The

Economic
Valueof
Intellectual
Property

Table of Contents

I.

Introduction

2.

II.

Innovation, Economic Growth, and Intellectual Property Rights

3.

III.

Intellectual Property Rights and Globalization

7.

IV.

The Value of Intellectual Property in the American Economy

12.

V.

The Bush Administration Record

17.

VI.

Conclusion

20.

References

21.

About the Authors

26.

The Economic Value of Intellectual Property1

I.

Introduction

Knowledge and ideas have always been the vital force in economic development. The
natural resources available today in the United States and the entire world arable land,
usable energy sources and minerals, animal life, and so forth -- have existed for decades
or centuries. Only successive waves of intellectual and practical innovation have enabled
America and other societies to use them productively. In the same way, all of the
constituent natural elements used to build todays most advanced supercomputers or treat
infections have existed for decades or centuries. It took generations of ideas, building
one upon another, to turn those elements into technologies and medical treatments that
can change a nations economic prospects.
The power of ideas to drive economic development and growth is evident throughout the
world. Economists have long known that economic innovations have been a more
powerful force in determining how fast U.S. productivity and output grew during the 20th
century, than either increases in capital investment or improvements in the skills of
American workers. Moreover, the current value of the intellectual property which
embodies those ideas -- from computer software and musical recordings to patented
pharmaceuticals and information technologies -- is enormous. We estimate that U.S.
intellectual property today is worth between $5 trillion and $5.5 trillion, equivalent to
about 45 percent of U.S. GDP and greater than the GDP of any other nation in the world.
While new technologies and new ways of doing business usually are developed in
advanced economies such as the United States, their transfer to other societies has been a
key factor in the rapid modernization of the worlds most successful developing nations,
most notably the Asian Tigers and China. Both parts of this equation for growth and
productivity the development of innovations that help raise output and incomes in the
advanced nations where they originate, and their transfer to developing nations where
they also help drive growth and higher living standards depend vitally on respect and
protection for the intellectual property embodied in every innovation.
Over the last generation, economists have established a series of findings that
demonstrate the vital importance of strong intellectual property rights. As we will see,
research has established that intellectual property protections in developing societies,
especially countries with low per capita incomes, directly encourage technology transfers
from more advanced economies through both direct imports and foreign direct
investment. Moreover, technology transfers to developing nations expand as those
1

This analysis was supported by USA for Innovation. USA for Innovation is a 501c3 organization. Their
mission is to encourage government to defend the U.S. economy. USA for Innovation is intended to
educate the public about the value of IP to our economy and to highlight the leading perpetrators of theft
against U.S. technological assets overseas. http://www.usaforip.org/home/

nations strengthen their patent protections. Data also show that intellectual property
protections in developing nations can directly stimulate the pace of innovation in
advanced countries. Conversely, researchers have found that countries with weak
intellectual property protections receive less direct foreign investment; and the
investment they receive is less technologically sophisticated. Moreover, the advanced
technologies and products which multinational companies transfer to those developing
markets that protect intellectual property rights often diffuse to domestic firms, increasing
the rate at which those firms and their countries develop their own intellectual property.
Given the enormous value of economic innovations and the intellectual property
embedded in them, it is not surprising that the underlying ideas are often stolen by those
who pirate or counterfeit patented or copyrighted technologies and products. The
Organization for Economic Development (OECD) has estimated that counterfeiting and
piracy costs companies as much as $638 billion a year, losses greater than the total GDP
of all but 12 countries. Around the world, between 35 and 40 percent of all commercial,
packaged software and musical recordings sold every year are thought to be counterfeit.
Among patented products that are more difficult to duplicate, such as drugs, electronics
and semiconductors, the counterfeit rates are lower but substantial. The World Health
Organization (WHO) estimates that at least six percent of the pharmaceuticals sold
worldwide every year are counterfeit, valued at more than $30 billion.
In some nations, the vast majority of the software and musical recordings sold are
counterfeit versions. More than 90 percent of the recordings sold in China and Paraguay
are pirated; and the market shares for counterfeit software are more than 60 percent in
Latin America, more than 70 percent in Eastern Europe, and nearly 90 percent in Russia.
In addition, experts in pharmaceutical piracy have found that counterfeits account for up
to 50 percent of certain drugs sold in China and Pakistan, and more than 10 percent of the
entire markets in other Asian countries and Russia.
Despite the critical economic importance of intellectual property rights, since 2001 the
U.S. government has taken virtually no action against countries which tolerate wide-scale
piracy and counterfeiting of American technologies and other products. From 1996
through 2000, the United States filed 15 cases with the World Trade Organization (WTO)
for intellectual-property violations; but from 2001 to the present (September 2005), the
U.S filed just one new case. The U.S. government has also taken no action in response to
the Brazilian governments unprecedented move to unilaterally abrogate patents for three
new pharmaceuticals. Given both the extent and costs of all of these violations, and their
long-run implications for economic growth and development in America and around the
world, the international community along with the United States should take aggressive
measures to strengthen global enforcement of intellectual property rights.

II.

Innovation, Intellectual Property Rights and Economic Growth

The role that ideas play in global economic life may be greater today than at other times
in modern history. It is clear that a societys natural resources no longer bear a close

relationship to how fast it develops and grows. For example, from 1960 to 2000,
economic output and per capita incomes grew more than three times faster in South
Korea, with relatively few natural resources, than in Brazil, a country with abundant
natural resources.2 Much of the difference can be traced to Koreas relative openness to
technological and other innovations developed elsewhere and imported to Korea through
foreign direct investment or licensing agreements, as well as to Koreas greater
commitment to broad-based public education that prepared its future workers to adapt to
new technologies and ways of doing business.3
Wherever they originally occur, everyone has an interest in promoting innovations,
because most of the benefits are enjoyed by those who use them. For example, there is
no doubt that the benefits to workers and corporations around the world from using the
Windows operating system far exceed Microsofts profits; or that HIV medications
provide much greater benefits to those who use them. However, both the development
and application of economically-powerful innovations depend on legal and regulatory
arrangements that protect the intellectual-property rights of those who develop and
transfer them, and thereby enable them to profit from doing so.
As Paul Romer, one of the worlds leading experts on economic growth, has written,
The knowledge needed to provide citizens of the poorest countries with a
vastly improved standard of living already exists in the advanced
countries. If a poor nation invests in education and does not destroy the
incentives for its citizens to acquire ideas from the rest of the world, it can
rapidly take advantage of the publicly available part of the worldwide
stock of knowledge. If, in addition, it offers incentives for privately heldideas to be put to use within its borders (for example, by protecting foreign
patents, copyrights and licenses, and by permitting direct investment by
foreign firms), its citizens can soon work in state-of-the-art productive
activities (emphasis added).4
There is no controversy among economists about the major role which innovation plays
in economic growth and development. Since the 1950s, researchers beginning with
Nobel laureate Robert Solow have established that the development and adoption of
economic innovation is the most powerful factor determining a nations underlying
growth rate. In the United States, the worlds most successful advanced economy, an
estimated 30 percent to 40 percent of the gains in productivity and growth achieved
during the 20th century are attributable to economic innovation in its various forms.5
2

World Bank, World Development Indicators, Washington, DC: World Bank, 2005.
Op. cit.
4
Paul Romer, Economic Growth in the Fortune Encyclopedia of Economics, David R. Henderson, ed.,
Warner Books, 1993.
5
Robert M. Solow, A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics,
Vol. 70, 1956; Robert M. Solow, Technological Change and the Aggregate Production Function, Review
of Economics and Statistics, Vol. 39, No. 3, 1957; Edward F. Denison , The Sources of Economic Growth
in the United States and the Alternatives Before Us, Committee for Economic Development,
Supplementary Paper Number 13, 1962
3

