Edith Tilton Penrose, ‘The Economics of the International Patent System’ (Baltimore John Hopkins Press 1951; excerpted).
Tilton Penrose – The Economics of the International Patent System
Background
Switzerland is home to world-leading pharmaceutical and medical technology companies, alongside its traditional watch-making and machine and machine tool industries. The country today is an ardent defender and advocate of strong patent protection, particularly in the pharmaceutical and chemical sectors. This attitude has not always been in evidence. In the 19th century, Switzerland was an emerging economy, attracting foreign direct investment and plants utilizing extensive hydropower from its rivers. Textiles laid the foundations for industrialization. Chemical industries emerged in Basel, next to Germany and France across the Rhine River. These industries pleaded for weak intellectual property (IP) protection and ample room to imitate. Patent protection was introduced only upon foreign pressure, in particular by the German Reich on behalf of its strong chemicals industries, threatening to impose economic sanctions. Swiss industries free-rided and benefitted heavily from patent protection abroad through membership of Switzerland in the Paris Union while opposing at the same time the introduction of reciprocal protection to foreign inventions, as they did not wish to lose the ability to imitate and use foreign inventions for free.
Switzerland only introduced limited patents for inventions in 1907. Originally, the federal government had no powers to introduce patent protection. Such powers were defeated in 1866 and again in 1882, only being adopted in 1897 by referendum. The chemicals and textile industries strongly opposed patent protection for foreign competitors, which led to increased pressure from German industry. In the tariff negotiations of 1894, the German government exerted pressure to enact patent legislation. Additionally, there was risk of losing membership of the Paris Convention and thus lose patent protection abroad. The BIRPI in Berne argued strongly in favour of introducing patent protection, to avoid such consequences. The country saw a fierce debate on the subject take place. The Patent Act was adopted, but offered only limited protection. It excluded process patents by requiring a physical model for the invention. Chemical processes for the textile industry were also excluded. Moreover, the law provided for compulsory working requirements. Subsequent revisions amended the Act. But it was only in 1976 that Switzerland would adopt substance patents for pharmaceutical products, strongly supporting the globalization of such rules in the Uruguay Round of the GATT (1986-1993). The TRIPS Agreement requires all countries, except the least developed ones, to adopt substance patents for pharmaceuticals and chemical products. Developing countries were obliged to introduce such protection by 2005, which led to new rules on compulsory licensing for the exporting of medicines in 2001 under Article 31bis of the TRIPS Agreement. Patent protection is one of the main battlegrounds between industrialized and emerging economies, having for example caused negotiations to fail on a free trade agreement between India and Switzerland.
Edith Tilton Penrose wrote in the post-World War II era, when markets were much less globalized than today and the foreign trading interests of larger and smaller countries varied greatly. Her reflections on the patent system, referring to Switzerland as an export depending economy in assessing losses and gains, remain valuable today, especially in the debate on fine tuning of the system. This entails defining the scope of rights and in particular compulsory licensing between industrialised, developing and emerging economies. We learn foremost from her work to what great extent intellectual property is interest-driven, much more so than by principles of law.
Summary
The seminal monograph of Edith Penrose essentially addresses the advent of patent protection in the Paris Convention for the Protection of Industrial Property (1883). The book is foundational, as the doctoral thesis concerned, published in 1951, offered the first economic analysis of the matter − economists having refrained from dealing with the subject after losing the battle on patents in the 19th century. Importantly, the book also offers an interesting case study on the evolution of Swiss patent law and its exposure to foreign economic pressures.
Chapter I of the book provides a concise Historical Introduction to patent law in Europe and the United States, discussing the patent controversy in the 19th century. The free trade movement and the effort to build the German Zollverein and a common market disfavoured patent protection from a liberal point of view of free trade. The 1883 recession, increasing nationalism and the advent of the Paris Union brought about a turn of the tide. While benefitting from patent protection abroad, Switzerland was a late-comer to domestic patent protection, as outlined above. Penrose used the example of Switzerland to elaborate the pros and cons of patent protection in Chapter VI of her book entitled The Economics of the International Protection of Patentees: The Balance of Costs and Gains. The chapter starts with a quote from an 1886 Swiss government report that stresses the need for pluralism in intellectual property protection, commensurate with the largely divergent economic needs of countries. The report opposed uniform global legal standards at that time in a manner somewhat at odds with the government’s effort to host the International Bureau for the Paris Convention in Berne. While industries welcomed protection abroad under the principle of national treatment of the Paris Union, they opposed protection at home as a cost exceeding the benefits of protection abroad. Penrose argues that countries rarely have an interest in granting patents on foreign inventions. The balance is different for smaller developed countries, as they depend on foreign markets and protection abroad, thus the costs of an international patent system and of protecting foreign inventions at home are outweighed and worth incurring. The Swiss experience is discussed in this context. Already in the 19th century, Swiss inventors were taking out a surprisingly high number of patents per capita abroad, in the absence of patent law at home. The lack of protection at home put long-term membership of the Paris Convention at risk, jeopardizing the interests of exporting industries. Introducing patent law at home thus became indispensable, but opponents insisted on the most minimal levels of protection. This in turn led to diplomatic pressure from Germany that eventually led to adoption of the Patent Act in 1907, regulating working requirements and compulsory licensing. The case of Switzerland, Penrose argued, is fairly typical and different from the interests of the larger industrialized countries, which she addresses next. In those countries the emphasis from the outset is on domestic markets, the interest in obtaining patents abroad being much smaller, as their industries do not depend on foreign markets. For the world as a whole, any net increment attributed to foreign patents is more likely to come from countries with small domestic markets, such as Switzerland. Nevertheless, the value of the international system lies in reducing unilateral pressure by exporting countries on smaller ones and in keeping an overall balance within the system. Limiting patents to domestic markets only would place patentees at a disadvantage abroad, as the rest of the world could use the invention freely while domestic competitors cannot. Working requirements and compulsory licensing are eventually developed as the principal answer, in order to limit the costs of foreign patents for an economy.