Compulsory Licensing - Evidence from the Trading with the Enemy Act

Abstract: Compulsory licensing, which is permissible under the Trade Related Intellectual Property Rights (TRIPS) agreement, allows domestic firms to produce inventions that are patented by foreign nationals, without the consent of patent owners. As an emergency measure, compulsory licensing offers clear benefits: It helps deliver life-saving drugs to millions of patients. The long run effects of compulsory licensing, however, are unclear. This paper uses an exogenous event of compulsory licensing after World War I to measure the long-run effects of compulsory licensing on domestic invention. Specifically, the analysis compares changes in patents by domestic inventors across U.S. chemical inventions that were differentially affected by compulsory licensing under the Trading with the Enemy Act (TWEA). Our data suggest that compulsory licensing has a large positive effect on domestic invention. Firm-level analyses indicate that most of the increase in domestic invention results from learning-by-doing, as compulsory licensing enables a new set of firms to produce an invention. Our data also show that the full effects of compulsory licensing take up to ten years to materialize, suggesting that they will be missed in analyses of contemporary data.