How the Commonwealth of Nations Can Become the Most Innovative Bloc in the World
By Alexander Flint Mitchell
MSc Dissertation for Business Innovation with Entrepreneurship
Birkbeck, University of London
Much has been written on the three topics of the literature review of this thesis: innovation, the Commonwealth of Nations' potential, and the relationship between trade and innovation. This thesis leads on and advances the aforementioned three by combing them all in the form of a policy suggestion for the future of global innovation within the Commonwealth of Nations.
There are three research questions, one primary and two secondary. They are as follows. Primary: To what extent does free trade between nations cause an increase in innovation?
Secondary (first): Would the creation of a Commonwealth Free Trade Agreement create a greater opportunity for an increase in global innovation than existing trade relationships?
Secondary (second): To what extent is there appetite within the Commonwealth of Nations for free trade and harmonisation of intellectual property rights?
The methodology used in researching for this thesis was quantitative. The objective of this thesis is to successfully argue that the Commonwealth of Nations possesses characteristics that, if transformed into a tariff-free single market would enable an innovation boom that no current (WTO, EU etc) trade organisation or supranational bloc could rival.
The main findings of this thesis are that the conditions — which are stated in Part II, the literature review — for innovation to flourish can easily be satisfied by the creation of a single market within the Commonwealth and that, coupled with its hugely favourable characteristics, the Commonwealth could reasonably lead the world's innovation efforts.
The main conclusions and implications of this thesis are that the Commonwealth poses the greatest opportunity for those who seek to innovate to a greater extent than current agreements allow, and that there is considerable movement towards the creation of a Commonwealth Free Trade Agreement. The implications of this thesis for the advancement of the Commonwealth towards a single market are advisory in that the considerations which ought to be taken into account to make the Commonwealth a huge economic success are thoroughly studied and outlined herein.
DEDICATION AND ACKNOWLEDGEMENTS
This thesis has been written at a time of great excitement in not just the United Kingdom but the wider Anglosphere and Commonwealth. Great Britain, historically the world's pioneer of trade and innovation, has the opportunity to return from a 47 year hiatus and transform the Commonwealth of Nations into the largest single market in the world.
There have been many battles fought to get to this point in history, and there are two people whose efforts must be acknowledged and I proudly dedicate this thesis to both of them: Margaret Thatcher and Nigel Farage.
I must also pay great gratitude to the work of Brent H. Cameron whose book 'The Case for Commonwealth Free Trade: Options For a New Globalization' were instrumental in researching for this publication. No other work on the Commonwealth's potential compares to the thoroughness and detail of Cameron's scholarship.
PART I — INTRODUCTION
The OECD defined an innovation as "the implementation of a new or significantly improved product (good or service), or process, […] method" (OECD and Eurostat 2005, 46).
Innovation can only occur under certain circumstances and enhanced, truly global innovation requires the reduction or removal to barriers to trade.
This thesis will discuss at length the requirements for innovation to take place both within an organisation in one geography, and how innovation can exponentially grow if these very same conditions are allowed to flourish without governmental interference between nations.
Part II, the literature review, explores the themes of open innovation by highlighting the works of Henry Chesbrough; international strategic alliances with specific emphasis on Andrew Inkpen's works, IBM's historical example, and the threats posed to such alliances; the Commonwealth of Nations where the prominent scholarship of Brent. H Cameron will be explored regarding the theme of existing free trade within the bloc, and the desire for total free trade among members; and finally the relationship between trade and innovation which will discuss many case studies to irrefutably connect the two. Namely, the works of Lileeva and Trefler, Bustos, Ghanbari and Ahmadi, the World Economic Forums' report entitled Trade and Innovation: Policy Options for a New Innovation Landscape, Santacreu and Varela's study of China's entry into the WTO and the consequential effect on innovation, and Coelli on trade liberalisation.
Part III explores the methodology employed in writing this thesis. Here, the quantitative research method undertaken is explained by means of identifying and justifying the data collection method, and method of analysis.
Part IV leads on from the literature review in the form of the discussion and argument. Here, a Commonwealth Free Trade Agreement ('CFTA') is proposed and a departure from the existing literature is made. There exists no thesis that studies the Commonwealth of Nations from the prospective of innovation. It is here that further rationale for a CFTA will be made.
In doing so, the existing foundations for a CFTA, the political and economic self-interest, and the cultural alignment of Commonwealth countries is discussed which builds upon existing literature. This is followed by an application of the literature review regarding trade and innovation to the Commonwealth.
The practical functionality of a CFTA is then explored. Here, the harmonisation of intellectual property rights ('IPRs') is advocated as well as discussion around the creation of Commonwealth Single Market.
This is followed with a discussion about how to create a CFTA. It is advocated that the Anglospheric countries ('CANZUK') create a free trade agreement between themselves — something that is happening at the time of writing — and add additional Commonwealth countries to it.
The benefits of a CFTA on Commonwealth innovation are then highlighted with even greater emphasis and further applies the literature review connecting trade and innovation to the CFTA proposal. Finally, the criticism of the proposed policy is discussed.
Part V is the conclusion in which it is argued that the creation of a CFTA would see, according to the prominent literature review on innovation and trade, the biggest opportunity for an innovation boom that the world has ever known.
PART II — LITERATURE REVIEW
The literature review of this thesis focuses on the most important authors in the fields of innovation, the feasibility of the Commonwealth of Nation's becoming a free trade bloc, and the relationship between free trade and innovation.
1. Open and Closed Innovation
In the context of a firm, or a company, the historical approach has not been to practice open innovation1 but rather closed innovation which is the idea that if innovation is to be successful then it must be controlled by the company itself. In stark contrast to this, firms are more rapidly practicing open innovation: when companies commercialise either internal ideas by means of outsourcing to those better suited to monetise the ideas, or companies bringing external ideas into the firm in order to commercialise them (Chesbrough, 2003). Examples of open innovation are joint ventures and licensing agreements.
Herny Chesbrough, the world's preeminent scholar on open innovation, pointed out that if a company is too inward looking, as a result of closed innovation, it will be vulnerable to overlooking additional opportunities due to the fact that spotting them and commercialising them fall outside of the firm's expertise.
Chesbrough further characterised open innovation as the opening of a company's business model by "actively searching for and exploiting outside ideas and by allowing unused internal technologies to flow to the outside, where other firms can unlock their latent economic potential" (Chesbrough, 2007).
In analysing this case, Chesbrough highlighted that "different companies possess different assets, resources and market positions […] because of that companies look at opportunities differently." Chesbrough went on to highlight that companies often recognised ideas and opportunities that mirror their previous successes and are quick to exploit these but they often miss the great opportunities that involve a different mixture of either their existent expertise or seeing the opportunities that await them if they enable ideas to flow out of their companies into others which could become business partners in what would be, if successful, a win-win situation in that both the ideas and expertise of the companies in question would compliment each other in the form of new, potentially disruptive, innovation.
Furthermore, when companies collaborate with other companies, there is a correlation between the declining costs of developing innovation with the increased usage of external technology in a given company's own R&D processes. This does not only save a company money but also another precious resource: time. The fact that a company is collaborating with at least one other company, which most likely will have different expertise and be in slightly-to-very different markets will often see increased revenue for all companies involved as they generate income streams that would have been outside of the company's reach if they were to have pursued a closed innovation system.
