Let knowledge spread around the world

It is not in the west’s interests to stop developing countries from innovating

Martin Wolf

In the long run, as the Nobel laureate Paul Krugman has written, productivity is almost everything. But what drives productivity? The answer is know-how. It is because humanity has discovered, developed, deployed, and disseminated useful knowledge that an ever-rising proportion of the world’s population is at last escaping the “poor, nasty, brutish and short” lives of our ancestors, pithily described by the philosopher Thomas Hobbes in the 17th century.

Knowledge is also somewhat paradoxical. It is most productive when freely available. But the incentive to create it depends on the ability to restrict its use. The former consideration justifies dissemination. The latter justifies control. How, then, is this balance working?

The latest World Economic Outlook offers an illuminating chapter on how globalisation has been helping to spread useful knowledge. This analysis sheds light on the contemporary landscape of innovation, on the current diffusion of knowledge, on what is happening to productivity, on the role of global value chains and on the impact of competition on creation and use of knowledge.

Perhaps the most significant conclusion is on the shift in the location of innovation. If this is measured by what are called “patent families”, by which is meant patents filed in more than one jurisdiction (a measure of their significance), the US, Japan and the big three European economies (Germany, France and the UK) are still dominant. China is already second in terms of spending on research and development, only a little behind the US. In the aggregate stock of patents, China is also already ahead of the UK. Strikingly, the annual rate of patenting is stagnant in the big five advanced economies, while it is soaring in the emerging world, and above all in China. (See charts.)

The slowdown in patenting and, to a lesser degree, spending on research and development in the high-income countries parallels the slowdown in productivity. There is much debate on the causes of the latter. Some argue that the latter will naturally reverse. Others suggest the flow of good new ideas is slowing at the productivity frontier for more fundamental reasons: it is simply harder to make big breakthroughs.

Meanwhile, emerging economies are benefiting from applying already developed ideas within their own economies. That is how the diffusion of economic growth has worked since the industrial revolution (indeed, before). Globalisation, it appears, has accelerated the rate of diffusion by lowering the obstacles. This has occurred via foreign direct investment and via the unbundling of production via global value chains. Access to foreign know-how fertilises invention: thus, the greater the knowledge inflow, the stronger becomes domestic patenting.

This is not only true for emerging countries. It is also true for those at the knowledge frontier.

Access to foreign knowledge also promotes productivity, as one would hope. Not surprisingly, this effect is particularly important for emerging economies. Yet, unfortunately, the growth of labour productivity has slowed almost everywhere since 2004, perhaps because of the global financial crisis.

A particularly important conclusion of this analysis is that greater competition — one of the benefits of economic globalisation — accelerates the diffusion of technology across countries and even the rate of innovation itself. One explanation for the latter might be that returns to innovation are increased by access to a bigger global marketplace.

What do these findings tell us about the state of the global knowledge economy and appropriate policy towards it? The most important conclusion is that the global diffusion of knowledge is an important benefit of globalisation. Over time, this adds significant new contributors to the development of useful knowledge. The addition of hundreds of millions of minds must be a good thing for all. This is now the case with China, as it once was with the entry of Japan and South Korea into the business of creating new knowledge.

Unfortunately, what is happening today is not just the entry of new innovators, but an apparent slowdown in the rate of innovation and productivity growth in the advanced countries. This is yet another reason why their voters, business leaders and politicians have become more defensive. Yet if there is one lesson from two centuries of unprecedented economic growth it is that old knowledge ultimately becomes a widely-available commodity. The most important task for the advanced countries is to create useful new ideas. On that will their futures ultimately depend. Achieving this will require not just well-designed intellectual property rights, but government support for fundamental science and breakthrough technologies, as was the case for the internet some decades ago.

A particularly important aspect of the globalisation of useful knowledge is the relationship of the west with China. One of the tragedies of the Trump administration’s blunderbuss approach to trade policy — leave no friend untargeted, usually for no good reason — is that it has alienated potential allies in its attempt to tackle the forced transfer of know-how by China. Yet even Chinese policymakers understand that the future of their economy depends on incentives for developing and disseminating new IP. The US should be pushing on an open door.

Above all, it is not just about protecting IP. It is also about recognising that it can be an obstacle to competition. It is still more about focusing on the future. A world in which innovation is more widely shared is both inevitable and desirable. This is a future we ought to want. The old monopoly is gone. Good.

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