Progress Snapshot 1.22, December 2005
By James V. DeLong *
My role here today is to discuss the importance of intellectual property for the development of information technology industries. I have four points, which I will state at the outset. Then I will elaborate on each.
Point one is that a number of recent studies of the importance of IP to the U.S. economy support the conclusion that it is indeed a crucial factor.
Point two is a discussion of why this should be so.
Point three is a consideration whether the same factors apply to less developed nations, with, obviously, particular attention to Vietnam.
Point four consists of a few comments on the issue of open source software.
The connection between intellectual property protection and the development of the Information Technology sector, and the relationship between IP protection and overall economic growth, is a topic of immense interest, both in the U.S. and around the world. Recently, several studies of this issue have been conducted. While these have, for the most part, been sponsored by interested industries, they have been conducted by reputable economists who have their reputations at stake, and who have strong incentives not to fudge their conclusions. In consequence, they are, I believe, reliable.
The major studies are:
Stephen E. Siwek (Economists Inc.), Engines of Growth: Economic Contributions of the U.S. Intellectual Property Industries (Nov. 2005)
Robert J. Shapiro & Kevin Hassett, The Economic Value of Intellectual Property ( USA for Innovation) (Oct. 2005)
International Chamber of Commerce, Intellectual Property: Source of Innovation, Creativity, Growth and Progress (Aug. 2005) http://www.iccwbo.org/uploadedfiles/
The OECD, Intellectual Property as an Economic Asset: Key Issues in Valuation and Exploitation (Background and Issues) (Report of the European Patent Office) (2005).
All these studies reach a similar conclusion: that IP is crucial to the growth of the U.S. economy, and particularly its export segments. For example, the Executive Summary of Engines of Growth concludes that the U.S. IP industries are:
- the most important growth drivers in the current U.S. economy, contributing nearly 40% of the growth achieved by all U.S. private industry and nearly 60% of the growth of U.S. exportable high-value-add products and services;
- crucial to the future growth of the U.S. economy; gross domestic product (GDP) 10-year growth estimates would be approximately 30% lower than current predictions without the contributions of these industries;
- essential contributors to U.S. GDP, responsible for 1/5 of the total U.S. private industry's contribution to GDP and 2/5 of the contribution of U.S. exportable high-value-add products and services to GDP;
- among the largest and highest-paying employers in the country, representing 18 million workers who earn on average 40% more than all U.S. workers;
- increasingly contributing to the U.S. economy-in 2003 the "core" copyright industries contributed $33 billion in reported net export revenues, and the patent-dependent aerospace industry reported 2004 net export revenues of $32 billion; these two sectors are the largest positive contributors to the U.S. balance of trade.
The reasons for the connection between intellectual property protection and economic growth are, of course, complicated, but I will emphasis two main lines of analysis.
Cooperation. The U.S. is often characterized as a very competitive, individualistic society. There is considerable truth in this, but there is another truth as well, which is that it is also a deeply cooperative society. The individualism is exercised within a framework that encourages cooperation, and makes it possible.
The principal institutional mechanisms used to achieve this cooperation, and to blend cooperative and individual efforts into a smoothly functioning whole, are markets and property rights. The United States has found that the best way to give adequate play to both types of economic and social need is to give individuals, including those collections of individuals called "companies," property rights in their creations and then to allow them to bargain freely with others over the use of these.
The term "creations" is chosen because it is broad, encompassing both the tangible and the intangible. It covers the cables in the ground used to transmit signals, the content - such as music or movies - transmitted through those cables, and the software that makes it all happen.
It cannot be stated too often that property rights and markets are not antithetical to "cooperation." Quite the opposite; they are the precise mechanisms by which advanced societies achieve cooperation. Nothing else works with comparable efficiency and justice - not voluntarism, and certainly not command-and-control.
The mechanisms of markets and property rights are immensely useful tools for cooperative behavior because they are flexible - they allow individuals to work out by contract whatever is needed to fit a particular situation. They are also dynamic, in that they can be adjusted continually over time to meet changing needs. And, it should be noted, because the mechanisms are flexible and dynamic, arrangements can often be kept simple. The parties do not need to anticipate and provide for every possible contingency in advance, which would be very inefficient.
The U.S. West of the 19 th century is often cited as an example of an individualistic society. But in fact it was quite cooperative, and I recommend a book by Terry Anderson and Peter Hill called The Not So Wild, Wild West: Property Rights on the Frontier (PERC 2004), which tells how miners and ranchers developed property rights in land, water, and minerals appropriate to the circumstances of the American West during that period.
