventually lead to the convergence of the growth rates of all countries.

   Unfortunately, the only feature that knowledge shares with pure public goods is non-rival nature, whilst excluding others from knowledge is easily accomplished with various devices (such as secrecy and intellectual property rights). Moreover, the inclusion of others in the use of knowledge (that is, its transmission and diffusion) may be very costly. Thus, exclusion from the use of knowledge is not only feasible but also particularly costly for those excluded because its private ownership is meant to imply that only the first discoverers have the right to use it. Ironically, non-rival goods like ideas, which can be simultaneously used by many users without additional costs, cannot be replicated by other individuals in the same way as the other standard production inputs can. This circumstance may generate two interrelated phenomena at micro and macro level or, to put it in another way, at firm level and country level.

   At micro level, each firm may be forced to specialize its investments in the narrow field left free by the intellectual monopoly of other firms (being, in turn, innovative investments an important determinant of a firm's productivity (Crepon et al., 1998)). In some cases, these specialization opportunities coincide with the shrinking fields, untouched by IPR, which are the modern equivalent of the common lands unaffected by the enclosures of the industrial revolution. In other cases, besides these shrinking commons, the field includes the firm's exclusive private intellectual property (which contributes to the narrowing of all the other possible fields of specialization). Some have maintained that, in the case of land, enclosures and private property prevented the over-exploitation of a resource being depleted by overcrowding. However, in the case of intellectual assets, it cannot be claimed that the modern counterpart of the enclosure movement has brought similar benefits. It does not save us from a tragedy of commons but may instead produce an anti-commons tragedy (Heller and Eisenberg, 1998; Nelson, 2004; Murray and Stern, 2007; Boyle 2003; Yuan, 2009): unlike farmland and pasturage, the fields of knowledge are not subject to overcrowding, but they may be greatly damaged when they are enclosed within narrow and rigid boundaries. When the access to knowledge is seriously limited

   by the fields privatized by others, the resulting forced specialization is likely to be associated with a dramatic squeeze of investment opportunities.

   At macro level, the traditional theory of comparative advantage is based on the idea that each country acquires the specialization dictated by the natural endowments of the immobile resources enclosed in its geographical field.

   However, in the present global economy, the ownership of knowledge (potentially, the most mobile resource) generates an artificial field and a related comparative advantage. This artificial field includes the ideas owned by the country's production units and those under common ownership, while it is limited by the ideas owned by other nations. If a good like knowledge is moved from the public to the private sphere, the legal positions on intellectual property influence the comparative advantages of nations and cause patterns of asymmetric development (Pagano, 2007a). The legal ownership of knowledge that limits the liberty of some countries to enter certain specialization fields has consequences more drastic than those of tariffs. At most, tariffs can completely close the market of the country imposing them. By contrast, the IPRs imposed by a firm or by cluster of allied firms close global markets for all the other firms.

   While these clusters do not coincide with specific countries, they closely overlap with them, and as a consequence tend to create a new sort of national comparative advantage. However, although IPRs act like global tariffs, other countries cannot reciprocate them. Thus, unlike tariffs, they are associated with forced specialization and with increases in global trade. Countries which are prevented from specializing in certain fields must import goods or licenses from the holders of the legal rights on the related knowledge.

   Both countries and firms are forced to specialize in restricted fields, the overall consequence being a possible polarization in innovativeness across firms as well as across countries. Moreover, if in all industries (albeit to different extents) technology is cumulative in nature, the same polarization dynamics should persist at sectoral level as well. A picture of these dynamics emerges rather sharply from Figure 1 (panel A and B). As will be seen from Figure 1, the degree of inequality in the distribution of...