It is worth noting that open innovation is a two-way street in that it also sees the inflow of knowledge from outside the company. As Chesbrough said, "the boundary between a firm and its surrounding environment is more porous, enabling innovation to move easily between the two" (Chesbrough, 2003).
Both closed and open innovation models provide companies with the ability to discover false positives (bad ideas that initially appeared encouraging). However, only the open innovation system enables companies to discover false negatives — ideas that initially look pointless but in fact have high-value potential.
An example of just how successful the open innovation model has been is that of Procter and Gamble who, in 2003, set an aim to source 50% of its innovations from outside of its company structure (an increase from 10% in the previous year). Procter & Gamble also created the position of Director of External Innovation.
III. International Strategic Alliances
A) What Alliances Are
Andrew Inkpen, a scholar on international strategic alliances, once observed that "new knowledge provides the foundation for new skills, which in turn can lead to competitive success" (Inkpen, 1998). Inkpen highlighted the driving force of this phenomena as being global competition which has necessitated companies to think about how "new organisational knowledge is required".
Inkpen also noted that "In bringing together firms with different skills and knowledge bases, alliances create unique learning opportunities for the partner firms." In a world of global competition, new knowledge appears to give companies an additional competitive advantage over those companies who do not acquire it. In terms of the rationale behind such alliances, Inkpen highlighted that they are "formed for the joint accomplishment of individual firm goals linked to the strategic mission of each partner firm" (Ibid).
These can take many forms such as joint ventures, research and development partnerships and equity alliances whereby one party to an alliance buys equity in another or via an equity joint venture between the two parties. The essence of such alliances can be best described as the sharing of resources.
The current epoch in human history has been called "the age of alliance capitalism" as cross-border international alliances form part of a company's strategic future and competitive advantage (Dunning, 1995).
Technology company IBM's strategic shift from an exploitation strategy to an exploration strategy is a great example of successful alliance policy. Exploitation in this context means the "strategic renewal process aimed at leveraging existing firm-specific assets by improving them or by improving their use" (Brand et al, 2002). Exploration means the "strategic renewal process aimed at acquiring and/or controlling new firm-specific assets by other parties" (emphasis added)
The exploration strategy is also characterised by weak ties between the parties to an alliance which allows for flexible legal structures, i.e. non-equity agreements (Granovetter, 1973). On the other hand, the exploitation strategy is characterised by strong legal structures that benefit long-term partnerships such as equity agreements. The latter often comes with an intense level of knowledge transfer between the partners leading to the creation of economies of scale. Both strategies can be beneficial especially under political and economic policy that allows for tariff free trade and strategic alliances to flourish without interference.
IBM's shift in strategy was clear when it was willing to sell and share its coveted technology in return for knowledge in emerging areas of software and service development. Between 1991/92, IBM had 55 strategic alliances — including ten with Apple (Dittrich, Duysters and de Man, 2007).
In the same time-period, 63% of IBM's partners were new partners with whom they had not worked with before. In 2001/02, this was 78% and the majority of these partners came from a different technological field from IBM. As a result, IBM managed to change from being a hardware manufacturer into a global service provider. This is proof that strategic alliances can lead to pivoting and greater success and innovation on a global scale.
As Inkpen further noted, "alliances are no longer a peripheral activity but a mainstay of competitive strategy. If this is the age of "alliance capitalism", alliances will undoubtedly become more important as a tool of competitive strategy." (Inken, 1998). Inkpen warned, however, that the existence of an alliance does not necessarily lead to success and that it was managers of such alliances who needed to take affirmative steps to exploit the knowledge potential from such an alliance. It has in fact been noted that an estimated half of alliances fail (Singh, 2008).
On a practical level, in order for newly ascertained knowledge to move from the alliance to its parent, there must be connections between the two. This can be in the form of a parent company appointing, for instance, a manager or chief executive to a joint venture or legal instruments mandating the transfer of such knowledge if it is to be produced in the form of written reports.
It could also take the form of a parent and subsidiary company with a department connecting the two that facilitates such transfers. In the context of tariff free trade and open free markets, this could see unprecedented transfers of knowledge including tacit knowledge.
If an economy of one country has access to such alliances without interference, that economy will have greater chances of outperforming ones that do not due to the innovation that will consequentially take place. The extent of what is possible for innovation in the Commonwealth is discussed in Part IV.
B) The Threats to Alliance Capitalism
Often, such alliances can end due to State intervention in the economy. If the activity of an alliance involves the transfer of goods, capital, people and/or services, the creation or increased severity of tariffs can see the alliance's activities brought to an abrupt end. In such an event, the economy in which the dependent alliance partner is located will suffer. This is due to the fact that they will no longer possess the knowledge — perhaps in the form that services and people provide — that the alliance enriched them with. Innovation in the said economy will therefore suffer within the context that it was previously succeeding in.
There are two potential burdens when a company attempts to acquire knowledge which relate to its accessibility: i) the degree of protection an alliance partner places upon their knowledge, and ii) the extent to which the knowledge in question is tacit knowledge.
Tacit knowledge is not readily visible and is difficult to share with others. Tacit knowledge is inherently intangible and is based on the personal experiences, values and even beliefs of those who hold such knowledge. As Inkpen (1998) stated, when individuals are asked about the source of their tacit knowledge, and "how and why things are done in a certain way, they often say "I am not sure, its just the way things are done around here".
Consequentially, the greatest indicator of tacit knowledge is an inability to articulate why things are done in a particular way.
Whilst tacit knowledge transfer is clearly more difficult than explicit knowledge transfer, this difficulty leads to a greater value being placed upon tacit knowledge. Clearly, then, an economic system that allows for the transfer of tacit knowledge will only benefit the parties involved, the innovation process more broadly and consequentially the individuals within such economies.
There are, however, multiple reasons as to why a company may be protective of their knowledge. For instance, if there is a high degree of competitive overlap between the partners then it is likely that the partners will be reluctant to share knowledge with each other so to avoid enriching a competitor with what may form the basis of one partner's competitive advantage. For this reason, it is unlikely that competitors would become partners.
In terms of political and economic systems, many unions exist that allow the transfer of goods, people, services and capital across borders. However, the economic systems under which such activities take place are heavily regulated and are often guilty of regionalism (the grouping of countries within a geographic region into an internal market which is protectionist towards outside business) as opposed to being truly global, open and free markets.
IV. The Commonwealth of Nations
Much has been written about the Commonwealth of Nations' future prospects. The most influential and data driven — as opposed to narrative driven — sources have been used in this final section of the literature review.
The most important and factual analysis of the Commonwealth's potential is The Case for Commonwealth Free Trade by Brent H. Cameron (2018). In this book, a whole analysis of the Commonwealth's potential for free trade and the existing appetite, as well as current examples of intra-Commonwealth free trade, are examined. Significant findings of Cameron's scholarship will be highlighted here and the remainder, where more appropriate, in the Part IV.
The Commonwealth of Nations is comprised of fifty-four countries — from the most industrialised in the world to developing economies — where over 60% of the collective population is below 29 years of age and it is home to the fastest growing economies in the world (collective GDP is expected to be $13 trillion by the end of 2020). Furthermore, at present, the cost of bilateral trade between Commonwealth countries is on average 19% less than between non-Commonwealth countries. Half of the top twenty emerging cities in the world are in the Commonwealth. In Africa, seven out of the top ten countries in the Ibrahim Index (which measures the quality of governance) are Commonwealth countries (thecommonwealth.org).
