August 06 2012
With the new Ministry of Business, Innovation and Employment, the government has created a 'super-ministry' with a name that emphasises innovation. However, the official papers and announcements make no mention of the link between innovation and patents. This is surprising, especially at a time when New Zealand's patent law is - at last - being totally reformed and the Patents Bill is before Parliament. The omission is even more surprising given that the Ministry of Economic Development - the senior ministry that forms the foundation of the Ministry of Business, Innovation and Employment - administers patent law at present.
The inclusion of 'innovation' in the ministry's name indicates that the encouragement of innovation is a major goal. Economists now generally accept that innovation drives economic growth. Murray Bain, the chief executive of the old Ministry of Science and Innovation, stated that it acknowledged "the significant role of science and innovation in building stronger economic growth".
However, the process of innovation is subject to market failures. For example, a pure competition model means that an innovator can be copied and undercut by a competitor that is not burdened with the associated R&D cost. The market failure is that where the R&D spend is significant, innovation is rendered unattractive; the result is underinvestment in R&D and less innovation.
The government's role is not to deliver innovation to industry, but to provide a facilitating environment. For example, it should ensure an efficient legal infrastructure - a function noted by the new ministry's acting chief executive, David Smol, in a speech in May 10 2012. In a small country, such as New Zealand, the government's role is also to undertake and supply through research institutions and universities the fundamental science which underpins commercial R&D.
It is also critical to provide incentives to innovate where there is a risk of market failure. Such incentives may include subsidising corporate R&D, offering tax concessions and making available appropriate and balanced IP rights to innovators. The third of these incentives involves little, if any, government expenditure.
Patents are the primary IP right for innovators and the Intellectual Property Office of New Zealand (IPONZ), which will become part of the new ministry, is essentially funded by those that use it. However, the Patents Act 1953 - which provides the legal framework for IPONZ, patent applicants, patent owners and the courts - is an anachronism by international standards.
At present, many are sceptical about IP rights, such as patents and copyright. In the latter case, the balance between owners and users is questioned. With patents, criticism is mainly directed towards the possibility of obtaining patents for software and biotechnology inventions.
Nevertheless, despite the market failure theory, it is fair to ask what evidence there is of a link between patents and innovation. Most of the evidence comes from measurements of the overall link between IP rights and growth, rather than the respective links between innovation and growth and between IP rights and innovation. In short, it appears that IP rights stimulate growth in developed countries, whereas the link is weak in less-developed countries. However, the relationship between IP rights and growth is not simple, even in the developed world. A balance between under-protection and over-protection seems to be essential. As IP rights strength increases, economic growth increases, up to a point at which growth falls off - the relationship can be plotted as an inverted 'U' curve. New Zealand is a developed country, so it will benefit from IP rights; however, with legislation nearly 60 years old, it is nowhere near the top of the curve.
In addition to the evidence of these economic studies, there is the importance of IP rights, such as patents, in facilitating commerce in innovation. Patents effectively convert innovation into property, allowing it to be commercially exploited. Patents may be sold (usually for a one-off payment) or licensed (usually for ongoing royalties). They provide an infrastructure for technology transfer and the supporting legal agreements. (The position of patents contrasts with that of unpatented trade secrets, which cannot legally be sold, as they are not property under New Zealand and Commonwealth law.)
The Organisation for Economic Cooperation and Development (OECD) uses patent filing statistics as a measure of national innovation. Figures for the filing of international patent applications have revealed New Zealand to be only one-third as innovative as Denmark and Israel by OECD measurements. The Ministry of Business, Innovation and Employment's goal of facilitating innovation could redress this - but only if its ministers and officials get a grip on these issues.
The government and the new ministry must place a higher priority on the patent system and the Patents Bill. However, not all of New Zealand's high-technology industries support all current provisions of the bill - the Commerce Select Committee's belated exclusion of patents for software inventions is a case in point (for further details please see "Select committee report on Patents Bill: computer software not patentable"). It was introduced on the basis of faith-based arguments and in the face of a total lack of evidence that such patents had resulted in any economic mischief that required addressing by legislation. It seems irrational to exclude embedded software inventions of the type devised by high-technology New Zealand manufacturers, such as Fisher & Paykel Appliances and Navman for their computer-controlled global positioning systems.
Subject to the qualifications above, the evidence shows that a workable innovation policy requires a modern, balanced patenting system. It is time that New Zealand politicians and officials became familiar with the basics of patents and other IP rights. Other nations have long moved beyond this point and are more focused on national fine tuning and international IP rights treaties.
An edited version of this article was published in the National Business Review on July 6 2012.
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