INTELLECTUAL PROPERTY RIGHTS AND GLOBAL IMITATION CHAINS:

THE NORTH-SOUTH-EAST MODEL

Caner DEMİR

(corresponding author)

Kırklareli University,

Department of Economics

Kırklareli-TURKEY

caner.demir@klu.edu.tr

Aykut LENGER

Ege University,

Department of Economics

Izmir-TURKEY

aykut.lenger@ege.edu.tr

ABSTRACT

This study investigates the effects of intellectual property protection on economies by proposing a three-

pole global economy model. The main proposition of the study is that the classical two-pole approach (North-

South) does not reflect the technological heterogeneity and conflicts within the developing world. Therefore, a

three-pole world economy model which consists of the following regions has been designed; an innovator, an

imitator and an innovator-imitator. The simulation results reveal firstly, northern region benefits from tighter IPR

in any case; secondly, stronger protection of IPR certainly exerts negative effects in the South while it brings

benefits eastern region in some aspects.

Keywords: Intellectual Property Rights, Imitation, Developing Countries.

JEL classification: O34, O39, O19

1. INTRODUCTION

The effect of intellectual property rights (IPR) protections on economic development is

still a controversial issue. Since IPR has started to be protected, it has been still doubtful

whether countries with different development levels could benefit from these rights.

Moreover, by indicating the unnecessity of IPR, some perspectives suggest that enabling the

free-flow of knowledge will lead to acceleration of the knowledge spillover which is a very

important mechanism in the modern economic growth theory (i.e. Boldrin and Levine, 2004;

Boldrin and Levine, 2006; Banerjee and Chatterjee, 2010; etc.).

Even though the related literature is still in doubt about it, the mainstream global policy

on IPR is in the direction of harmonization of IPR for all countries. This study propounds that

it is unfeasible to expect all the countries could benefit from tighter IPR policies. The main

motivation of this idea is that the development level differentials are important determinants

of getting benefit from IPR and these differences bring out many structural inabilities of less

developed countries. At the present, we do know that most of the developing countries have

some research and development (R&D) sectors and try to innovate new products while some

others have not similar possibilities. Therefore, a three-pole world economy which

decomposes the developing world into two regions has been designed in this study.

In today’s world, while some developing countries have relatively advanced research

and development (R&D) sectors and innovate new ideas and goods, some others still do not

have enough capacity to carry out these kinds of innovative activities. In an attempt to

represent the international differences in development levels and technological capacities, the

model of this study has been based on the North-South model, which has a broad range of

usage in the development economics and international economics literature. However, due to

the differences in technological capacities, the present study has taken the North-South

framework a step further and designed a three-pole world economy which has been

denominated as the North-South-East Model. According to this setup, the North represents

technologically advanced countries, the South represents technologically backward countries

and the East represents countries which have accomplished some technological improvements

compared to the South.

As a touchstone study in this literature, Helpman (1993) has built a North-South model

in which the North is an innovator and the South is an imitator. Helpman (1993)’s study,

which makes use of the structure of Grossman and Helpman (1991) has paved a substantial

way for further research within this literature (i.e. Mondal and Gupta, 2006; Grinols and Lin,

2006; Parello, 2008; Akiyama and Furukawa, 2009; Branstetter and Saggi; 2011 etc.). The

structure of Helpman (1993) was very useful with regards to presentation of the IPR-oriented

relations between developed and developing worlds. However, due to its simplifier

description on the characteristics of the regions, this functional structure has laid itself open to

criticism. Because innovation is not limited to the North but it exists also in the South even if

on a smaller scale. Then, some follower studies have made a modification on Helpman (1993)

and assumed that the southern region which represents the developing countries have also

innovation process in addition to the imitation (i.e. Lai, 1998; Lai and Qiu, 2003; Grossman

and Lai, 2004; He and Maskus, 2012 etc.). Indeed the late economic history of 20th century

shows the technological development success of some developing countries such as Asian

Tigers.

These types of countries have started to innovate new products and proved the difficulty

of assuming the southern region is composed of only imitation. Even today, it is impossible to

consider all developing countries technologically equal. Some of them make innovation while

some others cannot move beyond imitation. The theoretical contribution which has been

mentioned above is quite substantial when it is considered with this recent historical fact. On

the other hand, imitation background and learning by doing processes in the past have formed

a basis for innovation success of these developing countries. In other words, the imitators of

the past have become the innovators of the present.

The model of the present study has taken inspiration from the inference of Kim and

Lapan (2008), which asserts that the relations between developing countries is more complex

than mentioned in the literature and emphasizes the heterogeneity within developing world.

According to this, besides the conflict of interest between northern and southern regions, there

exists a conflict of interest within developing world as well.

Helpman (1993), in his innovator – imitator based North – South analysis, has stated

that even someone benefit from tighter IPRs, probably this would not be the South. The

inferences of Helpman (1993) imply that with an increase in the IPR protection the innovation

of northern region may increase in some cases; while southern region is hurt by this policy in

any cases. However, some of the second wave studies in this literature which have been given

above have asserted that even the southern region may benefit from tighter IPR policies.

