Foreign Direct Investment and Collective Intellectual Property Protection in Developing Countries

Abstract

This paper analyzes spillovers related to intellectual property rights (IPRs) in developing countries, and investigates how these spillovers influence the desirability of IPRs reform. I provide evidence that the IPRs of a developing country influences foreign direct investment (FDI) inflows into that country, as well as FDI flows into adjacent developing countries. This finding suggests the presence of multilateral effects related to IPRs that existing models do not account for. I develop a general equilibrium international product cycle model to accommodate these effects, and find that the short-run benefits of unilateral IPRs reform spills over to neighboring countries, creating an individual incentive to maintain weak IPRs. However, reciprocal IPRs reform improves welfare among all reforming countries. I argue that this finding suggests a novel justification of the TRIPS agreement as a harmonization of IPRs among developing countries, which allows developing countries to achieve mutual benefit through collective reform.

Keywords: Intellectual Property Rights, Foreign Direct Investment, Developing Countries, TRIPS

JEL Classification: F23, O24, O34