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Small country, less innovativeness Paris Convention = national treatment foreigners are treated the same as nationals. ( give the same right to foreigners.) countries could have varying patent law

National treatment Best outcome : stong protection in W and weak protection in A -- free riding

1. Why would a small country (e.g. Vietnam) benefit from a system where the rest of the world has IPR but not in the home country? Is the Paris Convention an important factor in this case? Explain

Small countries would benefit from a system where the rest of the world (W) has IPR but they do not which is the best outcome for policy makers in any country. Total value for innovations in a small country includes surplus in its own country and surplus from the rest of the world (which has IPR). Total value for a small country = V /r - lV T + V T
a a a w w

A small country will benefit from consumer surplus and producer surplus from the innovation in its country a without baring any deadweight loss from the protection (no lv because products sell at competitive price) and it also collect the profit from the innovation in other countries with IPR. Without protection in a small country, it means that domestic people can use the innovation for free without paying anything to the innovator and let user in other countries that provide protection pay for the cost of innovation. The Paris convention can be an important factor in this case. Under the provisions on national treatment, the Convention provides that, as regards the protection of industrial property, each contracting State must grant the same protection to nationals of the other contracting States as it grants to its own nationals. In other words, if a small country doesnt have IPR, innovations from other countries cannot be protected in a small country as well. It is possible that a small country can be less innovative so they dont have innovations to protect in the large markets (the rest of the world). Therefore, it would be better for its domestic people to free ride on the cost of other countries innovations.

2. Assuming that nations have signed treaties for national treatment. Innovator a Country a Innovator w

Country w

a) How would a country choose the strength of protection if there is no harmonization requirement? E.g. only under Paris Convention. If there is no harmonization requirement, national planner will choose the strength of protection with regard to domestic consumers surplus and profit, net of domestic R&D cost. With independent choice of country a a w and country w, let T and T represent the lengths of protection in country a and w respectively and let c be R&D investment cost (assume the same for all innovations). National planner a will set the protection such w w a a) w that (V T + V T = c. For example, If country w has a strong protection (T is long) that covers the cost of w w a innovations (V T >=c), National planner in country a will not provide any IPR (T =0). However, if the w w protection from country w is not enough to cover the costs of innovation (V T <c), country a will provide protection to cover the cost. Country as decision for social welfare: Max (1+2+8+4 cost of innovation a) As mention above, with no harmonization requirement, each country can choose the strength of protection such that it can receive maximum national welfare. To strengthen the protection or not, national planner of country a needs to consider the increase of the deadweight loss of existing innovation of innovator a and innovation w in country a and also the increase of outflow of profit of innovation w in country a that is less than consumer surplus of new innovation a and w, and profit from new innovation a in country a and w or not in order to maximize social welfare.

b) How would a country choose the strength of protection if there is harmonization requirement? E.g. under TRIPS. Under a system of harmonized national treatment, both countries must adopt the same level of protection. Thus, if one country strengthens the protection, the other countries will do the same. a w If national planner increases T , T will increase the same amount. Social welfare in country a = in consumer surplus in country a from additional innovations from both country a and w. and producer surplus from additional innovation a in country a and w (1+2+8+4) DWL of existing innovations of a &w in country a outflow profit of existing innovations of w in country a (5) Harmonization -

c) Compare answers in a) and b), would you expect this country pushing for a stronger protection in b) than in a)? Hint: your answer may depend on the characteristics of the country.