Modern Economy, 2011, 2, 107-113
doi:10.4236/me.2011.22015 Published Online May 2011 ( l/ me )
Copyright © 2011 SciRes. ME
The Effects o f Intellectual Property Rights Violations on
Economic Growth
Patrick G. McLennan1, Quan V. Le2
1University of Denver, Den ver, USA
2Department of Economics, Seattle Univer s ity, Seattle, USA
E-mail: lequ@seattleu. edu,
Received December 20, 2011; revised March 2, 2011; accepted April 3, 2011
This paper examines the relationship between intellectual property rights (IPRs) and the growth rate of per
capita GDP during the period 1996-2006 in a sample 71 countries. Using software piracy data as a proxy for
IPR violations, we find that countries with increasing rates of software piracy have lower growth rates. We
also find th at states with strong commitments t o enact policies to prot ect intellectual prop erty rights are able
to achieve higher growth rates.
Keywords: Intellectual Property Rights, Software Piracy, Economic Growth
1. Introduction
This paper considers intellectu al property rights (IPRs) a
fundamental institution for economic growth. We also
view the state as equally important because implement-
ing laws to protect property cannot be provided through
private means; enforcement must come from a legitimate
source. Previous studies focus on the ability of the state
to produce and distribute IPR protection [1], or its inabi l-
ity to enforce them [2]. This paper explores the role of
IPR violations on economic growth. Specifically, it fo-
cuses on the rates at which software piracy is increasing,
which demonstrate deteriorations in IPR protection. We
hypothesize that countries with rising rates of software
piracy exhibit decreasing growth rates of per capita GDP.
According to the Business Software Alliance (BSA)
and International Data Corporation (IDC), software pi-
racy has many negative economic consequences. IDC
and BSA’s study revealed that “decreasing piracy by 10
percentage points over four years would add more than
2.4 million new jobs and almost $70 billion in tax reve-
nues to local governments worldwide. Most of that new
employment and most of an additional $400 billion in
GDP would be added to local economies (p. 6) [3]. Thus,
the effects of intellectual property rights violations on
economic growth are quite clear. Countries with higher
rates of IPR violations tend to have lower growth rates.
In other words, when business is disrupted, and govern-
ments ignore, or take away the ability to produce legiti-
mate capital, people become less productive, leading to
lower economic growth.
We test the connection between GDP per capita growth
and software piracy, along with a governance indicator in
a sample of 71 countries from 1996 to 2006. Although
the period is more limited than previous studies, this in-
dicator examines a period in which the world has seen
increased market integration, especially in the technolo-
gy industries. The IDC and BSA [3] state that “the issues
in dealing with PC software piracy in emerging markets
remain—from a rapid influx of new PC users in the con-
sumer and small business sectors, to increased availabil-
ity of pirated software over the Internet and difficult en-
forcement and education over sometimes sprawl- ing
geographies (p. 1)”. Thus, th e rise of economic p owers in
East Asia, along with the ongoing importance of pe-
tro-states in the Middle East, gives further context for the
study’s importance. Given the fact that most previous
studies have focused on the distribution of IPRs or the
bureaucratic inefficiencies associated with business
growth, this paper gives a unique insight into the role of
property rights violations and its effects on economic
Given that previous studies have focused on the dis-
tribution of IPRs or the bureaucratic inefficiencies asso-
ciated with business growth, this paper provides a unique
insight into the role of property rights violations and its
effects on economic growth. So ftware pir acy has a n ega-
tive impact on economic growth because, according to
Copyright © 2011 SciRes. ME
the IDC, “for every $1 in software sold, there is at least
another $1.25 in services sold in design, install, custom-
ize and support that software. That software and those
additional services then drive approximately $1 of chan-
nel revenue. Most of the additional services or channels
revenue goes to local firms (p. 6) [3]. Countries that have
significant IPR violations cannot take advantage of the
revenues generated by obtaining legitimate software.
