Wednesday 5 January 2011

IP reform does boost foreign direct investment, says Harvard Working Paper

"Has the Shift to Stronger Intellectual Property Rights Promoted Technology Transfer, FDI, and Industrial Development?" This question is the title of a Harvard Business School Working Paper prepared by the threesome of Lee Branstetter, C. Fritz Foley and Kamal Saggi and the FDI in this context is "foreign direct investment". In short, the piece reviews the authors' own recent research which finds that that IP rights reform does indeed increase technology transfers, foreign direct investment inflows and industrial development. For those who like also places the findings of this work in the broader context of the literature.  The authors conclude as follows:
"A substantial and growing body of work indicates that IPR reform is associated with an acceleration of industrial development. Earlier concerns that a shift to stronger IPR would freeze the industrial development of countries – or send it into reverse – now seem overblown.
However, it is important to keep in mind that the empirical results described above are focused on one type of effect of stronger IPR and the results may not generalize to all countries. For example, the poorest countries attract little FDI, and a change in the IPR regime may do relatively little to induce large FDI flows simply because the degree of IPR protection is only one of many determinants of inward FDI [This is an important caveat: the multiplicity of determinants includes elements that are difficult to build into mathematical models too, such as political and social stability].

Much remains to be done to extend recent research. Further empirical analyses could reveal what sorts of countries and industries obtain the greatest boost from IPR reform and whether increases in industrial development persist in the long run. Research that employs high quality price data in a way that allows analysts to conduct welfare calculations would be particularly informative. Additional work could also reveal the extent to which production shifting reshaped  the Northern economies. Is the temporal coincidence of rising patent rates, higher R&D intensity, and accelerated productivity growth in the United States with the shift of production overseas a consequence of the mechanisms emphasized in these models described above? [I wonder whether the increasing use of the Patent Cooperation Treaty, and the larger number of countries which now belong to it, makes it difficult to compare patent rates as between the same and different categories of country]

There is also a clear need for more theoretical work in this area. Under what circumstances is the acceleration of industrial development induced by stronger IPR truly welfare enhancing? Under what circumstances are the benefits of more rapid industrial development undercut by other effects of stronger IPR? [More work must be done on the effect of stronger IPR in terms of rights other than patents too.  And unregistered rights regimes pose their own problems for economic analysts as well as for investors]  The mathematical challenges that theorists confront in building models that could address these questions are clear, but so are the potential benefits for policymakers and empirical researchers. Given the number of questions for which we still lack complete answers, this domain is likely to be an area of active research in economics for some time to come".
You can access the full text here.

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