Intellectual property enforcement costs and international trade

Non Technical Summary

Innovation plays an important role in economic growth, productivity and competitiveness. Intellectual property rights, such as patents, are designed to encourage innovation by allowing firms to benefit from new ideas and technologies. However, the existence of legal rights alone is not enough. Firms must also be able to enforce those rights when disputes arise. If enforcement is expensive, slow or uncertain, firms may be unable or unwilling to protect their intellectual property.

This paper examines how the cost of enforcing intellectual property rights affects international trade. We study reforms to the UK intellectual property court system introduced between 2010 and 2013 that reduced the cost and complexity of resolving intellectual property disputes and made the enforcement process faster and more predictable. Importantly, the reforms did not change the scope of intellectual property rights which allows us to isolate the economic effects of enforcement rather than changes in intellectual property law itself.

The premise for this study is that intellectual property enforcement affects all firms selling into a market, whether based domestically or abroad. A company exporting to the UK operates under the same legal environment as a UK-based producer. When it becomes easier and cheaper to defend intellectual property rights, firms that own valuable intellectual assets may find the market more attractive. At the same time, firms whose products risk infringing existing intellectual property may face higher risks and costs.

Using detailed data on UK imports, we find that imports increased in product categories where intellectual property disputes are more common. The increase occurred after the reforms were introduced and is not observed beforehand. Among other major European countries that did not introduce comparable changes over the period, we find no similar pattern. This suggests that the changes in UK trade patterns were linked to the reforms in the UK court system.

Looking beyond overall import growth reveals important differences across countries. Imports increased most strongly from countries with relatively strong intellectual property systems. In contrast, imports of the same products fell from countries with weaker levels of intellectual property protection. These findings suggest that the reforms changed which firms were most successful in serving the UK market. Firms that owned intellectual property appear to have benefited from lower enforcement costs and stronger protection, while firms facing a greater risk of infringement became less competitive.

To explore this mechanism further, we combined Chinese customs data with information on patent ownership. This allows us to identify firms that held patents and, more specifically, firms that had patents registered in the UK. We find that Chinese firms with UK-registered patents expanded the range of products they exported to the UK following the reforms. The evidence suggests that lower enforcement costs improved market access for firms whose intellectual property was protected in the UK.

We also examined whether the reforms encouraged additional innovation. Stronger enforcement could increase the rewards from innovation and encourage firms to invest more in research and development. However, we find no evidence that Chinese firms increased their patenting activity as a result of the UK reforms. Given the relatively small size of the UK market in the global economy, this result is perhaps unsurprising.

There is some evidence, however, that innovation-related activity increased within the UK. Industries more affected by the reforms increased their spending on research and development, and UK exports also rose. This suggests that stronger enforcement has a greater effect on firms whose activities are more closely tied to the domestic market.

Overall, the reforms produced only modest changes in total trade volumes. Their main effect was to change the composition of trade by altering which firms could compete successfully in the UK market. Lower enforcement costs improved market access for firms holding intellectual property rights, while making conditions less favourable for firms whose products faced a greater risk of infringement disputes. The results suggest that reforms to intellectual property enforcement can have important effects on the mix of exporters serving a market even when their impact on aggregate trade flows appears relatively small.