Source: China Daily

Intellectual property rights can encourage innovation - but taking them too far can lead to the stifling of creativity.

Creating an effective design for intellectual property protection helps avoid two extreme scenarios: 1) there is no music available to listen to and 2) the available music is not affordable.

Intellectual property takes the form of patents, copyright and trademarks, which grant the creators of an original work recognition and financial benefit from what they produce. Some basic level of IP protection is necessary to encourage the creation of new work, but overzealous IP protection limits the diffusion of inventions and harms society, as those who follow cannot build their research on the most recent findings. China is still at the building stage for a basic level of IP protection and, as President Xi Jinping mentioned at the Boao Forum for Asia in April, the country will strengthen protection of IP rights.

We are expecting a flow of innovation to follow, but we should also be careful that protection doesn't go too far.

A basic level of IP protection encourages innovation and creation, as evidenced by events during the Napoleonic Wars in Italy. The primary purpose of IP protection is to reward its creators with some monetary payoff to encourage further creation, and recent study of history demonstrates that a basic level of protection can successfully encourage the creation of original work.

Professor Michela Giorcelli from the University of California, Los Angeles, and Professor Petra Moser from New York University - both in the United States - have studied the effects of copyrights on the output of new operas in Italy around the year 1800. They have found that the introduction of a basic level of copyright protection for the creation of operas, where it had previously been absent, increased both quality and quantity of opera output.

A common challenge faced by this kind of study is disentangling the impact of IP protection from other effects, such as social trends. Giorcelli and Moser have exploited the variation in timing of Napoleon's military victories in Italy to overcome this challenge. More specifically, in the first quarter of the 19th century, two Italian states that came under Napoleon's control before the passage of the Civil Code in 1804 adopted copyrights, while other states that came under his control after that year did not. By comparing these two states with the rest, the study has been able to control for other influencing factors.

In China, IP protection may benefit all society by encouraging innovation in various ways. First, it guarantees the creator the exclusive right to benefit from the work they have produced. The magnitude of the benefit is determined by the market, as works that are perceived to be of higher value will generate higher financial returns, so the top creators receive the greatest reward. Second, with the monetary payoff received from their work, creators can free up their time from tasks not associated with content creation, allowing them to allocate their time more effectively. Finally, China is competing with other countries to create a healthy ecosystem for innovation that can attract talented innovators. Strong IP protection is necessary to win this competition. With its massive market and government support, China will be the home for creators from all over the world, and domestic and international companies alike will benefit. However, we should not go too far.

Strict implementation of IP protection, brings benefits to society. However, the design of the protection has other dimensions, such as the length of time for which an individual's creation can be protected and how broadly the protection may extend to other related ideas. An IP protection policy lasting too long or extending too broadly will stop the diffusion of new creations and harm society as a whole.

I recently published a paper, with Professor Megan MacGarvie from Boston University and Professor Moser from New York University, that identifies a considerable price increase due to the extension of the length of copyright in 19th century Britain. We examined Britain's Copyright Extension Act of 1814, which applied differing copyright lengths to books by living and dead authors, to tease out the effect on the price of books. In our analysis, we found that doubling copyright length had increased the price of a book by 50 percent, which was twice the weekly wage for a working class man in 19th century Britain. Because of high prices, readers had limited access to newly published books.

Many studies in economics find that the effect of IP protection is always overstated. Copyright protection limits the diffusion and later adoption of scientific discoveries. The patent is not a good measure of the level of innovation, so the need to protect patent rights is weak. The introduction of the patent system in pharmaceuticals limits consumers' choices and is detrimental to their welfare. On the other hand, some infringement of IP rights is found to do little harm. Studies of Napster, the file-sharing application that was believed to encourage music piracy, have found that its burgeoning use in the 1990s did not lead to a decrease in music production, either in terms of quality or quantity. In fact, compulsory licensing, which forcefully transferred German patents to US companies during wartime, even had a positive spillover effect of spurring further innovation, both in the US and in Germany.

With the strict imposition of IP protection, the duration and how broadly it is applied both need careful thought. A copyright that outlives the author cannot lead to more innovation, as the work's creator cannot gain from the money generated after his or her death. Overprotection of patents may slow down the pace of innovation if later scientists are not allowed to "stand on the shoulders of giants "and build their research upon existing knowledge. Another downside is the anti-competitive effect, as the patent may provide the patent holder with a monopoly for too long.

At its current stage, China does not need to worry too much about the downsides of IP protection, as we are improving our implementation of basic IP protection to give people an incentive to create and innovate. However, we should bear in mind that protection should not go so far that it makes it difficult for an original creation to be widely distributed.