A Dynamic Model for Investigating the Relationship between Intellectual Property Rights and Economic Complexity: A Study of the New Knowledge-Based Innovation Indicator

Innovation is at the center of attention in economic growth theories. It can largely determine the production capacity of economies. Although the effects of factors such as human capital accumulation, financial development, and ease of technology transferring in encouraging innovators are straightforward, the role of intellectual property rights is still debatable. In this regard, economists such as Schumpeter and Helpman have different theories. Schumpeter's theory of creative destruction suggests that with the protection of intellectual property rights, an innovator gains monopolistic power by presenting new products to the market. This monopoly motivates other people to make more advanced and higher-quality innovations in the process of "creative destruction". But Helpman believes that when imitation is the only channel for product transfer from developed countries to less developed countries, strong intellectual property rights in less developed countries will have a negative impact on innovation.
The Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement states that, for the purposes of the agreement, the term “intellectual property” refers to all categories of intellectual property namely, copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout-designs (topographies) of integrated circuits and undisclosed information. According to the definition of the Organization for Economic Co-operation and Development (OECD), “innovation” is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations. In this study, the economic complexity index was used to measure innovation. The economic complexity index shows the ability of countries to produce complex goods through providing appropriate structures for individual interaction in order to integrate diffused and diverse knowledge and utilize it. This indicator is determined by the diversity of products produced by each country as well as the number of countries that can produce that product (ubiquity).
In this way, according to Schumpeter’s and Helpman's different views about the impact of intellectual property rights on innovation, this paper try to answer these questions: Is there any relationship between protecting intellectual property rights and innovation? If so, how is this relationship? This paper examines the factors affecting innovation emphasizing intellectual property rights over the period of 1976-2010. Since, according to theoretical foundations, the relationship between innovation and intellectual property rights can be different in countries with high and low per capita income, in this paper, countries where research variables data was available for them are divided into two groups: upper-middle per capita income and lower-middle per capita income countries. Therefore, the present study has two main First, the study of the factors affecting innovation, and secondly, the impact of intellectual property rights on innovation in countries with upper and lower-middle per capita income.
After collecting data about the variables of the research, for the analysis of data and examining the effect of independent variables on the dependent variable, innovation, the generalized method of moment (GMM) has been used in the form of dynamic panel data model. One of the advantages of dynamic panel data is that it allows a better understanding of dynamic adjustment for the researcher. These dynamic relationships are distinguished from other panel data models by using the dependent variable as one of the explanatory variables.
Research variables are including: innovation (ECI), intellectual property rights (IPR), foreign direct investment (FDI), financial development (FD), human capital (HC), trade openness (TO), and population (POP). The results of the model estimation in upper-middle per capita income countries show that there is a positive and significant relationship between intellectual property rights and innovation. This confirms Schumpeter's creative destruction theory. In this way, by protecting intellectual property rights, the innovator has acquired monopoly rights and others have no right to imitate his/her innovation. This will increase the incentive of others to innovate more and more, and thus innovation will increase in the process of creative destruction. But the results of the model estimation in the group of countries with lower-middle per capita income indicate that protection of intellectual property rights have not any significant effect on innovation in these countries. The production of complex goods, on the one hand, requires the cheap access of innovators to previous technologies and, on the other hand, requires material incentives and economic benefits in the production of these goods. So, the increase in the security of intellectual property rights, on the one hand, makes it difficult for innovators in lower-middle per capita income countries in access to previous technologies but on the other hand, it raises material incentives for producing sophisticated products. Since these two effects are in the opposite direction, in the studied countries none of the two effects have overcome the other, and thus, it is observed that the consolidation of intellectual property rights does not have a significant effect on innovation.
Also, the results of the econometric model show that in upper-middle per capita income countries, foreign direct investment has a negative and significant effect on innovation and variables of financial development, population and trade openness have a positive and significant effect on innovation. Human capital also does not have a significant effect on innovation in these countries. In lower-middle per capita income countries, foreign direct investment has a negative and significant effect on innovation and human capital has a positive and significant effect on innovation. Other research variables have no meaningful effect on innovation. In this paper, the relationship between intellectual property rights and innovation has been investigated in two groups of countries with upper-middle per capita income and lower-middle per capita income for the period 1976-2010, which is divided into seven five-year periods, in format of a dynamic econometric model and by using the generalized method of moment. Unlike recent studies, in this paper, the representative variable for innovation is the economic complexity index, which in some ways is preferred to the indicators that have been used for innovation so far.
The obtained results show that the protection of intellectual property rights affects innovation only in upper-middle per capita income countries. This result suggests that innovation simultaneously is the result of two processes: invention and imitation. Although these two processes exist in both groups of countries, the role of imitation is bigger in lower-middle per capita income countries and the role of the invention is more pronounced in upper-middle per capita income countries. The imitation process suffers from guaranteeing intellectual property rights and the invention process benefits from the assurance of intellectual property rights. For this reason, the positive effect of increasing the protection of intellectual property rights on innovation is lower in countries with lower-middle per capita income. Therefore, Iran, as a low per capita income country, should support a degree of intellectual property rights that does not stop the imitation process.
The foreign direct investment variable in both groups of countries has a negative effect on innovation. It can be explained that a significant part of foreign direct investment is allocated to the production of primary goods and services. The service sector is not considered in the economic complexity index, and the production of primary goods also reduces the economic complexity. Human capital has a positive effect on innovation in the group of countries with lower-middle per capita income; and in upper-middle per capita income countries, there is no significant effect on innovation. Variables of financial development, population, and trade openness have a positive effect on innovation only in countries with upper-middle per capita income.