Relationship-Specific Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers

Quaderni - Working Paper DSE N° 985

25 Pages Posted: 13 Jan 2015

See all articles by Alireza Naghavi

Alireza Naghavi

University of Bologna - Department of Economics

Shin Kun Peng

Academia Sinica - Institute of Economics

Yingyi Tsai

National University of Kaohsiung

Date Written: January 12, 2015

Abstract

This paper examines the impact of intellectual property rights (IPR) enforcement on multinationals' choice of input suppliers and industry profits in a host economy. The framework consists of suppliers with heterogeneous capabilities who must engage in a relation-specific investment to customize intermediate inputs upon a transfer payment by final producers.

An outsourcing contract with better technologically-endowed suppliers requires a lower transfer and generates a higher surplus. Stronger IPR enforcement leads firms to self-select into better quality suppliers on average by reducing their outside option. Weak legal institutions instead make it possible for a larger range of suppliers, including the less capable ones, to form partnerships by granting them a larger outside option. A better IPR environment is more likely to harm lagging countries where the technology distribution is characterized by less capable suppliers.

Keywords: International outsourcing, Supplier heterogeneity, Relation-specifi…c investment, Intellectual property rights enforcement, Outside option, Customization, Technological capability

JEL Classification: O34, L24, F21, F23, O32, L22, D23

Suggested Citation

Naghavi, Alireza and Peng, Shin Kun and Tsai, Yingyi, Relationship-Specific Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers (January 12, 2015). Quaderni - Working Paper DSE N° 985, Available at SSRN: https://ssrn.com/abstract=2548518 or http://dx.doi.org/10.2139/ssrn.2548518

Alireza Naghavi (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, 40126
Italy

HOME PAGE: http://alirezanaghavi.altervista.org/

Shin Kun Peng

Academia Sinica - Institute of Economics ( email )

128 Academia Road, Section 2
Nankang
Taipei, 11529
Taiwan

Yingyi Tsai

National University of Kaohsiung ( email )

Department of Applied Economics
700 Kaohsiung University Rd
Kaohsiung, 811
Taiwan
+886 7 5919189 (Phone)
+886 7 2169365 (Fax)

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