Surely, this view of the second wave studies arises from their modification that assumes also

southern region has an innovation mechanism. At this point, by recalling Kim and Lapan

(2008), it is crucial to ask this question; “which south?”.

To deal with the question above, the model of this study examines the hypothesis which

is an extended version of Helpman (1993) and tries to check over it. The modified hypothesis

of the three-pole model of the present study can be defined in this way; “even someone

benefit from tighter IPRs, this might be the North or possibly the East; but probably the South

would be hurt by this policy.”. This hypothesis bases upon the fact that most of the

developing countries still do not have enough technological capacity to innovate new

products. For this reason even the incentive function of IPR may work for innovation sectors

of developed and some developing countries, in developing countries with low technological

capacity the incentives would make no sense. This situation is like making an incentive with a

lot of money to someone who has never painted before expecting from him/her to paint a

unique picture. In such cases the incentives are completely useless. After giving a brief

information on the existing literature and the concept, let us start to define the model of study.

2. THE MODEL

The three-pole model of this study has been demonstrated in Figure 1 and Figure 2.

Figure 1 shows the innovation-imitation chains for northern goods. According to first ring of

the chain system for northern goods, northern region innovates a new product and eastern

region tries to imitate this product by solving the details and conducting the required reverse

engineering activities. The second ring of the chain system for northern goods is about the

relations between southern and eastern regions. Once eastern region has imitated the northern

product, the solved details spread to the rest of the world; for this setup, to the South. The

second ring is a very important key factor for this model. According to this, southern region

will not access to the details of the northern product unless eastern region solves and imitates

it. This assumption is quite similar with reality. Many developing countries still do not have

enough capacity even to make reverse engineering activities and imitate some technological

goods. These types of countries usually cannot imitate high or mid-technology goods directly.

To imitate the northern products, they need for the solved details and wait for eastern region

to do the necessary reverse engineering activities and finally imitate the products. On the

other hand, the Figure 1 implies the east-dependent situation of southern region in respect to

the imitation of northern products. Figure 2 shows the innovation-imitation chain for eastern

goods; which presents a simpler relation. At this chain, there is a mechanism starting with the

innovation of eastern region which represents developing countries with relatively higher

technological capacity. Eastern products, as might be expected, are simpler products (i.e. low-

tech products) in comparison with the northern products (i.e. high-tech products). Therefore,

unlike the first chain, these products’ technology level is closer to the technology level of the

South. Thus, southern imitators have sufficient ability to solve the details and directly imitate

these low-tech products.

Figure 1. Interregional Innovation-Imitation Chains (Northern Products)

Figure 2. Interregional Innovation-Imitation Chains (Eastern Products)

The North innovates new

products.

The East imitates northern products.

The South imitates northern products,

that have been imitated by

eastern imitators before.

The East innovates new

products.

The South imitates eastern products.

N

S

E

S

E

Besides its practicality on modelling the IPR protections in a global framework, the

three-pole model suggestion of this study may bring a new perspective also on investigating

other global economic issues. In the related literature, David Ricardo’s North-South

framework, in which Britain and Portugal represent the North and the South respectively, has

been regarded as the pioneer of these types of models (Molana and Vines, 1989). From

Ricardo to present, the North-South literature has made a significant progress by adapting the

new conditions and the new research questions to the model. However, especially as from the

last quarter of the 20th century, some south-labeled countries have transformed and showed a

remarkable growth performance compared to other countries (i.e. “Growth miracles”). Even

at the present time, besides some developing countries with relatively higher technological

capacity, there are still a lot of developing countries with lack of technological capacity to

innovate even simple, low-technology products. Thereby, the heterogeneity within the global

economy is quite obvious and making the global analyses without considering the necessary

discrimination will give rise to get biased and inconsistent results. The proposition of the

study is to classify countries according to their development level and technological capacity

and to develop policies.

The North-South literature, specific to the economics of IPR, involves many types of

modelling approaches. However, due to its useful and simple structure, most studies have

developed their models by grounding on Helpman (1993). In the present study, even if the

fundamentals of Helpman (1993) are used, the main structure of the model is inspired by a

newer study, Lorenczik and Newiak (2012). Here, let it be known that even the Lorenczik and

Newiak (2012) study has grounded on Helpman (1993), and used some components and

assumptions of a relatively newer model which has been built by Gustafsson and Segerstrom

(2011). However, due to the differentiation in the research questions and some assumptions

the model of the present study and the Lorenczik and Newiak (2012) model differ from each

other.

Let us start to define the model. As it has been stated up to now, the model consists of

three regions;

1. The North, which innovates only high-technology products

2. The East, which innovates low-technology products and imitates northern high-

technology products by doing reverse engineering activities.

3. The South, which imitates both northern high-technology and eastern low-

technology products.1

It is assumed that the labor is mobile within each region, but not between the regions.

