THE projects set to be executed under the CPEC umbrella have followed years of enthusiasm about rejuvenating economic cooperation and capitalising on Gwadar’s natural advantage. But with the plaudits there has also been criticism. In this regard, concerns about the long-term economic viability of the corridor are not entirely misguided, and it is time the debate focused on CPEC’s impact on Pakistan’s budding innovation economy.

In recent years, the world has seen a switch from conventional economies, focusing on tangible goods and services to innovation economies primarily dependent on software and technological developments. The shift towards intangible assets has paved the way for a separate market for innovation on which modern economies now thrive.

What sustains the innovation economy is not the injection of tangible resources but technology and knowledge transfer incentivised through legal rules and policies in the form of intellectual property, or IP, rights. Recognising the rights of inventors to IP allows them to exercise control over their invention by determining who to exclude from its use and to monetise the rights by selling or licensing them. Ex ante, these rights encourage and incentivise innovation: people invent because of the prospects of profiting from their inventions.

CPEC could affect local innovation.

The innovation market, however, is distinct from conventional markets as it is not driven by scarcity. Instead, it works on the premise that inventors have the right to exclude others. It gives monopoly rights to inventors who can license or sell their rights in the market. While monopolies are generally considered to be BAADD — big, anti-competitive, addictive and destructive to democracy — because monopolists earn economic rents by commanding rates higher than the competitive price, in the case of IP rights, giving monopoly to the inventor is crucial to incentivising creativity.

In CPEC’s context, recognising such rights may become problematic if the monopoly is to be enjoyed by Chinese investors entering the domestic innovation market. The possible influence of monopolistic behaviour by these investors in the innovation economy raises three main concerns; 1) adverse impact on competitors in the domestic market, 2) effect on consumers and 3) stifling of indigenous innovation.

Pakistan’s innovation economy is still in its embryonic phase with a few tech start-ups attempting to move the needle. The number remains small. With the ingress of investors from China, the number is unlikely to improve for two reasons. First, tech development in China is already past the basic stage and second, the marginal cost of producing IP is zero, raising barriers to entry and making it difficult to break through in areas already captured by Chinese inventors.

The repercussions of opening the doors to Chinese inventors may also result in stifling innovation in the domestic market owing to the fact that Chinese methodology and technology is sophisticated and the inventors enjoy first-mover advantage. That advantage coupled with monopoly rights gives a natural edge to them to exploit their IP rights and drives potential domestic competitors out of the innovation market.

The second concern surrounding CPEC’s impact directly affects the consumers. The high prices Chinese inventors may potentially charge for inventions may result in deadweight losses, ie consumers willing to pay price X may not be able to purchase the product if the inventor charges price X+10 resulting in loss of access to the product. This does not mean that loss of consumer surplus will not follow where the monopoly advantage is exploited by local inventors; however, the impact is worsened where domestic competition has been forced out. In the long run, this should be a cause of concern for policy­­­­­makers.

In the grander scheme of things, the third concern becomes more daunting especially given the historical relevance of IP rights in China’s national development plans. China has relied heavily on using IP rights as a mechanism for capacity building. That explains how Chinese technology firms have grown in a short span of time. The Chinese government ditched conventional wisdom that emphasised the importance of foreign technology transfer where the country receiving the technology remains dependent on it for learning, much of which is true for Pakistan. Instead, the focus shifted to Zizhu Chuangxin, ie developing indigenous innovation capabilities focusing on developing long-term competitiveness in the global innovation market and commercialising that innovation.

This is not to say that the Chinese protectionist model of developing indigenous innovation capabilities is the perfect prototype. The impact of Zizhu Chuangxin on global trade has been questioned. But the point is that in opening doors through CPEC, Pakistan may be exposing the vulnerability of its system. This may have damaging consequences for the innovation economy and adversely affect efforts to build capacity for indigenous innovation.

The writer is a lawyer with an interest in intellectual property law.
samar.masood2@gmail.com

Published in Dawn, February 4th, 2018