Abstract
Developing Asian countries are strengthening their intellectual property rights (IPR) regime as they themselves become producers of intellectual property. At the same time, developing Asia has attracted large amounts of foreign direct investment (FDI) and this trend is expected to continue in light of the region’s strong growth prospects. In this paper, we explore the relationship between IPR and FDI in developing Asia. To do so, we develop a theoretical model which predicts that stronger IPR protection attracts more FDI in countries with small informal economies — i.e., strong institutions — but not in countries with large informal economies — i.e., weak institutions. Our empirical analysis, based on a threshold effect model, yields some evidence which supports our theoretical model.
Highlights
In recent years, developing countries have substantially strengthened their intellectual property (IP) regimes in response to growing pressures from developed countries, after the advent of World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 1995
In institutionally weak countries plagued by excessive bureaucracy, corruption and government predation, intellectual property rights (IPR) protection will have a noticeably weaker effect on illegal imitation activity
Where foreign direct investment (FDI) is total inward and outward FDI—net inflows and outflows in constant 1990 billion dollars; IPR is an index of IPR protection—0–10 scale, where 10 represents the strongest protection—taken from the Economic Freedom of the World (EWF) 2007 report; IFEC is the size of the informal economy as a percentage of GDP taken from Schneider (2005); LGDPpc is lagged real GDP per capita in constant 1990 dollars; Popg population growth rate; Tax is the top marginal tax rate index taken from EFW; Tariff is the medium tariff rate index taken from EFW; Open is Imports plus Exports divided by GDP; Capital is the capital stock; and inf is the inflation rate
Summary
In recent years, developing countries have substantially strengthened their intellectual property (IP) regimes in response to growing pressures from developed countries, after the advent of World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 1995. Multinational firms may maximize profits by producing and investing less (Maskus and Penubarti 1995; Smith 1999, 2001) Much of this empirical ambiguity arises from country and industry effects. Another possible explanation is that IPR reforms may generate “resource wasting effects" due to strict uniqueness requirements (Glass and Saggi 2002) According to this argument, as IPR protection grows stronger, developing countries are forced to spend more resources on imitation activity despite the reduction in the profitability of imitation. IPR protection raises cost of illegal imitation and reduces illegal imitation activity This reduces the competition that foreign investors face and frees up more resources for them.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