A CFTA would create a trade network that is not solely dependent on the economic interests of one country or bloc — be that the United States, the European Union, the African Union or alike. It would enable economic self-interest to take place and in many respects amicably divorce politics from economics.
In terms of the threat to global free trade, in an age of uncertainty in Europe, the ascendency of authoritarian China and the uncertainty as to whether the United States will continue its global role, the words of Brent Cameron ought to be fully realised:
"Almost three decades on, and one could easily argue that the post-Cold War world did not mark an end in history, but rather a return to an earlier version of it. In retrospect, the Cold War can be seen as a period where history had been put on pause. National interests and rivalries were recasting the context of the ideological battle between Communism and Capitalism, and whether you fell in with the Americans or the Soviets. With the fall of the Berlin Wall, however, history did not end — it simply returned from a 50-year sabbatical."
With this in mind, as appears to certainly be persuasive and evident when one looks at current affairs, the creation of a CFTA would be instrumental in not only furthering the UK's interests but in massively bolstering innovation and free trade — on a scale not seen before in human history due to the size of the Commonwealth — in a world that is increasingly rejecting globalisation in favour of other protectionism.
In furthering the desire for Commonwealth free trade, The Commonwealth Business Council (CBC) was created in 1997 complete with a Secretariat and with the stated objectives to "encourage trade facilitation and further liberalisation of services; encourage developing countries to play an active role […] in new trade rounds, by maximising their negotiating strength through cooperative action; [and] ensure an effective dispute settlement system, recognising that the Appellate body must be restrained from seeking a supranational role." (Cameron, 2018).
The CBC was replaced with the Commonwealth Enterprise and Investment Council (CWEIC) whose stated goal was more ambitious than its predecessor which promotes the enforcement of "enforceable physical and intellectual property rights" and "an overarching understanding that financial probity from government and the private sector is key to a flourishing business environment."
In the words of former Minister of State, Baron David Howell:
"… an era of new networks and alliances, between both states and non-states, with international and multilateral sets of initials barely recognised, replacing the old familiar ones. Many of these networks will bypass the UN; some will be regional, some continental, some ignoring geography altogether. All will become necessary participants in addressing the main global issues, such as […] economic recovery, economic development, maintenance of free trade…" Howell concluded: "the Commonwealth network, largely underused, could in fact play a significant part in this new scene".
Indeed, the governmental structures and laws which are common or at least incredibly similar which are shared by all Commonwealth members — including Rwanda, which was never a British colony, as they move away from French in favour of English and away from civil law in favour of British common law — provide the prerequisite harmonisation for intellectual property laws and a free trade agreement that other organisations can only achieve by the imposition of force.
Regarding free trade and freedom of movement of people, goods, capital and services, an opinion poll of 13,600 from the CANZUK countries in 2018 found 73% approval in Australia, 76% in Canada, 82% in New Zealand and 68% in the UK (Skinner, 2018).
Indeed, such agreements in part already exist between the said countries.
i. Existing Free Trade Agreements between Commonwealth Countries
One of the biggest attempts at bringing together Commonwealth countries into a single market is in the Carribean. The Caribbean Free Trade Association (CARIFTA) was signed and came into effect on 01 May 1968. By 1971, there were thirteen members of the CARIFTA — all of which are Commonwealth countries. In 1973 and more Commonwealth and British Overseas Territories in the Caribbean joined.
Whilst this indeed was a regional attempt at creating a free trade bloc, the fact it only concerned those within the Caribbean is not to say that distance matters when it comes to free trade agreements, as is justified elsewhere in this thesis.
A further illustration of not only the desire for free trade among Commonwealth countries but an example of it in action is the Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA). This agreement saw the removal of tariffs and restrictions on over 80% of trade between the two nations (Cameron, 2018).
The rationale for ANZCERTA was to "forward the proposition that an appropriately structured closer economic relationship would benefit the international competitiveness of both countries and improved living standards" which would "not conflict with an outward- looking approach to trade" (BBC, 2018). In other words, these two countries saw the huge benefits of free trade with each other and pursued it with the understanding that it will not become a protectionist bloc. This is in contrast to the European Union which prohibits free- trade agreements between member states and other countries or blocs.
ANZCERTA was ratified and enforced in 1983. It was agreed that it would be reviewed in 1988 and 1992 to progress it further. Through such reviews it was proposed that there be business law harmonisation, such as intellectual property rights. The focus is presently on the establishment of a single economic market.
Australia-New Zealand trade has increased by 500% as a result of ANZCERTA. The desire for free-trade exists throughout the Commonwealth and in regard to every industry and market. The array of examples, in addition to what has been stated above, is too exhaustive to list and describe. It is beyond doubt, as has been conveyed thus far, that there is a strong desire for free trade agreements between Commonwealth countries themselves and as a bloc.
V. The Relationship Between Trade and Innovation
The primary research question of whether freedom to trade with a third of humanity would necessarily mean that innovation would increase from its current levels must be addressed fully.
The correlation between trade and innovation is very clear: the more trade that exists between individuals, the more innovation that results. This is true within a nation's borders and it is true globally between nations.
In answering why this is, the current literature review is clear. As Lileeva and Trefler state: "market size matters for innovation and hence for productivity. Improved access to foreign markets will thus encourage firms to simultaneously export and invest in raising productivity." These authors studied the innovative response of Canadian plants after the removal of American tariffs.
Such a view has been held historically such as with Schmookler (1954) who highlighted that the larger the market, the more profitable it is for firms to invest in productivity- enhancing activities. Lileeva and Trefler discovered, and argued that it was well-known, that "exporters have faster productivity growth than nonexporters".
Their study conclusively found that the removal of tariffs lead to new exportation and increased exportation, rapidly increased productivity, higher levels of product innovation and higher adoption rates of technologies across borders.
Furthermore, they highlighted with aid of Bustos (2007) that firms over a one year period in which the study took place increased their technological spending in those markets that benefited from the removal of tariffs. In these respective markets, exports increased by 75% in just five years which was unprecedented in Canadian history (as table above illustrates).
Literature on international trade show a clear causation, as opposed to mere correlation, between innovation and international competitiveness as a result of innovation (Posner, 1961; Vernon, 1966; Fagerberg, 1997). The key conclusions of Ghanbari and Ahmadi's study, The Effect of Innovation on International Trade, was that "economically useful new knowledge that leads to innovation - product, process and disruptive - plays an important role in economic growth, international trade and regional development."
In the World Economic Forum's report entitled Trade and Innovation: Policy Options for a New Innovation Landscape (2016), it was observed that R&D in both public and private spheres is becoming transnational as opposed to being entirely or predominantly done within a country's borders.
The report highlights Benavente's (2014) conclusions that "Trade rules, regimes, and flows provide some of the necessary inputs to innovative activities. On the other hand, inventions, new processes, goods, services, and intangibles benefit from global markets to increase sales, scalability, efficiency, profitability, productivity, and skills"
The report also highlights that there is not one singular WTO agreement that deals with innovation in itself. Instead, there are various agreements that directly or indirectly influence innovation. Examples include: subsidies, intellectual property rights, trade barriers and so forth. The subject of this thesis will be the creation of an agreement that is truly global — as opposed to regional — that is centred around innovation.
The report also highlights the complete lack of a digital trade agreement to cover all or any aspects of the digital economy. As former WTO Director General Roberto Azevêdo noted "current WTO rules were conceived in a world with no internet connection" and that the "multilateral trading system is in urgent need of update if it is to be relevant; if it is to stimulate innovation and development."
