Intellectual property rights and quality improveme

IntellectualpropertyrightsandqualityimprovementAmyJocelynGlassa,⁎,XiaodongWubaDepartmentofEconomics,TexasA&MUniversity,CollegeStation,TX77843,USAbDepartmentofEconomics,UniversityofNorthCarolina,ChapelHill,NC27599,USAReceived1October2003;accepted1August2005AbstractThispaperexploreswhytheoriesabouttheeffectsofintellectualpropertyrights(IPR)protectiononforeigndirectinvestment(FDI)andinnovationhavereachedmixedconclusions.Inourmodel,NorthernfirmsinnovatetoimprovethequalityofexistingproductsandmaylatershiftproductiontotheSouththroughFDI.Southernfirmsmaythenimitatetheproductsofmultinationals.WefindthatimitationcanincreaseFDIandinnovationforqualityimprovements,whereastheoppositeoccurswheninnovatorsdevelopnewvarieties.Hence,strongerIPRprotection,byreducingimitation,mayshiftinnovationawayfromimprovementsinexistingproductstowarddevelopmentofnewproducts.©2006ElsevierB.V.Allrightsreserved.JELclassification:F21;F43;O31;O34Keywords:Innovation;Foreigndirectinvestment;Intellectualpropertyrights;Productcycles1.IntroductionIntellectualpropertyrights(IPR)protectionisthesubjectofheateddebateininternationalpolicynegotiations.ManydevelopingcountriesfeelthattheTrade-RelatedAspectsofIntellectualProperty(TRIPs)agreementsignedintheUruguayroundbenefitsrichcountriesattheexpenseofthepoor.McCalman(2002)findsevidencesympathetictotheirview:hiscalculationsindicatethattheUnitedStatesisthemajorbeneficiaryanddevelopingcountriesaremajorcontributors.Consequently,developingcountriesarenowpushingtohaveintellectualpropertyissuesrevisitedinthenewDoharound.StrongerIPRprotectionisclaimedtoencourageforeigndirectinvestment(FDI)andinnovation.FDIisheraldedasthekeytointernationaltechnologytransfer.YetthebulkofFDIJournalofDevelopmentEconomics82(2007)393–415⁎Correspondingauthor.Tel.:[phone];fax:[phone].E-mailaddress:[e-mail](A.J.Glass).0304-3878/$-seefrontmatter©2006ElsevierB.V.Allrightsreserved.doi:10.1016/j.jdeveco.2005.08.002occursbetweendevelopedcountries—seeMarkusen(1995).SodevelopingcountriesneedtohavestrongerIPRprotectiontoattractFDIthatwillbringinstate-of-the-arttechnologies,orsothestorygoes.LogicalongtheselineswasusedtohelpselltheTRIPsagreementtoreluctantdevelopingcountries.Buthowrobustisthisreasoning?HowdoesprotectionofIPRaffectFDIandinnovation?AretherecircumstancesinwhichstrongerprotectionofIPRdoesnotencourageFDIandinnovation?IsthereariskthatIPRprotectioncouldimpede,ratherthanpromote,thedevelopmentprospectsforcountriesthatlagbehindthetechnologyfrontier?Aliteraturehasemergedtoaddressthesequestions.1InHelpman(1993),innovationoccursintheNorthandimitationintheSouth.WeakerprotectionofintellectualpropertyisanincreaseintheexogenousimitationintensitysothatNorthernfirmsfaceahigherriskthattheirproductswillbeimitated.Yet,hefindsthatweakprotectionofintellectualpropertyrightsincreasestheaggregaterateofinnovation.2HelpmanalsoconsidersamodelwithFDI,butinnovationisthenexogenous.Lai(1998)modifiesHelpman'smodeltoconsidertheeffectsofimitationtargetingmultinationalproductiononinnovation.HefindsthattheaggregaterateofinnovationandtheflowsofFDIincreasewithstrongerintellectualpropertyrightsintheSouth.3GlassandSaggi(2002)castdoubtonwhetherstrongerSouthernIPRprotectionmustalwaysencourageFDIandinnovation.TheyarguethatstrongerSouthernIPRprotectionreducestheaggregaterateofinnovationandtheflowofFDIregardlessofwhetherFDIorimitationtargetingNorthernproductionservesastheprimarychannelofinternationaltechnologytransfer.Intheirmodel,strongerIPRprotectionisanincreaseinthecostofimitation,whichcausesareductionintherateofimitation.Theyidentifytwoeffectsoftheincreasedcostofimitation:alaborwastingeffectduetotheincreasedamountoflaborusedforimitationandanimitationtaxeffectduetothedecreasedincentiveforimitation.TheyshowthateacheffectreducesFDIandinnovation,andneithereffectaroseinpreviousanalysiswithexogenousandcostlessimitation.SothereasonforthedifferenceinresultsappearstobethedifferenceinhowIPRprotectionwasmodeled:asanincreaseinthecostofimitationratherthanasanexogenousdecreaseintheimitationintensity.Butthemodelsdifferinanotherimportantway.IntheGlassandSaggimodel,innovationsareimprovementsinthequalityofexistingproductsratherthanintroductionofnewvarieties.CouldthedifferenceinthetypeofinnovationaltertheconsequencesofIPRprotection?Toanswerthatquestion,thispaperconsidersanexogenousdecreaseintheimitationintensityinasettingwithFDIandwhereinnovationstaketheformofqualityimprovements.WefindthatstrongerSouthernIPRprotectiondiscouragesFDIandinnovation,or(inthereversedirection)thatgreaterimitationencouragesbothFDIandinnovation.TheseresultsmatchthoseofGlassandSaggi(2002),butcannotstemfromhigherimitationcostsinceimitationiscostlesshere.4OurmodeliskeptidenticaltoLai'smodelinallrespectspossibleexceptforthetypeofinnovation,soweconcludethattheeffectsofIPRprotectioncandependonthenatureof1SeeMaskus(2000)forabroaderreview.2Taylor(1994)hasarguedthatlackofpatentprotectionreducesaggregateR&Dinatwo-countryendogenousgrowthmodel.3YangandMaskus(2001)findthatbett