Economic Growth in a Digital Economy: The Role of Intellectual Property and Innovation

Setting appropriate policies for economic growth tops the agendas of most national leaders. From the European Union’s Digital Single Market to China’s most recent five-year plan, and various other such broad outlines, governments across the world are trying to enact public policy that spurs economic growth. But what is the role of innovation and of intellectual property (IP) in driving economic growth?  

Economists have long articulated the critical role of technological innovation in driving economic growth. Robert Solow’s neoclassical economic growth model clearly displayed that the primary driver of long-run economic growth is not the accumulation of labor or capital (although they play a role), but technological progress. While other inputs can only scale linearly, technological progress enables a multipliers effect on productivity of labor and capital. Most recently, Paul Romer was awarded a Nobel Prize in economics for articulating the mechanisms that enable innovation to drive economic growth. Most governments’ plans reflect the focus on innovation leading to technological leadership—not only for economic growth, but also for concerns related to national security and tech sovereignty.

What is less understood is the role of IP in driving innovation. From the early work of Kenneth Arrow to Romer’s recent writings on the drivers of innovation, the question of whether IP enables or hinders innovation has at best been unanswered, and at worst been ignored. In today’s knowledge economy, one led by the digital platform giants, this question is of critical importance and has immediate and actionable consequences for policymakers. A few decades ago, 80 percent of the market value of S&P 500 firms was explained by their labor and capital assets. Today that has reversed, and 80 percent of their market value is explained by intangible assets.

These intangible assets come in various forms: accumulation of skills and ideas, patents, copyrights, trade secrets, novel business models, etc. Whatever they are, both individuals and firms are incentivized to innovate if there is a return on their investment. If their ideas and inventions are not monetized and protected by institutions such as IP—designed to make those ideas a public good after a finite timeframe—innovation will only come in the form of proprietary ideas, that is, those that can be protected by other mechanisms, such as vertical integration and conglomerates who develop ideas and design products. Innovation will only become accessible to large organizations that have the means to protect their intellectual assets through mechanisms other than through the IP regime. For this reason, economic historians have identified IP as the key instrument for the “democratization of invention” in the United States, making economically feasible inventing activity available to all. At the Center for Strategic and International Studies, we are embarking on projects that empirically explore the mechanisms by which IP drives innovation, and what kind of innovation takes place (and by whom) when IP is no longer available as a reliable institution.

Understanding the importance of IP in driving innovation has geopolitical implications. If the United States adopts policies that only enable large, vertically integrated firms to innovate, any country with centralized policies and state-subsidized conglomerates gains a huge advantage over a market-driven economy. China’s state-backed policies and enterprises understand this. Plans such as China Standards 2035 ensure large, vertically integrated firms drive the innovation agenda for future critical technologies. The United States has an advantage it should not risk losing, by ensuring a market-driven approach to innovation remains through access to protection of all intangible assets, including IP. A regime where the future innovation agenda is driven by preferences of a state or large conglomerate creates a non-democratized, riskier, and poorer world.

Kirti Gupta is a senior adviser (non-resident) with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Kirti Gupta
Senior Adviser (Non-resident), Renewing American Innovation Project