These innovations encompass the development of not only new technologies, but also
new materials and processes, new ways of financing, marketing and distributing goods
and services, and new ways of managing a workplace and organizing a business.
The dominant role of ideas in economic life is also documented in an important new
study from the Federal Reserve System.6 Its authors analyzed the various ways that
companies use ideas by examining several categories of business spending on so-called
intangibles, including: Software programs and databases; scientific and non-scientific
R&D, covering costs to develop products subject to patents, licenses and copyrights, as
well as new-product development costs by service firms; spending on advertising and
market research to create brands; resources devoted to developing new business models
and corporate cultures; and expenditures on firm-specific training. By classifying these
outlays as capital investments intended to increase future rather than current output, the
authors found that U.S. business currently invest as much in these idea-related intangibles
about $1 trillion a year -- as they do in plant, equipment and other traditional, tangible
forms of investment. They further established that in the 1990s, U.S. business spending
on this long-lasting, knowledge capital grew faster than any other form of business or
personal spending. Finally, they traced more than four-fifths of the gains in the growth
rate of U.S. productivity in the latter 1990s to the development and application of new
ideas. Over the period 1995-2001, the development of new information technologies
accounted for 28 percent of those gains, capital investment in those technologies
accounted for another 34 percent, research and development accounted for 10 percent,
and changes in the organization of firms and worker training in response to innovations
accounted for another 10 percent.7 By applying this approach to data for 2001-2003, we
calculate that nearly 90 percent of U.S. economic growth during this most recent period
can be attributed to increases in the stock of intangible assets.
Economically-powerful innovations originate primarily in advanced economies where
commitments to research and development are strong, the political and economic
environments are stable, barriers to starting new businesses are relatively low, and
intellectual property rights are respected. The close relationship between innovation,
growth and these conditions is evident in the recent records of developing economies. In
the words of two analysts, most of income above subsistence is made possible by
international diffusion of knowledge.8 In this regard, the World Bank has reported that
since 1980, the worlds greatest economic gains have been achieved by developing
nations that aggressively opened their economies to foreign technologies and business
methods and protected the intellectual property rights of their developers.9 From 1980 to
2002, the developing East Asian economies achieved growth averaging more than 7.4
percent per year, and the developing South Asian economies grew by an average of more
than 5.4 percent annually. By contrast, Latin American economies with more restrictive
6

Carol Corrado, Charles Hulten, Daniel Sichel, Measuring Capital and Technology: An Expanded
Framework, Federal Reserve Board, Finance and Economics Discussion Series, No. 2004-65, August
2004.
7
Ibid., Table 3.
8
Peter J. Klenow and Andres Rodriguez-Clare, Externalities and Growth, National Bureau of Economic
Research Working Paper No.11009, December 2004..
9
World Bank, World Development Indicators, op. cit.

foreign-investment policies and lax intellectual property protections grew by less than 2.5
percent per year over the same period. Generally, another recent World Bank study of
patenting and growth in 92 countries over the period 1960 to 2000 found that a 20 percent
increase in the annual number of patents granted, wherever the technologies originated,
was associated with an increase of 3.8 percent in output, an unusually powerful finding.10
The issue which we examine here is more limited. Given that innovation is the largest
single force responsible for changes in rates of growth and productivity in most nations,
how critical are intellectual-property protections to the development and spread of those
innovations? It may seem obvious that rates of innovation would fall sharply if the
innovations developed by one person or company could be copied and reproduced
without limit or compensation by any other company in any country. Yet, serious
questions have been raised recently about traditional intellectual-property rights,
including appeals to the World Intellectual Property Organization (WIPO). These
questions argue that those rights actually impair economic progress in developing
nations.11 Moreover, one prominent national proponent of this view, the government of
Brazil, recently suspended the intellectual-property rights of three pharmaceutical firms
to new AIDS medications which they developed.12
In fact, the relationship between innovation and intellectual-property rights is wellestablished in modern economics. To be sure, invention for its own sake has not always
depended on those rights. For example, recent research based on data from the
catalogues of inventions displayed at three 19th century world fairs found that inventors
remained active in Denmark and Switzerland during periods in the 19th century when
those nations lacked intellectual-property protections.13 However, the research also found
that the inventions developed in places without patent protections predominantly
involved products in which the inventor could preserve secrecy without a patent, such as
new food stuffs with secret recipes. Virtually all of the inventions which ultimately
hastened economic development and lifted living standards especially new technologies
and manufacturing processes were developed in societies with strong intellectualproperty protections, most notably the United States and Germany.
A portion of the explanation for these dynamics lies in how people normally respond to
economic incentives. While a few souls are true altruists, most people expend the effort
to develop something that provides economic benefits to others, only if doing so also
benefits themselves as well. Moreover, as corporations have come to dominate the
development of innovations, the prospect of future gains as an essential incentive has
10

Derek H.C. Chen and Carl Dahlman, Knowledge and Development: A Cross-Section Approach, World
Bank Policy Research Working Paper No. 3366, November 2004.
11
Group of Friends of Development, Proposal to Establish a Development Agenda for the World
Intellectual Property Organization (WIPO): An Elaboration of Issues Raised In Document Wo/Ga/31/11,
Submission
to
the
World
Intellectual
Property
Organization,
April
6,
2005,
www.ipjustice.org/WIPO/elaborationDA.
12
Brazil health minister to break Abbott AIDS drug patent, Reuters, June 24, 2005; Mary OGrady,
Brazil Mulls Drug Patent Theft as an AIDS Antidote, Wall Street Journal, June 24, 2005.
13
Petra Moser, How Do Patent Laws Influence Innovation? Evidence from Nineteen-Century World
Fairs, National Bureau of Economic Research Working Paper No. 9909, August 2003.

become conclusive. The development of most modern economic innovations, especially

in technology areas, generally requires highly-skilled people and sophisticated equipment
and business organizations. The use of that labor and capital is costly. The only reason
that a business bears those costs and forgoes more immediate and certain returns from
using its labor and capital in other ways is a prospect of larger returns in the future.
The rest of the explanation lies in the essential economic nature of ideas, which make the
prospect of earning future returns from them dependent on legal property rights and
protections. The ideas that animate economic innovations are what economists call nonrival goods, which means that unlike rival goods such as a piece of equipment or real
estate, an idea can be used by more than one person at a time and easily duplicated.
Because an idea cannot be physically possessed like land or equipment, its use by those
who develop it does not preclude others from using it at the same time.14 As a result, the
returns from innovations cannot be secure without legal protections for the new ideas that
animate them. This dynamic is evident in the results of a recent survey of American
R&D executives, who reported that without patent protections, 60 percent of the projects
which ultimately produced discoveries in pharmaceuticals would never have happened.15

III.

Intellectual Property Rights and Globalization

The importance of intellectual property and other intangibles presents the United States
with unique challenges in a period of rapid globalization. As knowledge expands rapidly
and discovery in many areas becomes easier, the period of time that a firm has to offer its
innovation or discovery, with little direct competition from substitutes, contracts.
Accordingly, American firms have sought to recapture their development costs more
quickly by expanding their worldwide market. Since 72 percent of worldwide GDP and
demand are located outside the United States, the potential increase in sales from
globalization during an innovations initial period of high revenues is immense so long
as the developers intellectual property rights are respected outside the United States.
Developing countries face different concerns with regard to intellectual property and
globalization. These countries have less economically-valuable intellectual property and
hence are often significant importers of innovative technologies and expertise. This
prospect may trigger protectionist responses in certain developing countries and tempt
them to simply ignore foreign intellectual property rights. This is especially true because
during the period in which a patent applies, intellectual property rights guarantee that its
owner can charge prices substantially greater than its marginal costs to produce the good.
Hence, recourse to piracy or counterfeiting can significantly reduce the costs of a given
patented product in a developing country. It is sometimes claimed that the market for
14

In economic terms, ideas are also considered to be partially non-excludable goods: An innovator acting
as a private agent cannot prevent others from using his idea, as compared to someone who owns a piece of
land or a factory who can prevent others from using it by hiring security guards.
15
Edwin Mansfield, Patents and Innovation: An Empirical Study, Management Science, Vol. 32, No. 1,
1986. For a literature review of the connections between innovation and intellectual property protections,
see Sunil Kanwar and Robert Evenson, Does Intellectual Property Protection Spur technological
Change?, Yale University, Economic Growth Center Discussion Paper No. 831, June 2001.

