Parallel Imports and Innovation in an Emerging Economy

Abstract

This paper studies the consequences of parallel import (PI) on process inno- vation of …rms heterogeneous in their production technology. In an international setting where foreign markets dier with respect to their intellectual property rights regime, a move by a technologically inferior …rm to exploit a new unreg- ulated market can result in imitation and PI. The impact of PI on innovation is determined by the degree of heterogeneity between …rms and trade costs. Increasing trade costs shifts from the market share losses brought by PI from the more to the less productive …rm. This induces the former to invest more in R&D. At this point, sales in the foreign market become a determinant of the R&D decision by the technologically inferior …rm. For low levels of …rm hetero- geneity, PI increases output by this …rm targeted for the unregulated market, hence increases its Innovation eorts. A taripolicy accompanied by opening borders to PI only increases welfare when the technological gap between the