حقوق مالکیت معنوی، نوآوری جنوبی و سرمایه گذاری مستقیم خارجی

The strength of intellectual property rights (IPR) in host countries is often considered to be an important determinant of inward foreign direct investment (FDI). Considering FDI to a developing or a newly industrialized country, we show that the host-country firm’s innovative activity, which is empirically relevant yet has been ignored mostly in the literature, plays an important role in the relation between IPR and FDI. If imitation occurs under both export and FDI by the developed-country firm, we show that stronger IPR in the host country may reduce inward FDI.

Intellectual property right is often considered to be an important determinant of foreign direct investment (FDI). Since developed-country firms make use of their intellectual-property related assets under FDI, it is generally believed that stronger intellectual property rights in developing countries encourage FDI to those countries by protecting the intellectual-property related assets of the foreign investors.1 However, empirical evidence on the relation between intellectual property rights in developing countries and FDI to those countries is mixed.2 We provide a reason for the negative relation between a stronger patent protection in the developing country and FDI to that country. We show that a stronger developing-country patent protection may create an ambiguous effect on inward FDI in the presence of innovation by developing-country firms. While imitation (or knowledge spillover) is prominent in developing countries, recent empirical evidences also show considerable innovative activities in many developing and newly industrialized countries, yet this aspect did not receive much attention in the literature.3 We consider an international duopoly where a Northern (developed country) firm can sell its product to the South either through export or through FDI, and the Southern (developing country) firm decides whether or not to innovate a new product. If the patent protection is weak, imitation allows a firm to produce the product of the other firm. We show that in the presence of imitation under both export and FDI, a stronger Southern patent regime may reduce the Northern firm’s incentive for FDI if either the cost of Southern innovation is low, such that the Southern firm innovates irrespective of the Southern patent regime and the plant location decision of the Northern firm, or the Southern firm’s cost of innovation is moderate, such that it innovates only under a stronger Southern patent regime. Otherwise, a stronger Southern patent regime increases the Northern firm’s incentive for FDI.4 Our results refute a blanket approach for strengthening Southern patent protection in order to attract FDI. If the southern firm’s cost of innovation is not large and imitation occurs under both export and FDI, a stronger Southern patent protection reduces inward FDI. Hence, Southern patent policies may need to be complemented by other policies making FDI by the Northern firms to the Southern countries attractive. If the Southern firm innovates irrespective of the Southern patent regime and the plant location decision of the Northern firm, the reduced product range of the Northern firm under a stronger Southern patent regime compared to a weaker Southern patent regime is the reason for the negative relation between the strength of the Southern patent protection and FDI to the South. However, if the Southern firm innovates only under a stronger Southern patent regime, the number of products produced by the Northern firm is unaffected by the Southern patent regime, but a stronger Southern patent regime increases the Northern firm’s profit under both FDI and export by reducing the intensity of product-market competition. If the products are not very much differentiated and the output distortion under export, due to the transportation cost, is not large, a stronger Southern patent regime reduces the Northern firm’s incentive for FDI by increasing the Northern firm’s profit more under export than under FDI. Glass and Saggi (2002) show the FDI reducing effect of a stronger Southern patent regime in a model where a stronger Southern patent regime absorbs more Southern resources for imitation, thus crowding out inward FDI. In contrast, imitation is costless in our analysis, as in Helpman (1993) and Lai (1998). Thus, we abstract our analysis from the resource effect of Glass and Saggi (2002), and the innovation by the Southern firm is the key factor for our results. The remainder of the paper is organized as follows. Section 2 describes the basic model. Section 3 finds out the Southern firm’s incentive for innovation. Section 4 describes the relation between Southern patent protection and the Northern firm’s incentive for innovation. Section 5 concludes. The proofs are relegated to the appendix.

