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How Intellectual Property Creates Value with Finite Resources

Presidio Economics | Monday May 16th, 2011 | 0 Comments

This post is part of a blogging series by economics students at the Presidio Graduate School’s MBA program. You can follow along here.

By Greg Kandankulam

Intellectual property (IP) has tremendous value  and can provide the economy with avenues for growth without overshooting the limits of the  ecosystem. Herman E. Daly’s and Joshua Farley’s text, Ecological Economics: Principles and Applications, discusses steady state economics, where growth will be limited by the human ecosystem and its limited resources. However, what constitutes the limits of certain resources, and economic growth, can be argued. I believe that the authors’ opinion concerning the growth in services is somewhat downplayed.

One obvious application of this ideal is software. The manufacturing aspect of software is slowly becoming a thing of the past as online downloads make updates almost free of many distribution and resource intensive costs.  What interests me more is the idea that  the creation and strategic management of IP can allow a company to utilize its  advantages  in the realms of innovation without unnecessarily taking part in resource intensive processes. This is in keeping with Daly’s requirement of being mindful of a reasonable rate of matter-energy throughput.

Intellectual property rights and patent law allow for companies who do not have the means to produce to do what they do best, research and design a product that can be licensed by others to produce. As the value of IP is recognized to have greater economic value, successful companies have become great managers of the intellectual portfolios. Apple is a very good example of this. The company designs products that some of us cannot seem to live without. The value of Apple’s stock is a good indication of how intellectual property can enhance a company and an economy. While there can be some argument made as to the negative impact that producing an iPhone in China can have on the U.S. economy, no one can argue that the totality of Apple’s business interests are good for the U.S. economy and is mostly done through the development of intellectual property.

Another example is the Croatian company, Pliva, which is given credit for the creation and controls of the international patents for the drug azithromycin. This is one of the best broad spectrum antibiotics on the market and was actually patented in 1981. Pfizer bought the license to produce this drug under the brand name Zithromax. The alliances born from cross-licensing azithromycin gave Pliva the ability to heighten the value of the company’s IP assets. The revenues this drug brought to Pliva allowed the company to expand into Russia and Poland due to the incredible royalties it received from the sale of Zithromax until the patent ran out in 2005.  This easily made Pliva the biggest pharmaceutical company in Central and Eastern Europe. All of this from one drug patent.

The assertion here is that imagination and innovation can have near limitless potential and growth.  Imagine the throughput issues that would arise if Pliva or Apple tried to re-create a manufacturing base for implementing production. There would be an inefficient use of global resources to create redundant infrastructures of manufacturing. That is what limits economic growth locally and globally.


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