Future Tense

The U.S. Chamber of Commerce’s IP Myth

The group wants developing countries to accept strict intellectual property rules that may harm them. Here’s why its arguments don’t work.

A pharmacy owner checks newly arrived packages of drugs at a market in Jakarta November 26, 2008.
A pharmacy owner checks packages of drugs at a market in Jakarta, Indonesia, on Nov. 26, 2008. If the government starts cracking down on copycat drugs, it would hurt patients.

Crack Palinggi/Reuters

Although the presidential candidates have rushed to disavow it, the Trans-Pacific Partnership isn’t dead. The Obama administration has made clear that Senate ratification of the trade agreement is a top priority, and it is widely expected to push for the pact’s approval in the lame-duck session following November’s election—this despite public opinion that is hardening against the deal.

One of the things that the TPP does is to force signatories—some of which are developing nations where there’s a lot of piracy of intellectual property—to adopt stricter, U.S.-style IP laws. Obliging countries like Vietnam, Peru, and Indonesia to boost patent, copyright, and trademark protections may well benefit large American companies. Pfizer may be able to charge more for its pills in those places, for example, if their governments crack down on copycat drugs. But whatever the benefits to big American companies, a lot of people doubt whether stronger IP laws in the developing world are good for the citizens of those countries. Take Indonesia, which plans to join the TPP. The country has a per capita gross domestic product of less than $3,500. It also has Asia’s fastest-growing rate of HIV/AIDS infection. If Indonesia expands patent protections and patent enforcement, the likely result is more expensive anti-AIDS drugs. And that means that Indonesia is going to have to spend more scarce resources to beat back its growing epidemic.

This isn’t a theoretical point. The price of some anti-AIDS drugs in the developing world has fallen by more than 95 percent following the introduction of copycats. Raise patent protections and those copycats become more difficult to produce.

In short, expanded IP protections come at a cost in developing countries. But is there a countervailing benefit? The U.S. Chamber of Commerce—a “longtime supporter” of the TPP and of strict IP laws in general—says there is. According to the lobbying group for U.S. business interests, developing countries that introduce stronger IP laws will reap benefits in the form of more innovation, which will lead to more economic growth.

As evidence of this link, the Chamber points to its International IP Index, which is paid for by the Chamber but produced by Pugatch Consilium, an economic consulting firm. The index assesses the strength of the IP laws in 38 countries around the world, accounting for approximately 85 percent of global GDP. It also assesses the level of innovation in each of those countries. And then it finds, using a simple measure of correlation, that the countries that have strong IP laws also enjoy high levels of innovation.

In the report detailing its findings, the Chamber says that the correlation between robust IP laws and vibrant innovation is around 0.80, which is high. And although the Chamber is careful to say at one point in the report that correlation isn’t causation, at other points it sure doesn’t sound that way. Here’s an excerpt from the first paragraph of the report’s executive summary:

Intellectual property fuels the creation of knowledge-based economies. By providing a legal infrastructure through which ideas can become products, robust IP systems foster innovation leading to economic growth, job creation, and sustained competitiveness in global markets.

That sounds like an argument that IP laws cause innovation. And overall, the message to developing countries is clear—jack up IP protections, and you’ll get more innovation and more economic growth. If only.

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Correlation is not causation. We hear this phrase all the time, but what does it actually mean?

A famous example of the perils of using a correlation to suggest a causal relationship is the association between ice cream sales and drowning deaths. Like clockwork every June, ice cream sales go up, and so too do the number of deaths by drowning. Without a deeper understanding of how the world works, we might be tempted to use this correlation to tell a story about how eating ice cream causes people to drown—especially if we’re a company that makes snow cones and thinks that warning people off of ice cream will boost sales of our competing product.

Now, most people are nowhere near gullible enough to fall for the argument that ice cream causes drowning—even if it’s made in a paper full of scientific-sounding metrics and graphs that show “strong to very strong” correlations. Most people would realize that the correlation between ice cream sales and drowning is spurious. The only link between the two variables is that they are both independently related to the weather. When it’s hot, people look for ways to cool off. They go out for ice cream. They also go swimming. Unfortunately when more people go swimming, drowning deaths increase.