Further, the global picture indicates that software piracy
remains a global issue affecting both developed world
and emerging countries. According to IDC and BSA [3],
the legitimate software market in developed countries is
almost 10 times the size of that in emerging countries;
however, the losses from software piracy are merely
double. Thus, software piracy has a negative impact on
economic growth in both developed countries and emerg-
ing countries.
The paper is organized as follows. Section 2 provides
a brief overview of the literature. The data and measures
used in the empirical analysis are described in Section 3
and the results are discussed in Section 4. Section 5 of-
fers the concluding remarks with a discussion on IPRs in
2. A Brief Overview of the Literature
In his earlier work on property rights and economic
growth, Leblang [4] shows that countries that protect
property rights grow faster than those that do not. Leb-
lang [4] uses credit access to the private sector as a proxy
for property rights because it “represents the scope of
and support for free enterprise (p. 12)”. Drawing on the
earlier work of Goldsmith [5] he explores the presence of
democracy, assuming that democratic states have more
protection of property rights, and, thus, grow faster.
Leblang [4] finds a strong correlation among property
rights, democracy and growth. However, this attempt to
correlate protection of property rights with democratic
political regimes falls short. He even claims it as a “fun-
damental mistake” (p. 18) in current literature, stating
that democracy may not ensure property rights, and pro-
perty rights may not insure democracy. That is, other
types of government’s may provide adequate property
rights; his results aren’t only democratic phenomena.
Similarly, Svensson’s [6] study finds that countries
with unstable governments have few incentives to protect
property rights. Political instability reduces the need for
incumbents to prepare future regimes for economic de-
velopment. Park and Ginarte [7] write that IPRs affect
growth by encouraging firms to accumulate more inputs,
and conduct research and development. Clague et al. [8]
introduces the variable of contract-intensive money to
explore private entities’ willingness to invest. They find
that economic gains are made when a government pro-
tects private economic actions. Keefer and Knack [2]
take this further and look at the role of social polarization
and government on property rights. They find that in-
creased social polarization does not affect investor con-
fidence directly; it influence s the po licy p roces s , which is
ultimately responsible for the distribution of property
rights. However, they do contend that property rights
may have a bigger impact on investment and growth than
extreme political instability, including political violence,
revolutions, coups, and revolutions.
In the FDI literature, Markusen [9] explains that mul-
tinational companies will gain from property rights if
they switch their production to a different country, but
this may be bad for economic growth if it crowds out any
existing production in the same industry. Javorcik [10]
finds that weak IPRs discourages foreign investors from
innovating. Furthermore, this appears to be more appar-
ent in technology-intensive industries. Glass and Saggi
[11] argue that stronger IPRs benefit stable and devel-
oped economies, but imitation and copying waste useful
economic resources. Claessens and Laeven [12] argue
that weak property rights in a country with “poorly de-
veloped financial systems (p. 2431)” make it hard for
firms to obtain outside financing, limiting growth. Falvey
et al. [13] finds that IPRs have an ambiguous impact on
economic growth. They find that IPRs appear to be bene-
ficial for h igh and low inco me countries, but IPRs do not
matter for middle-income countries where a market niche
may be in product imitation. In other words, violating
property rights may help growth for a period of devel-
Other works are skeptical or completely against IPRs.
More recently, Lerner [1] explores the role of the state
and finds that there is little positive impact of protecting
patents on innovation. He focuses on the number of pa-
tents demanded and negates specific processes limiting
these activities—violations and institutional quality, which
can discourage or encourage production. Boldrin and
Levine [14] argue that protecting innovative activities is
important for the first units of “discovery,” but in the
long-run, protecting intellectual property is damaging
because of diminishing returns and the extent to which
less developed economies can imitate and copy.
This paper provides a unique way of studying the ef-
fects of property rights on economic growth by utilizing
software piracy as a proxy for IPRs violations.
