How Economic Growth is driven by Intellectual Property

ip valuation

What is economic growth? why is it so important?

According to Nobel Prize winning economist Simon Kuznets a country’s economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands.1

To answer the question of why economic growth is important, we need to look at it from two different perspectives – from a developing and a developed countries perspective. According to an OECD report, economic growth is the most powerful instrument for reducing poverty and improving the quality of life in developing countries. 2 In the case of developed countries, high economic growth leads to increased profitability for firms, enabling more spending on research and development which can lead to technological breakthroughs, and it also increases confidence and encourages firms to take risks and innovate. According to the Bank of England, “the citizens of a country with high GDP are likely to have high incomes, people are likely to be earning and spending more and businesses are likely to be hiring and investing more (heavily in R&D).”3

Explanations of economic growth have increasingly focused on the role of innovation and on the power of expected profits to motivate innovation. 4 Private-sector companies and industries likewise are looking for ever-more competitive ways to succeed, by developing and incorporating creative and useful innovations into products and services that we all benefit from and enjoy in virtually every area of life. Intellectual property (IP)the copyrights, patents, trademarks and other similar rights upon which creative and innovative products and services rely upon – have an important role in growing the economies of developed and developing countries all over the world.5 IP protection benefits the economy, promotes innovation, helps firms monetize their innovations and grow, helps small and medium enterprises (SME), and finally it benefits consumers and society. This is the patent bargain:  the trade-off between short term monopoly and long-term social service by bringing innovation to market. The monopoly on commercialisation encourages firms to innovate and profit (and so for the purposes of this article drives the economy).

The macroeconomic effects of IP:

Sectors that rely on IP protection are contributors to the economy. For example, according to a study by the EU IPO IP-intensive industries generated 29.2% of all jobs in the EU during the period 2014-2016 with 11% being patent intensive industries. In addition, another 21 million jobs were generated in industries that supply goods and services to IP-intensive industries. Over the same period, IP-intensive industries generated almost 45% of total economic activity (GDP) in the EU, worth €6.6 trillion out of which patent intensive industries accounting for 16%. It is also interesting to note that wages in IP intensive industries are higher compared to non-IPintensive industries with this wage premium being 72% in patent intensive industries.6 Also, in the G8 countries, copyright-based industries and interdependent sectors alone account for approximately 4-11% of Gross Domestic Product.7 IP also generates substantial economic activity, employment and growth in developing anddeveloped countries. WIPO and other organizations and economists have done several studies on the economic contribution of patent-related industries in developing countries and found that patent-related industries generate GDP contributions of between approximately 2-6% and employment contributions of between 311% of total employment. 8 A more recent study by the OECD has further quantified the benefits of IP protection for foreign direct investment, not just with respect to patent protection but also copyright and trademark. A 1% increase in the strength of patent correlates to a 2.8% increase in FDI. 9 Patents are an engine of economic growth, which is quite evident based on the above evidence presented.

However, it is also important to note that in some instances the analyses simply focuses on quantitative patent data without taking into account the quality of the underlying patents. For example, patents from innovative areas such as artificial intelligence should not be weighted equally to less relevant technologies. Furthermore,the only figures used in some analyses are ones regarding a country’s patent applications. Many years may pass between the patent application and the final grant. Therefore, it is a country’s active patent portfolio and not merely the number of patent applications relevant to economic analysis.

As the ‘knowledge economy’ advances, more and more of the value that firms and the overall economy achieve will come from intangible assets—including IP. IP is on the rise of becoming the currency of the knowledge based economy, helping to promote economic growth, company competitiveness and innovation world-wide.