Institutional Outsiders and Insiders: The Response of Foreign and Domestic Inventors to the Quality of Intellectual Property Rights Protection

Abstract

We analyze how the quality of intellectual property rights (IPR) protection in developing countries impacts patent applications. We extend institutional economics to propose that firms vary in their interpretation of institutions, specifically arguing that foreign and domestic inventors respond to different institutional signals because of their different positions as institutional outsiders and insiders. Thus, we propose that foreign inventors, as institutional outsiders, respond more positively to the quality of IPR protection in countries with more democratic political systems, whereas domestic inventors, as institutional insiders, respond more positively to the quality of IPR protection in countries with higher quality legal systems.