Research Spotlight: Does might make right in global trade rules?

global-currencies-300.jpgThe World Trade Organization‘s rules governing the multilateral trading system may pass legal litmus tests, but from an economic standpoint, do they work?

Kamal Saggi, chairman of the Department of Economics in SMU’s Dedman College of Humanities and Sciences, has been examining international trade and the effects of multinational companies on developing countries since graduate school at the University of Pennsylvania. Lately he’s also been delving into the legal layers of trade. A recent research focus has been India’s burgeoning pharmaceutical industry.

“India has one of the most advanced pharmaceutical industries in the developing world and is poised to be a world player,” says Saggi, Dedman Distinguished Collegiate Professor of Economics and a 2003 Ford Fellowship recipient. “But pharmaceutical patents have been a big area of controversy.” Divergent approaches to intellectual property (IP) have often caused friction between Indian and global pharmaceutical companies. “In India, you could patent a process but not a product,” says Saggi, who grew up in India.

By developing alternative production procedures, Indian companies cleared their country’s legal hurdle to produce cheap, generic drugs that could meet local demand and be exported to other developing countries. In 1995, member countries of the World Trade Organization (WTO) successfully negotiated a multilateral agreement that “basically says all members have to adopt the same rules and regulations regarding patents, trademarks and copyrights,” he says. The WTO ruling protected the status quo for U.S. and European enterprises, but the benefit to firms in emerging economies was debatable, Saggi says. “Developing countries were asked to ratchet up their legal coverage of IP, but the question was: Why should they?”

His study of that complex issue appears in the paper “Intellectual Property Rights, Imitation, and Foreign Direct Investment: Theory and Evidence” (National Bureau of Economic Research, 2007). Saggi built a mathematical model that captured the essence of the problem – was it economically worthwhile for developing country members of the WTO to adopt its new rules regarding IP?

He and three co-authors – Lee Branstetter, Carnegie Mellon University; Raymond Fisman, Columbia University School of Business; and C. Fritz Foley, Harvard Business School – then plugged firm-level data on U.S. multinational companies collected by the Bureau of Economic Analysis into the model to “theoretically and empirically analyze the effect of strengthening intellectual property rights in developing countries.”

The economists determined that there were more gains than risks to the budding economies. “In some instances, it may be a case of trading apples for oranges. For example, a developing country may say, ‘If we reform our IPR, then you’ll open up agricultural trade to us,'” Saggi says. Or, as in the case of Indian pharmaceuticals, it may be an apples-for-apples exchange.

“We found IPR reform in developing countries had a pretty substantial effect,” he says. “Where the IP laws have been strengthened, there has been a measurable increase in multinational investment.” For example, some multinationals split aspects of research and development, such as clinical trials, into separate operations in collaboration with Indian companies.

Read more from the 2009 SMU Research magazine
Find more of Kamal Saggi’s research at his faculty homepage