Intellectual Property, the Unsung Hero of Innovation

Ross Marchand

February 12, 2018

Too often, rhetoric about “innovation” is only used to drum up support for tax and regulatory reform. Seldom, though, do lawmakers recognize the importance for intellectual property (IP) protection in creating “the next big thing” to the benefit of customers and taxpayers. This oft-neglected issue is finally being ushered back into the limelight, thanks to the U.S. Chamber of Commerce’s 2018 International IP Index

While the United States continues to stand out in its stalwart overall protection of intellectual property, cracks in enforcement efforts are contributing to a decline in global standing. America has slipped into twelfth place in patent protection, behind other developed countries like France and Germany. A cascade of court decisions, kicked off by a 2014 Supreme Court case, has rendered certain classes of software unpatentable. 

Anticipation of poor policy is another important aspect, with misguided legislation such as the Creating and Restoring Access to Equivalent Samples (CREATES) Act perennially up for consideration in Congress. Proposed policies would allow generics the right to sue patent holders for samples of their products, with large allowable damages to pay if they refuse. It’s hard to remain at the top of the pack if “intellectual property” is defined by forced collaboration with a competitor.

Even if the U.S. remains at the head of the pack, absolute standards of enforcement remain important. As the report clearly shows, higher IP protection scores are highly correlated with higher investment and research levels. Countries totaling above the median IP aggregate score are 42 percent more likely to attract venture capital and private equity funds and 36 percent more likely to attract private investment in R&D. While reverse causation can’t be ruled out, other studies point to IP protection as the driver of capital flows.  Increased capital flow also benefits taxpayers as tax revenue increases without lawmakers having to raise taxes.

Researchers from Iowa State University, Washington University, and the Swedish House of Finance found that, of various government measures to foster innovation, only patent protection and basic financial market rules seem to do the trick. These measures are found to be superior to “traditional tax subsides at promoting the innovative investments that drive economic growth.” Additionally, prominent British biochemist Terence Kealey notes that there is little correlation between levels of public R&D investment and economic growth. Despite all the criticism of IP enforcement, propertarian rules cannot be effectively replaced by government intervention.

Nor can the issue of intellectual property protection be placed in a vacuum. Since IP is such a large driver of growth, the US government derives a hefty share of yearly tax revenue from enforcing it. While direct estimates are few and far between, the US Patent and Trademark Office (USPTO) keeps estimates of employment and wages in IP-intensive industries. Assuming the latest (2014) estimate of 27.9 million direct jobs and a median yearly wage of IP-intensive workers ($68,000), the federal government pulls in more than $72 billion in income taxes each year due to IP enforcement. And since corporations derive $115 billion a year in IP-specific licensing revenue, resulting corporate tax revenues amount to $30 billion each year.

Intellectual property is a windfall for the US, adding over $100 billion  to federal coffers each year. Given such a large figure, even slight cracks in enforcement can cost taxpayers dearly. U.S. businesses lose around 10 percent of revenue to online counterfeit sales, resulting in billions of dollars in foregone tax revenue each year.

There are some “simple” ways the U.S.’s position as the standard-setter of intellectual property can be strengthened. For starters, Congress should take the fight to suspicious foreign websites promising Americans shady generic versions of drugs produced by domestic pharmaceutical companies. While these “online pharmacies” seem to do Americans a favor by allowing inexpensive access to pricy medications, customers are in fact hit with a double whammy. The claims that these drugs are in fact generic versions of popular drugs are questionable; many Americans have been hospitalized due to contaminated foreign brands.

Additionally, pharmaceuticals such as Pfizer and Merck have a diminished incentive to market new medications when their products will easily be imitated by foreign knock-offs. Increasing market shares attained by online pharmacies can and will reduce the rate of new, life-saving drugs released to the public. 

Other reforms will have to address the root causes of intellectual theft, and will have more gradual effects. Regulatory barriers to entry increase the price of everything from new drugs to new movies, and encourage customers to find illicit ways of getting what they want. Streamlining the drug approval process and reducing penalties on small movie theaters and streaming services can level the playing field, and encourage lawful innovation. Enforcement and regulatory reform pack a powerful one-two punch, and keep the US churning its inventive spirit. 

Politicians alone cannot claim responsibility for innovation, but they can certainly do their fair share in giving industries the right tools for growth.