We also follow the full employment assumption and define the labor supply for each region as

following; lN ,t=lS , t=lE, t=li , 0 egLt where gL represents the population growth rate. The N , S

and E indices here highlight northern, southern and eastern regions respectively. The

housholds in each region have identical preferences and the household maximization problem

defined as below;

U ( t )=∫t

∞

e−¿¿¿(1)

Here, ρ represents the intertemporal discount rate which shows the time preference (

ρ>gL), while x j , t and α represent the quantity demanded of variety j and the degree of

product diffentiation respectively. Thus, the elasticity of substitution between varieties is

determined as ε=1/(1−α). Similarly with Helpman (1993) and its followers, by solving the

household maximization problem we will obtain the quantity demanded of varity j as follows;

1 Notice that the South can imitate northern high-technology products only via the Eastern reverse engineering channel as it seen from Figure 1. Thus, there is an indirect mechanism for northern product imitation of the South.

x j , t=et

Pt( p j , t

Pt)−ε (2)

In the demand equation above, e and p j ,t represent average consumption expenditure

and the price of variety j. It should be noted here that the price index (Pt) in the denominator

consists of the prices of each varieties and is defined as Pt=[∫0n

p j ,t1−ε dj ]

1 /(1−ε)

. The consumption

expenditure in the model has a growth rate as e /e=r t−ρ, where r t denotes the market interest

rate.

Since the new varieties are innovated only in northern and eastern regions, the fountains

of the new varieties exist only in these two regions. The equations (3) and (4) show the

varieties that are innovated by northern and eastern innovators (nN , t and nE, t respectively).

nN , t=nNR ,t+nEN ,t+nSN , t

nE , t=nER , t+nSE ,t

(3)

(4)

The two-digit indices that emphasize the regional varieties (n symbols) in the right hand

side of the equations show the origins and the types of the unimitated and imitated varieties.

The first digit shows where the varity is produced, while the second digit shows whether it is

an unimitated or imitated variety. For example, the N or E letters in the first digits imply the

variety is produced in northern or eastern regions respectively. On the other hand, the R, N

and E letters in the second digits represent unimitated varieties, imitated northern varieties

and imitated eastern varieties respectively. According to these definitions, in the right hand

sides of the equations, there exist northern and eastern products that have not been imitated

yet (nNR ,t and nER ,t), products that have been imitated by eastern imitators (nEN , t) and products

that have been imitated by southern imitators (nSN ,t ve nSE ,t). As it can be understood from the

equations, while eastern imitators target only northern products, southern imitators target both

northern and eastern products. But remember that the South can imitate northern product only

if the East has imitated them before. The limited imitative situation of the East arises from the

differentiation of the regional wage rates. More clearly, to keep the model in a simple

framework, in this three-pole model there exists three different wage rates and each region has

only one wage rate. In such a case, it is not economically rational for eastern imitators to

imitate eastern innovative products. This point is going to be explained comprehensively in

next parts of the study. The total product variety of the model consists of the varieties below;

N=nN +nE=nNR+nER+nEN+nSN+nSE (5)

Now, let us define the innovation sectors of northern and eastern regions;

Innovation

nN=nNR+nEN+nSN=lNR N θ

ag

nE= nER+ nSE=lER Nθ

δag , δ >1, 0<θ<1, g=N /N

(6)

(7)

The equation (6) and (7) show how innovation occurs in northern and eastern regions.

According to this, the total number of northern varieties in global consists of northern

unimitated products, northern products that have been imitated by eastern imitators and

northern products that have been imitated by southern imitators; while the total number of

eastern varieties in global consists of eastern unimitated products and eastern products that

have been imitated by southern imitators. In these equations, N θ denotes knowledge stock (the

total number of varieties), where θ is the intertemporal spillover parameter and g is the

growth rate of the knowledge stock. Here, by operating as a denominator, g causes the

situation of decreasing returns to innovative activity. lNR and lER represent labor devoted to

R&D in northern and eastern regions respectively. On the far right hand sides of the equations

imply that the number of varieties rise with the number of labors in R&D and the total number

of varieties. The parameter a stands for general difficulties in the innovation process while the

parameter δ denotes the inefficiency of the eastern innovative sectors as against the northerns.

The efficiency differentiation here enables the model to reflect the technological capacity

differences between the North and the East. Also these assumptions come from the model of

Lorenczik and Newiak (2012) wich they base upon Jones (1995) and, Gustafsson and

Segerstrom (2011). After the definitions on the innovation of northern and eastern regions,

now let us define the imitation sectors in the eastern and southern regions;

Imitation

nEN=lEN Nθ

ϕ E amEN , mEN=

nEN

nNR

nSN=lSN N θ mEN

z ϕS a mSN ,mSN=

nSN

nEN

nSE=lSE Nθ

z ϕS a mSE , mSE=

nSE

nER

(8)

(9)

(10)

The imitation equations above show the imitation productions of the imitator firms. li

terms denote labors that work for the imitator firms of eastern and southern regions. mEN , mSE

and mSN terms represent eastern imitation of northern products, southern imitation of eastern

products and southern imitation of northern products respectively. ϕ E and ϕ S terms show the

difficulty of imitation in eastern and southern regions; also known as intellectual property

rights. Since northern region does not have any imitation process and this study does not

focus on innovation processes, we did not define any IPR parameter for this region. Similarly

with relative inefficiency difference between the northern and eastern innovation sectors, also

in imitation equations an inefficiency parameter (z) has been defined. This assumption on

southern imitation sectors is quite important to build a three-pole innovation-imitation system.