many innovative products in low or middle-income countries is too small to affect global
investment in R&D, and therefore developing countries can ignore the intellectual
property rights of foreign companies and improve their welfare at little cost to the rest of
the world. The question is, are developing countries better off if they ignore intellectual
property rights?
Many economists have explored various aspects of this issue in great detail. A clear
consensus has emerged in this literature. The costs to a developing nation of ignoring the
intellectual property rights of foreign companies significantly exceed any benefits. For
example, in one line of inquiry researchers examined whether innovating firms are
sensitive to intellectual-property rights only in the place where they develop their
innovations, or whether the strength of their patents in other countries also matters. Once
again, the economic logic linking the development of new technologies and strong
intellectual-property rights in foreign markets is clear. The prospect of a larger market
for an innovator to earn returns directly stimulates R&D by expanding the potential
customer base against which an innovating corporation can amortize that R&D spending
and by raising the potential rate of return on the R&D. Recent research supports this
logic. One study found that strong intellectual-property protections in developing nations
directly stimulated the pace of innovation in more advanced economies.16
Opponents of traditional intellectual property protections have claimed recently that
regardless of the impact of patent protections in developing countries on the pace of
innovation elsewhere, the innovations benefit primarily those who develop them and not
the people in developing countries. This also is an important issue, since innovative
activity is largely concentrated in stable, advanced countries that can afford substantial
financial commitments to R&D and that encourage firms to commercialize and export the
innovative products and processes which result. Moreover, there is evidence of some
corporations using their patent protections to maintain monopolies and deter potential
competitors from entering the market, focusing their resources on defending their original
innovations rather than developing additional new products.17 Nevertheless, the overall
evidence shows that such adverse effects are outweighed by the contributions of
innovations to growth and productivity in the developing markets to which they were
transferred, as well as the countries where they originated. Those transfers would not
have occurred had the innovators doubted that they could claim rights to the returns.
One major study examined data for 95 countries from 1960 to 1988 and found that
intellectual-property rights had a significant effect on growth in all cases, with the
greatest effects occurring in both the high-income countries where the innovations were
developed and those low-income countries where strong patent protections encouraged

16

Ishac Diwan and Dani Rodrik, Patents, Appropriate Technology and North-South Trade, Journal of
International Economics, Vol. 29, No. 1, 1991
17
These charges, summarized in Intellectual property Rights and Economic Growth, (Rod Falvey, Neil
Foster, David Greenway, Research Paper 2004/12, University of Nottingham, 2004), are made by many
opponents of intellectual-property protections, including the Group of Friends of Development in their
April 2005 submission to WIPO. (see footnote 11 for citation)

the importation and inward foreign direct investment of innovations.18 These results are
confirmed by another study conducted in 2004 which examined 80 countries over four
time periods covering 1975 to 1994.19 These researchers found that strong intellectual
property protections stimulated growth in countries with high per capita incomes and
even greater gains in countries with low per capita incomes, by encouraging imports and
foreign direct investment from advanced countries.20
Whether these technology transfers occur by export or foreign direct investment usually
depends on the product and the market, with intellectual property rights playing a
significant role in both cases. The existence of strong intellectual-property rights in a
developing country encourages the export of new technologies to that country by both
protecting the exporter from local imitations and increasing the size of the exporters
potential market; and several studies have found that countries with relatively stronger
intellectual property rights attract relatively more imports.21 Foreign direct investment is
likely to replace exports as a marketing strategy for innovating companies when the
products are relatively R&D-intensive and the market is large, and when the costs of
conducting the trade and transporting the goods are high and the costs of establishing new
plants are low.22 For example, it is not surprising that foreign direct investment of
technologies that are both complex and easily copied or imitated increases as intellectual
property rights are strengthened especially compared to technologies and products that
are more standardized and labor intensive. The result, as documented in one study, is that
the quality of technologies transferred to developing countries generally rises as those
countries strengthen intellectual property rights.23
Generally, researchers have established that technology transfers to a developing market
increase as it strengthens patent rights, especially when its domestic companies compete
with the foreign innovators,24 and that every one-percent increase in the degree of patent
protection in a developing country expands the stock of U.S. investment in that country
by 0.45 percent.25 As these studies demonstrate, the issue for foreign direct investments
that transfer technologies is ultimately the same as any other investment: Will it raise the
18

D. M. Gould and William C. Gruben, The Role of Intellectual Property Rights in Economic Growth,
Journal of Development Economics, Vol. 48, No. 2, 1996.). M.A. Thompson and F. W. Rushing found
these effects only when a country had achieved a certain level of GDP (An Empirical Analysis of the
Impact of Patent Protection on Economic Growth, Journal of Economic Development, Vol. 21, 1996.
19
Falvey et. al.op. cit..
20
Ibid. The researchers could not establish the same link for middle-income countries: The positive effects
of patents on growth, from imports and foreign direct investment, were offset by negative effects associated
with discouraging domestic imitators and slowing the pace with which new knowledge is diffused.
21
Keith Maskus and Mohan Penubarti, How Trade-Related Are Intellectual Property Rights? Journal of
International Economics, Vol. 39; Pamela Smith, Are Weak Patent Rights a Barrier to U.S. Exports?
Journal of International Economics, Vol. 48, No. 1, 1999.
22
Keith Maskus, Intellectual Property Rights and Foreign Direct Investment, Center for International
Economic Studies, University of Adelaide, CIES Policy Discussion Paper 0022, May 2000.
23
Sharmila Vishwasrao, Intellectual Property Rights and the Mode of Technology Transfer, Journal of
Development Economics, Vol. 44., No. 2, 1994
24
M. Scott Taylor, Trips, Trade and Growth, International Economic Review, Vol. 35, 2004.
25
Keith Maskus, The International Regulation of Intellectual Property, Weltwirtschftliches Archiv, 1994,
cited in Maskus, Intellectual Property Rights and Foreign Direct Investment, op. cit.

firms expected profits so that it can earn a higher return on its protected knowledgebased assets through the foreign direct investment than in any other way?
The evidence also shows the other side of the coin. Countries with weak intellectual
property rights receive relatively less foreign direct investment, and the investment which
they do attract is technologically less sophisticated.26 For example, a survey of 100 U.S.based multinational firms found significant reluctance among them to do business in
India, Brazil, Argentina and Indonesia, all countries cited by the Office of the U.S. Trade
Representative for failing to respect or protect the intellectual property rights of
American companies and citizens.27 More than 80 percent of the pharmaceutical and
chemical companies included in the survey reported that they would not conduct any
joint ventures or transfer or license their technologies in India, despite that countrys huge
market.28 Similarly, among all of the surveyed firms, 62 percent said that they would not
license their products production in Argentina, 69 percent said they would not do so in
Brazil, and 73 percent would not do so in Indonesia.
This link between intellectual property protections and foreign investment is also evident
in numerous studies of how U.S. multinational firms shift their revenues for tax purposes.
It is well documented that multinationals participate in an extraordinary amount of
income-shifting across borders, with income derived from intellectual property
accounting for about half of the income shifted from high-tax to low-tax jurisdictions.29
In fact, firms transfer their intellectual property to low-tax jurisdictions so aggressively,
that low tax-rate countries often collect higher corporate revenues than high tax-rate
countries a genuine Laffer curve effect.30 However, the data show that nations that do
not respect a multinationals intellectual property rights receive much lower tax revenues
from foreign multinationals, demonstrating the significant role that intellectual property
rights play in determining if a country is an attractive place for multinational investment.
Intellectual property protections also affect the composition of foreign direct investment.
One recent study found that in country-markets with weak intellectual property rights,
foreign multinationals tend to focus on developing distribution channels for their
products compared to country-markets with strong intellectual property rights, where
multinational focus more on transferring their production technologies and
manufacturing.31
26

Jeong-Yeon Lee and Edwin Mansfield, Intellectual Property Protection and U.S. Foreign Direct
Investment, Review of Economics and Statistics, Vol. 78, 1996.
27
Edwin Mansfield, Intellectual Property Protection, Foreign Direct Investment and Technology Transfer.
International Finance Corporation, Discussion Paper, cited in Maskus, op. cit.
28
Similarly, among the machinery producers surveyed, 73 percent said that they would not license the
production of their products in Brazil and 59 percent would not do so in India.
29
Harry Grubert, Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of
Location, National Tax Journal, Vol. 56, No. 1, Part 2, March 2003; Eric Engen and Kevin Hassett, Does
the U.S. Corporate Tax Have a Future? Tax Notes, 30th Anniversary Issue, 2002.
30
Engen and Hassett, op. cit.
31
Smarzynska, B. K., Composition of Foreign Direct Investment and Protection of Intellectual Property
Rights: Evidence from Transition Economies, The World Bank, Policy Research Working Paper No.
2786, 2002.

