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Research Assessment #1

Date: ​8/13/18

Subject: ​Trademark Law

MLA Citation:​ ​Focus, Aug 29 2018 Podcasts Research Global. “In a Globalized
World, Strong Intellectual Property Laws Matter.” ​Knowledge@Wharton​,
knowledge.wharton.upenn.edu/article/globalization-and-its-impact-on-inequality-for-companies/.

Assessment:

Last year as an ISM I student, I focused on the future impacts of technology and

innovation on trademark law. This year as an ISM II student, even though I am continuing the

topic of trademark law, I am planning to explore the future economic growth of trademark law

and trademark law firms themselves. Keeping this in mind, I searched for material online that

would serve as good initial research of my focus area for this year. The aforementioned article I

came across provided thorough explanation of how firms across the world will have to

strengthen their intellectual property rights (such as trademark laws) to prosper in increasingly

globalized markets. While this notion may seem obvious, there is actually a lot of debate among

emerging world economies on whether to strengthen their IP rights, and this article strongly

advocated for that.

The biggest takeaway from this article was that a lot of world nations are currently

discussing whether to strengthen their intellectual property rights. This came off as a surprise to

me, because it seems obvious to improve IP rights if one wants to ally and trade efficiently with

a domestic or even foreign entity. However, the more I progressed throughout the article, I came

to a realization that improving such rights actually involves a lot of development and
implementation on part of a nation’s legal institutions, as well as cooperation with said nation’s

bureaucracy. All such efforts will ultimately add up in time and more importantly, money. Thus

it makes sense why an emerging economy would be hesitant to contribute expenditures to such a

task.

I found the content within the article quite relevant to what I plan to focus on this year.

Along with studying the future economic growth of trademark law, I am planning to look into

the growth of trademark law firms. The article was especially relevant in this context, because it

spent a good amount of time discussing the potential growth of firms within nations. I realized

that in consideration of American firms, improving intellectual property rights is already a given.

The question for American firms, however, is how exactly can they improve their IP rights and

in what specific manners.

I plan to utilize the content of this article as foundational material for the rest of this year.

This article gave a thorough generalization of the future impacts of economies on trademark law

and how firms within countries can improve their intellectual property rights. As of now, the

next step for me is to devise the specifics of my study focus for this year. I may potentially

incorporate some of my findings from last year on technology and innovation, to analyze how

such factors contribute to the economic growth of trademark law and trademark law firms.

One of the quotes that heavily impacted my area focus last year was by Bill Gates,

“Intellectual property has the shelf life of a banana”. Essentially, this quote means that the world

of intellectual property is in constant evolution and adaptation to the latest innovation and market

shifts. Last year, I explored how the field of trademark law will adapt with the changes in

technology and innovation. This year, it only makes sense that I look into how this field will
evolve with market and economic changes. Ultimately, this article served as great foundational

material for the specific focus I am concerned with this year.

Annotated Article on Next Page


Why Strong Intellectual Property
Laws Matter in a Globalized World
The impact of globalization on income inequality for individuals is a 
much-discussed affair. Far less attention is paid to how it affects inequality in 
terms of opportunities for companies around the world. The paper,​ “Do 
Institutional Reforms Benefit Strong or Weak Firms: Intellectual Property Rights 
and Access to International Alliances,​” takes a look at the latter. 

The paper seeks to answer this question: When globalization opens up a country’s 
economy, does it hurt or help local firms, especially weaker businesses? The paper 
is based on the research of Wharton management professor Exequiel (Zeke) 
Hernandez and Wharton doctoral candidate Sarath Balachandran. Hernandez 
recently spoke to Knowledge@Wharton about their findings. 

An edited transcript of the conversation follows. 

Knowledge@Wharton: Can you tell us about your paper? What did you set out 
to discover in your research? 

Hernandez: The broad goal we had was to essentially tackle this debate: If 
policy efforts open up an economy to global markets, will globalization help 
or hurt companies from countries that adopt those kinds of policies? Now 
that is a huge question that can’t be answered in just one study. So for this 
project we just took a narrow slice of that question. 

We explore the efforts that countries have made to reform and improve their 
intellectual property (IP) rights laws [as part of its globalization efforts].​ Has 
this helped companies have more opportunities … to establish alliances or 
partnerships with companies from other countries? 