Pricing and Profit Rates

Now let us define the profit rates for each regions by calculating the following equation

π i=(p i−w i) x i L ; where π i, pi and w i are the profit rate, the price and the wage rate

respectively. Notice that in this system labor is the only factor and one unit of labor produces

one unit of output. First, the profits of northern and eastern innovators are calculated as

below;

pNR=wN

α , πNR=

1−αα

wN xNR L

pER=wE

α , πER=

1−αα

wE xER L

(11)

(12)

Firstly, it is inevitable to remark that both the innovation and imitation type products are

supplied to the global, without making any discrimination. Thus, the demanded quantity ( x i)

is multiplied by the total population (L). The assumption on the definition of the prices is

based on Grossman and Helpman (1991) which assumes a wide wage gap between countries.

According to this we can define the wage differentials as follows; wS/α ≤ wE and wE /α ≤ wN.

The reason of choosing such an assumption is to be able to create a feasible condition for

mark-up pricing for monopolies. Remember here that in this system all the innovators and

imitators have monopoly power and make mark-up pricing for their products. For example, let

us assume an eastern imitator imitates a northern product and sells this imitated product at a

price of wE /α. This price is the mark-up price of that imitated product. Here, according to the

assumptions above, the mark-up price of eastern product is less than northern marginal cost (

wN) and so the northern innovator will be pushed out of the market and the eastern imitator

will be the new monopoly of the product.

The assumption on wage rates and prices above rules also for imitators;

pEN=wE

α , πEN=1−α

αwE xEN L (13)

pSN=wS

α , πSN=1−α

αwS xSN L (14)

pSE=wS

α , πSE=

1−αα

wS x SE L (15)

Distinctively for southern imitators, there is a special situation on prices. For southern

imitators the price of northern products and eastern products are same. At first glance, due to

the differences in technology levels of these two variety origins, this might seem implausible.

However, one has to notice that southern imitation which targets northern products (mSN) is

not the first step imitation of these products. Before the South, these products are solved and

imitated by eastern imitors and just after southern imitators can imitate them. Expectedly, this

chain process takes time and the uniqueness of northern products diminishes over that time.

At this point, the model assumes that the price of a northern high-tech product with

diminished uniqueness is equal to the price of an eastern low-tech product with relatively

uniqueness (pSN=pSE). The eastern product in this example is relatively unique because

southern region is the first and only imitator for this product. So indeed, at the present time

there are many high-tech products that loose their uniqueness (i.e. basic MP3 players, USB

flash drives, optical mouses etc.) and priced equal to a low-tech product.

Project (Firm) Values

By recalling the assumption that supposes one unit of labor and one unit of production

for each firm, and using the equation (6) – (10) let us determine the firm values and their

financial conditions. Notice that in such a system, each firm expects a financial return as an

outcome of their R&D investment. This return must be equal at least to their investment costs.

According to this, firm values (vi) are defined as below;

vNR=wN lNR=wN ag

Nθ

(16)

vER=wE lER=wE δag

N θ

(17)

vE N=wE lEN=wE ϕE a mEN

Nθ

(18)

vSN=wS lSN=wS z ϕS a mSN

N θ mEN

(19)

vSE=wS lSE=wS z ϕS amSE

Nθ

(20)

The No-Arbitrage Conditions

It is assumed that there exists perfect flow of capital between the sectors of a region. In

each region agents have two choices; holding a portfolio with a fixed return (ri) and holding

the shares of innovator or imitator firms in their region which pay a return as ( π i /v i). Now

then, by piecing together the profit rates, firm values, risk factors and expected returns we can

create the no-arbitrage conditions of the system. Here, the risk factor is nothing short of the

risk of being imitated; in other saying if a product of a sector is imitated, this implies for that

sector, loosing the monopoly power. In our three-pole model, besides the innovators also an

imitator sector (eastern imitators) has a risk of being imitated. However, southern imitators do

not have such a risk factor. Within this framework, the no-arbitrage conditions will be

obtained as follows;

π NR

vNR+

v NR

v NR−m EN=r N

(21)

π ER

vER+

vER

vER−mSE=r E

(22)

π EN

vEN+

vEN

vEN−mSN=r E

(23)

π SN

vSN+

vSN

vSN=

π SE

vSE+

vSE

vSE=rS

(24)

Balanced Growth Path

Up to this point, we have obtained the relevant components to build a balanced growth

path for this system. To do this, firstly we assume that the subjective discount rate and all the

interest rates are equal (ρ=rN=r E=rS). Moreover, let us assume that the growth rates of all

the varieties are equal to the growth rate of total number of varieties.