10

A number of researchers have found that countries that do not aggressively respect
intellectual property rights also have a more difficult time achieving economic growth
through technology transfer. One recent study looked at how reforms in intellectual
property rights in 16 countries over the period 1982 to 1999 affected technology transfers
by U.S. multinational firms to their foreign affiliates.32 The research showed that royalty
payments to parent companies for the use or sale of technologies transferred to their
affiliates increased at times of the reforms, as did R&D carried out by the affiliates as a
complement to the technology imports from their parent companies.33 The conclusion
was that U.S. multinationals respond to changes in IPR (intellectual property rights)
regimes abroad by increasing technology transfers to reforming countries.34 This
response was particularly strong among firms whose revenues prior to the reforms
depended most on intellectual property. The data further showed that bilateral trade in
manufactured goods also rises sharply when intellectual property protections are
enhanced.
These dynamics also may lie behind the findings of a recent World Bank study, which
found that during the same period of intellectual property reforms, the share of global
trade comprised of knowledge-intensive or high technology products rose sharply.35
There is also substantial evidence that multinational firms often shift some R&D activity
to countries which respect intellectual property rights, creating positive feedback effects
in those developing countries. Once a multinational locates intellectually intensive
activities in a country, those activities can have positive effects on other domestic
businesses. For example, one study analyzed investment decisions by firms in a large
number of countries and found that as a countrys protections for intellectual property
increase, firms focus more of their activity there on the development of intangible assets,
with a significant, positive effect on GDP growth.36 These findings establish a clear
causal chain and virtuous circle. Countries that respect intellectual property rights
encourage foreign multinationals to transfer state-of-the-art technologies to those
countries. Once that countrys businesses and citizens become familiar with the new
technologies, domestic firms both adopt them and often increase the rate at which they
develop their own intellectual property. These developments lead to higher growth by
domestic firms, which make the country a more attractive locale for further investment by
foreign multinational companies.
In some cases, this virtuous circle has helped produce remarkable economic
transformations. In particular, researchers have shown that as a developing country
32

Lee Branstetter, Raymond Fisman, C. Fritz Foley, Do Stronger Intellectual Property Rights Increase
International Technology Transfer?, National Bureau of Economic Research, Working Paper No. 11516,
July 2005.
33
The countries include Argentina, Brazil, China, Indonesia, Japan, South Korea, Mexico, the Philippines,
Spain, Taiwan, Thailand, and Turkey.
34
Branstetter, et. al., op. cit, p. 26
35
Carsten Fink & Carlos A. Primo Braga, How Stronger Protection of Intellectual Property Rights Affects
International Trade Flows, The World Bank, Policy Research Working Paper Series 2051, 1999.
36
Stijn Claessens & Luc Laeven, Financial Development, Property Rights, and Growth, The World
Bank, Policy Research Working Paper Series 2924, 2002.

11

modernizes, its R&D expenditures as a share of its GDP tend to not just increase, but to
rise at an increasing rate.37 In some countries -- including Finland, Korea, Taiwan and
Israel both R&D expenditures and economic growth have sharply exceeded global
norms. The authors of the study also compared this positive experience with other
regions and noted that Latin America in particular underperformed global norms in both
regards. This result is linked to the relative disregard for intellectual property rights in
many Latin American countries.
Respect for the intellectual property rights of foreign companies may benefit developing
in another important way. If multinational firms can expect to have their patents
respected in certain regions, they may be more likely to invest in research projects that
would be beneficial to those regions. A recent study found evidence for this result in data
on increases in research into anti-malaria treatments by pharmaceutical firms following
improvements in intellectual property protections in countries subject to malaria
outbreaks.38 If those data are confirmed, it may demonstrate that greater respect for
intellectual property rights can be literally a matter of life and death in many developing
countries.

IV.

The Value of Intellectual Property in the American Economy

The value of legally-protected intellectual property to the American economy is

enormous. A recent report found that copyright industries alone principally music,
publishing and software -- accounted for six percent of U.S. GDP in 2002, or more than
$600 billion.39 This estimate does not include the value of the output of patent-intensive
industries such as computers and pharmaceuticals. We estimate that including those
sectors would increase the share of GDP to 9.2 percent.40 These estimates do not include
any of the value of the output from industries such as financial services and equipment
makers that, while not considered traditional intellectual-property sectors, nevertheless
produce goods or services whose value depends substantially on their use of intellectual
property. Moreover, a number of studies have found that the value of such intangible
goods has increased significantly, and now constitute a large share of all U.S. domestic
output or production.41
The value of intangibles to firms also has been widely examined and analyzed. A
number of studies have found that companies future earnings respond positively to R&D
37

Daniel Lederman and William F. Maloney, Research and Development (R&D) and Development, The
World Bank, Policy Research Working Paper Series 3024, 2003
38
Jean O. Lanjouw and Iain Cockburn, Do Patents Matter?: Empirical Evidence after GATT, National
Bureau of Economic Research Working Paper No. 7495, January 2000.
39
Stephen Siwek, Copyright Industries in the U.S. Economy, The 2004 Report, Economists Incorporated,
October 2004., www.iipa.com/pdf/2004_SIWEK_FULL.pdf.
40
Bureau of Economic Analysis, Value Added by Industry in Current Dollars as a Percentage of GDP,
April 2005, www.bea.gov/bea/industry/gpotables/gpo_action; NDC Health, 2005 Pharma Insight,
www.ndchealth.com/press_center/uspharmaindustrydata/NDCHealth_2005PharmaInsight.
41
Leonard Nakamura, (Intangibles: what put the new in the new economy?, Federal Reserve Bank of
Philadelphia, Business Review, July 1999) provides a detailed analysis of recent trends in this regard.

12

expenditures.42 Similarly, researchers have also found that public firms stock market
returns tend to rise following significant R&D investments, and the market value of a
firm relative to its book value increases following investments in intangibles generally.43
These findings may reflect, in part, the inadequacies of book-value accounting in tracking
intangible investments. Nevertheless, the ratio of a companys market value to its book
value is a strong and reliable measure of the importance of intangible capital to that firm.
Even after all of the turmoil in U.S. stock markets in recent years, the ratio of market
value to book value for the S&P 500 today is a whopping 3.32.44
This result suggests that intangibles account for 70 percent of the current value of equities
in the United States. Moreover, the finding that the intangible assets of American firms
are more important today than their tangible assets in determining their market value is
supported by the recent Federal Reserve study of the role of intangible assets in overall
investment and recent productivity gains, which we described earlier.45 Furthermore, by
combining these two approaches, we can estimate, at least roughly, both the value of all
of the intangible knowledge capital in the American economy and how much of it
constitutes traditional intellectual property.
The Federal Reserve study found (Table 3) that 47 percent of all intangible investment
lies in computerized information (software and databases) and R&D, with expenditures
for organization and branding comprising the remaining 53 percent of intangible
investment. Using the ratio of market value to book value as a guide, and assuming for
simplicity that all forms of intangible investment have the same productivity and
depreciation rate, and that the patterns in the latest data reflect historical patterns, we find
the value of U.S. firms intellectual capital comprises 47 percent of their intangible value.
Since intangibles are 70 percent of market value, it follows that the intellectual capital of
U.S. firms is equal to roughly 0.33 [0.47*0.70] of their market value. According to
Bloomberg, the market value of all U.S. equities on September 6, 2005 was $15.2 trillion.
Therefore, the value of intellectual capital on that date would be roughly $5 trillion.46
Alternatively, the Federal Reserve study also found that the value of all U.S. intangible
investment is approximately the same as the value of all U.S. tangible investment. If we
assume here that tangible and intangible investments depreciate at the same rate, then
over time the stock of U.S. intangible capital will approximate the stock of U.S. tangible
42

See Baruch Lev and Theodore Sougiannis, The Capitalization, Amortization and Value-relevance of
R&D,Journal of Accounting and Economics, Vol. 21, 1996, for a recent example.
43
Pamela Megna and Marck Klock, The Impact of Intangible Capital on Tobin's q in the Semiconductor
Industry, American Economic Review, Vol. 83, No. 2, May 1993, is a recent example of a large literature
that began with Zvi Griliches, Market Value, R&D and Patents, Economics Letters, Vol. 7, 1981.
44
Barrons, September 6st, 2005, www.online.barrons.com/page/mlab_index_yields.html.
45
Corrado, et. al., Measuring Capital and Technology: An Expanded Framework, op. cit., See Section II.
46
The authors of the Federal Reserve study did not report a comparable number, but in correspondence
with us revealed that their estimate for 2003 was approximately $3.6 trillion. This number is lower than
ours for a number of reasons, including reliance on source data that varies by year and different
depreciation assumptions. The essential point that we raise here would still hold if we relied upon this
estimate, but we prefer ours for the purposes of this discussion as it relies on a simple and transparent
approach.