The IT industry is particularly dependent on cooperation because it is quite fragmented, with many players making many different products. A century ago, Henry Ford could set up an assembly line where ore came in one end and automobiles left at the other. But this is not really an efficient form of organization because it means that individual functions cannot be structured at the optimal size. As the U.S. economy has become bigger, no one in any industry tries to do everything. This is especially true in IT, where the playing field is vast and the gains from specialization great. But this means that there must be good boundaries, which we call "definitions of property."
So, not so paradoxically, the more an industry depends on cooperation, the more important it is that coordination be effected by property rights, markets, and contracts.
Financing. Property rights are crucial to financing. A large percentage - well over half -- of the value of companies now is attributable to their intellectual or intangible property rather than to their concrete assets. Bankers are indeed hard people; before they provide money, they want to see some security that they will get it back. In the old days, the borrower could put up his factory or his inventory of goods as security. But when the output is intangible, such as software, it cannot serve that purpose unless there is a legal institution of property rights to make the inventory into the equivalent of a concrete asset.
One extra point should be made. The rationales of cooperation and financing are very utilitarian - we adopt property rights and markets because they work. They make us all richer. But these institutions also have a moral basis. We believe that people are morally entitled to the fruits of their labors, whether those fruits take the form of a crop or a song or a well-shaped piece of furniture or a software program. And we extend this moral imperative to the groups of individuals joined together in companies.
So efficiency and fairness are happily wed.
Applicability to the Less-Developed World
The third point is the applicability of this model and these institutions to less industrialized nations. I believe it is fully applicable, and that its adoption is crucial to the future of these nations.
Let me start with a candid observation. If this were a one-way street, a situation in which Vietnam paid the western nations for IP and got nothing back, you would not do it. Why would you?
The U.S. in the 19 th century did not pay for the works of British authors, such as Dickens. Eventually, though, American authors objected, because in retaliation the Brits did not pay for Mark Twain, either. Vietnam is a country that prides itself on the quality of its human resources. It has much to contribute. It will not be in a situation of taking without returning, and it will want its contributions respected.
In addition, though, even immediately, there is no such thing as a one-way street. The IT world is a densely-packed collection of cooperating entities. By respecting IP rights, a nation automatically becomes part of that system, and this has immense advantages.
Joining means that a nation can specialize, filling particular niches that provide opportunity. Vietnam did not decide to produce all kinds of agricultural products, for example; it focused on the niche of becoming a coffee producer. And on another niche of duck ponds, I am informed.
Joining the system also provides encouragement to a nation's own entrepreneurs, who are indeed a tremendous potential resource. It would also strengthen ties with overseas Vietnamese, and, due to the ironies and tragedies of our shared history, there is a large Vietnamese population in the U.S. , a population held in great respect by other American peoples, I might add.
Finally, joining the system is crucial to obtaining financing, for the reasons noted. In the 19 th century, the U.S. may not have respected copyrights, but it always had a patent system and respected patents, which is not surprising, because the nation depended on British capital to build its factories and railroads. The U.S. may not have cared about Dickens, but it cared about the British financiers.
Open Source Software
Finally, a word on how open source software fits into this system of IP and markets.
I have nothing against open source as a mode of production. But, to my mind, it is useful primarily in two contexts -
- research, where academics are working fast on new ideas; and
- commodities, where groups of hardware vendors want to develop common platforms and the ideas involved are not themselves very valuable.
In the computer field, users must always obtain three sets of inputs: hardware, software, services. All three must be paid for somehow. Any company that specializes in one or two of these would like to make any segment in which it is not active into a low-priced commodity so that it can collect the buyers' total budgets. Thus IBM, which sees itself as particularly strong in hardware and services, would like to make software into a commodity. Microsoft, strong in software and services, would like to see hardware become a commodity.
In considering directions for Vietnam, you should take into account where you can be strong in this system. If you cannot find a good niche in hardware or internationally-sold services, but can find one in software, then it is hard to see why a preference for open source would be to your advantage. Contrary to myth, open source software is not built by armies of volunteers who work at other jobs in their spare time. It is built by professional programmers who are paid well by IBM and Sun and HP and Red Hat. If you do not have a stream of income from hardware or services, then it is difficult to see why you would want to opt into this system, or how (except by direct government subsidy) you would finance the production of open source software.
* James V. DeLong is Senior Fellow and Director of the Center for the Study of Digital Property at The Progress & Freedom Foundation. This Progress Snapshot is based on his presentation during a Round Table discussion of Strategies for Building a Competitive Software Industry, sponsored by the Vietnamese Association of Information Processing (VAIP) and the Computing Technology Industry Association (CompTIA). The session was held in Ha Noi, Socialist Republic of Vietnam, on November 23, 2005.
About Author Paragraph.
Copyright X. Reprinted with Permission.