NN

=nNR

nNR=

nER

nER=

nEN

nEN=

nSN

nSN=

nSE

nSE=g, g=

gL

1−θ (25)

Apart from the growth rates of the firm values ( vi /vi) all the parameters in the system

are constant or have a positive growth rate. This situation is caused by the setup of the

equation (6) – (10) which comes from the assumption of Lorenczik and Newiak (2012). 2

v NR

v NR=

v ER

v ER=

vEN

vEN=

vSN

vSN=

vSE

vSE=−θg

(26)

By inserting the obtained firm values (Eq. 16 – 20) and given growth rates above into

the no-arbitrage conditions (Eq. 21 – 24) we obtain the conditional equations for each sectors

and regions. These conditional equations are important constitutent to obtain the imitation

rates for each imitator sectors.

Conditional Equations for Innovators:

π NR

θg+ρ+mEN=

wN agN θ

(27)

2 The equation (26) can be proveed as follows;Previously the firm (project) values have been defined as vi=wi a g/ Nθ. If we take the logarithm of both sides

in this equation, we will get log(v¿¿ i)=log (w i )+ log (a )+ log ( g )−θ log (N )¿; which can also be written

in the growth rates form as v i

v i=

wi

wi+ a

a+ g

g−θ N

N . Here, by the reason of w , a and g are constant, their

growth rates will be equal to zero and we will obtain the remaining part of the equation(−θ NN ); in short

(−θg).

π ER

θg+ρ+mSE=

wE δagNθ

(28)

Conditional Equations for Imitators:

π EN

θg+ρ+mSN=

wE ϕ E a mEN

N θ

(29)

πSE

θg+ρ=

wS z ϕS a mSE

N θ

(30)

π SN

θg+ρ=

wS z ϕS a mSN

Nθ mEN

(31)

By piecing together the conditional equations above, using the profit rates and utilizing

the demand equation (Eq. 2) we obtain the imitation rates for eastern and southern imitators;

mSE=δg (θg+ρ )

(θg+ ρ )(wS/wE)ε (zϕ S)−δg (32)

mEN= δgϕD

(θg+ρ+mSE )( θg+ ρ+mSN ) (33)

mSN=( θg+ ρ+mEN )

(θg+ρ )g mEN

( zϕS) (wS

wN)− ε

(34)

The imitation rates obtained above show that the system includes some endogenous

variables. According to this the imitation rates are determined by the relative wage rates and

the other sectors’ imitation rates as well as the constant parameters. Thus, it is not that simple

to solve the model by executing an ordinary numerical analysis in a lump. This dissimilarity

with the literature is caused by the three-pole structure of the model and the assumptions on

pricing. In such a case, the models are solved via the appropriate computer softwares; which

will be given in the next parts of the study.

Lastly, by using the conditional equations and the demand equation, let us obtain the

relative wage rates which are substantial components of the imitation rate equations. The

conditional equations enable us only to obtain the relative wages for southern region.

However, once we obtain the two relative wages for southern region (wS/ wE and wS/ wN) we

will be able to obtain also the eastern/northern relative wage (wE /wN) by dividing the former

two relative ratios.

wS

wN=[ (θg+ρ ) ϕG zmSN

mEN g (θg+ρ+mEN ) ](1

−ε )

wS

wE=[ (θg+ρ ) ϕG z mSN

mEN δg (θg+ρ+mSE ) ](1

−ε )

(35)

(36)

Through the imitation rates and the relative wage rates, now we are able to make a

policy analysis on the model. In the exiting literature on this subject, there are also many

studies that focus on the innovation effects of IPR. However, to keep the present study’s

framework as simple as possible, we deal only with the changes in the imitation and relative

wage rates.

3. THE POLICY ANALYSIS

In this section of the study, a global policy analysis on the three-pole model will be

carried out. Notice that, in this system there is a perfect protection of IPR in the North; which

means the tightening policies exist only in eastern and southern regions. In such a framework

which is quite similar with reality, the expectation of northern region is obviously to protect

IPR as strong as possible. This is so because tighter IPR protection in eastern and southern

regions implies lesser risk factor in northern region. However, due to its dual techonoly

sectors (both innovator and imitator), eastern region is affected by tighter IPR differently from

the North. Because stronger IPR may enhances innovation, while it reduces imitation. The

important point here for the East is whether the innovation stimulating effects may

compensate the loss in imitation sector. On the other, the status of the South is more complex

than the other two regions. As it has been stated before, southern region can imitate northern

products if and only if eastern region’s imitators could solve and imitate them. For northern

products, this makes the South an East-dependent region and it is affected sensitively both by

eastern and southern IPR strengthening policies.

Except the inefficiency terms (δ and z), the parameters that are used in the policy

analysis (i.e. gL=0.016 ,θ=0.67 , ρ=0.07 , α=0.714) have been taken from the existing

literature (i.e. Gustafsson and Segerstrom, 2011; Lorenczik and Newiak, 2012). However, due

to the three-pole structure of the model, we are no more able to use the inefficiency parameter

of Lorenczik and Newiak (2012). Therefore, to overcome this issue, by using the income level

and R&D expenditure data from Penn World Tables 8.0 and World Development Indicators

dataset of World Bank, we calculated per capita R&D expenditure levels. Notice that, here we

assume that countries with higher per capita R&D expenditure levels are more efficient than

others. According to this, the inefficiency parameters of the present model have been

calculated as δ=10 and z=7 which means northern region’s innovation is 10 times more

efficient than eastern region’s innovation, while eastern region’s imitation is 7 times more

efficient than southern region’s imitation.

