Innovation Policy Apr 1, 2009

The Glob­al Idea” Market

Inno­va­tion and inter­na­tion­al trade in technology

Based on the research of

Daniel Spulber

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.

Inte­grat­ing Innovation

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.

Fur­ther read­ing
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.

Featured Faculty

Daniel Spulber

Elinor Hobbs Professor of International Business, Professor of Management Strategy, Professor of Law (Courtesy)

About the Writer

Katharine Gammon is a science writer based in Santa Monica, CA.

About the Research

Spulber, Daniel F. (2008). “Innovation and International Trade in Technology.” Journal of Economic Theory, 138(1): 1-20.

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