As leading technology companies like IBM , Intel and Microsoft invest in R&D projects overseas, it may be surprising to note that many of the foreign host countries have relatively weak IPR regimes compared to the US. Places such as Brazil, China and India do not provide the same IPR protections nor enforcement that American companies enjoy back home. Why then do US companies risk taking their R&D overseas?

Professor Minyuan Zhao of the University of Minnesota provides one possible explanation in "Conducting R&D in Countries with Weak Intellectual Property Rights Protection," Management Science, (Forthcoming). The author argues that while weak IPRs lead “to low returns to innovation and underutilization of innovative talents”, firms can substitute “internal organization for external IPR protection in countries with poor institutional environments” through processes called “institutional arbitrage.” The paper is significant because it suggests that securing IP assets can shape how US technology companies pursue R&D overseas.

Specifically: “Innovating firms can discourage imitation by developing technologies that require complementary knowledge and resources not readily available to potential imitators. By doing so, they are able to take advantage of the arbitrage opportunities presented by the institutional gap across countries.” Further,”the higher cost in obtaining complementary knowledge located in other countries with stronger IPR policies deters imitators.” The strategy of modularizing R&D makes disclosure of individual components in weak IPR regimes less threatening due to lack of access to complementary technologies. The value of R&D in economies with weak IPR regimes “emerge(s) only when combined with complementary knowledge and resources held within the firm.”

The article addresses R&D for “frontier technologies”, not simply R&D focused on localization, which US companies regularly place overseas. The survey included 1567 US based firms, 84% of whom cited inadequate IPRs in developing economies as a challenge for R&D globalization. The author uses an eight factor methodology (including general legal and political envrionment, data from US trade authorities and industry piracy rates) to distiniquish “Strong IPR” and “Weak IPR” countries. Strong IPR countries include Japan, Singapore, Ireland, the UK, and other countries in Europe. Weak IPR countries include Brazil, China, India, Russia, South Korea and Taiwan. The list of all countries can be found in Table 1 of the report.