INTELLECTUAL PROPERTY RIGHTS, INNOVATION IN DEVELOPING COUNTRIES, AND COPYRIGHT TERM EXTENSION A DISSERTATION SUBMITTED TO THE GRADUATE DIVISION OF THE UNIVERSITY OF HAWAI'I IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS AUGUST 2004 By Xiaopeng Cheng Dissertation Committee Sumner La Croix, Chairperson Theresa Greaney Denise Konan James Moncur Kate Zhou To my mom and dad. 111 ACKNOWLEDGEMENTS This dissertation could not have been written without Dr. Sumner La Croix, who not only served as my supervisor, but also encouraged and challenged me throughout the writing ofthis dissertation. I am also greatly indebted to my dissertation committee members, Dr. Theresa Greaney, Dr. Denise Konan, Dr. James Moncur and Dr. Kate Zhou fot their patience, time andinsightful comments through out this process. I thank them all. April 16, 2004 IV TABLE OF CONTENTS LIST OF FIGURES vii LIST OF TABLES vii Abstract viii Introduction x CHAPTER I: 1 INTELLECTUAL PROPERlY RIGHTS PROTECTION AND GLOBAL TECHNOLOGICAL CHANGE 1 Abstract 2 I. Introduction 3 II. Model. 6 III. Equilibrium and Comparative Statics 13 IV. Conclusion 22 Appendix I 24 Appendix II 24 Appendix 111 26 References 29 CHAPTER II: ~ 31 DYNAMIC COPYRIGHT PROTECTION AND TECHNOLOGICAL CHANGE 31 Abstract 32 I. Introduction 33 II. Literature Review 39 III. The Model 43 IV. Technological Change : 51 V. Conclusion 61 v Appendix I 65 Appendix II 66 Appendix III ~ u : ; ••••••;.; 67 Appendix IV ; 70 References 73 CHAPTER III: 74 AN ANALYSIS OF THE SONNY BONO COPYRIGHT TERM EXTENSION ACT 74 Abstract 75 I. Introduction 76 II. A Discussion of CTEA and a BriefHistory of Copyright Term Extensions 76 III. A BriefDiscussion of U.S. Copyright Term Structure 82 IV. The Legal Battle 84 V. A Review of the Economic and Legal Literature on Copyright Terms 89 VI. Proposed Rationales For Term Extension :: 91 A. Longer life Expectancy and Increased Concern for the Wellbeing ofHeirs 91 B. Harmonization of Copyright Protection with the European Union 96 C. Balance of Trade 100 D. Technological Change 102 VII. Retroactivity and the Welfare Impact of CTEA 107 VIII. Possibility ofFurther U.S. Extension and Globally Harmoriized Copyright Term 115 IX. Conclusion 118 Appendix I 125 References 128 VI LIST OF FIGURES FIGURE 1 COMPARATIVE STATICS WHEN IPR STRENGTHENS 14 FIGURE 2 SADDLE PATH EQUILIBRIUM 15 FIGURE 3 VALUE OF IMITATION RATE WHEN LABOR IN THE NORTH IS GREATER THAN THAT OF THE SOUTH 17 FIGURE 4 VALUE OF IMITATION RATE WHEN LABOR IN THE NORTH IS LESS THAN THAT OF THE SOUTH 18 FIGURE 5 TECHNOLOGICAL CHANGE IN DIFFERENT REGIONS 21 FIGURE 6 EQUILIBRIA AND STABLE BRANCH 49 FIGURE 7 CHANGE IN WELFARE PER WORK 53 FIGURE 8 TECHNOLOGICAL SHOCK 56 FIGURE 9 CONTINUOUS TECHNOLOGICAL SHOCK 58 FIGURE 10 EQUILIBRIA WHEN WELFARE PER WORK RESPONSIVE TO COPYRIGHT 67 FIGURE 11 PER CAPITA NUMBER OF LITERARY WORKS IN THE U.S. IN 20TH CENTURy 96 FIGURE 12 GROWTH RATE OF PUBLIC DOMAIN 110 FIGURE 13 COSTS OF COPYRIGHT TERM EXTENSION4 114 LIST OF TABLES TABLE 1 TECHNOLOGICAL CHANGE IN RESPONSE TO IPRS 19 TABLE 2 COPYRIGHT HARMONIZATION IN CATEGORIES 120 TABLE 3 ESTIMATED LIFE EXPECTANCY 123 Vll Abstract This thesis explores the interrelationship between the intellectual property rights (IPRs) and technological changes. In unraveling the causality, it was found that the relationship between IPRs and technological changes is largely a mutually fostering one. On one hand, the IPRs help promote innovations. On the otherhand,IPRs are institutions developed endogenously in response to the rapidtechridlogical changes. This interrelationship is manifest in copyrights and patents - industrialists argue that patents lead to more innovations by locking in competitive advantages for companies that take technological lead, while copyright becomes longer and stronger when new technologies facilitating faster distribution become easier to access. Each ofthese relationships is relegated to one chapter for detailed examination. In the first chapter, I extended Helpman (1993) model by incorporating the innovations in developing countries. As a result, I found both positive and negative effects depending on the relative population size and current rate of innovation, as opposed to Helpman's finding ofnegative effect only. The second chapter explores the next aspect ofthe relationship. A concept ofcost of expression advanced by Landes and Posner in (1989) is one ofthe pillars ofthe model on copyright. I find that an optimal path over time should be a stronger copyright protection when new technologies are introduced followed by a relaxed protection after technologies stop to advance. Additionally, when experiencing the same technological shock, countries with lower works ofauthorship to begin with need to strengthen