Intellectual Property Rights And Foreign Direct Investment
Keith E. Maskus
University of Colorado at Boulder - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
Centre for International Economic Studies Working Paper No. 22
The global system of intellectual property rights (IPRs) is changing profoundly. Many developing countries have undertaken significant strengthening of their IPRs regimes. Several regional trading arrangements now address questions of regulatory convergence, particularly in IPRs. Most significant is the introduction of the agreement on trade-related intellectual property rights, or TRIPs, within the World Trade Organization (WTO). Under TRIPs, WTO members must adopt and enforce strong and non-discriminatory minimum standards of protection for intellectual property. Many developed countries are extending strong protection to controversial areas, including biotechnology and electronic databases.
The movement toward much stronger global IPRs is consistent with processes of economic globalization, or the successively closer integration of national and regional markets through the reduction of barriers to trade, investment, and technology flows. In this world, knowledge creation and its adaptation to product designs and production techniques are increasingly essential for competitiveness and growth. This situation takes on political importance because the international mobility of capital and technology have risen markedly relative to that of most types of labor. In turn, globalization pays its largest rewards to creative and skilled workers and places its largest pressures on lower-skilled workers.
The means by which IPRs influence FDI are complex and subtle. Furthermore, strong IPRs alone are not sufficient incentives for firms to invest in a country. If they were, recent FDI flows to developing economies would have gone mainly to sub-Saharan Africa and Eastern Europe. In contrast, China, Brazil, and other high-growth, large-market developing economies with weak protection would not have attracted nearly as much FDI. And as noted above, IPRs are an important component of the regulatory system, including taxes, investment regulations, production incentives, trade policies, and competition rules. Thus, from a policy perspective, it is the existence of a pro-competitive business environment that matters overall for FDI.
This analysis points out that, in theory, investment and technology transfer do not necessarily expand with stronger intellectual property rights, but there is emerging evidence in favor of that view. It is increasingly assumed around the globe that FDI and licensing are beneficial for the recipient country and there is a strong presumption in this direction but it is not a necessary outcome in all situations. Rather, it is important that such flows result in stronger competition on local markets, which tends to promote long-run gains.
In terms of policy options, freer market access, together with sensible competition rules and related regulatory systems, promise to promote the greatest net benefits from incoming investment. Thus, economies that wish to increase their attractiveness to foreign investors would be advised first to undertake significant market liberalization. While the Uruguay Round committed most countries to cutting trade barriers, further reduction of tariffs and removal of NTBs on a credible schedule would provide an important signal to foreign investors. Regional trade integration, particularly with developed economies that could be the source of additional FDI, could assist in this process. However, such agreements also bear potential for trade and investment diversion and should be considered carefully in each instance.
Key words: multinational corporations, intellectual property rights, World Trade Organisation, foreign direct investment
Number of Pages in PDF File: 27
JEL Classification: F23, F13, F21, O34
Date posted: June 27, 2000