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Sinclair Davidson

Why intellectual property rights are key for Singapore's economic future

BY SINCLAIR DAVIDSON

One of the great economic challenges of the 21st century is defining the role and scope of intellectual property (IP) in the economy. This may sound like a nonsensical proposition – after all everyone agrees that IP is a driver of economic growth and prosperity.

The security IP provides on property rights ensures that new ideas will be commercialised, and new products and services will be created. While all that is true, but once we move beyond these general statements, there is a lot of devil in the details.

IP rights create incentives for businesses to invest in ideas, develop new products, and earn a profit from the sale of those products. This in turn leads to improved customer satisfaction, improved profitability, and greater employment opportunities.

Governments also benefit from having a prosperous economy and increased tax revenues from a growing economy.

In establishing itself as an IP hub, Singapore is hoping to capitalise on the benefits intellectual property creates as well as maintain its position as an economic trading powerhouse economy. Within the Asia and Oceania region, Singapore is ranked as having the second highest IP protections. The Republic is ranked fifth in the world.

In September, Singapore will be hosting IP Week with the explicit notion of transforming ideas into assets. Of course, ideas are already assets, but the objective is to commercialise ideas.

Many people have a clear idea what it means to own physical property. But it isn’t clear if owning intellectual property is the same thing. For some people, the very idea of IP is controversial, and for others they like the idea of IP but not the actual rights that are created.

The thing is IP rights must be created by the government; they are not natural rights. As such, the design of the rights becomes important. If it is too strict, they inhibit innovation and growth. If it is too lax, they fail to create the incentives necessary for growth.

So just like in the story of Goldilocks and the three bears, IP rights have to be “just right”. Some of the components of being “just right” is certainty and transparency.

Government created rights, however, can be very fragile. What governments give can often also be taken away. Governments come under a lot of pressure to modify property rights. For example, the US government is often trying to extend the terms of copyright, while public health advocates are often trying to reduce the term of medical patents.

All this lobbying undermines certainty and transparency. Businesses can no longer invest, secure in the knowledge that they will be able to profit from their investments and cover their risks.

The Singaporean government, however, is known to take a long-term approach on policies and be firm on its positions. This would suggest that Singapore should be able to derive the full benefits from an IP-hub strategy. Not quite.

There are two threats to IP rights here. The first is from the public health lobby. There seems to be notion that branding and trademarks – a very important component of IP – can be restricted.

The nadir of this assault on IP has been the Australian plain packaging policy where the government was able to take IP away from the brand owners but not pay compensation under a loophole in the Australian constitution. Expropriation without compensation is usually a hallmark of third world dictatorships, not developed high-income economies.

The plain packaging policy is described as being an anti-tobacco health measure. Yet, interestingly, Australian government figures show that smoking did not decline as a result of the policy. Rather the policy appears to be an attack on businesses – in this case the tobacco industry – and its ability to deploy its own IP to earn a profit.

The second threat comes from international efforts to crack down on so-called “profit-shifting”. Some companies supposedly route their profits or royalties through countries with lower or no taxes, so that they end up paying almost no tax in the countries where their money is earned.

For instance, IP located in Singapore earns substantial royalties that flow into the Singaporean economy and have been taxed by the government at low rates compared to international standards.

Many foreign governments, however, take the view that those royalty payments are a form of tax avoidance – if not actual evasion. This view is based on the notion that IP isn’t particularly valuable. Unfortunately it appears that Singapore has bowed to international pressure and is modifying its IP taxation framework. At present, it is not clear how this will impact Singapore’s IP Hub strategy.

So what would be a response to these challenges?

Singapore needs to ensure that public health measures actually target public health issues, rather than IP. The incidence of smoking is likely to be reduced by public education campaigns and increased excise rather than plain packaging.

Attacking trademarks emphasises the fragility of government created rights and undermines strategies to grow economic prosperity through intellectual property protection.

It is here that the two threats are linked. Royalty payments are thought to constitute profit shifting because people do not value IP highly enough. The Singapore government needs to emphasise through its words and its deeds that IP is valuable – and that businesses are fully entitled to own IP rights and earn a return on them.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.

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Sinclair Davidson

Sinclair Davidson

Sinclair Davidson is Professor of Institutional Economics in the School of Economics, Finance and Marketing at RMIT University in Melbourne, Australia; and a honorary Senior Fellow at the Institute of Public Affairs. His research interests include public policy, taxation and property rights.

He is a regular contributor to public debate with opinion pieces having appeared in The Age, The Australian, Australian Financial Review, The Conversation, Daily Telegraph, The Drum, Sydney Morning Herald, and Wall Street Journal Asia. He is also a regular commentator on both radio and television.

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