Global Financial Crisis and Economic Outlook: Global Think Tank Summit

China Center for International Economic Exchanges (Beijing, July 3, 2009)

Francis Gurry - Director General

In the present context of contraction of economic growth provoked by the global financial crisis, it is worth returning to basics and recalling the drivers of economic growth. It is now over 50 years since the insight was made that economic growth could not be explained on the basis of the traditional factors of production of land, labor and capital alone. Rather a large residual factor in growth was attributed to improvements in productivity consequent on technological progress or innovation.

That insight has led, generally speaking, to a vast expansion of investment around the world in research and development (R&D) and in knowledge infrastructure. The annual global budget devoted to R&D now exceeds one trillion US dollars. But it has become apparent that, while investment in knowledge creation is a necessary condition of job creation, growth and competitiveness, it is not a sufficient one. Having knowledge is not enough. It is also necessary to create the conditions for its commercialization.

Intellectual property is one of the indispensable mechanisms for translating knowledge into commercial assets. Intellectual property rights create a secure environment for investment in innovation and provide a legal framework for trading intellectual assets. In looking to strategies for overcoming the economic crisis and for ensuring a sustainable expansion following the crisis, both investment in knowledge creation and the maintenance of a robust intellectual property system that strikes an appropriate balance between the needs and interests of knowledge producers, investors and society should feature prominently.

While it is still too early to see clearly what is happening in the world of intellectual property as a result of the crisis, preliminary indications are revealing some interesting developments. Historically, we know that demand for intellectual property rights has declined in times of recession or depression. In the Great Depression, for example, patent applications declined in the United States of America by 37 percent between 1929 and 1933. The number of such applications filed in 1929 was not surpassed again until 1965. The picture emerging now does not look quite so clear and linear. Three possible differences may be sketching themselves. The first is that patterns of patenting behavior seem to be different on the international level from those on the national level. While domestic patent applications are down in Japan and the United Kingdom, for example, international patent applications filed out of those countries seem to be rising , suggesting both the increased influence of globalization and the exercise of greater discernment by enterprises in the selection of when and how to patent inventions. Secondly, there are clear differences in behavior across the world. International patent applications from the United States of America this year are down by 14 percent, while those from China are up by 19 percent, suggesting a differential innovation impact of the crisis. Thirdly, there will no doubt also be a differential sectoral impact of the crisis, where we may expect that use of the patent system by the automobile industry, for example, traditionally a large filer of patent applications, will suffer a significant decline. The crisis is producing both threats and opportunities and might lead to a re-configuration of behavior in innovation, depending on the financial health of industries and countries and the availability of credit for risk-taking.

The greatest opportunity for innovation lies perhaps in the area of clean technologies and alternative energies. If the impact of the use of carbon technologies in the future were to be built into the cost of those technologies, we would find ourselves in the position of having a capital stock that is in need of complete renovation, much as if the existing capital stock had been destroyed by a catastrophe. The transition to clean technologies and alternative energy sources will take place. Much like the economic crisis, only the duration of the transition is uncertain – whether it will be 5 or 50 years. Intellectual property rights have a role to play in that transition as, like fiscal measures, they can be used to incentivize behavior. Some initial steps in this regard can be seen in several countries where fast tracks to patent grant are being created for applications in the area of clean technologies and alternative energies.

The financial crisis has unfolded at a time of great change for intellectual property. As a result of the increased value of intangibles in the knowledge economy, demand for intellectual property rights had reached unprecedented heights prior to the crisis, with some 1.7 million patent applications being filed worldwide each year and growing backlogs of unprocessed applications accumulating. The geography of technology production is rapidly changing, with now over 26 percent of international patent applications being filed each year from North East Asia (Japan, the Republic of Korea and China), a figure that keeps rising. Universities and research institutions are active users of the intellectual property system, which no longer remains the preserve of industry. Open innovation is increasingly practiced, resulting in much greater collaboration, at the level of both research and commercialization, between enterprises and across countries. Questions of balance between the rights of owners of intellectual property and the social benefit of new knowledge are widely debated, as are questions of distributional justice across the world.

These demands on the intellectual property system need to be carefully managed in the context of the global economic crisis. Solutions need to be found to both the functional and the political stress in the system. Those solutions also have to be worked into strategies for using intellectual property as a balanced mechanism for assisting in improving the conditions for expansion of economic growth and the transition to a green economy.