13

capital. The Bureau of Economic Analysis (BEA) estimates the value of the total stock
of U.S. business fixed (tangible) capital in 2003 at $11.7 trillion.47 Assuming that the
stock of U.S. intangible business assets already approximates the stock of tangible
business assets, then business knowledge capital is worth $11.7 trillion, and intellectual
property would comprise 47 percent of that total or $5.5 trillion.48
This range is also consistent with the new pressures on firms arising from globalization.
A companys profitability increasingly depends on the depth and quality of its intellectual
property, rather than on simply its level of industrialization or modernization. Therefore,
firms with the highest-value intellectual property are most likely to succeed in a highly
competitive global environment and will likely have the highest market value.
These developments also point to the grave economic harm posed by counterfeiting and
other violations of intellectual property rights. These violations reach across major
sectors as well as national borders, inflicting large costs on businesses and individuals.
While revenue losses from counterfeiting are the most direct costs for businesses, sales of
counterfeit or pirated goods also inflict other costs, such as lost wages by workers from
victimized firms, injuries and deaths from counterfeit pharmaceuticals, and the costs to
police markets for violations. Given the scale and scope of the value of patented and
copyrighted goods, these costs may well constitute a significant drain on both national
and world economies and impede the efficient exchange of goods, services, and ideas.
No comprehensive data are collected to assess the full scope and extent of international
counterfeiting and other violations of intellectual property rights. Nevertheless, various
estimates have been developed to gauge the range of those costs. The Organization for
Economic Development (OECD) estimates that the total costs of counterfeiting are
equivalent to 5 percent to 7 percent of world trade.49 Figure 1 represents these costs over
time, based on these percentages of world merchandise exports.

47

Bureau of Economic Analysis, www.bea.gov, Table 2.1, Current-Cost Net Stock of Private Fixed Assets,
Equipment and Software, and Structure by Type, 1987-2003.
48
The convergence of the two stocks likely has already occurred or nearly so, since intangible business
investment was equal to more than 80 percent of tangible business investment in the 1980s and more than
90 percent in the 1990s. Unless intangible assets decays more rapidly than tangible assets, which seems
highly unlikely, the tangible and intangible stocks are very likely to approximate each other by now.
49
Organisation for Economic Co-operation and Development, The Economic Impact of Counterfeiting,
1998, http://www.oecd.org/dataoecd/11/11/2090589.pdf.

14

Figure 1. Cost of Counterfeiting Based on Total

World Merchandise Exports, 1990 - 2004
700.00
600.00
500.00

Value ($Billions)

400.00
300.00
200.00
100.00
0.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source : WTO; OECD, The Economic Impact of
Counterfeiting, OECD, 1998

5% of World Trade Assumption

7% of World Trade Assumption

Since piracy, counterfeiting and other violations of intellectual property rights are often
clandestine activities, the 5 percent to 7 percent estimates of the direct costs of
counterfeiting are likely conservative. Applying the 7 percent estimate to the most recent
data on merchandise trade from the World Trade Organization (WTO) suggests that the
losses to businesses and workers resulting from counterfeiting alone came to more than
$638 billion in 2004. For purposes of comparison, those losses are greater than the GDP
of Australia, the worlds 13th largest economy.50
The United States, as the worlds largest economy with the greatest levels of patenting
and copyright activity, is especially harmed by counterfeiting. Based on U.S. good
exports of more than $807 billion in 2004 and the OECDs 7 percent estimate of direct
costs, counterfeiting alone cost the American economy more than $56 billion in 2004.51
Figure 2, below, represents the costs of counterfeiting to the United States over time.

Figure 2. Cost of Counterfeiting Based on a Percentage

of U.S. Merchandise Exports, 1992 - 2004
60

50

Value ($Billions)

40

30

20

10

0
1992 1993 1994 1995 1996 1997 1998 1999 2000
Source : BEA; OECD, The Economic Impact of
Counterfeiting, OECD, 1998

5% of U.S. Goods Exports

2001 2002 2003 2004

7% of U.S. Goods Exports

50

World Bank, Total GDP 2004, http://www.worldbank.org/data/databytopic/GDP.pdf.

Bureau of Economic Analysis, U.S. International Trade in Goods and
www.bea.gov/bea/newsrelarchive/2005/trad0605.xls,, June 2005.
51

15

Services,

The impact of modern counterfeiting is particularly severe for businesses and workers in
certain sectors. Core copyright industries including software, musical recording and
motion pictures, represent some 6 percent of U.S. GDP.52 These industries have
benefited enormously from recent technological innovations, including the internet and
modern data-writing technologies which enable them to produce compact disc and digital
versatile disc media that are easier to use and higher quality than older technologies.
However, these same innovations increase their vulnerability to counterfeiting. The
software industry estimates that their $50 billion in global sales of commercial, packaged
software for personal computers in 2003 represented less than two-thirds of the almost
$80 billion in commercial, packaged software actually installed on PCs in that year.53
This suggests that more than one-third of all commercial, packaged software installed on
PCs is counterfeit. In some countries, rates of theft of software intellectual property are
much higher. For example, one study estimated that some 61 percent of installed
software in Brazil is counterfeit.54 According to the same research, American companies
alone lost $6 billion to software counterfeiting in 2004, followed by Chinese firms with
estimated counterfeiting-related losses of more than $2.6 billion.
Violations of intellectual property rights are also rampant in musical recording. One
study of piracy in the global recording industry found that one-third of all compact discs
sold are counterfeit.55 Again, some countries evidence even higher rates of piracy. It is
estimated that 52 percent of the recordings sold in Brazil are counterfeit, with sales of
pirated recordings there topping 73 million units, compared to 66 million units in the
legitimate market. Based only on the sale prices of counterfeit recordings, the global
counterfeit recording market in 2004 topped $4.6 billion, a calculation that does not
include losses from internet file-sharing and other related forms of counterfeiting.56
The worldwide counterfeit market for pharmaceuticals is both large and troubling, given
the potentially-dangerous health effects of counterfeit drugs. While traffic in counterfeit
recordings and software causes significant economic harm, counterfeit medicines cause
injuries and death. For example, at least 30 people in Cambodia died from using
counterfeit anti-malaria drugs in 2000, and at least 59 children died in Haiti in 1997 after
taking counterfeit fever medications.57 In 2003, the WHO reported that 10 percent to 20
52

Stephen Siwek, op. cit.

Business Software Alliance and IDC. First Annual BSA and IDC Global Software Piracy Study, July
2004, www.bsa.org/usa/research.
54
Ibid
55
IFPI, The Recording Industry Commercial Piracy Report 2005, June 2005, www.ifpi.org/sitecontent/antipiracy/piracy-report-current.
56
Ibid; The June 27th U.S. Supreme Court decision against file sharing, is only the most recent example of
the scale at which copyrighted materials can now be disseminated over the internet without the consent of
the copyright holder. It also indicates that counterfeiting has likely grown since a number of these recent
industry studies were conducted.
57
See www.gphf.org/web_en/projekte/minilab/hintergrund_arzneimittelfaelschungen.htm, German Pharma
Health Fund.
53