Indeed, as the report could not be more clear in stating in its introduction:
"There is a clear link between trade and innovation—with innovation broadly perceived as the transformation of an invention into marketable products and services, the development of new business processes and methods of organization, and the absorption, adaptation and dissemination of novel technologies and know- how. The relationship is one of mutual reinforcement: trade can serve to shape innovation and innovation can shape trade."
The purpose of the report was to "determine whether the existing system of trade rules is either promoting or simply accommodating innovation worldwide". It is the conclusion of this thesis that innovation is not itself dealt with sufficiently on a global scale, and that a CFTA would provide an unprecedented focus on it as well as an unprecedented boost of it.
The report also concludes that there is a global consensus, at least among policy-makers, that universities, research centres and so forth, combined with global innovation networks, are the key drivers of "technology transfer, knowledge diffusion, local innovation, entrepreneurship and competitiveness." It will be the task of this thesis to convincingly argue that a CFTA can be the biggest and only truly global driver of such advancement.
Indeed, the report also correctly acknowledges that "developing countries with narrow markets and more limited absorptive capacities are confronted with several barriers for the effective transfer and adaptation of technologies through imports."
As will be clearly argued in this thesis, the consequences of a CFTA will see such barriers eliminated and innovation all over the Commonwealth grow exponentially.
Existing literature also touches upon trade liberalisation's effects at home. In Coelli et al's (2016) paper, it was argued that "trade policy liberalization opens up new markets abroad while increasing the competitive pressure in the home market. Both mechanisms are likely to affect the innovation rate in the economy, as well as the rate of economic growth.
Coelli et al studied the period known as "the Great Liberalisation" in which tariffs were rapidly decreased. On average, tariffs were cut from 8% to 3% in developed countries and from 25% to 15% in developing countries.
The paper concluded that "the Great Liberalization of the 1990s had a large positive net impact on innovation. Overall, our estimates can explain roughly 7 percent of the increase in aggregate patenting over the period. This suggests that innovation was one important channel by which trade policy liberalization improved growth during this period."
Also, "Overall, our estimates can explain roughly 7 percent of innovation globally during this time period. Our findings underscore the importance of trade liberalization for firms' long term performance and for aggregate economic growth. Our study points to large dynamic gains from trade; gains that are typically not observed and therefore neglected in empirical analyses."
As was highlighted by Bustos (2011) "Trade liberalization can increase productivity by inducing a better allocation of production factors or the adoption of more advanced technologies" and "the resulting increase in revenues can induce exporters to invest in new technologies."
Bustos' studied Brazil's removal of tariffs with Argentina from 29% to 0% between 1991 and 1995. This, he evidenced, saw exports quadruple (400%) while exports to the rest of the world (in which tariffs remained) increased by a mere 60%.
Bustos discovered that productive firms make higher revenues and therefore are the only ones that find paying the fixed costs to enter the export market profitable, as in Melitz (2003). In addition, only the most productive firms adopt the most advanced technology. This is because the benefit of adoption is proportional to revenues, while its cost is fixed. In this setup, a bilateral reduction in tariffs increases export revenues more than it decreases domestic revenues, inducing more firms to adopt the new technology — and therefore more innovation occurs.
Bustos' data collection is even more impressive than most studies because he had access to spending figures on various types of technology during this period of time such as computers and software. Bustos concluded that in 1992, exporters had a higher technological spend than non-exporters in the same market, and that the reduction in tariffs (averaging on 24%) increased the probability of entering the export market by 12%. Therefore, firms increased their spending on technology faster in markets where tariffs fell or were eliminated entirely.
Essentially, the freer the company is to trade globally (to export) the more likely they are to invest in technology and that investment will lead to innovation (as is seen from other highlighted pieces of literature).
Bustos observed that "the evidence is consistent with falling trading partner's tariffs increasing revenues for exporters and making adoption of new technologies profitable for more firms. The finding that falling trading partner's tariffs induce firms to take actions that can increase their productivity suggests that the cross-sectional differences between exporters and nonexporters are not completely explained by selection of the most productive firms into the export market but are partly induced by participation in export markets."
Finally, in Santacreu and Varela's 2019 paper, Innovation and the Patterns of Trade: A Firm-Level Analysis, it was concluded that international competition results in firms increasing R&D efforts "to differentiate their products and escape competition".
The authors also highlight that "Firms in already competitive sectors succeed in escaping competition by increasing the quality and number of products exported. Higher R&D efforts and product innovation allow them to increase their exports and competitiveness in the global economy."
In their paper, they studied the impact of China joining the WTO in 2000. In joining the WTO — which enables global trade by appealing to the lowest common denominator of agreeability between nations — Chinese imports surged by 400% and the total number of Chinese products in the global market doubled. By 2016, 50% of France's product imports were directly coming from China. This was correlated with a huge increase in R&D efforts.
Prior to 2000, French imports from China averaged €2.8bn per annum, reached €10bn post 2000 and doubled to €20.8bn after the financial crisis of 2008. This was because one country (China) had many — but nowhere near all — trade barriers removed.
Santacreu and Varela estimate that this lead to 10% increase in import penetration and an increase in R&D employment by 11.3%, an 8.25% increase in quality of exports, and an increase in probability of product innovation by 6.5%. The authors concluded that higher R&D efforts are directly in line with increases in worker productivity, R&D expenditure, and the potentiality of patenting. The key conclusion that was made in this regard was that "firms escape competition by investing in technology to differentiate their products and export more sophisticated goods".
Santacreu and Varela concluded by stating: "increased Chinese import penetration led French firms to expand their share of R&D employment, share of researchers and their probability of conducting product innovation. Higher innovation efforts translated into increases in the number and quality of products exported."
Whilst the literature review on trade's connection to innovation is clear, and whilst the literature on the Commonwealth's potential is strong and indeed the literature on a CFTA is compelling, no argument has been made with specific focus on innovation such as this thesis seeks to achieve. All of the conditions are set for a CFTA to enable the Commonwealth to be the world's hub of innovation.
PART III — METHODOLOGY
This section deals with the research methods used to answer the primary research question: To what extent does free trade between nations cause an increase in innovation?
As well as the first secondary research question: Would the creation of a Commonwealth Free Trade Agreement create a greater opportunity for an increase in global innovation than existing trade relationships?; and the second: To what extent is there appetite within the Commonwealth of Nations for free trade and harmonisation of intellectual property rights?
A) Research Method:
In answering these questions, a quantitative approach was taken as opposed to qualitative. Given the nature of the questions — which relate to trade, innovation, and facts pertaining to the characteristics of the Commonwealth — the prerequisite and necessary data which would be required in order to answer these questions are not the sort that could be answered via interviews.
This thesis measured the extent of trade and innovation through published papers detailing official economic figures released by governments and supranational bodies around the world. There were no assumptions made.
B) Data Collection:
In order to gather the data to answer the aforementioned research questions, various academic tools were employed. Journals were downloaded via JSTOR, Bloomberg, and Mintel. Academic papers were also downloaded directly from the Quarterly Journal of Economics, the National Bureau of Economic Research, the University of Warwick, the Iranian Economic Review, American Economic Review, and the World Economic Form's International Centre for Trade and Sustainable Development. Additionally, CANZUK International, the Adam Smith Institute and the Institute of Economic Affairs were widely used during the research of this thesis as well as a number of key books which are detailed in the bibliography.
