Patent protection in developing countries and global welfare: WTO obligations versus flexibilities

• Published in: Journal of international economics Vol. 122; p. 103281
• Main Authors: Bond, Eric W., Saggi, Kamal
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.01.2020
• Subjects: Compulsory licensing; Exhaustion policies; Imitation; Patent protection; Quality; TRIPS; Welfare; WTO; F12; F23; TRIPS; F13; Exhaustion policies; Patent protection; O34; WTO; Welfare; O38; Quality; Imitation; Compulsory licensing
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2019.103281

This paper develops a North-South model to evaluate the South's incentive for patent protection when a Northern firm's investment in quality-enhancing research and development (R&D) is affected by its patent policy. The model is used to (a) evaluate the impact of requiring the South to fulfill its key WTO obligation of instituting patent protection and (b) to address the role of two major flexibilities that WTO members enjoy with respect to their patent policies: the freedom to implement exhaustion policies of their choosing and the right to use compulsory licensing (CL) subject to certain stipulations. Two forces drive the model: how much the firm invests in R&D and whether or not selling in the South maximizes its global profit. CL improves consumer access in the South and can even raise innovation and global welfare. Provided the South implements patent protection, innovation and welfare are higher if the North follows national as opposed to international exhaustion. However, the South's incentive for patent protection is not necessarily stronger under national exhaustion. Not only is CL more likely to be used under international exhaustion, the welfare gain resulting from its application is also higher relative to that under national exhaustion. •We analyze how key TRIPS flexibilities interact with its central obligation.•TRIPS flexibilities pertain to compulsory licensing (CL) and patent exhaustion.•CL improves consumer access and can even raise innovation and welfare.•Patent protection in the South maybe less likely under national exhaustion.•The likelihood of welfare-improving CL is higher under international exhaustion.