Given their lack of modern scientific research infrastructure, many developing countries will be faced with a difficult choice if they wish to enjoy the benefits of the revolution in agricultural biotechnology. They can protect the intellectual property rights of foreign developers of new biotechnological products and have the transfer take place in the international marketplace. Alternatively, they can ignore the developer’s intellectual property rights and allow domestic pirate production to take place. The WTO’s TRIPs agreement was put in place at the Uruguay Round of GATT negotiations to discourage developing countries from following the latter course.
In this a paper, a formal model is developed in a game theory framework under the assumption that the innovation has already taken place in the developed country and the new biotechnology is produced and marketed in both the innovating country and a developing country. Firms in the developing country have the option of paying a licensing fee or to produce identical pirated goods. The innovating firm must attempt to set its royalty rate to maximize profits while the government of the developing country must attempt to choose a level of enforcement that will maximize social welfare. Both a simultaneous game and a leadership game (where the innovating firm sets its royalty rate prior to the government setting its enforcement strategy) are presented. Our findings suggest that the presence of the WTO trade penalty will under some circumstances have no impact on the enforcement of intellectual property rights in agricultural biotechnology. We also find that under other conditions as the trade penalty rises, so will the level of enforcement. Piracy, however, cannot be eliminated.
The details of the results should be of interest to firms investing in the development of biotechnology, governments attempting to implement their TRIPs commitments and those wishing to strengthen the international protection of intellectual property rights in agricultural biotechnology.