The criteria which was employed to determine which papers that should be read and utilised was simply relevance. Many papers were read which did not contribute, at least directly, to this thesis. Many others were read and summarised in Part II.
The statistics used throughout this thesis came from the aforementioned sources, and are, as previously stated, either governmental figures or based upon studies of entire markets and industries with a sufficient number of participants that went over-and-above what may be otherwise considered sufficient.
In terms of the primary research question, the variable used throughout the papers read was the reduction or abolition of tariffs between nations. The studies vary from comparing pre-tariff reduction/removal trade and innovation to post-tariff reduction/removal trade and innovation, or markets/industries or whole countries who benefited from tariff reduction/ removal and those which did not. This variable was used throughout the literature review of the impact of free trade on innovation.
C) Method of Analysis
When processing and analysing the data provided by the sources, all original sources were validated by checking footnotes and bibliographies. Additionally, a search for any missing data or fallacies was conducted. To the extent that any were detected, the relevant research was not used in the writing of this thesis.
D) Methodology Justification
As said previously, the quantitative methodology was chosen because of the data required to answer the primary and secondary research questions. Only national statistics and/or extensive research papers based on a large enough test group would be able to provide the answers necessary to answer the questions.
Whilst such research could partially have been undertaken under qualitative research methods, the decision was taken not to due to a far higher volume of sources being available already than could reasonably have been hoped or expected to have resulted from qualitative data gathering.
There were no limitations to the quantitive research method as it provided the exact information needed to answer the research questions. Thus the chosen methodology perfectly suited this thesis' objectives.
As has been stated, the variable used throughout the existing literature on the connection between free trade and innovation has been constant regardless of where the source originated — academic paper, the World Economic Forum or otherwise. This thesis deployed the same variable as all preceding publications that were utilised.
In connecting the primary research question to both secondary research questions, this thesis filled a gap in the literature connecting both innovation and the future of the Commonwealth of Nations. Whilst much literature has been separately written about innovation, its relationship with free trade and the Commonwealth of Nations, there has been no published paper connecting all three. This thesis not only address this gap in research but provides a policy suggestion for all fifty-four Commonwealth governments to pursue.
PART IV — DISCUSSION AND ARGUMENT
C) Discussion and Argument
IV. Towards a Commonwealth Free Trade Agreement (CFTA)
If the Commonwealth were to form a single market the consequences of doing so would see innovation take place on a level that would be unrivalled on the world stage as a third of humanity would have unrestricted trade with each other. The remainder of this thesis will convey how this could happen, having set out above the requirements for successful and enhanced innovation above.
A) The Rationale
1) The Foundations
Any grouping of such a vast number of nations in every corner of the world with a population which is currently marching towards comprising half of all humans on earth under a free trade agreement would see a huge economic boom and unrivalled innovation. However, all such theoretical agreements2 are the stuff of fantasy other than one: a CFTA. The reasons for this are deep, wide and entrenched in the very fabric of each nation that is a member of the Commonwealth except Samoa, Namibia, Mozambique and Rwanda who were never British colonies.
The British Empire lasted for three and a half centuries. This has consequentially lead to the total entrenchment within the Commonwealth countries of British institutions and way of life, e.g. the Westminster parliamentary model and capitalism. Indeed, various Commonwealth countries such as Canada and Australia had their constitutions created with significant British input and until very recently required the consent of Westminster in order to alter them.
This is not the most important aspect of the Commonwealth, however; the following is. The Commonwealth has a common language (English is either the first or second working language, overwhelmingly the first); common legal systems; common commercial practices; and increasingly common security concerns which are the subject of ever increasing collaboration among member states.
Indeed, even Rwanda, which was never a British colony, joined the bloc in 2009 with its Information Minister Louise Mushikiwabo sating that: "My government sees this accession as recognition of the tremendous progress this country has made in the last 15 years… Rwandans are ready to seize economic, political, cultural and other opportunities offered by the Commonwealth network."
It's also worth noting that since the date of this speech, the French language was replaced with English in Rwandan secondary schools and its current legal system is being converted from a civil code to one based on English common law — a colossal act of voluntary integration into the British liberal international system.
2) Self Interest
In addition to having solid foundations, it is also in the self interest of all Commonwealth nations to join a CFTA. In exploring why this is, we must look at economic regionalism and its alternatives and the threat to global free trade.
The creation of a CFTA would convey to the world that it is possible to have a free trade agreement that does not have 'winners' and 'losers' in the sense of 'net benefactors' and 'net losers'. When the UK was a member of the European Union, it 'gave' it £8.9bn more than it 'received'. In other words, the UK received back just a percentage of the money it gave the EU in the first place. The UK would rightly, in these terms at least, be classified as a 'net loser'. The same can be applied to any country in any bloc or region (where they may not be a member of the dominant bloc, be it NAFTA or alike) where they give more than they receive.
Many small or medium sized countries in the world who wish develop further and further — developing or developed economies — do not have many options. They could continue to adhere to the status quo in which their national policies are subject to their nearest regional power or bloc's interests due to the perceived trade benefits of doing so which can often be detrimental to the nation in question.
Alternatively, they could choose to act on WTO terms which are cumbersome, unambitious and represent consensus around the lowest common denominator; OR, they could join a CFTA which enables them to be free of political and economic pull of regional powers whose interests do not align with theirs or the perceived staleness of the WTO.
As Brent Cameron observed: "They could choose to seek relationships that respect their legal and moral status among the broader community of nations. This requires a greater appreciation of each other's relative situation or status, as well as a conscious commitment to not allowing power inequities to unduly skew practical progress. This is what a CFTA would aspire to achieve."
Indeed, this is already happening. As Tonga's Deputy Prime Minister and Minister for Foreign Affairs Siaosi Sovaleni commented:
"The Commonwealth has worked arduously to increase the awareness of the vulnerabilities of small island developing states and remains at the head of policy research and advocacy to assist small states such as Tonga to build resilience, access financing…"
As former British Prime Minister Gordon Brown said on the topic of a CFTA:
"The key challenge now is to devise procedures and institutions — nothing less than new international rules of the game — that help deliver greater stability and prosperity for all of our citizens in industrialised and industrialising economies alike."
Prime Minister Brown's predecessor, Tony Blair, also mirrored such sentiments:
"The Commonwealth should not be reluctant to take on an economic role and an economic profile".
3) Cultural Alignment
For alliances to work in the most efficient manner, there needs to be a sufficient degree of trust — especially if there is to be tacit knowledge transfer. As Inkpen stated:
"Previous ties between alliance partners can generate an initial base of interpartner trust. As a result, experienced partners can forgo the relationship building process that will be necessary for partners working together for the first time. On the other hand, inexperienced partners must go through a relationship building period that may interfere with learning."
Inkpen also pointed out that where there are great differences between partners to an alliance, the opportunity for learning is even greater than otherwise because the likelihood of acquiring new knowledge is even more remote than if they were connected in some way, e.g. culturally. Therefore, the value of what can be learned in such a situation is greater than in any other due to its rarity and unlikeliness.
In terms of cultural alignment, a fantastic example of where an alliance has failed due to a lack of such an alignment is an American-Japanese joint venture. The Japanese company insisted that for the alliance to go ahead that the head office of the joint venture had to be located in a different building from that of the plant (where the research was being conducted).