We are especially interested in who benefits more [among local companies]. 


Is it companies that already had access to these partnerships [with other 
foreign companies], what we will call strong firms? Or is it companies that 
had a hard time doing so before the reforms, what we will call weak firms? I’ll 
explain why this is important. 

First of all, these alliances or partnerships are really crucial for firms from 
pretty much any country, but especially for firms from emerging markets 
that tend to have weak intellectual property rights [laws].​ And the reason is 
that these alliances help firms access foreign markets to sell their products, 
and they also help firms access new technologies and capabilities that then 
help them upgrade their knowledge and their products. ​And so, they help 
them become stronger firms. 

“The question is important because inequality is not just


about people, but it’s also about companies.”

Let’s say a firm from Chile can use a partnership with a firm from the U.S. to 
sell in the American market and it can develop a new technology or product 
from what it learns from that partnership. ​It is clear that having more access 
to these partnerships is good for the Chilean company, but the question is, 
once Chile improves its IP laws, is it the stronger firms in Chile or the weaker 
ones that will benefit? 
The question is important because inequality is not just about people, but it’s 
also about companies. So for example, we care a lot about markets 
functioning competitively, [which cannot happen if one or a few companies 
dominate the economy]. … In an economy in which few firms control valuable 
resources, such as the alliances that I just mentioned, that could be harmful. 
All of this plays into the importance of the law as a way to make the playing 
field level for both individuals and firms. 

Knowledge@Wharton: I am just curious, why did you choose intellectual 


property rights to examine that question? 

Hernandez: There are a lot of different changes that countries can make to 
globalize their markets. … T
​ he reason we chose intellectual property rights is 
that it is actually one of the most important barriers for companies and for 
countries in order for them to participate in the global economy. 

Let’s say you are a French technology company, and you are considering 
partnering with an Indian or a Chinese firm to sell your product in India or in 
China. Now if the IP laws of those countries are weak you would be concerned 
about whether your technology, the trademark, or brand that makes your 
company valuable, are protected. ​If your Indian and Chinese partner does 
something to, say, expropriate or harm your intangible assets, what recourse 
would you have? The answer is you have almost no recourse if the IP laws are 
weak. 

Surveys of companies doing business in emerging economies show that this 


issue of intellectual property rights being weak is often the number one 
concern they have in operating in these markets. ​And this becomes 
increasingly relevant as the assets that differentiate companies are intangible 
— technologies, brands, trade secrets, etc. So we thought that this was not 
just a good empirical setting, but also a really timely one as a way to see if 
intellectual property enhances access to foreign markets. 

Knowledge@Wharton: In your paper you refer to what is called the Matthew 


Effect, which is the idea that the rich, with their capital and connections, get 
richer, while the poor get poorer. Can you tell us more about this? 

Hernandez: The Matthew Effect [which is named after the parable of the 
talents from the Gospel of Matthew in the Bible] is a phenomenon that has 
been found in many different settings. … In social science, what has been 
shown is that essentially an economic actor that starts out with more 
resources — say it’s capital or social connections or any other asset — over 
time that actor will accumulate additional resources at a faster rate than an 
actor that starts out with fewer resources. And that leads to a very uneven 
distribution of resources. So the rich are getting richer, the poor getting 
poorer. 

KNOWLEDGE@WHARTON HIGH SCHOOL

Now this applies to our study because we are interested in whether changes in 
IP laws strengthen or weaken this Matthew Effect when it comes to the ability 
of companies to access more foreign partnerships with companies. So you 
could imagine that the IP laws could have two competing outcomes, and it’s 
not really clear beforehand which will happen. 

The first outcome, or the first scenario, is one that actually strengthens the 
Matthew Effect. What that means is that the strong get stronger, which in our 
case is that firms that already were able to establish international 
partnerships now can do it even more after their country improves its IP laws. 
And that could happen because, say, these firms are more capable, they are 
more desirable to the foreign partners, and a dynamic like that would lead to 
an increase in inequality among firms in the economy when it comes to 
accessing these foreign partnerships. 