Although evidence suggests considerable innovative activities by the developing-country firms, the literature on patent protection did not pay much attention to these activities. We take up this issue here. In an international duopoly with Southern innovation, we show that strengthening Southern patent protection increases the incentive for FDI if imitation occurs only under FDI by the Northern firm. However, if imitation occurs under both export and FDI by the Northern firm, the effect of a stronger Southern patent protection on the Northern firm’s incentive for FDI is ambiguous. If either the cost of Southern innovation is low, such that the Southern firm innovates irrespective of the Southern patent regime and the northern firm’s plant location decision, or the Southern firm’s cost of innovation is moderate, such that it innovates only under the strong Southern patent regime, a stronger Southern patent regime may reduce the Northern firm’s incentive for FDI. Otherwise, a stronger Southern patent regime increases the Northern firm’s incentive for FDI. An important policy implication resulting from our paper is that, Southern countries may need to consider the trade-off between attracting FDI and encouraging domestic innovation while designing their patent policies. There are situations where a strong patent protection increases domestic innovation, yet deters FDI, refuting a blanket approach for strengthening Southern patent protection in order to attract inward FDI. Hence, along with patent protection, Southern countries may need to increase the attractiveness of FDI through complementary policies.12 While international duopoly helps us to present a simplified analysis keeping the central points in focus, the implications of more Southern firms are easy to see. If there are multiple firms in the South, given the other specifications of the model, the market will be more competitive. If the cost of innovation is very low so that all Southern firms innovate, the Northern firm may have higher incentive for FDI under a weaker Southern patent regime, since a weaker patent protection helps to increase the product range of the Northern firm and FDI helps to reduce the output distortion from the transportation cost. However, if the cost of innovation increases, which reduces the possibility of new product development in the South, the northern firm’s incentive for FDI under strong Southern patent regime increases, since it helps to protect the product of the Northern firm from imitation. We have assumed in our analysis that demand for the product is only in the Southern market. Alternatively, we may consider that the cost of serving the Northern market by the Southern firm is very high, so that the Southern firm finds it unprofitable to serve the Northern market.12 However, if firm S can export to the Northern market, it can be seen easily that it gives the Northern firm further incentive for FDI under strong Southern patent regime. If firm S exports to the Northern market, it increases the Southern firm’s incentive for innovation by increasing its benefit from innovation, 13 yet the possibility of imitation under weak Southern patent regime keeps the Southern firm’s incentive for innovation higher under strong Southern patent protection compare to weak Southern patent protection. On the other hand, the incentive for protecting the Northern market by reducing the Southern firm’s incentive for innovation increases the Northern firm’s incentive for FDI in the presence of exports by firm S compared to the situation with no export by firm S. Unless this effect is very strong, we can still get situations where the Northern firm’s incentive for FDI is higher under weak Southern patent regime. To show our results in the simplest way, we have assumed that the degree of product differentiation is not affected by the investment in innovation. However, it is quite possible to visualize a situation where the Southern firm not only innovates a new product, but it can also increase the degree of product differentiation by investing more in innovation (e.g., as in Lin & Saggi, 2002). In this situation, the equilibrium investment in innovation depends on the Southern firm’s net marginal benefit from innovation, which is the difference between the marginal profit from innovation and the marginal cost of innovation. It is intuitive that if the slope of the Southern firm’s marginal cost of innovation is sufficiently high, it reduces the Southern firm’s net marginal benefit from innovation, thus creating lower amount investment in innovation and a lower degree of product differentiation. In this situation, one might expect results similar to our analysis with a lower degree of product differentiation. On the other hand, if the slope of the Southern firm’s marginal cost of innovation is low, the equilibrium investment in innovation and therefore, the degree of product differentiation is high. In this situation, we might expect results similar to our results with a higher degree of product differentiation. In contrast to the usual belief, we show that a stronger Southern patent protection may reduce a Northern firm’s incentive for FDI, which has empirical validity. We have considered Cournot competition to show our results. An interesting extension would be to examine the robustness of the results under Bertrand competition. However, a simple intuitive argument suggests that our qualitative results hold under Bertrand competition. Innovation by the Southern firm is the driving force behind the negative relation between Southern patent regime and inward FDI. The Southern firm’s incentive for innovation in our analysis depends on its profit differential under innovation and no innovation, and a stronger Southern patent regime increases the Southern firm’s incentive for innovation by eliminating imitation and reducing its profit under no innovation. Hence, our qualitative results on the Southern firm’s incentive for innovation under different Southern patent regime (Proposition 1 and Proposition 3) are supposed to hold under Bertrand competition, which, in turn, is expected to create our qualitative results on Southern patent regime and inward FDI. It is important to note that we have only considered the incentive for inward FDI by the Northern firm. However, in the present economic scenario where the Southern firms are increasingly taking parts in FDIs, it is important to identify the effects of the patent regimes on FDIs by both the Northern and Southern firms. Further, along with greenfield FDI, the effects of the patent protection on cross-border mergers also deserve attention. The issue of patent harmonization (see, e.g., Briggs, 2013 and Yang, 2013) is also worth considering in these respects. We intend to take up these issues in our future research.