Influence of Patent Policy in the South on the Research and Development of the North: Exploration of the Foreign Direct Investment Channel

Abstract

Developing countries have harmonized and subsequently strengthened their patent regime to comply with the Trade Related Intellectual Property Rights agreement. Theory suggests that developing countries benefit from strong patent protection as such rights shift innovation in developed countries to meet the needs of the South. Empirical studies, however, do not support this hypothesis in its entirety. There is an inter‐link between research and development in the North, foreign direct investment flows, and patent rights in the South that remains unexplored in the empirical studies. As the South provides strong patent protection, innovating firms based in the North shift production to the South, releasing resources in the North for R&D. Consequently, FDI outflows to the South along with its patent protection determine R&D undertaken in the North. This study verifies this hypothesis by performing a two‐stage least square model on a panel of 78 developing countries from 1990–2010, to study the impact of their patent regimes on FDI inflows from developed countries and consequently on respective R&D expenditure. This empirical analysis shows a positive impact of the South's patent protection on innovation in the North.