A new working paper by scholars at the National Bureau of Economic Research contributes to understanding how IPRs support industrialization in developing economies. Lee Branstetter, Raymond Fisman, C. Fritz Foley, Kamal Saggi, Intellectual Property Rights, Imitation, and Foreign Direct Investment: Theory and Evidence, NBER Working Paper No. 13033 (2007).

The scholars look at how strengthening IPRs impacts industrialization in developing economies and the world economy. They test a North-South product cycle model of trade and foreign direct investment (FDI), where the North hosts relatively advanced IPR policies, and is developed in capital and production factors. The South hosts firms that can only produce goods they have imitated and has relatively weak IPR policies. Northern firms would produce more cheaply in the South, but refrain from doing so for fear of imitation by Southern firms.

The major findings:

*MNCs expanded activities, technology transfer, R&D and investments in nations that strengthened their IPR policies;
*MNC affiliates in countries that reformed IPR policies saw capital increases of 11% following reform.
*Affiliates of MNCs that extensively leveraged IPRs gained an additional 9% in capital.
*Strengthened IPR policies resulted in both industrial expansion and accelerated local access to new goods.

First, the current model allows the level of FDI in the South to respond endogenously to changes in IPR policies, this differs from models that conclude strengthening IPRs in the South would stifle industrialization. The model predicts that MNCs in the North will react to stronger IPRs in the South by shifting production there while reallocating the difference in production costs in the North towards R&D and other innovating activity. Undertaking production would enhance Southern industry, and give the South more access to new goods. Losses due to diminished imitation in the South would be offset by FDI from the North, and increased industrial activity in the South. The scholars also predict that the global rate of innovation would increase, creating global welfare gains.

Second, the model treats imitation endogenously, which the scholars argue addresses the scenario where IPR reforms change the allocation of resources (whether they would go into imitation or innovation related activities). The scholars predict that stronger IPR protection in the South diminishes imitation, which frees up resources that can be leveraged by MNCs. Possible welfare diminishment from reduction in imitation is offset by increased attraction of capital from the North, and innovating activity in the South.

An interesting aspect of the model is that it assumes the cost of innovation falls with the number of products invented. Positive externalities, or “knowledge spillovers,” enable “innovation [to] sustain further innovation.”

The scholars test their model by investigating the responses of US MNCs to IPR reforms in 16 countries in the last two decades of the 20th century.

Empirical testing found that MNCs expanded their activities, technology transfer, R&D and investments in nations that strengthened their IPR policies; sometimes reallocating them from countries with stagnant IPR policies. MNC affiliates in countries that strengthened IP policies capital increases of 11% following reform. Affiliates of MNCs that extensively leveraged IPRs, and undertook activities in countries that do not strengthen IPR policies, gained an additional 9% in capital. Further, affiliates of firms that extensively transfer technology abroad increased their capital by nearly 19% more than other affiliates following reforms.

Testing of the theorized relation between loss in imitative goods and introduction of new goods found that IPR reform did not cause a collapse in existing industrial activity in the reforming country that would be offset by the increased activity of MNCs. Rather there seemed to be a value add in industrial expansion at an average of 11%. MNCs accelerate the pace at which they introduce products to their affiliates in nations with strengthened IP policies. The empirical data shows a 21% increase in new goods to countries that strengthened their IP policies.

This study is a good contribution to the effects of strengthening IPRs in developing economies. Taken together, the model and empirical testing suggest that strengthening IP protection has enhanced, rather than stifled, industrial development and integration into the world economy.

posted by Noel Le @ 7:00 AM | Academia, International, Patents

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