The Creative Cost of Piracy

Proponents of effective intellectual property (IP) rights have long argued that weak IP protections will lead to less intellectual property creation.  The logic appears clear: if content creators and other innovators know that a significant share of their work will be pirated or otherwise stolen they will have both less incentive and less revenue to create new ideas, creative goods, and innovations.

But how strong is this effect? To find out, we compared IP protection data from the World Economic Forum’s 2014-2015 Global Competitiveness Report, which incorporates the strength of IP laws and the stringency and effectiveness of anti-counterfeiting laws, and creative outputs scores from the 2014 Global Innovation Index, a report from Cornell, Insead and WIPO.

Put simply, countries that score higher on IP protection also score higher on creative outputs relative to the size of their economy. Over a sample of 136 countries there is a strong positive correlation of 0.72 between the strength of IP protections and score on creative outputs.

The Global Innovation Index has three distinct measures of creativity in an economy. First, “intangible assets” combines measures of domestic and international trademark applications and rates of information and communication technology (ICT) adoption. Second, “creative goods and services” measures trade in creative services and output by the nation’s media, printing and publishing, and entertainment industries. Finally, “online creativity” measures a nation’s top level Internet domains, as well as the number of YouTube videos uploaded and Wikipedia page edits. The last category, “online creativity” seems to be driven strongly by income, and is closely related to GDP per capita (with a correlation of 0.77). However, for both “intangible assets” and “creative goods and services” the correlation with IP protections is stronger than the correlation with GDP per capita.

To test whether this correlation was solely based on income, the data were divided between high income (>$20,000 GDP per capita), middle income ($5,000-$19,999 GDP per capita), and low income nations (<$5000 GDP per capita). The result was strongest with high income nations, with a correlation of 0.57, but also fairly strong in middle income  nations, with a correlation of 0.47.  For middle income groups, the correlation between IP protections and “intangible assets” (0.48) was stronger than with “creative goods and services” (0.32) or “online creativity” (0.19). For the wealthiest nations, the correlation was strongest for “online creativity” (0.51), followed by “intangible assets” (0.47) and “creative goods and services” (0.32).  In low income countries, the correlations between IP protections and all measures of creative output were weaker but still positive.  There is a correlation of 0.22 between creative outputs and IP protections.

Finland and Singapore have the world’s strongest IP protections and unsurprisingly score well on creative outputs as well. Finland is one of six countries score in the top 10 of both lists, accompanied by Switzerland, Luxembourg, the Netherlands, Hong Kong, and the United Kingdom. Iceland, the world’s most creative nation according to the index, also scores well on IP, almost a full standard deviation above the mean. In contrast, Algeria, Burundi, Kyrgyzstan, and Yemen all rank in the bottom 10 of both categories. Venezuela and Bosnia and Herzegovina rank as the bottom two countries for IP protection. For its part, the United States ranks 20^th in creative outputs and 21^st in IP protection.

Of the 136 country sample, very few countries managed to score well on creativity measures without above average IP protections. Moldova, which scores third in the world on intangible assets, is the most creative country that still has very weak IP protection, but this is an outlier. Bulgaria, Argentina, Paraguay, and the Dominican Republic also fit this category, though each of these four countries displays only marginally above average levels of creativity. In contrast, Gambia, Brunei, Bahrain, Oman, and Rwanda have above average IP rights but score low on creative output. Most countries, rich or poor, follow a simple rule: the more rights that are attached to intellectual property, the more likely citizens are to create it.

To be sure, some of this correlation has to do with a relationship with GDP per capita as richer countries tend to have more creative outputs and more disposable resources to invest in creative pursuits and also tend to have better IP protections.  But the fact that there was a positive correlation within income groups suggests that this is more than a function of income.

Of course, correlation does not imply causation, and simply enacting strict IP protections will not automatically generate creative output growth. But there are several theoretical reasons why countries that focus on smart IP protections (e.g., a regime that limits piracy but provides reasonable safe harbors for intermediaries) would see creative outputs generated at a greater rate than a similar country which is content to enact and enforce weak IP protections.

In the short run, a country will have to pay more to access foreign inventions and ideas (compared to IP theft). However, in the long run, by ensuring that domestic innovators have clearly defined rights to what they produce, innovators have greater incentives to innovate. In leading countries, a culture of creation spills over from business to other parts of the society, leading to a more creative, more engaged populous.  Protecting inventions through patents has a similar effect.

Countries may think that by side-stepping foreign IP laws they are gaining an advantage. However, such policies have deleterious consequences.  Weak IP may also discourage foreign direct investment by multinationals who want their innovations protected. Indeed, leading empirical research in the field shows that weaker IP rights are associated with lower volumes of FDI and exports among developing nations. Conversely, IP agreements are frequently included in free trade agreements which serve to liberalize and encourage trade. In addition, a lack of IP protections, even if just on foreign goods, stifles internal innovation and essentially freezes the transfer of technology through market channels. Moreover, concentration in innovation-stagnant industries crowds out more innovative nascent industries that could have created real growth and moved the country closer towards the technology frontier.

In short, whether a country’s goals involve pushing the technology frontier outwards or catching up to it, robust IP protections advance the invention, entrepreneurship, and creative spirit needed to create real growth.