INTELLECTUAL PROPERTY RIGHTS AND NORTh-SOUTH TRADE
Working Paper No. 2769
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 1988
We are grateful to Avinash Dixit, Ron Jones, and Anne Krueger for comments on an earlier draft. Grossman thanks the National Science Foundation andthe World Bank for partial financial support. This research is part of NEER's research program in International Studies. None of these organizations is responsible for any of the views expressed herein.
NBER Working Paper #2769 November 1988
INTELLECTUAL PROPERTY RIGHTS AND NORTH-SOUTH TRADE
We study the incentive that a government in the South has to protect the intellectualproperty rights of Northern firms, and the consequences of the decision taken by the South for welfare in the North and for efficiency
of the world equilibrium. We conduct our analysia in the context of a competition between a single Northern producer and a single Southern producer
selling some good to an integrated world market. In this competition, only
the Northern firm has the abilityto conduct R&D in order to lower its prod-
uction costs, but the Southern firm can imitate coatleasly if patent protection for proceaa innovationa is not enforced by the government of the South.
We find that the interests of the North and the South generally conflict
in the matter of protection of intellectual property, with the South bene-
fitting from the ability to pirate technologyand the North harmed by such
actions. A strong system of intellectual property rights may or may not
enhance world efficiency.
Judith C. Chin Department of Economics Princeton University
Princeton, NJ 08544
Gene N. Grossman Woodrow Wilaon School Princeton University Princeton, NJ 08544
The issue of intellectual property rights has become a contentious oneindeed in recent trade relations between North and South. In the North, producers of new knowledge and ideas rely on protection in the forms of patents, copyrights and trademarks to enable them to appropriate some of the
benefits from investment in research and development. The Northern
governments have responded to pleas for assistance from their corporate sectors in the face of billions ofdollars of lost revenue and profits from piracy and counterfeiting1 by applying pressure on the South to provide greater enforcement of property rights and by pushing for new codes of
international behavior.2 At the urging of the United States, for example, the
parties to the GATT established as one of the fourteen negotiating groups of the Uruguay Round one charged "to clarify GATT provisions andelaborate as appropriate new rules and disciplines regarding international enforcement of intellectual property rights" (Baldwin, 1988, p.65). The South, for its part, manifests almost total dependency on the North for the technologies needed for
growth and development. These countries fear exploitation at the hands of innovative firms in the North in view of their weak bargaining position.They
have been quite reluctant to accede to Northern demands for strengthening of
standards on protection of intellectual property (GAO, 1987).
The welfare economics of intellectual property rights in a closed-economy
setting are reasonably well understood. A fundamental tension exists between
the social desirability of widespread dissemination of available know-how and the need for societyto provide adequate rewards to purveyors of new
information. The tension stems from the public-good nature of most forms of
knowledge; once generated, knowledge can be used simultaneously by many
parties besides the original creator at zero or minimal additional cost. This
consideration argues against protection of intellectual property, since the granting of property rights can...