Furthermore, the Japanese company placed restrictions on the American company's employees by limiting their access to the plant and that the manager of the joint venture was not allowed to be from the American company and had to be sourced from elsewhere. As a consequence of these highly protective measures, the American firm acquired very little insight into the knowledge that they set out to discover. The alliance was terminated a few years later.
In the example, the two partners had different basic assumptions about each other and the practices that they were undertaking. Due to this, their cultures clashed and knowledge acquisition was mostly thwarted. The main reason in this historical illustration for its failure was the different management styles practiced in each culture.
Given the almost identical cultures, shared history, shared and like-for-like institutions et cetera that the CANZUK countries share, such failure would be heavily unlikely to occur. Furthermore, in the rest of the Commonwealth, where there is admittedly less of a strong bond between all countries, they share language, institutions, traditions, many cultural aspects, history and more. The differences between them allow for greater learning opportunities.
Essentially, non CANZUK Commonwealth countries share institutional culture but on a less explicit basis. Whether Commonwealth countries are alike or not, the national trust is reciprocal and it is logically deducible, therefore, that trade and knowledge transfer would more easily occur than between Commonwealth and non-Commonwealth countries.
Indeed statistics evidence this, as discussed below. As Dyer and Singh (1998) pointed out, the low success rates of alliances means that those companies that do achieve success with them acquire a competitive advantage over their rivals. This is true not only nationally but internationally.
Owing to the shared history, culture, norms and proposed single market, it is more than possible that knowledge within such relationships could be articulated. This means the retrieving and extracting of knowledge held by individuals into explicit knowledge which is then known by those within a company, for instance.
Furthermore, this articulation can lead to codification which is "providing the content (know-what), the methodology (know-how), and even the rationale (know-why) for executing and managing various alliance-related tasks." In essence, articulated tacit knowledge can be codified by companies to further solidify their competitive advantage which can exist beyond the lifespan of an alliance. If successful, this means that the benefactor of the alliance, with regard to tacit knowledge transfer, will not suffer the usual consequences of the end of an alliance: a loss of the tacit knowledge it benefited from and its consequential competitive advantage.
The key ingredient, according to Kale and Singh, is learning how to do something and not merely why it works. The alliances and economic partnerships that can be formed without state interference under a CFTA between developed and developing economies will be of huge benefit to both. Companies in developed economies can learn how to conduct manual processes that their developed economies do not need, for instance, due to living with high-technological standards.
This knowledge can then be used by investors and entrepreneurs to innovate easy, technology-driven ways of achieving faster, more accurate and automatic results that presently human labour produces. This in turn will massively benefit the developing economies (and lead to them becoming developed), as well as bringing about high returns for investors and companies in developed economies.
A combination of a thirst for advancement (also shared by developed countries) and the capital to finance innovations will see large-scale innovation take place. As is highlighted elsewhere in this thesis, large companies will create innovations that they otherwise would not have created due to lower financial returns by virtue of opening subsidiaries in developing economies.
B) Commonwealth Alliances
As has been clearly stated in the literature review, for alliances to be created and flourish to their maximum potential, open innovation must be the generally accepted approach of companies within a given economy. The flow of technology to outside of the company, as Chesbrough argued, would see the "unlocking" of ideas and new innovations to occur (Chesbrough, 2007).
The decision taken by companies in developed Commonwealth economies to not pursue a particular innovation — perhaps because of lower returns than other projects — opens the door to the acquisition of smaller companies or the creation of subsidiaries in developing economies. A subsidiary whose entire function is the exploitation and scalability of low-end opportunities would be more apt in doing so, and thus see greater innovation happen than without a CFTA.
The subsidiary's work could then ultimately benefit the parent company as it produces new innovations that better the lives of the public. An historic illustration of this is Hewlett- Packard's ('HP') laser printer division. The company's ink-jet project, at the time a disruptive innovation, was not gaining traction whilst being within the internal structure of the parent company. HP's management decided to transfer the ink-jet project to another location and grant it autonomy. Success ensued.
Indeed, when the topic of acquiring companies arises it is best to not integrate the acquisition into the parent company if the value — which is what has been paid for in the acquisition — resides in the acquisition's processes and values. Integration of this form would vaporise the value that has been paid for. Integration makes sense only if the resources of the acquired company formed the rationale for the acquisition. IBM's 1987 decision to fully integrate its subsidiary Role into itself vaporised the value of the acquisition — its processes.
Such decisions would drive down the price of research and development, maximise the likelihood of successful innovations and inventions at low cost, and benefit the economies, and therefore the citizenry, of developing countries. In other words, open innovation under a CFTA would lead to enhanced innovation that would benefit all economies and citizenry.
The sensing and seizing of opportunities, and where necessary adapting to national or global happenings by companies in Commonwealth countries would be unrivaled on the world stage due to the benefits of a CFTA.
D) How a CFTA Should Function
i. Harmonised Intellectual Property Rights
As this is a policy suggestion, and one of great magnitude, it would be incomplete if it did not touch upon the core functioning of a CFTA. For the avoidance of doubt, in addition to the removal of tariffs throughout the whole Commonwealth, each member state would have the autonomy to make their own laws regarding the movement of people. The removal of tariffs would necessitate the freedom of movement of capital, goods and services (unless such services are rendered by individuals, in which case the national policy of Commonwealth countries takes precedence).
It is suggested that the Commonwealth, as part of a CFTA, pursue and enforce harmonised intellectual property rights throughout the bloc. This would mean that an innovations made in South Africa would be protected by the same intellectual property laws in the fifty-three other countries. This would not only make the lives of Commonwealth citizens better — they would have much easier access to products made elsewhere — but innovation itself would be far cheaper and commonplace. The barriers entry for many entrepreneurs would be lessened in both time and expenditure.
For the avoidance of doubt, a patent is "a government-granted right to prevent other people or companies from making, selling or using a product or process that you have invented" that usually lasts for twenty years (Jaffe and Lerner, 2004) .
No longer would a company need to budget for innumerable intellectual property rights (which are not limited to patents) which can lead to market frustration, failure to expand and reduced innovation. Indeed, the more widespread products are the more likely it is that consequential innovation will occur which is inspired by the entrepreneur's use of a current product.
As pointed out by Mazzoleni and Nelson, the anticipation of receiving a patent creates motivation for entrepreneurship. Furthermore, patenting inventions induces the requisite capital to create and monetise them. The very existence of patents encourages other firms to focus on products that are sufficiently different from that which is subject to a patent.
Consequentially this can lead to greater innovation and the emergence of new markets.
Indeed, whilst many smaller firms with limited capital may not be able to make the most of a patent, i.e. they may not be able to take the product to market in time before the patent protection runs its course or simply lacks the desire to do so, larger companies may subsequently benefit from this. Mueller (1962) highlighted that a considerable share of DuPont's innovations were inspired by inventions purchased from smaller firms.
Companies in developed economies could ultimately buy these smaller, struggling companies in developing nations as a fast-track to innovation.
This could have significant benefits not just for the acquiring companies and consumers in developed economies but for the company being acquired in another Commonwealth country and the citizens of it and the wider Commonwealth — the harmonisation of intellectual property laws would lead to widespread distribution of the product(s). If acquisition does not happen, a developed economy's company could simply pick up where a smaller company from a developing nation left off after buying its patents or using its unprotected ideas.
A CFTA would cover such aspects of innovation and trade explicitly. The current global trade architecture of the WTO was created before the internet revolutionised trade and innovation. It is time for a fresh and updated approach in a technological age. Innovation was not considered when the WTO was created in 1994.
