Elinor Hobbs Professor of International Business, Professor of Strategy; Professor of Law, Northwestern University School of Law (Courtesy)
When we imagine international trade, we conjure up images of supertankers and massive container ships, or maybe ships laden with exotic cargoes of rum, coffee, and spices. But international trade today involves much more than crude oil and bananas. We live in a global marketplace of ideas, when trademarks, patents, and research are moving from Argentina to Tanzania at the speed of light. In the Internet age, people are trading ideas around the world.
These are the early rumblings of a tectonic shift in trade. Just as electronic commerce challenged bricks and mortar, so the trade in ideas challenges the traditional multinational corporation. A company with a new technology need not build a factory halfway around the world, with all the costs and risks that entails. The innovative company can license the technology to a local partner, transferring only the necessary ideas.
Will all countries benefit from the growing trade in ideas, or will some countries prosper at the expense of others? Since the days of Adam Smith and David Ricardo, economists have debated exactly how countries gain from international trade. More recently, Paul Krugman argued that countries benefit from trade because they can take advantage of economies of scale and that consumers benefit because they get more variety in their products. Krugman’s Nobel Prize-winning work in the scale-variety tradeoff sent ripples through the field of international trade economics. But there was always something missing from these theories of gains from trade: they centered only on trade in goods and services, like air-conditioning units from China, machine tools from America, or call centers in India.
Contrary to these analyses, the world of trade is not made up of goods and services exclusively. Daniel Spulber, Elinor Hobbs Distinguished Professor of International Business and professor of management and strategy at the Kellogg School of Management, has developed a new theory of the sources of gains from trade—based on the trading of ideas and innovations rather than products and services. International trade is growing with enormous speed, encompassing completely new entities. “Countries are literally trading patents, blueprints, copyrights, brands, and other ideas,” says Spulber. “These ideas are not necessarily embodied in goods or services—like IBM licensing its chip design and selling it to other countries.”
Patents and blueprints are joining cars and coffee in the great flow of global trade. Globalization means much more than trading goods; it means communicating and sharing cutting-edge ideas.Spulber created a model that examined markets for technology in three stages—the points involving consumers, producers, and inventors. In the model, two countries with identical consumers trade goods with each other. The consumers act as workers in the system, each representing a unit of labor. This labor, when combined with technology, churns out human capital. Technology boosts this human capital—for example, information technology increases workers’ knowledge and productivity. The model shows that without international trade in technology, the county’s entire human capital is equal to the population times the base productivity—but with trade in technology, that human capital is increased directly by the amount of technology. This trade then benefits producers, who provide opportunities for inventors in the countries. The model shows that as the best technology bubbles to the top, it is used by producers to create technology for consumers, who can in turn increase their own output.
This massive idea swap is essential to growth: a recent study found that outside of the five leading research economies (the United States, Japan, the United Kingdom, Germany, and France), all other countries in the Organisation for Economic Co-operation and Development (OECD) obtain over 90 percent of their productivity growth from ideas that originated abroad (Eaton and Kortum, 1996).
There are other non-obvious gains when trade in innovation occurs. As the body of innovative ideas gets larger with collaboration and trade, the quality of the best ideas is improved. “Everyone sees technology improve because you draw from a global pool of ideas,” says Spulber. These ideas are generated in more places than ever before—biotechnology innovation coming out of India, flat screen technology coming out of Korea, and computer designs coming out of China. Educational institutions also become more relevant as they can spread ideas around the world.
In addition, global trade in innovations increases the returns to inventors. Inventors profit by selling their innovations to the global market, which stimulates additional research. When a county has a larger market for ideas, in contrast to reliance only on domestic research, the incentives for research will be greater.
Technology trade also boosts each country’s income when innovations increase the productivity of human capital. When inventions such as computers, software, and industrial robots increase the productivity of human capital, it is as if a country’s labor force increases without changing the size of its population. Greater productivity increases the amount companies will pay their workers and increases a country’s total income.
Quality, efficiency, and capital aren’t everything to consumers, who also want variety. Spulber shows that gains in trade from innovation also increase the variety of products in global trade. People enjoy having many MP3 players to choose from, a reflection of the variety of fashions and cultural products traded internationally. When trade in innovations increases the productivity of human capital and people then earn greater incomes, their countries will import a larger variety of products.
Intellectual Property Rights
For these gains in trade to become realized, countries have to protect intellectual property. According to the OECD study, “stronger patent rights in developing countries have the potential not only to attract technology transfer but also to encourage foreigners to transfer new technologies” (Park and Lippoldt, 2008).
When intellectual property rights protect international technology transfer, companies make money directly by “renting” out their ideas to each other. Properly protected, the efforts of innovative inventors benefit their society as well as themselves. In order to keep earning rent on technologies, companies have to find ways to stop others from accessing their technology. Trademarks, patents, and copyrights are all systems of keeping the rent going to the company, and they work well in most technological endeavors.
In one OECD study, there were 32,000 families of patents each protecting a single innovation filed at the European Patent Office, the U.S. Patent and Trademark Office, and the Japanese Patent Office (OECD, 1999). A number of international treaties and the World Trade Organization’s agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) extend protections to international technology transfers, including copyrights, trademarks, geographical indications, industrial designs, patents, layout designs of integrated circuits, and undisclosed information.
Spulber’s research shows that all countries experience benefits from the global trade in ideas. Countries obtain gains from international trade in technology as the best that science and technology has to offer is spread more evenly around the world. Patents and blueprints are joining cars and coffee in the great flow of global trade. Globalization means much more than trading goods; it means communicating and sharing cutting-edge ideas.
Eaton, J. and S. Kortum (1996) “Trade in ideas: patenting and productivity in the OECD.” Journal of International Economics, 40: 251-278.
Park, W. G. and D. C. Lippoldt (2008). “Technology Transfer and the Economic Implications of the Strengthening of Intellectual Property Rights in Developing Countries.” OECD Trade Policy Working Papers, No. 62, OECD Publishing.
OECD (1999) Basic Science and Technology Statistics.
Katharine Gammon is a science writer based in Santa Monica, CA.
Spulber, Daniel F. (2008). “Innovation and International Trade in Technology.” Journal of Economic Theory, 138(1): 1-20.
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