16

percent of all drugs used in developing countries are sub-standard, indicating that the
problem of counterfeited pharmaceuticals is very serious.58 Many researchers have tried
to quantify the global market in counterfeit drugs. For example, Business Week estimated
the value of counterfeit drugs sold in 2001 at between $6 billion and $19 billion, while
another study calculated that counterfeiting costs pharmaceutical companies some $12
billion per year.59 The actual costs may well be substantially greater. For example, the
WHO has estimated that counterfeit drugs comprise 6 percent of the worldwide
pharmaceutical market.60 If the counterfeiting is distributed evenly across all drugs, the
WHO estimate suggests that pharmaceutical counterfeiting costs some $30 billion a year,
based on worldwide sales of $492 billion (2003).61 Since the incentive to counterfeit
rises with the price and market size of a good, the actual cost of counterfeit
pharmaceuticals may well be even greater still.
These violations of intellectual property rights also tend to be concentrated in certain
countries and regions. While current data on the trade and sales of counterfeit goods are
insufficient to assess all of the major sources, industry studies provide significant data on
the countries and regions that are most heavily involved in some of the major areas of
counterfeiting. For example, one industry report identified Latin America as the hub of
counterfeiting in musical recordings, with piracy rates of 50 percent or more in every
Latin American country surveyed.62 The worst offender is Paraguay where counterfeits
comprise an estimated 99 percent of the entire recording market. China also has had
extraordinarily high levels of counterfeiting in this area. In China a piracy rate of 85
percent in recordings in 2004 cost record companies an estimated $411 million in 2004 in
that one market. The recording industry also reported that counterfeits comprised up to
66 percent of the recoding market in Russia and 68 percent of the market in the Ukraine.
Thefts of intellectual property in software follow a similar regional pattern. The software
industry has estimated that 36 percent of sold-and-installed software worldwide is
counterfeit, with pirated software comprising 71 percent of the East European market, 63
percent of the Latin American market, 87 percent of the Russian market, and 91 percent
of the market in the Ukraine. 63 The same study also found that counterfeit software is
very common across much of Asia, especially in China, Vietnam and Indonesia.
While these studies provide limited data on certain segments of world trade in counterfeit
goods, they point to some consistent patterns. Developing countries in Latin America,
Eastern Europe and Asia are persistent violators of intellectual property rights in software
and recordings. Moreover, there is evidence that this pattern applies to other forms of
intellectual property. For example, the European Federation of Pharmaceutical Industry
58

Ibid.
Kerry Capell and Suzanne TimmonsWhat's in That Pill?, Business Week, June 18, 2001 and Geoff
Power, Pharmaceutical Counterfeiting, International Criminal Police Review, No. 476-477, 1999. Cited
in Adam Scheer, Pharmaceutical Counterfeiting, Tampering and Diversion, American Bank Note
Holographics Inc., December 2002, <http://www.abnh.com/security/Pharm_WhitePaper_WEBSITE.pdf> .
60
EFPIA, Counterfeit Medicines, www.efpia.org/2_indust/counterfeitdrugs.pdf.
61
IMS Health, reported at www.acrpnet.org/resources/acrpwire/apr_2004/apr_ims.htm
62
ifpi., op. cit.
63
BSA and IDC. op. cit.
59

17

Associations reports that counterfeits account for up to 50 percent of certain

pharmaceuticals sold in China, more than 50 percent of the drug market in Pakistan, and
10 percent of the market in other Asian countries and Russia.64 All of these findings
point to significant rates of intellectual property theft in many developing countries.

V.

The Bush Administration Record

In the face of these findings, the U.S. government in recent years has compiled a
disappointing and troubling record. During President George W. Bushs first term, his
administration took few steps to sanction the illegal appropriation of American
intellectual property in Asian and Latin American markets,65 and failed to even
formulate and announce a formal strategy for enlisting allies in efforts to enforce
intellectual property rights until 2005.66
The record shows that since January 2001, the U.S. Governments commitment to pursue
those violating the intellectual property rights of American companies has declined
significantly. The clearest evidence comes in the number of cases filed by the United
States with the World Trade Organization for such violations. Under the agreement on
Trade-Related Intellectual Property Rights (TRIPS), any government can use the dispute
settlement process of the World Trade Organization (WTO) to pursue countries that fail
to protect the intellectual property rights of its companies. Under WTO rules, developed
nations were required to fully implement TRIPS and protect the intellectual property
rights of companies from other countries by January 1996. Developing nations were
required to complete this process by January 2000, while the least-developed countries
were directed to be in full compliance by January 2006.
The current administration has consistently failed to use this process effectively. From
1996 to 2000, the United States filed 15 cases with the WTO charging foreign nations
with failing to ensure that the intellectual property rights of American companies are
respected in their countries. The countries charged with these violations included Brazil,
64

EFPIA, op. cit..

By contrast, the Clinton administration was fairly aggressive, for example, in pressuring Chinas
government to crack down on piracy in various markets, successfully threatening to impose $2 billion in
new tariffs in 1995 and again in 1996 to stop Chinese production and export of counterfeit apparel,
electronics and CDs (Robert J. Samuelson, Punishment For Piracy, Washington Post, May 22, 1996).
China ultimately responded by closing down more than a dozen factories producing counterfeits (Paul
Blustein, China, U.S. Smooth Rough Spots In Trade; Bush Touts Plan; Democrats Dont, Washington
Post, April 22, 2004). The Clinton administration also used a 1998 presidential visit to Beijing to press
President Jiang Zemin to protect U.S. intellectual property rights ((Joe McDonald, U.S. Official: Clinton
Visit Adding Urgency To Trade Talks, Associated Press, April 14, 1998) and issued an executive order
making intellectual property protection a major priority for the United States Trade Representative (Sink
The Web Pirates, Investors Business Daily, October 9, 1998).
66
U.S. Trade Representative, US Expands Outreach in Campaign to STOP! Trade In Fakes, 6/6/2005,
www.ustr.gov/Document_Library/Press_Releases/2005/June/US_Exps_Outreach_in_Campaign_to_STOP!
_Trade_in_Fakes; US To Determine If Quotas Should Be Reimposed On Chinas Textile Products,
Xinhua General News Service, April 4, 2005; Alexa Olesen, U.S. Officials: China Promises To Prosecute
More Pirates, Ease Software Rules, Associated Press, July 11, 2005.
65

18

Argentina, Greece, India, Pakistan, Portugal, Japan, Sweden, Denmark, Ireland and
Canada, as well as the European Community. Yet, from 2001 to the present (September
2005), the number of new cases U.S. filed with the WTO for violations of intellectual
property rights dropped to one single case. Since 2001 has the U.S. government has
failed to pursue most of the 15 intellectual-property cases filed by the preceding
administration from 1996 to 2000.67 In 2005, the Bush administration even proposed to
give least-developed nations an additional ten years, beyond their January 2006 deadline,
to comply with the WTO-TRIPS protections, a proposal which those countries readily
accepted
This lack of commitment to protect U.S. intellectual property rights is also evident in the
recent record of the United States Trade Representative (USTR). Each year, USTR
issues a priority watch list of countries that have substantially failed to either protect
the intellectual property rights of Americans or to provide reasonable access to U.S.
patented or copyrighted products.68 Since 2001, six countries -- Argentina, India,
Indonesia, Russia, Lebanon, and the Philippines have been listed every year for
substantial violations while suffering no retaliatory action by the United States. A
seventh major country that USTR added to the priority watch list in 2002, Brazil, also has
remained on the list every subsequent year without incurring any penalties.
USTR can not control how much protection other countries accord to the intellectual
property rights of American businesses and citizens. But when serious and persistent
violations are identified, the United States government can impose sanctions. The U.S.
can withdraw tariff preferences provided under the General System of Preferences (GSP)
or, in less serious cases, impose penalties equal to the losses arising from the violations.
Since the current administration took office in 2001, it has applied sanctions to only one
country, the Ukraine. Apart from that one case, the United States has imposed no
penalties on any country for tolerating or committing serious and persistent violations of
the intellectual property rights of American companies.
A similarly lax attitude is apparent in the recent record of the International Trade
Commission (ITC). Since January 2001, American companies have filed 107 Section
337 complaints with the ITC, alleging that imports of pirated or counterfeit goods into
the United States violated their intellectual property rights.69 Of those 107 cases, 75 have
been settled or otherwise disposed of. More than 50 percent of those 75 settled
complaints were ultimately withdrawn, often because the complainant found the ITC
process very protracted, expensive to pursue, and relatively unlikely to produce satisfying
results. In addition, in 17 percent of those 75 cases, the ITC sided with the foreign
importer in another 17 percent of those 75 cases. In the end, less than 30 percent of the
Section 337 cases filed with the ITC since 2001 and subsequently settled resulted in
cease-and-desist orders against the importers.