3. Data
Software piracy data is obtained from BSA and IDC’s
Global Software Piracy Study 2006. IDC covers all pack-
aged software that runs on personal computers, including
Copyright © 2011 SciRes. ME
laptops, desktops, business applications, consumer ap-
plications, operating system, databases, etc. [3]. The fol-
lowing formula reflects the method IDC applied to
measure piracy rates: 1) determine how much packaged
software was put into use; 2) determine how much
packaged software was paid for or legally acquired; 3)
subtract one from the other to get the amount of pirated
software; and 4) determine the piracy rate as the percen-
tage of total software installed that was not paid for or
legall y ac quired [3].
The change in the piracy rates, PIRACY, is used to
measu re IPRs violations. This approach has a desirable
feature for this study. Wh ile the total worldw ide weighted
average piracy rate is 35%, the median piracy rate is 62%
in 2006, implying that half of the countries in the BSA
and IDC study have a piracy rate of 62% or higher [3].
However, some countries experienced significant piracy
rates drop, while others experienced rates increase. By
differentiating we can observe these changes. A positive
number implies increasing rates of piracy, while a nega-
tive number indicates d ecreasing rates of piracy. Table 1
groups the countries into quintiles depicting the change
in piracy rates. The table reveals that many developed
countries and emerging markets, such as China, India,
and South Korea appear to have declining rates of piracy.
China is a particularly striking example of a declining
piracy rate. Between 2003 and 2006, the average annual
economic growth rate in China is 9.58%, and the average
Table 1. Change in pir acy rates.
Increasing rates of property rights violations
Decreasing rates of property rights violations
Highest Medium Low Negative Significantly negative
5 to 14 2 to 4 0 to 11 to –3 –4 to –10
Chile Argentina Algeria Australia China
Colombia Cameroon Botswana Austria Costa Rica
Panama El Salvador Cote d’Ivoire Belgium Egypt
Venezuela Guatemala France Brazil Finland
Honduras Hong Kong Bulgaria Ireland
Italy Hungary Canada Japan
Peru Kenya Cyprus Jordan
Portugal Mexico Denmark Kuwait
Spain Nicaragua Ecuador Netherlands
Uruguay Senegal Estonia Morocco
Zimbabwe Thailand Germany Romania
Zambia Greece Singapore
India Switzerland
New Zealand
South Africa
South Korea
United Kingdom
United States
Note: Change in Piracy Rates, PIRACY = PIRACY RATE2006 - PIRACY RATE2003.
Copyright © 2011 SciRes. ME
piracy rate is 87.5%—a very astonishing level. However,
the change in the rate of piracy is 10 (a decrease of ten
percentage points). Given the IDC and BSAs data re-
garding the economic benefit to decreasing software
policy, it is more logical to attribute such high econo mic
growth to China’s ability to decrease IPRs violations
rather than to only look at the country’s very high piracy
Following Barro [15], we control for initial GDP per
capita (GDPPC ), and secondary school-enrollment rates
(SECEDU). According to the convergence hypothesis,
initial GDP per capita is expected to have a negative sign.
Human capital, proxied by secondary school-enrollment
rates, contributes positively to growth in the endogenous
growth model. Human capital is expected to have a pos i-
tive sign. Data for initial GDP per capita and secondary
school-enrollment rates are taken from the World De-
velopment Indic a t or s [16].
The cost of software is only one factor driving soft-
ware piracy. The strength of intellectual property laws,
and the effectiveness of the institutions enforcing IPRs
also contribute to th e reduction of IPR violations. Strong
institutions and good governance assures investors more
assurance that their ability to be innovative is protected.
In order to control for differences in in stitutional quality,
we use the Kaufmann, Kraay, and Mastruzzi’s (KKM)
[17] governance dataset. KKM [17] compute aggregate
perceptions of governance from 33 data sources provided
by 30 different organizations and classify them into six
indicators. Each indicator refers to a different dimension
of governance: government effectiveness, regulatory
quality, rule of law, c ontrol of corruption, po litical voice
and accountability, and absence of political violence.
Globerman and Shapiro [18] argue that these indicators
are highly correlated with each other. Thus, it is very
difficult to use them all in a single regression equation.
