Monday, 9th July, 2012

New ‘super ministry’ forgets patents are incentives for growth

With the new Ministry of Business, Innovation and Employment (MBIE) the Government has created a “super ministry”, with a name that emphasises “innovation”.

However, any mention of the link between innovation and patents is absent from the official papers and announcements.  This is surprising, especially at a time when New Zealand's patent law is at last being totally reformed and the Patents Bill is in parliament right now.  Even more surprising, when it is understood that the Ministry of Economic Development, the senior ministry forming the foundation of the MBIE, is the one which currently administers patent law.

The inclusion of "innovation" in the name of the ministry indicates that encouragement of innovation is a major goal.  The proposition that innovation drives economic growth is now generally accepted by economists.  As stated by Murray Bain, CEO of the old Ministry of science and Innovation, it "acknowledges the significant role of science and innovation in building stronger economic growth".

But the process of innovation is subject to "market failures".  For example, a pure competition model means an innovator can be copied and undercut by a competitor who does not have to carry the same R&D cost.  The market failure is that where the R&D spend is significant innovation is rendered unattractive and there will be underinvestment in R&D and reduced innovation as a result.

It is not the role of the Government to itself deliver innovation to industry, but to provide a facilitating environment.  For example, ensure there is an efficient legal infrastructure - a function noted by the MBIE acting CEO, David Smol in a speech 10 May.  It is also a role of government in a small country such as New Zealand to undertake and supply through research institutions and universities the fundamental science which underpins commercial R&D. 

But it is also critical to provide incentives to innovate where there is a risk of market failure.  Such incentives may include subsidising corporate R&D, tax concessions for R&D and making available appropriate and balanced intellectual property rights to innovators.  The latter incentive involves little, if any, government expenditure. 

Anachronistic patent law 

The primary IPR for innovators is patents and the patent agency (the Intellectual Property Office of New Zealand - IPONZ), which will become part of the MBIE, is essentially funded by those who use it.  But our 1953 Patents Act which provides the infrastructure for IPONZ, patent applicants, patent owners and the courts is long out of date and by international standards is a total anachronism.

At the present time many are sceptical about IPRs such as patents and copyright.  With the latter the balance between owners and users is questioned.  With patents any criticism is mainly directed to the possibility of obtaining patents for software and biotechnology inventions.

Nevertheless, despite the market failure theory it is fair to ask what is the evidence on a link between patents and innovation?  Most of the evidence comes from measures of the overall link between IPRs and growth and not the innovation-growth and IPR-innovation links separately.  In summary it seems that IPRs are a stimulant for growth in developed countries.  The link is weak in underdeveloped countries.  But the relationship between IPRs and growth is not simple even in developed countries.  It seems that a balance between under protection and over protection is required.  As IPR "strength" increases growth increases until a point where growth falls off.  The relationship is an inverted "U" curve.  New Zealand is a developed country, so will benefit from IPRs, but with patents legislation nearly 60 years old is nowhere near the cusp of the IPR strength versus economic growth curve.

In addition to the evidence of these economic studies there is the importance of the role of IPRs such as patents in facilitating commerce in innovation.  Patents effectively convert innovation into property. This allows innovation to be commercially exploited.  Patents may be sold (usually for a one-off payment) or licensed (usually for ongoing royalties). They provide an infrastructure for technology transfer and the supporting legal agreements.  An interesting comparison is with unpatented trade secrets.  They cannot be legally sold, not being property under New Zealand and Commonwealth law.

Further, the OECD uses patent filing statistics as a measure of national innovation.  As I pointed out in a 2003 NBR article, figures for the filing of international patent applications (PCT) revealed New Zealand was on OECD type measures only one third as innovative as Denmark and Israel.  The MBIE goal of facilitating innovation could redress this - so long as its Ministers and officials get a grip on these issues.   

Software exclusions

While Government and the MBIE need to put higher priority on the patent system and the Patents Bill, this is not to say all of our high tech industries support all current provisions of the Bill.  For example, the belated exclusion by the Select Committee of patents for software inventions.  It was introduced on the basis of faith based arguments and in the face of a total lack of evidence that such patents had resulted in any economic mischief that required addressing by legislation.  The exclusion of embedded software inventions of the type devised by high-tech kiwi manufacturers such as Fisher & Paykel Appliances and Navman for their computer controlled appliances GPS systems is somewhat irrational.

Subject to the above qualifications the evidence to date shows that a workable innovation policy requires a modern balanced patent system.  It is time that New Zealand politicians and officials became familiar with the basics of patents and other intellectual property rights.  Other nations have long moved beyond this and in the 21st century are more focussed on national fine tuning and international IPR treaties.  We do not need to repeat the Nigerian scenario where in June politicians finally learnt about patents when the government was successfully sued for infringing a patent for electronic ballot boxes.

An edited version of this article was published in the National Business Review, 6 July 2012.