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In Sections XV and XVI an attempt is made to determine whether the extent of direct foreign investment is related significantly to the perceived strength or weakness of a country's intellectual property rights protection. Section XVII deals with the relationship between intellectual property rights protection, on the one hand, and the composition of direct foreign investment and the age of transferred technology, on the other. Section XVIII summarizes available evidence regarding the effects of the unauthorized use of intellectual property on the sales and profits of U.S. firms. Sections XIX-XXI discuss the results of recent studies of the effects of intellectual property rights protection on the rate of technological innovation and suggest a variety of kinds of research that might be carried out to shed new light on this very important, but inadequately explored, topic. Section XXII provides a summary and conclusions.

II. RATIONALE FOR THE PATENT SYSTEM

Intellectual property consists chiefly of patents, plant breeders' rights, copyrights, trademarks, and trade secrets. Economists have focused more attention on patents than other forms of intellectual property. Ever since the first U.S. patent laws were enacted about 200 years ago, the following arguments have been used to justify the existence of the patent system. First, these laws are viewed as an important incentive to get the inventor to put in the work required to produce an invention. Particularly for the individual inventor, patent protection is claimed to be a strong incentive. Second, patents are viewed as a major incentive for firms to carry out further work and make the necessary investment in pilot plants and other items that are needed to bring the invention to commercial use. If an invention became public property when made, a firm might be unwilling to incur the costs and risks involved in experimenting with a new process or product because another firm could watch, take no risks, and duplicate the process or product if it were successful. Third, it is said that patent laws result in inventions being disclosed earlier than otherwise, the result being that other inventions are facilitated by earlier dissemination of the information.

Despite these arguments, not all economists believe that the patent system is beneficial. Some stress the social costs arising from the fact that a patent is a monopoly right. They point out that patents have been used to establish monopoly positions in industries such as aluminum, shoe machinery, and plate glass. Also, they say that patents are not really important as incentives for innovation because long lead times ensure that most of the profits from many types of innovations can be obtained before imitators have a chance to enter the market. Further, they argue that new knowledge is not used as widely under the patent system as it should be, from the



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