67

World Trade Organization, www.wto.org/english/tratop_e/dispute/find_dispu_cases_e.html, "Dispute

Settlement: The Disputes," September 22, 2005.
68
U.S. Trade Representative, 2001 Special 301 Report, 2001
69
U.S. International Trade Commission, www.info.usitc.gov/ouii/public/337inv.nsf/All?OpenView.

19

Finally, the U.S. Government recently has tolerated a new and unprecedented challenge
to U.S. intellectual property rights by the Brazilian government. In 1997, after Brazil
passed a law authorizing domestic production of five U.S.-patented drugs, the Clinton
administration imposed sanctions that headed off any actual production of the copies.70
In June 2005, however, Brazil renewed this approach, announcing plans to breach the
U.S. patents on three drugs and permit the domestic production and importation of their
generic copies. These are the only instances on record of a government friendly to the
United States officially and formally breaching the recognized patent rights of American
companies. Yet, the Bush administration has failed to respond to this unprecedented
attack on U.S. intellectual property rights. Secretary of State Condoleezza Rice visited
Brazil immediately following the announcement and declined to criticize the action.
Since that time, no American official has denounced Brazils decision. In April 2005,
two months before that decision was announced, the USTR began a formal review of
Brazils record on intellectual property rights to determine whether it warrants official
sanctions. Given the Brazilian governments latest and most extraordinary breach of
intellectual property rights, the administrations decision regarding sanctions will provide
another important measure of its commitment to protecting those rights.

VI.

Conclusion

The critical importance of intellectual property to the American economy is clear and
well-established. Today, intellectual property accounts for some one-third of the market
value of all U.S. stocks -- $5 trillion to $5.5 trillion. That total is equivalent to 42 percent
of Americas GDP and greater than the GDP or any other economy in the world.
Moreover, intellectual property and their protections play a critical role in economic
progress throughout the world.
Extensive economic research and analysis have established that economically-powerful
forms of intellectual property, embodied in innovations, are the largest single factor
driving economic growth and development, and that intellectual property protections are
critical for the development and diffusion of those innovations. The evidence further
demonstrates that the pace at which developing nations grow and modernize depends
substantially on the transfer of these innovations from advanced nations, and that
intellectual property protections in developing nations play a critical role in determining
the extent of those transfers.
In many parts of the developing world today, lack of respect for intellectual property
rights or lax enforcement of those rights remains the rule rather than the exception.
Moreover, since 2001, the United States government has effectively neglected these
issues. If the American government did so, the pace of innovation in the United States
would accelerate and the diffusion of new technologies to the worlds developing nations
would increase, ultimately promoting faster and broader global growth and
modernization.
70

United Nations, Brazil May Face Trade Sanctions If IP Negotiations Fail, Daily International Pharma
Alert, May 25, 2005, www.un.org

20

In July 2005, the Bush administration created a new Coordinator of International

Intellectual Property Enforcement at the Department of Commerce and named Chris
Israel to the post. We believe that the National Intellectual Property Law Enforcement
Coordination Council, which Mr. Israel now heads, should be directed to create special
task forces on compulsory licensing, piracy and counterfeiting of U.S. patented or
copyrighted goods. These task forces would examine foreign enforcement in each of
these areas and issue recommendations for sanctions or new filings against foreign
governments with the WTO. In this way, the United States could make a serious
commitment to protect the single most important element for the countrys future growth
and development, the ideas and innovations of American citizens and companies.

21

References

Blustein, Paul. 2004. China, U.S. Smooth Rough Spots in Trade; Bush Touts Plan; Democrats
Dont, Washington Post, April 22, 2004
Branstetter, Lee, and Raymond Fisman, and C. Fritz Foley, Do Stronger Intellectual Property
Rights Increase International Technology Transfer?, National Bureau of Economic Research,
Working Paper No. 11516, July 2005
Business Software Alliance and IDC. First Annual BSA and IDC Global Software Piracy
Study, July 2004, www.bsa.org/usa/research (August 31, 2005)
Capell, Kerry, and Suzanne Timmons, What's in That Pill?, Business Week, June 18, 2001
Chen, Derek H.C., and Carl Dahlman, Knowledge and Development: A Cross-Section
Approach, World Bank Policy Research Working Paper No. 3366, November 2004
Claessens, Stijn, and Luc Laeven, Financial Development, Property Rights, and Growth, The
World Bank, Policy Research Working Paper Series 2924, 2002
Denison, Edward F., The Sources of Economic Growth in the United States and the Alternatives
Before Us, Committee for Economic Development, Supplementary Paper Number 13, 1962
Diwan, Ishac, and Dani Rodrik, Patents, Appropriate Technology and North-South Trade,
Journal of International Economics, Vol. 29, No. 1, 1991
EFPIA, Counterfeit Medicines, www.efpia.org/2_indust/counterfeitdrugs.pdf. (August 31,
2005)
Engen, Eric, and Kevin Hassett, Does the U.S. Corporate Tax Have a Future? Tax Notes, 30th
Anniversary Issue, 2002
Falvey, Rod, Neil Foster, and David Greenway, Intellectual Property Rights and Economic
Growth, Research Paper 2004/12, University of Nottingham, 2004
Fink, Carsten, and Carlos A. Primo Braga, How Stronger Protection of Intellectual Property
Rights Affects International Trade Flows, The World Bank, Policy Research Working Paper
Series 2051, 1999.
German Pharma Health Fund, Counterfeit Medicines - An Unscrupulous Business,
www.gphf.org/web_en/projekte/minilab/hintergrund_arzneimittelfaelschungen.ht. August 31,
2005
Gould, D. M. and William C. Gruben, The Role of Intellectual Property Rights in Economic
Growth, Journal of Development Economics, Vol. 48, No. 2, 1996
Group of Friends of Development, Proposal to Establish a Development Agenda for the World
Intellectual Property Organization (WIPO): An Elaboration of Issues Raised In Document

22

Wo/Ga/31/11, Submission to the World Intellectual Property Organization, April 6, 2005,

www.ipjustice.org/WIPO/elaborationDA.html (September 5, 2005)
Grubert, Harry, Intangible Income, Intercompany Transactions, Income Shifting, and the Choice
of Location, National Tax Journal, Vol. 56, No. 1, Part 2, March 2003
Griliches, Zvi, Market Value, R&D and Patents, Economics Letters, Vol. 7, 1981
IFPI, The Recording Industry Commercial Piracy Report 2005, June 2005, www.ifpi.org/sitecontent/antipiracy/piracy-report-current.html. (September 7, 2005)
Investors Business Daily, Sink The Web Pirates, October 9, 1998
Kanwar, Sunil, and Robert Evenson, Does Intellectual Property Protection Spur technological
Change? Yale University, Economic Growth Center Discussion Paper No. 831, June 2001
Klenow, Peter J., and Andres Rodriguez-Clare, Externalities and Growth, National Bureau of
Economic Research Working Paper No.11009, December 2004
Lanjouw, Jean O., and Iain Cockburn, Do Patents Matter?: Empirical Evidence after GATT,
National Bureau of Economic Research Working Paper No. 7495, January 2000.
Lederman, Daniel and William F. Maloney, Research and Development (R&D) and
Development, The World Bank, Policy Research Working Paper Series 3024, 2003
Lee, Jeong-Yeon, and Edwin Mansfield, Intellectual Property Protection and U.S. Foreign Direct
Investment, Review of Economics and Statistics, Vol. 78, 1996
Lev, Baruch and Theodore Sougiannis, The Capitalization, Amortization and Value-Relevance
of R&D,Journal of Accounting and Economics, Volume 21, 1996
Mansfield, Edwin, Patents and Innovation: An Empirical Study, Management Science, Vol. 32,
No. 1, 1986
, Intellectual Property Protection, Foreign Direct Investment and Technology Transfer,
International Finance Corporation, Discussion Paper 19, 1994
Maskus, Keith, The International Regulation of Intellectual Property, Weltwirtschftliches Archiv,
1994
, Intellectual Property Rights and Foreign Direct Investment, Center for International
Economic Studies, University of Adelaide, CIES Policy Discussion Paper 0022, May 2000
Maskus, Keith, and Mohan Penubarti, How Trade-Related Are Intellectual Property Rights?
Journal of International Economics, Vol. 39, 1995
McDonald, Joe, U.S. Official: Clinton Visit Adding Urgency To Trade Talks, Associated Press,
April 14, 1998
Megna, Pamela, and Marck Klock, The Impact of Intangible Capital on Tobin's q in the
Semiconductor Industry, American Economic Review, Vol. 83, No. 2, May 1993