To observe the region-specific effects of IPR, three different scenario have been

formed: implementing a globally harmonized IPR strengthening policy (ϕ E=ϕS), an IPR

strengthening policy only to regulate southern region and an IPR strengthening policy only to

regulate eastern region. By the reason of the endogenous structure of the model, the solution

will be made via a computer software.3

By using the predetermined parameters above and giving external IPR shocks to the

system, we will be able to obtain the steady state values of imitation (mSE ,mEN ,mSN) and

relative wage rates (wS/ wE ,wS /wN , wE/wN). Lorenczik and Newiak (2012) have also focused

on the threshold value of the IPR protection level and found that in such a system IPR

protection level varies around 5∓2. Due to the present study’s research question do not have

any interest on the threshold debate; we go on with an initial IPR protection level of 5. The

protection level has been increased 1 unit for each shock and to be able to observe the

maximum effects of an IPR strengtheninh policy the simulation exercise has been continued

up to a protection level of 20. Here, to explain the protection levels (units) with an example, a

5 unit of protection means that only one fifth of the imitation capacity can be used. Table 1,

Figure 3, 4, 5, 6, 7 and 8 show the effects of the enforced IPR shocks on each imitation

sectors and relative wage rates. While Table 2 involves all the policy scenarios with all the

variables, the corresponding figures show the emergent effects for each variable separately.

Figure 3. Changes in the Rate of Eastern Product Imitation of the South (mSE)

3 All the steady state values have been calculated by using the Dynare pre-processing engine on the Octave software.

.1.1

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Sou

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5 10 15 20IPR Protection Level

Common IPR Strengthening PolicyIPR Strengthening Policy in the SouthIPR Strengthening Policy in the East

The first policy scenario in Table 2 reflects a common IPR strengthening policy in

southern and eastern regions. According to the obtained steady state values, in case of such a

harmonized policy, the imitation rates and relative wage rates decline both in eastern and

southern regions. The decrease in the eastern imitation rate implies decreasing imitation risk

for northern innovators. Additionally, both eastern and southern relative wage rates against

northern region also drop off as a result of this policy. By piecing together these two findings,

it is clear to claim that the harmonized IPR strengthening policy damages eastern and

southern regions while it benefits northern region. Moreover, for this scenario, a special case

is shown for southern imitation rate of eastern products (mSE), which can also be seen

explicity on Figure 3. According to this, until a level of IPR protection this ratio follows a

stationary progress, and after, it starts to decrease ultimately. This means that until a level of

IPR, the booster effects equalize the dimmer effects; but after the dimmer effects prevail the

booster effects. By the way, one should notice here that this finding also indicates the

importance of the threshold discussions in IPR literature.

Figure 4. Changes in the Rate of Northern Product Imitation of the East (mEN)

.05

.1.1

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Eas

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5 10 15 20IPR Protection Level

Common IPR Strengthening PolicyIPR Strengthening Policy in the SouthIPR Strengthening Policy in the East

Beside the scenario 1, also in the scenario 2 and 3 the situation that is in favor of the

northern region is still observed. This makes the North the absolute winner due to the policies

that propound stronger IPR protection. In such a crystal clear framework, it is not complicated

to understand the reason of developed countries that underlies their oppressive position on

global IPR policies. The results of scenario 1 also show that southern relative wage rate

against eastern region declines; which makes southern region to be hurt harder than the East.

Now, to analyze the changes in southern and eastern regions let us give them the policy

shocks separately. The scenario 2 and 3 show these cases.

Figure 5. Changes in the Rate of Northern Product Imitation of the South (mSN)

.01

.02

.03

.04

.05

Nor

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5 10 15 20IPR Protection Level

Common IPR Strengthening PolicyIPR Strengthening Policy in the SouthIPR Strengthening Policy in the East

The scenario 2 shows a policy choice that offers to implement stronger IPR in southern

region. Expectedly, such an IPR policy has damaged both imitation sectors (mSE and mSN) of

southern region. On the other hand, according to the builded model, at first blush one can

claim that there should be a trade-off between southern imitation that targets northern

products (mSN) and eastern imitation that targets northern products (mEN). However, the

obtained simulation results show that also the eastern imitation rate declines in response to an

IPR strengthening policy in the South. To understand the reason of this result, we should

remind the equation (33) to realise that eastern imitation is determined not only by one

southern imitation rate but also by both imitation rates (mSE /mSN) of the South.

The IPR policy that is only implemented in southern region causes a decline for

southern relative wage rates against both to eastern and northern wage rate. Contrary to this,

eastern relative wage rate against northern wage rate (wE /wN) show an increase. In terms of

being an explicit example on the conflict of interest between the South and the East, this result

is quite important. Even this discrepancy by itself proves the heterogeneity that exists within

the developing world which should definitely be considered in such analyses.

