Intellectual Property Rights, Foreign Direct Investment and the Shadow Economy

19 Pages Posted: 20 Aug 2015

See all articles by Gustavo J. Canavire-Bacarreza

Gustavo J. Canavire-Bacarreza

Inter-American Development Bank (IDB); IZA Institute of Labor Economics

Antonio Saravia

Mercer University

Fernando Rios‐Avila

Bard College - The Levy Economics Institute

Date Written: June 10, 2012

Abstract

The relationship between intellectual property rights (IPR) protection and foreign direct investment (FDI) continues to pose a challenging puzzle. While several studies have found that these two variables are positively correlated, others have not been able to find conclusive results or have found that the relationship is actually negative. We contend that a partial explanation of these contradictory results resides on institutional differences among host countries. We find that increases in IPR protection encourage FDI in countries in which the shadow (informal) economy represents a relatively small percentage of the country’s economy but it does not produce the same result in countries in which that percentage is relatively large. The size of the shadow economy is determined, in turn, by the quality of institutional variables such as the degree of bureaucracy, the level of corruption, and the extent of confiscatory taxation and political instability. We present empirical evidence supporting the results of our theoretical framework using threshold regression techniques on a sample of 94 countries and data for the 2000-2005 period.

Keywords: Intellectual Property Rights, Foreign Direct Investment, Shadow Economy, Informality

Suggested Citation

Canavire Bacarreza, Gustavo Javier and Saravia, Antonio and Rios‐Avila, Fernando, Intellectual Property Rights, Foreign Direct Investment and the Shadow Economy (June 10, 2012). Center for Research in Economics and Finance (CIEF) Working Paper No. 12-33. Available at SSRN: https://ssrn.com/abstract=2647096 or http://dx.doi.org/10.2139/ssrn.2647096

Gustavo Javier Canavire Bacarreza (Contact Author)

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Antonio Saravia

Mercer University ( email )

1400 Coleman Avenue
Atlanta, GA 30341-4155
United States

Fernando Rios‐Avila

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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