23

Moser, Petra How Do Patent Laws Influence Innovation? Evidence from Nineteen-Century
World Fairs, National Bureau of Economic Research Working Paper No. 9909, August 2003
Nakamura, Leonard Intangibles: what put the new in the new economy?, Federal Reserve Bank
of Philadelphia, Business Review, July 1999
NDC Health, 2005 Pharma Insight, www.ndchealth.com/ (September 4, 2005)
Organisation for Economic Co-operation and Development, The Economic Impact of
Counterfeiting, 1998, www.oecd.org/dataoecd/11/11/2090589.pdf. (August 31, 2005)
OGrady, Mary, Brazil Mulls Drug Patent Theft as an AIDS Antidote, Wall Street Journal,
June 24, 2005
Olesen, Alexa, U.S. Officials: China Promises To Prosecute More Pirates, Ease Software
Rules, Associated Press, July 11, 2005
Power, Geoff Pharmaceutical Counterfeiting, International Criminal Police Review, No. 476477, 1999
Reuters, Brazil health minister to break Abbott AIDS drug patent, June 24, 2005
Romer, Paul Economic Growth in the Fortune Encyclopedia of Economics, David R.
Henderson, ed., Warner Books, 1993.
Samuelson, Robert J., Punishment For Piracy, Washington Post, May 22, 1996
Scheer, Adam, Pharmaceutical Counterfeiting, Tampering and Diversion, American Bank Note
Holographics Inc., December 2002, www.abnh.com/security/Pharm_WhitePaper_WEBSITE.pdf
(August 31, 2005)
Siwek, Stephen Copyright Industries in the U.S. Economy, The 2004 Report, Economists
Incorporated, October 2004, www.iipa.com/pdf/2004_SIWEK_FULL.pdf. (August 31, 2005)
Smarzynska, B. K., Composition of Foreign Direct Investment and Protection of Intellectual
Property Rights: Evidence from Transition Economies, The World Bank, Policy Research
Working Paper No. 2786, 2002
Smith, Pamela J. Are Weak Patent Rights a Barrier to U.S. Exports? Journal of International
Economics, Vol. 48, No. 1, 1999
Solow, Robert M., A Contribution to the Theory of Economic Growth, Quarterly Journal of
Economics, Vol. 70, 1956
, Technological Change and the Aggregate Production Function, Review of Economics
and Statistics, Vol. 39, No. 3, 1957
Taylor, M. Scott, Trips, Trade and Growth, International Economic Review, Vol. 35, 2004
Thompson, M.A., and F. W. Rushing, An Empirical Analysis of the Impact of Patent Protection
on Economic Growth, Journal of Economic Development, Vol. 21, 1996

24

United Nations, Brazil May Face Trade Sanctions If IP Negotiations Fail, Daily International
Pharma Alert, May 25, 2005, www.un.org (September 5, 2005)
U.S. Department of Commerce. Bureau of Economic Analysis, Table 2.1, Current-Cost Net
Stock of Private Fixed Assets, Equipment and Software, and Structure by Type, 1987-2003,
Fixed Assets, March 2005, www.bea.gov (September 6, 2005)
U.S. Department of Commerce. Bureau of Economic Analysis, Value Added by Industry in
Current Dollars as a Percentage of Gross Domestic Product, Annual Industry Accounts, April
2005, www.bea.gov (September 4, 2005)
U.S. Department of Commerce, U.S. Trade Representative, U.S. Expands Outreach in Campaign
To
STOP!
Trade
In
Fakes,
Press
Release,
June
6,
2005,
www.ustr.gov/Document_Library/Press_Releases/2005/June/US_Exps_Outreach_in_
Campaign_to_STOP!Trade_in_Fakes.html. (September 5, 2005)
U.S. Department of Commerce, U.S. Trade Representative, 2001 Special 301 Report, 2001
, 2002 Special 301 Report, April 2002,
www.ustr.gov/Document_Library/Reports_Publications/Section_Index.html (September 5, 2005)
, 2003 Special 301 Report, May 2003,
www.ustr.gov/Document_Library/Reports_Publications/Section_Index.html. (September 5, 2005)
, 2004 Special 301 Report, May 2004,
www.ustr.gov/Document_Library/Reports_Publications/Section_Index.html (September 5, 2005)
, 2005 Special 301 Report, April 2005,
www.ustr.gov/Document_Library/Reports_Publications/Section_Index.html (September 5, 2005)
Vishwasrao, Sharmila, Intellectual Property Rights and the Mode of Technology Transfer,
Journal of Development Economics, Vol. 44, No. 2, 1994
World Bank, World Development Indicators, Washington, DC: World Bank, 2005
World Bank, Total GDP 2004, www.worldbank.org/data/databytopic/GDP.pdf (September 6,
2005)
Xinhua General News Service, US To Determine If Quotas Should Be Reimposed On Chinas
Textile Products, April 4, 2005

25

About the Authors

Robert J. Shapiro is the co-founder and chairman of Sonecon, LLC, a private firm that
advises U.S. and foreign businesses, governments and non-profit organizations on market
conditions and economic policy. Dr. Shapiro has advised, among others, U.S. President
Bill Clinton and British Prime Minister Tony Blair; private firms such as MCI, Inc., New
York Life Insurance Co., SLM Corporation, Nordstjernan of Sweden, and Fujitsu of
Japan; and non-profit organizations including the American Public Transportation
Association, the U.S. Chamber of Commerce, and PhrMA. He is also Senior Fellow of
the Progressive Policy Institute, Economic Counselor to the Conference Board, and
director of the Ax:son-Johnson Foundation in Sweden, the Center for International
Political Economy in New York, and USA for Innovation in Washington, D.C. From
1997 to 2001, Dr. Shapiro was U.S. Under Secretary of Commerce for Economic Affairs.
In that position, he directed economic policy for the Commerce Department and oversaw
the Nations major statistical agencies, including the Census Bureau while it carried out
the 2000 decennial census. Prior to that appointment, he was co-founder and Vice
President of the Progressive Policy Institute and the Progressive Foundation. He also was
principal economic advisor in Governor Bill Clintons 1991-1992 presidential campaign
and senior economic advisor to Vice President Albert Gore in his 2000 presidential
campaign. Dr. Shapiro also served as Legislative Director for Senator Daniel P.
Moynihan, Associate Editor of U.S. News & World Report, and economic columnist for
Slate. He has been a Fellow of Harvard University, the Brookings Institution, and the
National Bureau of Economic Research. He holds a Ph.D. from Harvard University, a
M.Sc. from London School of Economics, and an A.B. from the University of Chicago.
Kevin A. Hassett is Director of Economic Policy Studies and Resident Scholar at the
American Enterprise Institute. He is also a weekly columnist for Bloomberg. Before
joining AEI, Dr. Hassett was a senior economist at the Board of Governors of the Federal
Reserve System and an associate professor of economics and finance at the Graduate
School of Business of Columbia University. He was an economic adviser to the George
W. Bush campaign in the 2004 presidential election and was the chief economic advisor
to John McCain during the 2000 primaries. He has also served as a policy consultant to
the U.S. Department of the Treasury during both the former Bush and Clinton
administrations. He holds a B.A. from Swarthmore College and a Ph.D. from the
University of Pennsylvania. Dr. Hassett is a member of the Joint Committee on
Taxation's Blue Ribbon Dynamic Scoring Advisory Panel and its Estimating Review
Panel. He is the author, coauthor or editor of six books on economics and economic
policy, including the recent AEI book on tax reform, Toward Fundamental Tax Reform.
He has published scholarly articles in the American Economic Review, the Economic
Journal, the Quarterly Journal of Economics, the Review of Economics and Statistics, the
Journal of Public Economics, and many other professional journals. His popular writings
have been published in the Wall Street Journal, the Atlantic Monthly, USA Today, the
Washington Post, and numerous other outlets. His economic commentaries are regularly
aired on radio and television including recent appearances on the Today Show, the CBS
Morning Show, Newshour with Jim Lehrer, Hardball, Moneyline and Power Lunch.

26