The Chamber’s International IP Index is, at a conceptual level, pretty similar. The report presents more than a dozen very strong correlations between the strength of a country’s IP laws and various indicators that purport to measure innovation. The story these correlations imply is something like the one about ice cream and drowning deaths, but at least at first, it’s a lot more believable. After all, IP laws are supposed to spark innovation. So these strong correlations and scientific-looking procedures might lead you to conclude that IP protections in fact work as advertised, whether in the U.S. or in Indonesia. The Chamber’s causal story is simple. It looks like this:

But there’s another story that might fit the developing world better. Back when the United States was a developing country, we had a much weaker IP system. For example, until 1891, the U.S. did not grant copyrights to the works of foreign authors. We legally “pirated” the works of Charles Dickens, Anthony Trollope, Oscar Wilde, Émile Zola, and Stendhal. And even after copyright was extended to foreign works, U.S. law continued to impose regulations that made it difficult for foreign authors to actually secure U.S. copyright. One such regulation, which required that foreign books be printed in the U.S. in order to be protected, was not removed until 1986.

Nor was the infant republic particularly respectful of foreign patents and trade secrets. Our first treasury secretary, Alexander Hamilton, put in place a policy of luring foreign technical experts to the U.S. in violation of British export and emigration laws, with the promise of rewards to British fugitives who brought valuable technologies—often owned by others—with them. Early U.S. patent law abetted this policy of state-sanctioned piracy. Foreign inventors were barred from receiving U.S. patents for technologies they had first patented abroad. Additionally, the system tolerated and even encouraged the theft of foreign inventions by permitting those who brought them to the U.S. to commercialize them without penalty.

And indeed, the U.S. continues to this day to resist some forms of IP expansion. For example, Congress has repeatedly refused to extend copyright law to cover fashion designs, leaving them unprotected by copyright in the U.S, in contrast to Europe, where they have broad protections. The result? A vibrant, innovative, fast-growing U.S. fashion industry that performs just as well, if not better, than its European competition.

A similar story can be told about computer databases. More than 20 years ago, the EU, concerned that it was falling behind the U.S. in this important technology, enacted special IP protections designed to spur innovation in new databases. The U.S., on the other hand, considered and then rejected such protections. The result? Two decades on, the U.S. is further ahead than ever, and the Europeans are considering whether to dial back their current protections.

In short, the early U.S. was a lot like modern China—we tolerated, and even encouraged, a lot of what would later be labeled IP piracy. And the modern U.S. hasn’t entirely abandoned that heritage.

Here’s the most important question: Why did the young U.S. tolerate, and even encourage, so much piracy? And why does China do it now? Because for a poor country, piracy can be good development policy. Cheap pirated foreign books in the 19th-century U.S. helped spread literacy, which sparked economic development. Similarly, in today’s China, manufacturing companies that pirate foreign technologies learn by working with those technologies. And as they learn, today’s pirates become tomorrow’s innovators.

We see a lot of this “piracy as development” policy in poor countries around the globe. We see, for example, the rise of a powerful local pharmaceutical industry in Brazil. The growth of Brazil’s pharma industry was sparked by production of generics and biosimilars—many made possible by Brazil’s comparatively permissive patent laws. But now Brazil’s pharma companies, having built skills by copying, are expanding into the development of more innovative drugs.

You can see the same dynamic at work in China’s booming smartphone industry. Handset-maker Xiaomi is one of China’s fastest-growing technology companies. Xiaomi sold more than 70 million smartphones last year—impressive numbers for a company that sold its first smartphone in August 2011. Xiaomi’s phones look familiar to Westerners because many of the company’s designs are copycat versions of Apple’s coveted iPhone. As with Brazil’s drug companies, Xiaomi started with copying but is now shifting toward innovation. And it is even contemplating expansion into the U.S. market.

None of this tells us what the right global IP arrangements should be. IP law clearly does have some link to innovation, at least in wealthier countries. But history complicates the Chamber’s simple causal story. In the developing world, perhaps some weaker IP arrangements are best for innovation and growth.