A CFTA's approach to digital trade should cover cross border data; where necessary consumer protection and security matters; data access, storage and use; complete transparency regarding authorisation for licensing and use purposes; unrestricted access to international information flows; uninhibited foreign participation in the ICT sector, and more.
ii. CFTA Rules
It is not the subject of this thesis to discuss in great detail how a CFTA would function beyond a single market. However, it would require certain rules in order to function which should form the basis of membership pre-conditions and a Commonwealth Secretariat should take swift action to suspend or even expel a country for breaches of these rules.
Needless to say, the breach of any of the basic rules of membership of a CFTA would be incredibly costly. This would help safeguard free trade — and all associated basic, inalienable freedoms — against statist hostilities and policies both within the Commonwealth and outside of it. To take an historical example, individual rights abuses such as carried out by Robert Mugabe in Zimbabwe would, at the very least, result in a suspension of free trade. Individual countries could choose to suspend trade altogether — that would be their prerogative. Indeed, there have been loud and high-ranking calls for a Commonwealth Defence Force to prevent such dictatorships from being formed in the first place.
It must be stressed that a CFTA would be about adherence to non-economic standards, such as freedom of speech, as opposed to control of national policy. These standards, however, are not the subject of this thesis. Whilst this means that the Commonwealth would not be able to impose a solution on member states, it should by no means tolerate abuses of individual rights by allowing continued access to its free markets.
E) The Path Forward
As was stated in the literature review, there is a huge, existing institutionalised desire for free trade among Commonwealth countries. Creating a free trade agreement between fifty-four countries in every corner of the globe is not a small ambition. However, it must also be noted — as will be discussed below — that not all Commonwealth members need to be signatories to a CFTA for it to be either feasible or successful.
The most likely scenario, according to what has happened thus far, is that the CANZUK countries will form a free trade agreement among themselves which would form the basis of a CFTA.
The main challenge for the proposed CFTA is simply that it does not exist yet. There is clear desire for one and there are great examples of free trade agreements between Commonwealth nations already, as discussed above. The hurdle that may have to be overcome, however, is dependent on the nature of the CFTA. If it becomes a customs union, there will have to be regulatory alignment beyond the harmonisation of intellectual property rights. If no customs union is created and the CFTA creates a free trade area — with no required harmonisation of regulations — then the hurdle to be overcome is a lot easier.
In terms of where we are today, there is significant traction for a free trade zone between the CANZUK nations. With a combined population of over 136 million, and a combined GDP of almost $7 trillion USD, it would be an economic superpower (if such a term can be applied to an economic bloc). A CANZUK free trade agreement could path the way for future Commonwealth participation.
Indeed critics will argue that the geographic distance between the Commonwealth countries — which covers every corner of the world — makes a CFTA a pointless endeavour, such as the distance between Canada and the UK (3,606 miles). However, the same critics seem to in the same breath suggest that we (and they) strike free trade deals with countries even further apart geographically, such as between Canada and China (5,828 miles). This is not an argument in itself as to why distance is irrelevant in free trade. It is, however, pointing out a fallacy.
It is obvious that the closer two countries are the more trading that will be done between them. However, this by no means suggests that trade between countries that are apart — even at the other ends of the world — is either pointless or less favourable than trading with those countries that are geographically close. Trading relationships depend upon the extent of liberalised trade (i.e. the extent of protectionism).
Indeed, just because countries undeniably trade more with those countries close to them does not at all mean that they should not trade with those far away. In fact, harmonised IPRs in a truly global single market would lead to further trade not just among Commonwealth countries which are in close geographical proximity to each other but globally. It is not expected that, for instance, Australia will end up trading more with the United Kingdom (currently worth 3.8% of its annual trade) than Japan (9%) because of a CFTA. It is, however, expected that trade and innovation will dramatically increase between these nations as a result of a CFTA.
As the examined literature evidences, increased trade — especially with harmonised IPRs and all of the other favourable Commonwealth facts — equates to increased innovation.
The Commonwealth, therefore, making up a third of humanity and spanning every corner of the globe would see, according to the literature and analysis, an unprecedented innovative boom. There is no rival to its global span nor would there be any patent office to rival its expanse. The conditions, under a CFTA, would be set for the Commonwealth to lead the world in innovation.
G) The Benefits of a CFTA on Innovation
The opportunities for developing nations who participate in a CFTA is as equally enormous as for developed countries. The opening of subsidiaries, transfer of tacit knowledge and unrestricted trade would see a huge economic boom and, as is clear from Part II, the requirements for innovation to excel would be present in a bloc that covers a third of humanity which is growing towards half of the world's population.
Such transfers of capital, knowledge and services would allow the creation, building and/or enhancing of industrial capacity in developing economies that would provide these countries with a 'launch pad' from which further economic growth could occur. For the developed countries, a CFTA would lead to new customers, new markets, new opportunities, and new innovations for investing capital and to grow — as private companies but also national economics — as well.
Needless to say, given the aforementioned facts about the Commonwealth's size, population, economic potential and so on that the sort of growth that would inevitably take place under a CFTA would be unparalleled on the world stage. For both developing and developed economies alike, a CFTA means an economic relationship that is what investors want: strong, stable, and respectful of individual rights which, of course, includes the right to own capital in whatever form it may take and without the fear of nationalisation or the like.
The causation between free trade and increased innovation has been evidenced in the literature review. Never in the course of human history has there been a third of humanity been able to trade freely with each other as if they are neighbours under the same flag — not even under previous British imperial rule, in which the trading system was wholly different from what is being proposed here.
In terms of venture capital and angel investment, the words of David French ring true: "Business people understand the benefits of investing in stable, outward-looking countries that share language, legal systems and economic approach."
As has been clearly stated, for alliance capitalism to work and for coveted tacit knowledge to be transferred, there must be a strong degree of trust between the partners to an alliance. It's perfectly rationale to assume that there is an unrivalled degree of trust between, at the very least, the CANZUK nations of the Commonwealth. However, assumptions are not necessary. In 2003, the Commonwealth Business Council found that there was a 10-15% increase in efficiency in dealing with other Commonwealth countries (all fifty-four) as opposed to a Commonwealth country dealing with a non-Commonwealth country. Some other studies have this statistic as high as 20% (Cameron, 2018).
Given this, in addition to the obvious innovation increases that would take place from a CFTA it is more than reasonable to assume that there would be a 10-20% increase on top of what might reasonably be predicted from a CFTA alone. The opportunities are endless, and such trust between the Commonwealth peoples would only increase over time under a CFTA.
H) Wishful Thinking?
The argument as to why a CFTA would work and why it is feasible has been made. As with every proposal, it is necessary to critique its contents. With this in mind, is a CFTA merely wishful thinking? Many would suggest that it is. In addition to the above arguments as to why it is not wishful thinking, the below will provide further rationale in this regard.
It is important to note that there does indeed exist trade barriers among CANZUK countries. For instance, as of January 2021, only 50% of the UK's exports to Canada will be tariff free. As the literature on the relationship between trade and innovation suggests, even a small decrease in tariffs equates to increased innovation. The likely criticism that there are not sufficient barriers to entry between CANZUK countries for a CFTA to have a meaningful impact on innovation among these nations is therefore false.
The last attempt to create a free trade zone between Commonwealth countries was in 1957 between Canada and the UK. Such a proposal did not come from the Westminster, however. It was initiated in Ottawa.
