Co-Authors:  Raeyoon Kang; Donghyun Park

This post draws on a paper presented at the Allied Social Science Association Annual Meeting in a session sponsored by the American Committee on Asian Economic Studies on "Economics of Innovation in Asia", 3 January 2021, video here.  

The study of intellectual property rights (IPRs) in economic development has long been framed in simple terms of the strength of the IPR regime. At low levels of economic development, the thinking goes, countries benefit from weak IPR regimes that limit impediments to absorbing technologies from outside so as to enable diffusion. Over time, as countries develop economically and build capacity to create new technologies from within, stronger IPR regimes are needed to incentize innovation.

We propose a more nuanced framework for considering the evolution of IPR regimes in the course of economic development based on four distinct types of IPR protection. As outlined in Table 1, these are: standard patent; design patent; trademark; and petite patent or utility model.

 Table 1. Types of Intellectual Property Protection

Petite patents, or utility models, offer protection for minor imitative and adaptive innovations that do not meet the crieteria for standard patents. For a country at an early stage of development, petite patents can serve as a vehicle to absorb new technologies and promote R&D capacity building.

Design patents pertain to innovations in the appearance or functionality of a product. Design protection is not so important at the early stage of development because growth relies mainly on low-wage mass production that incorporates existing designs. The importance of design innovation grows as an economy develops, especially with respect to international competitiveness as driven by product differentiation and qualitative features. In general, design intensive sectors tend to be more export oriented and less advertising intensive. Samsung Electronics, Korea's largest chaebol founded in 1969, emphasized design innovation to achieve its global success.

Trademarks protect innovations that involve tacit knowledge. Trademark protection tends to be more important in sectors that are oriented toward the domestic market and that are more advertising intensive but less R&D intensive. As an example, the Korean pharmaceutical sector has relied heavily on trademarks.

Standard patents require a high degree of inventivenss and become more important as a country's R&D capacity matures.

The Korean experience illustrates the evolvling nature of IPR protection patterns over time. Annual registration numbers by type of protection are shown in Figure 1 for the period 1971-2009, as recorded by the Korean Intellectual Property Office. 

Foundations for Korea's modern IPR system were laid in the 1960s. This period saw the advent of industrial planning that initially emphasized light industries such as apparel and shoemaking and by the 1970s turned attention toward heavy industries such as steel, oil refining, and ship building. Throughout the 1970s, annual registration of petite patents exceeded that of standard patents. Trademarks and design patents figured in at slightly higher levels. Innovative activity at this stage was modest in nature.

Ramping up of public investment in R&D and higher education in the 1980s paved the way for knowledge-driven growth. By the mid-1980s, Korean firms began to establish their own private research facilities in recognition of the limits of relying on technology licensing and embodied technological transfer. Public-private cooperation in high-tech research gave rise to a Korean presence in semiconductors, electronics, and automobiles. In accordance with changing needs, the IPR regime was enhanced. IPR registration picked up gradually in the 1980s, then climbed sharply in the 1990s with standard patents ultimately taking the foremost position. Under the supportive environment of a well-managed IPR regime, Korean firms such as Samsung, LG, and Hyundai became global leaders in technological and design innovation.

The 2000-aughts saw further transitioning of IPR institutions. In recognition of the diminishing role for minor incremental and adaptive innovation, the Korean government in 2006 adopted a more rigorous evaluation system for petite patents, and with this the registration numbers fell off sharply. The later drop in the registration of standard patents visible in the figure reflects a shift in preference by Korean firms to register with the US Patent and Trademark Office rather than registering domestically.

Our paper for the 2021 ASSA conference presents tests of two hypotheses regarding IPR protection in Korea as follows.

Hypothesis 1: At the sectoral level, higher design intensity is associated with greater export orientation.

Hypothesis 2: At the firm level, sales growth is more affected by both standard and design patents at a later stage of development.

We test Hypothesis 1 based on 22 sectors using annual data for 1971-2010. The dependent variable is a dichotomous measure of sectoral design intensity, as reflected by the number of design patents registered relative to sales, hence we apply probit estimation. The results confirm that higher design intensity is indeed associated with greater exporting. Korea's desire to achieve export competitiveness motivated an emphasis on investment in design innovation within the government's five-year planning framework, and IPR protection was important in supporting this goal. The strategy appears to have been effective.

We test Hypothesis 2 using annual firm data and distinguishing among three sub-periods taken as 1971-1986, 1987-1998, and 1999-2010. The dependent variable is sales growth with key explanatory variables given by the intensity relative to sales for each of standard and design patents registered. A system GMM regression technique was utilized. Based on the full sample of firms, both the standard and design patent variables are statistically significant for period 3 only. With the sample divided between high and low design intensity firms, the design patent variable becomes significant for period 2 as well.

The Korean experience suggests a road map for IPR policy. At an early stage of development, IPR protection should focus on petite patents to encourage incremental innovation and the building of R&D capacity. As an economy develops, export competitiveness can be fostered by encouraging design innovation with appropriate IPR protection. For domestically oriented sectors, trademark protection is more relevant. At an advanced stage of development and global integration, innovation at the technology frontier should be incentivized with a strong IPR regime that encompasses standard patents. Korean firms have become global powerhouses under the umbrella of IPR protection that evolved in just this way.

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Co-author Raeyoon Kang is a Research Fellow at the Institute of Economic Research at Seoul National University, Seoul, Korea.

Co-author Donghyun Park is a Principal Economist at the Asian Development Bank, Metro Manila, Philippines.