Summary

Saggi finds that the Maskus chapter provides a clear and convincing analysis of his chosen policy initiatives and there is little he disagrees with. Productivity is perhaps the most important determinant of a country's living standards in the long run. It can either continue producing the same with fewer resources or invest in R&D that delivers new or better products. In principle, developing countries could use the fruits of foreign R&D, but in practice conducting domestic R&D can facilitate exchange of technology by lowering transaction costs as new knowledge and technological change accumulates.

To the extent that intellectual property rights in developing countries have been strengthened by ratification of the TRIPS agreement, incentives for R&D should have been strengthened worldwide. Numbers of patent applications have indeed grown rapidly, particularly in Asia and most especially in China, which now takes the global lead in patent numbers. This nicely mirrors the observed increase in R&D expenditures, but of course tells us nothing about the quality of the output or its economic value. Maskus's proposals, taken together, could help to boost the quality of R&D output.

Because inventors can extract only a fraction of the value of their innovation and because R&D generates so many unforeseen externalities, it seems clear that market forces will tend to fund too little R&D. This makes a case for encouraging more, but policies are likely to produce more benefits if they increase research rather than development, which is likely to produce fewer spillovers.

The author's views on the large welfare gains possible by allowing free movement of labor are correct. The case is the same as for capital: to allow all factors of production to be employed most efficiently by allowing them to move freely throughout the world. Loosening the constraint on international labor mobility allows the world economy to narrow the gap between the marginal products of labor in different locations and thereby increase world output. To set against this is the fact that source countries may lose out from the “brain drain.” This cannot be ignored because, although human capital externalities are difficult to quantify, this does not mean they are unimportant.

In addition to Maskus's two proposals, Saggi suggests FDI as another potentially fruitful area for government policy.