Intellectual Property Rights, Distance to the Frontier and R&D

Abstract

Intellectual Property Rights (IPRs) are a key driver of economic growth as they provide agents with incentives to invest in Research and Development (R&D). The importance of IPRs should however vary when one moves along the technological frontier as firms can rely upon other mechanisms (i.e. imitation, equipment) to bring new products to the market place. An emerging strand of literature indeed has stressed how the incentives to growth vary according to the position of economic agents along the technological frontier. In this paper we explore variations at the intersection of these two factors - strength of IPRs and distance from the technological frontier - and show how IPRs relate to incentives for innovation at various stages of the latter. Using firm-level survey data for a sample of firms from a group of transition economies over the period 2002 to 2009, we provide evidence of heterogeneity in firms’ decision to invest in R&D to increasing strength in IPRs as we depart from the technological frontier. Specifically, we show that laggard firms in countries with stronger IPRs are more likely to invest in R&D than similar firms in countries with weaker IPRs. The effect is mainly driven by firms in sectors which make intensive use of legal mechanisms to appropriate R&D. Finally, the effect matters the most for firms introducing incremental innovations such as upgraded products, young and small firms. The results suggest that IPRs lead laggard players to invest in own R&D, possibly by limiting the ability of firms to absorb external knowledge.