So here’s a rival causal story, one which the Chamber isn’t interested in telling. Rich countries have large, dynamic economies, stable political systems, and educated, healthy populations. Each of these things fuel innovation. People (and by extension, countries) are more innovative when they have access to technology and education, when they aren’t spending all their time worrying about where they will get their next meal or whether they will get cholera from the water, when they are living in a place that isn’t ripped apart by civil unrest and violent conflict.

This isn’t to say that there isn’t a direct connection between IP law and innovation. It may be, however, that the line of causality—at least in a poor country with a developing innovation economy—goes in the opposite direction than the one implied in the Chamber report.

In this more nuanced narrative, economic growth sparks innovative activity. Soon enough, people who innovate start acting on their self-interest in preventing others from making money off their inventions and innovations. In the pluralistic democratic systems that characterize most wealthy countries, this leads to lobbying from organizations like the Chamber for the development of more IP law. We don’t doubt that IP law, once it’s established, feeds back into increased innovation and wealth. But unlike the Chamber’s simple causal story, this narrative is a lot more complex:

So we can see how the Chamber’s International IP Index would find very strong correlations between IP law and other innovation-related variables (such as how many researchers live in your country or how creative your population is), and yet it may be that a poor country with low rates of innovation would not benefit at all from adopting stronger IP law—at least not until the country is wealthier and other drivers of innovation are in place. Think of the early American period of relatively weak IP protections. The U.S. became rich and innovative, and then IP protections were strengthened. If this is generally the story for developing countries today, and if IP law is generally preceded by innovation and is—at least initially—a consequence, rather than a cause, of it, then telling a poor country to strengthen its IP laws is kind of like telling a swimmer not to eat ice cream. The two things may be related statistically, but a simple correlation tells us nothing about whether they are directly related or which comes first.

So we have two possible stories about poor countries and IP. The Chamber suggests on the basis of some correlations that poor countries that adopt stronger IP laws will get innovation. History suggests that poor countries that get rich and innovative will eventually adopt stronger IP laws. If our historical story is right, we should observe that level of economic development is just as, or more, correlated with innovation as having stronger IP laws.

In an attempt to explore this possibility, we contacted the authors of the Chamber report to ask for their data set, but they did not respond to our request. So we did the best we could to reconstruct the database ourselves, using the publicly available data sources listed in the Chamber report, and to replicate many of their analyses.

In place of the Chamber’s measure of the strength of a country’s IP laws, we substituted in two common measures of development: gross domestic product  per capita and the United Nations’ Human Development Index, or HDI. We found very strong correlations between both measures of development and many of the innovation-related indicators that the Chamber suggests are influenced by IP protections. In some cases, the correlations were stronger when using GDP per capita or the HDI in place of the Chamber’s assessment of the strength of various countries’ IP laws. For example, the authors reported a 0.80 correlation between the strength of a country’s IP laws and an index that attempts to measure a country’s creative output. Using GDP per capita in place of the IP Index, we found a 0.81 correlation—statistically indistinguishable from the Chamber’s result. We also found variables such as online creativity and share of the workforce in knowledge-intensive activities to be correlated just as, or more strongly, with level of economic development as the strength of IP laws.

Of course, our finding of an equally strong correlation between innovativeness and a nation’s level of economic development likewise doesn’t prove that wealth, and not IP, causes innovation. The truth is that, based on what we and the Chamber have done, neither causal pathway has been established.

The Chamber has chosen the causal narrative that is friendliest to the interests of its members. In contrast, our intuition, given the historical evidence, is that poor countries first get rich, innovative, and democratic, and then they get strong IP protections—not the other way around. Many of today’s most innovative countries have been both wealthy and innovative for a long time, and were both wealthy and highly innovative before they had IP laws nearly as strong as those laws tend to be in rich countries today. But there’s much more work to be done to establish the causal story definitively.

So where do we stand? The costs of IP to developing countries—more expensive drugs, books, and software—are clear: Making it more difficult for the poor to access and benefit from the fruits of global innovation has the potential to stifle innovation and growth in developing countries. By comparison, the prospect that adopting strong IP laws will spark innovation in poor countries is unproven. And while, given that it’s a lobby group, maybe we shouldn’t expect the Chamber to play by the rules of good science, that doesn’t mean anyone should listen to it when, as in this instance, it makes arguments about the power of strong IP laws to spur innovation in poor countries that go far beyond what the available evidence supports.