Based on this notion, I group the selected countries into four categories – high income (H), upper-middle income (UM), lower-middle income (LM) and low income (L) according to the income standard of World Bank in 2005. The World Bank defines that high income group is country’s gross national income (GNI) per capita over $10,726 or more; the upper middle income group is country’s GNI per capita range of $3,466 to $10,725; the lower middle income group is the economies with a GNI per capital of more than $876 and less than $3,465; and the low income group is the economies with a GNI per capita of more than $875 in 2005 (The World Bank, 2006).
The further detail information refers to Table 3 in 4. 2 Method and data. The flowchart of hypothesis 1 is illustrated in Figure 1 below. I expect our regression results in each group would be the same as Smith’s research (1999). The empirical indication of Smith’s research (1999) reveals a positive link between US exports and an improvement of patent rights in countries within the LM group but a negative relation between US export and an improvement of patent rights in countries within three others groups.
The predicted curve of coefficients between export and each of dummy variables is an inverted shape as Figure 2 shows. <Figure 2: The Predicted coefficient curve> The expectation derived from assumptions above that patent rights systems in countries with higher income are more mature than the systems in countries with lower income because rich countries possess significantly more resources and the patent confers market power in the world’s market.
Moreover, we further suppose that imitative risks in countries with high income and upper-middle income might be lesser than in countries with lower-middle income. The lack of substitutes and lesser imitative activities in the market results in weaker risks of imitation and imply that patent owners might possess market power in the market. If a reform of patent rights system is driven in countries with weaker imitative risks at this moment, the competition in the market would become less fierce.
Therefore, the market power of patent owners would more concentrate owing to reshaping and reforming the patent rights law. In conclusion, market power effect would occur in those countries with high income and upper-middle income has relatively low risk of imitation when the patent rights protections are improved. And the effect in high income countries would be more significant that the effect in upper-middle income countries. On the contrary, patent systems in low-middle income countries are likely to be weaker than in higher income countries.
Rampant imitative activities but weak patent protection would distract foreign investment and international trade. Exporters need to increase anti-imitative costs by using special techniques when they ship products to those importing countries in order to avoid imitation through reverse engineering (Catherine, Y. C. , 2004) which imitators figure out product’s functions and layout from analyzing its software and hardware. Hence, an improvement in the patent system causes a reduction of anti-imitative costs.
In a competitive market, market share of patent holders would be increasing as a result of cost reduction. Market expansion effect occurs when patent holder have increased competition. However, in low-income developing countries, people have lower consumption abilities. Lower demands lead to a limited number of exports. Even patent rights are enhanced in low income economies; there is insignificant but negative influence to exporters. Hypothesis 2- interaction between exports and patent rights with relation to country’s level of imitative abilities
In hypothesis 2, by following Smith’s research which takes country’s imitative abilities into account, we attempt to examine how sensitive are US exports to country’s patent right with relation to country’s level of technical skill. It is assumed that countries with higher technical capacities imply that they pose stronger imitative abilities and diffusion and imitation are rampant in these nations. Thus, exporters confront a higher (lower) but potential imitative risks if importing countries own strong (weaker) level of technical capacities to imitation.
Figure 3 above illustrates what kind of interactive influences between levels of technical capacities in a country and international trade occur. This study expects that exports will reduce to respond to an improvement of patent rights protection if the importing country is grouped into weak R&D ability. An ambiguous effect would happen in countries with middle level of imitative abilities. Therefore, if an improvement of patent right happens to a country with higher levels of technical skill, the effect would be positive link with exports. For further explanatory, the effect has to depend on the degree of imitative risks.
In first situation, when patent holders, which pose more market advantages, import their patented products into countries with weak imitative capacities, exporters gain higher level of market power because of less competition in local market due to the improvement in patent rights protection. Local firms might have insufficient abilities to imitation through reverse engineering and might need to spend much to imitation. Patent rights provide its holders with a relative an advantageous position and leading market power. Thus, after a patent rights system reform, patent holders pose larger market power.
In second situation which countries have moderate R&D abilities, effects will depend on the relatively dominance of market power and expansion when exporters confront moderate imitative risks, ceteris paribus. In addition, market expansion effect occurs in the last situation. When exporting firms face strong risks of imitation, importing countries have high levels of imitative abilities, an improvement of patent right would provide legal protection to exporting firms and tend to expand its market. The reason is that countries with strong imitative abilities imply fierce imitation activities in a competitive market.
Through an improvement of patent system, exporters can spend less anti-imitative costs but rivals must pay more to imitate products. Thus, the amount of imitation would be decrease to respond to patent reforms and might increase demand and supply as a result of cost reduction. Parts of market demand will retreat to the patent holders; indeed, parts of supply from exports will increase. That is the reason why we assume that market expansion effect occurs in countries within strong imitative abilities with respect to the improvement in patent rights.