Another perceived difficulty could be that not every Commonwealth country will participate in a CFTA. Considering that there are fifty-four nations, it would certainly not be an issue if even half of the nations chose not to participate. This is the case even if India were one of them. Without India, the Commonwealth's population would be 1.1 billion. If only 50% of the remaining countries participated, that would leave a CFTA with a population of 550,000,000.
This is higher than the European Union's population and, when one considers the aforementioned facts (concerning the Commonwealth's characteristics as well as relationship between trade and innovation), the possibility that only half of the Commonwealth's population would participate in a CFTA is no weakness at all.
It is also worth noting that The World Trade Organisation (WTO) does not have every nation in the world among its members. There are 195 nations in the world and 164 are members of the WTO. That is 84.6% of the world's countries. The fact that there may well be some countries that would not join a CFTA — and indeed some countries such as Pakistan may not even be offered the opportunity — does not mean that it is a pointless pursuit. Far from it, as is clear from the above.
When Brent Cameron wrote the second edition of his book The Case For Commonwealth Free Trade (2018), he observed a striking reality: "According to the Commonwealth Secretriat, the aggregate population of the Commonwealth is estimated at 2.32 billion persons [now 2.4bn and rising], with a nominal GDP estimated to be in the range of US$10.45 trillion. By comparison, at the time of the writing the first edition of this book (2004), the numbers were approximately 1.84 billion persons and US$3.51 trillion respectively. When one reads figures like this, it is clear as to why many view the Commonwealth as being "the future".
In terms of capital markets — which are key to innovation and capitalism more generally — the combined stock markets of London, Toronto, Mumbai, Sydney and Johannesburg would only be exceeded by the New York Stock Exchange (US$ 11.28 trillion and US$19.6 trillion respectively).
Crucially for innovation, as a high number of potential signatories to a CFTA do not have fully develop financial services infrastructure, access to the aforementioned stock markets would lead to economic development — and thus innovation — in literally every single market. The possibilities are endless.
Small, medium and large businesses in developing countries — as well as in developed countries — would be able to receive financing for the purpose of expansion or acquisition. Individual citizens would have unrivalled access to private capital. This would lead to a huge rise in local per capita income which in turn would mean that more spending would occur, increased demand for local services, and developing nations would have the same access to the entire Commonwealth markets as larger, more developed countries.
Crucially, all countries would be free to trade with non-Commonwealth countries as well. A CFTA is win-win in every possible way.
In the developing countries of the Commonwealth — of which all but six are — they may not have a strong enough private sector to be able to respond to the benefits of a CFTA on the required level to achieve maximum and immediate benefit. The inevitable outcome would therefore be companies, be they large or medium and perhaps even small, opening subsidiaries in developed countries.
As discussed earlier, this would see a huge transfer of knowledge, services, capital and tacit knowledge. Companies in the developed economies would be able to cheaply test products out in developing countries and thus further their innovations at lower cost and achieve maximum impact. This consequentially would also tremendously increase the extent of competition in markets.
Despite the perceived difficulties, there are no reasons to think that either a CFTA would be unsuccessful or difficult to create. A CFTA would be win-win for developed and developing nations alike, and the potential benefits to innovation that one third of humanity would enjoy would be unrivaled in the history of capitalism and globalisation.
PART V — CONCLUSION
In conclusion, the greater the trade among nations, the greater the innovation that takes place. The creation of a CFTA would create a greater opportunity for an increase in global innovation than any existing trade relationships today, and there is a huge appetite within the Commonwealth for a CFTA and associated harmonisation of IPRs.
The consequential international strategic alliances that would be created due to the removal of the current levels of tariffs would enable knowledge transfer, the sharing of resources and the exploration of new innovations both in developed and developing countries alike. The magnitude of this, which at full capacity would cover a third of humanity, would be unrivalled on the global stage. A CFTA would take the lead in this new age of alliance capitalism.
As is clear, there is a colossus desire — and many existing agreements — for free trade among Commonwealth nations. It may be presently the case that most of the free trade agreements in the world, not just within the Commonwealth, are between those who are in geographical proximity. This is not a weakness of the proposed CFTA; rather, it adds further allure to it as the Commonwealth can lead the world by being the only truly global single market.
As the great many studies in this thesis evidence, there is a clear causation between the levels of trade and innovation within and among nations. Study after study evidences that the removal of tariffs leads to greater trade, and that greater trade leads to enhanced innovation. Even a small decrease in tariffs can lead to far greater levels of innovation.
This is especially pertinent when one considers the current low levels of tariffs among CANZUK countries. Whilst it may seem like a good counter-argument that the level of trade and innovation, among these Commonwealth countries at least, would not grow exponentially as this thesis suggests, this would seem to be a mistaken belief. Coelli's paper that studies tariffs that fell from on average 8% to 3% which accounted for approximately 7% of the world's increase in innovation is case-and-point. Indeed, from January 1st 2021, only 50% of the UK's exports will enter Canada without tariffs.
The fact that the Commonwealth spans all four corners of the world and the likelihood that trade would increase by smaller percentage points among those who have the greatest distance is no weakness at all. Such trade increases will still see increased innovation — innovation that no other bloc in the world will be producing due to protectionism and a lack of global free trade.
Furthermore, the harmonisation of IPRs throughout the entire Commonwealth would mean that a product created and patented in one end of the world could be successfully protected and sold in every other continent in the world. Patent literature suggests that patent protection often leads to more innovative and different innovations which ultimately further human lives and economies.
Perhaps the greatest example of trade liberalism was China's accession to the WTO in 2000. There is an endless amount of data to evidence the causation link between trade liberalisation and increased innovation.
The feasibility of a CFTA is clear. Small states and big states, developed and developing economies alike all want greater access to foreign markets but without compromising on their sovereignty. A CFTA enables all Commonwealth nations to avoid the magnetic pull of regionalism and to embrace a true form of international market-based capitalism which will, as the data shows, ultimately benefit them and the state of innovation itself.
The cultural alignment, especially among the CANZUK countries, is so strong that it is unrivalled on the world stage. The alignment for other Commonwealth countries is less extreme but there exists a great deal of collegiality which the existence of the Commonwealth itself, along with its stated aims and existing processes and agreements, proves.
The road taken to create a CFTA is well under way with the UK having left the European Union and leading a resurgent charge towards global free trade within the Commonwealth. Extensive agreements have already taken place and more are being formed among the CANZUK countries. It is highly likely that there will be a free trade agreement among these nations in a short period of time. This agreement should form the template for, or indeed extended to, other Commonwealth countries.
The criticism of a CFTA is mostly centred around the fact that increased trade among countries which are far apart does not necessarily matter. This would be fallacious because, as shown above, a slight increase in trade equates to increased innovation.
The benefits of a CFTA on innovation are incredibly clear: a third of humanity trading with each other without barriers to entry and without governmental coercion. This will enable the largest number of people and countries to trade freely with each other that the world has ever seen. According to the leading literature on innovation itself and its relationship with free trade, a CFTA would tick all of the boxes for maximising the likelihood that innovation would take place to a greater extent under these circumstances than any other that exist in the world today. A CFTA provides all Commonwealth countries with the ability to turn their countries into the land of hope and glory.
1 the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively (Innoget (2014).
2This does not mean regionalised blocs such as the European Union, but rather truly international blocs or trade networks spanning diﬀerent continents.
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