World Intellectual Property Day – Highlighting How IP Incentivizes Innovation

Every April 26, the World Intellectual Property Organization (WIPO) celebrates World Intellectual Property Day to promote discussion of the role of intellectual property (IP) in encouraging innovation and creativity. Given the increasing tempest over the role of IP in the Trans-Pacific Partnership (TPP) trade agreement, the day provides an important reminder about the foundational role that IP plays in supporting innovation. IP is more important than ever as it is embodied in many economic sectors, especially across the digital economy, which means it affects not only innovation, but also trade, competition, taxes, and other areas of public policy and society. According to the OECD, investment in IP-protected capital is growing faster than investment in tangible capital.

To analyze this critical relationship between IP protection and innovation, ITIF compared the strength of IP laws and the effectiveness of anti-counterfeiting laws based on data from the World Economic Forum’s Global Competitiveness Report 2015-16 and creative output scores from the Global Innovation Index 2015, a report from Cornell University, INSEAD, and WIPO. The Global Innovation Index applies three distinct measures of creativity in an economy that taken together provide a measure of a country’s overall creative output. First, “intangible assets” combines measures of domestic and international trademark applications and rates of information and communication technology adoption. Second, “creative goods and services” measures trade in creative services and output by a 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 pages edited.

The key insight from this simple correlation is that countries which score higher on IP protections also score higher on creative outputs. The analysis showed a strong positive correlation of 0.70 between the strength of IP protections and those countries’ score on creative outputs, based on a sample of 127 countries (only those countries which had all the necessary data). A similar ITIF analysis in 2014 produced a similar result of 0.72 (from a sample of 136 countries).

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 (<$5,000 GDP per capita). The result was strongest in high-income countries, with a correlation of 0.52, but it was still positive for both middle-income (0.20) and low-income countries (0.16).

Showing that creativity is a process open to everyone regardless of income, the correlation between income and total creative output is reasonably large and positive for countries in all three income categories: 0.49 for high-income, 0.58 for middle-income, and 0.37 for low-income countries. The strong result for middle-income countries reflects the fact that the top 20 middle-income countries have a level of intellectual property protection just below the sample average while having an above average creative output score—108 vs. the sample average of 92. As in the 2014 analysis, Estonia is ranked the most creative middle-income country, ranking 13th overall, followed by the Czech Republic in 21st. These results help to dispel the notion pushed by the “information wants to be free” crowd that strong intellectual property protections are only of benefit to high-income countries.

As in 2014, the Global Competitiveness Report 2015-16 report shows that it’s difficult for countries to score well in creative outputs without ranking highly in intellectual property protections. Finland and Luxembourg are ranked as the countries with the strongest intellectual property protections, while Iceland is ranked the most creative country. Besides Qatar, every country in the top 20 for IP protection also ranked in the top 20 for total creative output. Delving deeper, the analysis shows that the majority of countries with above average creative outputs (54 countries) also have above average intellectual property protections.

In the years ahead it will be interesting to see the changes in the rankings for the developing country members of the TPP, which includes commitments on higher levels of intellectual property protection and enforcement. There exists substantial room for improvement for the TPP’s developing-country members in terms of their respective rankings for IP protection and creative output: Malaysia ranks 109th and 34th, Vietnam ranks 82nd and 54th, and Peru ranks 96th and 61st, respectively on those two measures. Furthermore, if they were to follow through on their interest in joining the TPP, the Philippines and Thailand (68th and 104th in IP protection, respectively) would need to make major improvements in their level of intellectual property protection, while Indonesia fares relatively well (46th).

Of course, correlation does not equal causation, and enacting higher levels of intellectual property protections will not automatically lead to greater creative output. This should not be surprising as IP does not function in a void without other policy support. An OECD literature review and empirical study found that efforts to strengthen IP protections over the last two decades had a positive economic impact and that variations were due to certain complementary factors, such as legal and institutional conditions, and fiscal incentives. However, the most important complementary factor for countries, both developed and developing, to reap the most from IP was human capital.

This all leads to back to a central point worth remembering this World Intellectual Property Day: Whether a country is trying to catch up to the technology frontier, or push it ahead, stronger intellectual property protections are key to incentivizing the creativity and innovation that helps make this happen.

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