Investment distortions

Another implication for developing countries is whether adopting a strong IPR regime will in fact direct R&D to their idiosyncratic needs. Diwan and Rodrik (1991) and

Deardorff (1992) argue that welfare in the South improves as preferences between the North and South are more homogeneous. Homogeneity of demand allows for free-riding and more readily transfers benefits to the South under a weak IPR regime. Thus, their logic would portend that a developing country's needs would go unmet if demand for a good did not mirror those of a technology-producing country. Goldsmith et al. (2005) empirically show how and why this occurs.

Only 4.3% of the pharmaceutical R&D expenditure is targeted to the health problems that mainly concern low- and middle-income countries (World Health Organization, 1996; Commission on Macroeconomics and Health, 2001). Total pharmaceutical R&D in the private sector has more than doubled in the last decade to an estimated US$44 billion in 2000 (Scrips Pharmaceutical R&D Compendium, 2000; Global Forum for Health Research, 2002). It has been estimated that of 1393 drugs approved between 1975 and 1999, only 13 were specifically indicated for tropical diseases (Trouiller et al., 2002). Where diseases are common to both developed and developing countries, the picture is different. For example, the majority of human immunodeficiency virus (HIV) vaccines are being developed for genetic profiles of subtype B, prevalent in developed countries, but most acquired immune deficiency syndrome (AIDS) sufferers in developing countries are types A and C.

Not surprisingly, firms invest in those activities where rents are appropriable. If the product under analysis is a critical food, food item or pharmaceutical product, the lack of investment can have vital short- and long-term social implications. Weak IPR causes product and service offerings of private firms to be shunted away from social need towards activities with superior returns on investment. So the most compelling implication of weak IPR may be that the South loses the capability to address its own needs and priorities, and over time the technology lag may become increasingly difficult to surmount.

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