To overcome this problem, we employ factor analysis to
extract the first principal component of the six indicators
of governance. We denote this aggregate measure as
GOVERNANCE. Tables 2 and 3 present descriptive sta-
tistics and correlations matrix.
4. Empirical Results
Ordinary least squares (OLS) estimates are reported in
Table 4 with the annual growth rate of per capita GDP
taken from the World Development Indicators [16] as a
dependent variable. Equation (1) in Table 4 shows that
PIRACY has a negative significant effect on growth as
predicted, suggesting that countries with increasing rates
of IPRs violations have lower rates of economic growth.
Equation (1) explains about 8% of the variation in eco-
nomic growth. I n Equation (2) we i ncl ude i niti al pe r capita
GDP, secondary school-enrollment rates, and governance
in the regression analysis. The estimated coefficient in
initial per capita GDP is negative and highly significant,
Table 2. Descriptive statistics.
N Min imu m Max i mu m Mean Std. Deviation
GDP per capita an nual growth (%) 713.540 8.750 2.635 1.860
PIRACY 7110.000 14.0000.803 3.446
GDPPC 71 186.440 28205.710 6915.253 7300.986
SECEDU 71 15.330 119.510 67.276 27.472
GOVERNANC E 711.360 2.090 0.536 0.973
Table 3. Correlations matrix.
GDP per capita annual
growth (%)
GDP per capita annual growth (%) 1.0000.300*0.177 0.164 0.113
PIRACY –0.300* 1.0000.2070.1530.196
GDPPC –0.1770.207 1.000 0.702** 0.779**
SECEDU 0.1640.153 0.702** 1.000 0.807**
GOVERNANC E 0.1130.196 0.779** 0.807** 1.000
Notes:* Pearson Correlation is significant at the 0.05 level (2-tailed), ** Pearson Correlation is significant at the 0.01 level (2-tailed).
Copyright © 2011 SciRes. ME
Table 4. Regression results.
OLS (2)
OLS (3)
OLS (4)
IVa (5)
IVb (6)
CONSTANT 2.505***
(11.497) 1.790***
(2.681) 1.769***
PIRACY –0.162***
(–2.613) –0.181***
(–3.285) –0.118**
(–2.133) –0.952***
(–2.773) –0.578*
(–1.908) –0.292*
GDPPC –0.000201***
(–4.857) –0.000193***
–4.936) –0.844
(–1.282) –0.0001
(0.254) –0.0005**
SECEDU 0.026**
(2.209) 0.024**
(2.196) –0.727
(–0.756) –0.089
(–0.801) 0.012
(1.813) 0.784**
(2.219) 1.141*
(1.861) 1.203
(.672) 3.267**
CHINA 4.997***
No. of observations 71 71 71 50 50 50
Adjusted R2 0.08 0.30 0.39 0.19 0.05 0.14
Notes: the dependent variable is GDP per capita annual growth (%). t-statistics are in parentheses. ***, **, * statistically significant at the 1%, 5%, 10% levels,
respectively. Whites heteroskedasticity correction is applied to the regression. aInstrument variables are Common law, latitude, European fractionalization,
language fractionalization, and lagged values of economic indicators. bInstrumen t variabl es are UK co lony, lati tude, E uropean f ractional ization, lan guage frac-
tionalization, and lagged values of economic indicators. cInstrument var iables are Span ish colony, latit ude, European fract ionalization , language fraction aliza-
tion, and lagged value s of economic indicators.
confirming the convergence hypothesis. The growth rate
of per capita GDP is positively related to initial human
capital as hypothesized, suggesting that countries with
greater initial stocks of human capital experience higher
rate of introduction of new products and ideas and the-
reby tend to grow faster. The estimated coefficient of
GOVERNANCE, is positive and significant, indicating
that good governance, especially protecting property
rights, assures investors that their innovations and prod-
ucts are protected under the law. More importantly,
PIRACY continues to have a negative significant effect
on growth. Equation (2) explains abou t 30% of the varia-
tion in economic growth.
Recognizing that China is an exceptional phenomenon,
a dummy variable for China is included in Equation (3).
