The Effect of Intellectual Property Rights on Domestic Innovation in the Pharmaceutical Sector

There is little empirical evidence concerning the effect of Intellectual Property Rights (IPR) protecting pharmaceutical products and processes on pharmaceutical domestic innovation. Indeed, existing literature does not provide a punctual estimate of this effect for developing countries. This paper fills this gap, by exploiting a self-constructed dataset which provides, for a 22-year period, information concerning IPR reforms involving pharmaceuticals for 74 developed and developing countries. The identification strategy exploits the different timing across these countries of two sets of IPR reforms. Domestic innovation is measured as citation-weighted domestic patent applications filed at the European Patent Office (EPO): the highly skewed distribution of the dependent variable, and the high number of zero observations, are taken into account using count data models. In particular, a Zero Inflated Negative Binomial model is adopted, to overcome previous literature assumption that all innovations are patented in the main markets of reference, and to take into consideration the choice not to patent at the EPO. Results show that innovation is sensitive to IPR protection, but not to its degree. Moreover, the effect is not long lasting. My study also finds that developing countries profit significantly less than developed ones from the protection, benefiting from an effect that is roughly half of that for developed countries. Consequent policy implications are examined, and include the conclusions that a “one size fits all” approach can be inappropriate, and that gradual reforms should be preferred to rare reforms that greatly alter the level of IPR protection.