the copyright protection to a greater extension compared with the countries having more works ofauthorship. Vlll In Chapter Three, I conduct a case study on the US Sonny Bono Copyright Term Extension Act (CTEA) passed in 1998. In thisstudy, the previously mentioned twoissuedare again addressed - the affect of copyrightterm extension on future creations, and the justification ofextension due totechnological changes. In this chapter, no adequate economic rationale for the extension was found. Although some of the factors are difficult to measure, it seems that the costs outweigh the benefits ofthe copyright term extension. IX Introduction The intellectual property laws evolved against the backdrop ofrapid industrial revolution and technological changes. The patent law protects new and useful processes, machines, manufacture, or composition ofmatters, or any new and useful improvement thereof. Copyright laws grew out ofde 2 facto monopolies which developed along with the establishment ofpresses • The common law of trademark arose originally to prevent manufacturers from trying to pass offtheir goods as someone else's; The grant ofa right to a certain mark involved recognition ofthe need to protect the good will which a 3 manufacturer may develop in his customers . All these three major categories of intellectual properties retain an element ofshielding the innovators or producers from unpermitted use or sales oftheir products, ideas or expressions, as means to foster further development or manufacture ofthese. Intellectual property laws were devised in the spirit of incentivising technology developers to endeavor into their undertakings to come up with more works of creation benefiting the society. What is intriguing to me here is the interaction between the intellectual property rights (IPRs) and technological changes. On one hand, it seems the IPRs help promote innovations. On the other hand, IPRs are institutions that themselves are endogenously developed in response to the rapid technological changes, in past few centuries in particular. This shows an interesting mutually fostering chicken~and-egg relationship between technological changes and IPRs. The modem IPR sy~tems came into effect only a few centuries ago with the industrial revolution and the mercantilism being the underlying driving forces. Once the IPRs are in force, they did playa vital role in helping I U.S. Patent Act, Sec. 101 2 Koepsell, David R. The Ontology ofCyberspace: Philosophy, Law, and the Future ofIntellectual Property. Peru, Illinois: Open Court Publishing, 2000. 3 Ibid. x producers to recover investments and undertake further innovations. This interrelationship is manifest in copyrights and patents - industrialists argue that patents lead to more innovations by locking in competitive advantages for companies that take technological lead, while copyright becomes longer and stronger when new technologies facilitating faster distribution ofcultural and artistic works, such as press, photocopiers,internet, etc. become easier to access. It should be noted that a sophisticated approach should be employed to treat both technology and IPRs as endogenous variables. While recognizing this important issue ofendogeneity, I choose to decompose this problem and separate it into two issues to simplify the analysis. One is an investigation ofthe impact of IPRs - as a planner's choice variable - on technological changes. The other is to regard technological changes as exogenous and examine its effect on optimal IPRs.. Chapter One follows the first line. It is a direct extension ofHelpman (1993) - one ofthe seminal studies on IPRs. Helpman (1993) found negative impact ofIPRs on innovation. Counterintuitive as it seems, the reason for this is that the innovating sector in the North - or developed countries - has lower costs due to stronger IPRs. However, the.profit rate decreases more than the decrease ofeffective cost due to the increased production share. This leads to lower rate of innovation in the long-run. In the first chapter, I explicitly model the innovation and imitation activities at the same time in the South - or developing countries - to better reflect the reality, and meanwhile expect that the negative impact ofIPRs in Helpman (1993) may be changed. As a result, I do find conditionally positive impact on world technological changes. In Chapter Two, contrasting Chapter One, I take IPRs, - copyright in this case - as endogenous. I am interested in exploring the pattern ofchange ofcopyright when technologies - especially those that Xl facilitate low-cost dissemination - are being developed. r find that an optimalpath overtime should be a stronger copyright protection when new technologies are introduced followed by a relaxed