The result indicates that PIRACY continues to have a
negative significant effect on growth, while the other
control variables remain robust with the intuitive signs.
With the inclusion of a dummy variable for China, Equa-
tion (3) explains about 39% of the variation in economic
We recognize a potential problem that PIRACY is an
endogenous variable, thus OLS regression is biased.
Countries are not exogenously endowed with the institu-
tions that promote IPRs. Indeed, IPR protection is deter-
mined endogenously, depending on the type of law that
governs the country. Countries with a Common law legal
system rely on the decisions of courts to frame laws.
Property rights vio lations are adjudicated through a c ourt,
which uses precedent to make a decision. In Civil law
legal systems, laws are enacted by through the legislative
process. Previous concepts pertaining to the new statute
are included unless there is a reversal in the law. Ac-
cording to Levine [19], Common law states are argued to
protect property rights more efficiently because th e legal
framework tends “to adapt more efficiently to the chang-
ing contractional needs of an economy than legal systems
that adhere rigidly to formalistic proc edures and codified
laws (p. 65)” found in Civil law legal systems. There are
19 Common law states and 52 Civil law states in our
sample. The average piracy rate for Common law states
is 53%, while the average piracy rate for Civil law states
is 60%. Furthermore, the average change in the rate of
piracy is 1.2 (a decline of 1.2 percentage points) for
Common law states compared to 0.6 for Civil law states,
confirming that Common law legal system is better at
protecting property rights than Civil law legal system.
We also employ other instrument variables to confirm
the robustness of the results. These include past colonial
relations—UK colony and Spanish colony.
Instrumental variable (IV) estimation can be used to
account for endogeneity, given the appropriate instru-
ments. Before we proceed with IV estimation, we per-
form a Hausman test for endogeneity to show whether
2SLS is necessary. The test marginally rejects the hypo-
thesis of consistent OLS estimates, sugges ting that it is a
good idea for us to report both OLS and IV estimates.
Our choices of instruments are Common law, UK colony,
Spanish colony, Western European influence (European
fractionalization), language fractionalization, and ma-
croeconomic initial conditions (investment, FDI, and
inflation). The instruments are positively related with
Copyright © 2011 SciRes. ME
IPRs. Equations (4-6) report the result indicating that
PIRACY has a negative and significant effect on eco-
nomic growt h.
In summary, the results in Table 4 reveal that coun-
tries with increasing rates of software piracy have lower
rates of per capita growth, suggesting that IPRs viola-
tions are impediments to economic growth.
5. Concluding Remarks
This paper demonstrates that the effects of IPRs viola-
tions on economic growth are significantly robust. Coun-
tries with increasing rates of property rights violations
tend to have lower growth rates. In other words, when
the means of production are disrupted, ignored, or even
taken away, people become less productive, which in
turn leads to lower economic growth. The results also
show countries with strong governance to enact policies
to protect property rig hts exhibit increasing growth. Thus,
governments must introduce strong policies aiming at
protecting IPRs to promote economic growth.
China is a good example for other emerging markets
to follow. The Chinese government realizes that one of
the greatest barriers for MNCs to successfully doing busi-
ness in China and for Chinese companies to successfully
competing in the global economy is its stance on IPRs.
As MNCs continue to invest in China, and as local com-
panies in China increasingly become multinational; the
risks of using pirated software will encourage the use of
legitimate software.
China’s piracy rate has dropped 10 points since 2003,
a result of stronger enforcement actions and govern-
ment-driven education programs as well as engaging in
distribution agreements with original equipment manu-
facturers (OEMs). For instance, the government has
mandated that PC OEMs only ship PCs with legitimate
software. The government also conducts raids in numer-
ous regions including Beijing, Shanghai, Xian, and She-
nyang. In addition, the government continues its efforts
to endorse legal use of software in government agencies
and state-owned enterprises. The efforts have been eco-
nomically rewarded. According to IDC, since 2003 Chi-
na has added more than 800 000 jobs to its IT sector, of
which IDC attributes 220 000 to lower software piracy.
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