Table 2. The Policy Scenarios and the New Steady-State Values

Scenario 1. Common IPR Strengthening Policy (ϕ E=ϕS)

ϕ E=5ϕ S=5

ϕ E=6ϕ S=6

ϕ E=7ϕ S=7

ϕ E=8ϕ S=8

ϕ E=9ϕ S=9

ϕ E=10ϕ S=10

ϕ E=11ϕ S=11

ϕ E=12ϕ S=12

ϕ E=13ϕ S=13

ϕ E=14ϕ S=14

ϕ E=15ϕ S=15

ϕ E=16ϕ S=16

ϕ E=17ϕ S=17

ϕ E=18ϕ S=18

ϕ E=19ϕ S=19

ϕ E=20ϕ S=20

mSE 0.216 0.212 0.206 0.209 0.205 0.202 0.176 0.170 0.165 0.160 0.156 0.153 0.149 0.146 0.143 0.141mEN 0.208 0.179 0.157 0.142 0.128 0.116 0.101 0.092 0.085 0.078 0.073 0.068 0.064 0.060 0.056 0.053mSN 0.045 0.038 0.032 0.030 0.026 0.024 0.018 0.016 0.014 0.013 0.011 0.010 0.010 0.009 0.008 0.008

wS/ wE 0.629 0.598 0.574 0.552 0.534 0.519 0.512 0.502 0.492 0.483 0.475 0.467 0.461 0.454 0.448 0.443wS/ wN 0.323 0.300 0.283 0.266 0.254 0.244 0.243 0.236 0.230 0.225 0.220 0.216 0.212 0.208 0.205 0.202wE /wN 0.514 0.501 0.493 0.483 0.476 0.471 0.473 0.470 0.467 0.465 0.463 0.461 0.459 0.458 0.457 0.456Scenario 2. IPR Strengthening Policy in the South

ϕ E=5ϕ S=5

ϕ E=5ϕ S=6

ϕ E=5ϕ S=7

ϕ E=5ϕ S=8

ϕ E=5ϕ S=9

ϕ E=5ϕ S=10

ϕ E=5ϕ S=11

ϕ E=5ϕ S=12

ϕ E=5ϕ S=13

ϕ E=5ϕ S=14

ϕ E=5ϕ S=15

ϕ E=5ϕ S=16

ϕ E=5ϕ S=17

ϕ E=5ϕ S=18

ϕ E=5ϕ S=19

ϕ E=5ϕ S=20

mSE 0.216 0.199 0.185 0.173 0.163 0.153 0.146 0.139 0.133 0.127 0.122 0.118 0.114 0.111 0.107 0.104mEN 0.208 0.203 0.199 0.195 0.191 0.187 0.184 0.182 0.179 0.177 0.175 0.173 0.171 0.169 0.167 0.166mSN 0.045 0.040 0.037 0.034 0.031 0.029 0.027 0.025 0.024 0.023 0.021 0.020 0.020 0.019 0.018 0.017

wS/ wE 0.629 0.602 0.580 0.562 0.547 0.534 0.523 0.513 0.504 0.496 0.489 0.483 0.476 0.471 0.465 0.461wS/ wN 0.323 0.313 0.304 0.297 0.292 0.287 0.282 0.278 0.275 0.272 0.269 0.266 0.264 0.261 0.259 0.257wE /wN 0.514 0.519 0.524 0.529 0.533 0.536 0.540 0.542 0.545 0.547 0.549 0.551 0.553 0.555 0.556 0.558Scenario 3. IPR Strengthening Policy in the East

ϕ E=5ϕ S=5

ϕ E=6ϕ S=5

ϕ E=7ϕ S=5

ϕ E=8ϕ S=5

ϕ E=9ϕ S=5

ϕ E=10ϕ S=5

ϕ E=11ϕ S=5

ϕ E=12ϕ S=5

ϕ E=13ϕ S=5

ϕ E=14ϕ S=5

ϕ E=15ϕ S=5

ϕ E=16ϕ S=5

ϕ E=17ϕ S=5

ϕ E=18ϕ S=5

ϕ E=19ϕ S=5

ϕ E=20ϕ S=5

mSE 0.216 0.231 0.244 0.255 0.264 0.272 0.279 0.286 0.292 0.297 0.302 0.307 0.311 0.315 0.319 0.323mEN 0.208 0.184 0.166 0.152 0.140 0.131 0.122 0.115 0.109 0.103 0.098 0.094 0.090 0.086 0.083 0.080mSN 0.045 0.043 0.041 0.039 0.037 0.036 0.034 0.033 0.032 0.031 0.030 0.029 0.028 0.027 0.026 0.026

wS/ wE 0.629 0.625 0.622 0.620 0.618 0.617 0.616 0.615 0.614 0.613 0.612 0.611 0.611 0.610 0.610 0.609wS/ wN 0.323 0.310 0.299 0.291 0.284 0.279 0.274 0.269 0.266 0.262 0.259 0.256 0.254 0.251 0.249 0.247wE /wN 0.514 0.496 0.481 0.470 0.460 0.452 0.445 0.438 0.433 0.428 0.423 0.419 0.416 0.412 0.409 0.406

