Foreign direct investment and collective intellectual property protection in developing countries

Abstract

This paper analyzes spillovers associated with intellectual property rights (IPRs) in developing countries, and investigates how these spillovers influence the desirability of IPRs reform. I provide evidence that foreign direct investment (FDI) flows into a developing country are positively associated with IPRs in that country, as well as IPRs in adjacent developing countries. This finding suggests the presence of multilateral effects related to IPRs that existing analyses do not account for. I develop a general equilibrium international product cycle model to accommodate these spillovers, and find that they create an individual incentive to maintain weak IPRs. However, strengthening IPRs through a multilateral agreement improves welfare among all reforming countries. I argue that this finding suggests a novel justification of international IPRs agreements among developing countries; by preventing free-riding behavior, these agreements allow mutual benefit through collective policy action.