The other scenario is the opposite, it’s that the Matthew Effect becomes 
weakened. So here the firms that had a hard time accessing international 
partnerships benefit the most from the improvement in IP laws, maybe 
because they lacked the reputation or connections beforehand to attract 
foreign partners, and the better IP laws now provide a mechanism for them to 
mitigate the concerns of foreign partners in entering into alliances with these 
so-called weaker firms. And it is clear that a dynamic like this would lead to a 
decrease in inequality, because the playing field now becomes more level. 

“Intellectual property rights being weak is often the


number one concern [companies] have in operating in
[emerging] markets.”

Knowledge@Wharton: What were your main hypotheses, and what was the 
source of your data? 

Hernandez: We actually didn’t have a specific hypothesis going into it. 


Rather, what we had was this idea that there could be these two competing 
scenarios: The Matthew Effect either becomes stronger or it becomes weaker. 
Our goal really was just to see which of the two would play out by looking at 
the data, because it’s hard to predict beforehand which would happen. 

In terms of the data, we actually went back about 20 years to the 1990s. And 
the reason we chose that period is because it was an era of tremendous 
globalization. In fact, that is the era that seeded everything that happened 
that is now being debated [in our current political environment]. But it was an 
era of liberalization, and many countries specifically made efforts to improve 
their intellectual property laws so that their companies could participate in 
international markets. 

So what we did is we built on some previous research that identified countries 


that had made meaningful, significant changes in intellectual property rights 
laws. And from that we identified 13 countries that made credible, 
meaningful, large improvements between 1991 and 1999. It’s countries like 
Chile, India, Brazil, Argentina, Thailand. 

None of these even today have what we would call an ideal level of IP 
protection, but during that time they made a significant step improvement. 
So we identified these 13 countries, and then what we did is gathered data on 
all of the alliances that firms from these 13 countries established, both before 
and after the changes in the IP laws. That allowed us to have a very simple 
research design, which was simply to assess if the number and quality of the 
alliances they established with foreign companies changed after the 
improvement in the IP laws compared to the period before. 

Knowledge@Wharton: What did you find out? 


Hernandez: In a nutshell, what we found is the IP improvements led to a 
significant and permanent increase in both the amount and quality of foreign 
partnerships established by firms from those 13 countries, at least on 
average. But what is more important for our purposes is that we found that 
this increase in quantity and quality of foreign partnerships was much 
stronger for firms that had the least access to those partnerships during the 
period before the IP reforms. 

In other words, the benefit was strongest for the weak, which led to the 
Matthew Effect being weaker, resulting in a more even distribution, or more 
level playing field, in terms of access to foreign partnerships. 

Knowledge@Wharton: You mentioned quality of these international 


alliances, not just the quantity. Could you talk about that a little bit more? 
How did you measure quality, and why is that critical? 

Hernandez: It is critical. Imagine a scenario where the weak firms get 


disproportionately more foreign partnership after the reform, but they get 
the worst, or the least desirable partners — maybe partners from places that 
aren’t very advanced technologically. That is not a real benefit, that is just an 
increase in quantity but not quality. 

“Emerging countries on net are much better off with


strong rather than weak IP rights.”

We felt it was important to actually see if the increase was also one in quality, 
and who got a bigger increase in quality as a result of these IP reforms. In 
terms of measurement, [quality] is always a little bit hard to capture at the 
firm level. So what we did is we used some of the attributes of the countries of 
the foreign partners as proxies [for the quality of the partners that firms 
could access across countries]. 

We used three measures. One measure is the extent to which a country makes 
high technology exports. Another is the number of science and technology 
publications in the country. What those two measures have in common is 
they capture the technological sophistication of the firms from that country, 
at least on average. And then a third measure is simply the variety or diversity 
of countries from which firms can find partners. This gets at the ability to 
access diverse knowledge and ideas through the alliances that these firms 
establish. 

Now regardless of the measure we used, we found something in common: The 


changes in IP laws led firms to access more partners from these high-quality 
countries, and partners from a [broader] variety of countries. Again, this 
effect was strongest for firms that were so-called “weak” during the 
pre-reform period. 

Knowledge@Wharton: Can you talk about the different types of alliances that 
the companies can enter? 

