The impacts of home and host country's intellectual property rights protection on foreign direct investment

Abstract

Over the last two decades, foreign direct investment (FDI) has been growing rapidly as a result of the globalization process. Nevertheless, the geographical distribution of FDI remains highly uneven even after the economic sizes of the source and destination countries are controlled for. This thesis focuses on the study of the role of intellectual property rights (IPR) protection in the determination of the geographical distribution of FDI. As the observed FDI values can be viewed as an outcome jointly determined by the demand of FDI inflows from the host countries and the supply of FDI outflows from the home countries, it must be emphasized that strong IPRs in the host countries alone are insufficient for generating strong incentives for foreign firms to invest in the host countries. It is argued that stronger IPRs protection in the home countries encourage more technological innovation there, and hence the host countries will rely more on the FDI inflows from these home countries to reap international technology spillovers. As a result, the demand for the FDI from those countries with higher IPRs protection will be higher. Nevertheless, even though the effect of IPR in the host countries (destination countries) on the FDI inflows has been discussed at length in the theoretical literature (see Maskus, 1997; Wu, 2000; Yang and Maskus, 2001), many of the previous studies did not take proper account of the impact of IPRs protection in the home countries (source countries) on their FDI outflows. This thesis aims at bridging the gap in the literature by providing empirical evidence on the significance of home countries’ IPR protection in the FDI determination. This thesis uses bilateral FDI data from 31 host countries and 16 home countries to examine the impacts of host and home countries’ IPRs protection on FDI. The host countries span from developing countries such as Philippines and Malaysia to technologically advanced countries such as the U.S. and Japan. The home countries also consist of countries with different levels of development, including Poland and Portugal on one side of the spectrum against the U.S. and Japan on the other side. Overall, we find evidence that IPRs protection in both the host and home countries are important determinants of FDI flows, though not all countries experience the same benefits on FDI flows from higher IPRs protection. Generally, the effect of IPRs protection on FDI flows depends on (i) the concentration of the FDI flows in the patent sensitive industries and (ii) the imitative abilities of the host countries. The impact of IPRs protection is more prevalent for host and home countries whose FDI inflows and outflows are more concentrated in the patent sensitive industries as the extent of technology transfer is often higher in these industries. Moreover, the beneficial effects of IPRs protection are more likely to be detected for host countries whose imitative abilities are strong. To summarize, estimation results support the view that improved IPRs protection has an important impact on FDI geographical choice, though the degree varies with the characteristics of the host and home countries. These results indicate that there is a large and vital role for host country and home country authorities to play in designing IPR policies to affect FDI.