.4.4

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5 10 15 20IPR Protection Level

Common IPR Strengthening PolicyIPR Strengthening Policy in the SouthIPR Strengthening Policy in the East

Figure 6. Changes in Eastern/Northern Relative Wage (wE /wN)

The scenario 3 which reflects a policy choice that offers to implement stronger IPR in

eastern region shows firstly an increase in southern imitation rate that targets eastern products

(mSE). This finding is also another proof on the conflict of interest between the East and the

South. The reason of the increase of southern imitation rate here depends on the innovation

stimulation effects of IPR. Remind that the present study does not claim that IPR has negative

effects on innovation; in fact IPR may have very useful effects on innovation. But as it has

been said before, the present study focuses only on changes in imitation rates to observe the

varying effects of IPR within the developing world. In this context, if we presume that

stronger IPR may stimulate innovation in a region that could enough capacity to innovate new

varieties, for scenario 3 we are able to say that the number of varieties have increased due to

the stronger IPR protection. Helpman (1993) explains this effects with these words; “the more

products are available for imitation the easier it is to imitate”. The causality here is clear; if

more unimitated products are in the target of an imitator, the number of potential imitation for

that imitator will increase.

.45

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Rat

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5 10 15 20IPR Protection Level

Common IPR Strengthening PolicyIPR Strengthening Policy in the SouthIPR Strengthening Policy in the East

Figure 7. Changes in Southern/Eastern Relative Wage (wS/ wE)

As distinct from the southern imitaton of eastern products, the rate of southern imitation

that targets northern products (mSN) is also hurt by the policy choice that offers stronger IPR

in eastern region; this situation can be seen graphically in Figure 5. Moreover, this is another

proof of the conflict of interest that exists between souther and eastern regions. For the

imitation of high-tech products, the fate of the southern region unambiguously depends on the

eastern imitation rate. In other words, besides the changes in eastern innovation also the

changes in its imitation determine the future of the southern region with regards to

technological development.

.2.2

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n / N

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Wag

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5 10 15 20IPR Protection Level

Common IPR Strengthening PolicyIPR Strengthening Policy in the SouthIPR Strengthening Policy in the East

Figure 8. Changes in Southern/Northern Relative Wage (wS/ wN)

CONCLUSION

This study has investigated the global effects of intellectual property rights (IPR)

policies by building a three-pole world economy model. Up to the present, the existing

theoretical literature has tackled this subject with the classical two-pole framework (i.e. the

North-South Model). However, many observable facts point out the technological

heterogeneity that exists within the developing world. From this point of view, the present

study has made a modification on the classical model and transformed it into a three-pole

structure, which we denominate as the North-South-East Model. Within this context, the

builded model consists of a region that only innovates high-tech new varieties (the North), a

region that innovates low-tech new varieties and imitates high-tech varieties (the East), and a

region that can only imitate both high-tech and low-tech varieties (the South). Through this

imitation chain system, it has been possible to reflect the technology-based economic trade-

offs and the conflict of interests between all the three regions.

To observe the possible effects of IPR in the builded model, three different policy

scenarios have been designated. Right after, by giving exogenous IPR shocks to the system,

the new steady state values have been obtained and compared with the initial values. The

results of the simulation reveal firstly that northern region is an absolute winner of the IPR

tightening policies. This fact gives us a clue about the IPR-insistent pressure on developing

world that is put by developed countries and international institutions in which those countries

have a strong voice. Secondly, IPR strengthening policies in eastern region enhances the rate

of southern imitation that targets eastern innovation. This result supports Helpman’s (1993)

finding on the relation between the innovator and the imitator that implies the more

innovation may cause the more potential imitation. Thirdly, stronger IPR in southern region

raises eastern relative wage and accordingly eastern welfare, while damaging both two

imitation sectors of the South. The second and third outstanding findings reveal the existence

of a conflict of interest even within the developing world. According to this, evaluating both

developing countries with low technological capacity and relatively high technological

capacity –at least in the matter of IPR issues– gives cause for getting biased and suspicious

results in the analyses. This inference shows that differences in technological development

levels are important determinants of the possible effects of IPR. Also in the existing literature,

some relatively new studies refer the importance of seeking an optimal IPR rate and threshold

values. Some new researchs indicate that the protection levels that are less or more than the

optimal value may damage the economies. A very recent study Chu et al. (2014) have

investigated the effects of patent protections in a Schumpeterian growth model which has

been built by them. Their findings reveal that the optimal patent protection level depends on

development level. According to the results, countries in earlier development stages should

implement weaker IPR protection to make the imitation process possible; and in later steps

they should turn to stronger IPR protection to encourage domestic innovations. It seems

henceforward the importance of the development stages and consideration of the inabilities of

developing world will be discussed more extensive. Further research in the IPR literature will

possibly focus on this point and take it forward.

In addition to the contributions and findings of the present study, the new three-pole

model is very applicative on investigating many other global economic issues in which the

heterogeneity is explicit and determines the way of the issue. Further studies in IPR or in

other topics of economics may evaluate the idea of thinking the global economy in such a

framework.

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