Hernandez: You are referring to a part of the paper where we try to see if the 
IP reforms led the weak versus the strong companies to increase across 
specific types of alliances — say partnerships that are about doing R&D, or 
partnerships that are about marketing or manufacturing. We didn’t really 
have any hypotheses about this; we just wanted to see if the increase in the 
number of these different types was different for the strong versus the weak 
forms. 

It turns out that there is no difference, meaning that the weak firms sort of 
consistently increased more than the strong firms in accessing all kinds of 
partnerships. So it seems to be that there is some across-the-board benefit of 
getting access to partnerships for the weaker firms. 

Knowledge@Wharton: One of the things that I thought was very interesting 


in your paper was that you mentioned when these reforms elevated the weak 
it actually did not also take away from the strong. Can you talk about that a 
little bit? 

Hernandez: This is actually a really important issue, because it would be 


wrong to interpret our study as showing that IP rights somehow make the 
weak firms stronger by taking away from the strong firms. That would be 
some kind of zero sum game where there is no … net gain [in the economy] 
because you are taking from one to give to the other, which would be kind of a 
Robin Hood effect. We don’t find that. 

“IP laws benefit the weakest firms the most, although


they benefit all firms on average when it comes to
accessing … foreign alliance partners.”

We find that the weak firms benefit more from the changes in IP laws in a 
relative sense. That means that relative to the strong firms, the increase in 
quantity and quality of alliances is greater, but not that the strong firms are 
hurt. And that is not just important for understanding, say, the distributional 
aspects of our results. But I think it also is realistic because these so-called 
strong firms were strong for a reason. And IP reforms don’t weaken those 
capabilities that made them attractive as foreign partners, it just … creates 
opportunities for the weak firms. So I suppose that is good news all around. 

Knowledge@Wharton: That’s true. Your paper also mentioned that your 


research has some limitations. Can you elaborate more on that? 

Hernandez: The biggest limitation of our work, especially if you think of 
where we started, was this huge question of the inequality of firms. We really 
have tackled only a very narrow part of that. And so our claims are also very 
narrow. Specifically, what we can say is IP laws benefit the weakest firms the 
most, although they benefit all firms on average when it comes to accessing 
something very specific, which is foreign alliance partners. 

We are really not saying much about a lot of other consequences that IP laws 
can have, which would have to do with the technological capabilities of firms, 
their patenting, their ability to create novel products, etc. I am certain that IP 
laws have some effects that are good and some effects that are not so clearly 
positive for the economy as a whole. Perhaps there are some consumers that 
are hurt by IP laws in some cases. And so our findings have to be interpreted 
as really a small piece of a much larger puzzle. 

Knowledge@Wharton: At the end of the day, what are you hoping to do with 
this research? Are you hoping to influence public policy, for example perhaps 
encourage governments of emerging countries to adopt strong property 
rights laws? What are you hoping to achieve? 

“In this era of protectionism and skepticism about


globalization, empirical facts like these are actually quite
relevant.”

Hernandez: The short answer is yes. I hope that the research that we do is 
impactful. Let’s start with the policy implications. What we found — coupled 
with a lot of other research that is out there on IP laws — is that emerging 
countries on net are much better off with strong rather than weak IP rights. 

Perhaps to a Western audience [from countries that already have strong IP 
rights] that sounds like an obvious statement, but there is a lot of debate in 
emerging economies on whether it is worth formalizing IP rights or not. And 
I think, again, we are one small piece of the puzzle that says that, yes, on net 
you are better off doing that. 

Knowledge@Wharton: Are there some other practical implications of your 


research? 

Hernandez: I would say two things. Let’s stay more on the policy side for the 
first one. With the caveat that our paper is addressing a narrow part of a 
bigger debate, I think it adds one fact in favor of policies that expose firms to 
global markets and global competition. In this era of protectionism and 
skepticism about globalization, empirical facts like these are actually quite 
relevant. 

From the standpoint of firms and managers, our study gives them a reason to 
at least understand that these kinds of policies that expose them to 
globalization can be good in the long run, and that they don’t necessarily 
have to have zero sum benefits, that in fact it can make them more 
competitive. Now of course we need more research to get at that, but I think 
we start pointing in that direction.