Patents, Innovation, and Imitation in a North-South Model with Increasing Product Variety

Abstract

This paper develops a North-South variety expansion model to explore the cross-country effects of patent protection on the relative wage, innovation, technology transfer, and welfare. Firms in the North perform R&D for innovation, whereas firms in the South perform R&D for technology transfer through imitation. We find that strengthening northern patent protection raises the relative wage between the North and the South permanently, decreases the rate of technology transfer permanently, and increases the northern innovation rate temporarily. In contrast, strengthening southern patent protection reduces the relative wage permanently, increases the rate of technology transfer permanently, and increases the northern innovation rate temporarily. Moreover, this model is calibrated to the the US-China data to perform a quantitative analysis. When a country strengthens patent protection unilaterally, the welfare of their citizens increases. Nevertheless, when both countries strengthen patent protection bilaterally by the same magnitude, the South benefits from welfare gain and the North suffers from welfare loss.

Keywords: Innovation; Patent Protection; R&D; Technology Transfer

JEL Classification: F43; O33; O34; O40