Readers Question: What economic factors should I consider if I want to know the relationship between innovation and the presence of patents/copyrights? Do copyright/patents (generally Intellectual Property Rights) stifle innovation? Does it slow down economic growth?
There is some debate. But, one argument is that patents are necessary to encourage innovation. If firms were unable to patent new machines, they would have less incentive to spend the necessary money on research and development. Research and Development is risky and expensive; a firm may have to spend millions of pounds on developing new technology. If the technology was then freely available to all firms the market would be competitive and therefore, they would not make sufficient profit to justify the investment. Also, it is argued that investment for innovation is paid for out of retained profit. So current patents on drugs are in effect financing future innovation. (This is certainly what the drug companies will say)