By Dr. Danny Friedmann
A never ending scholarly debate, put on the agenda by Professor Keith E. Maskus many years ago, about whether intellectual property rights harness or hinder Economic Development including Foreign Direct Investment from North (developed countries) to South (developing countries) has been enriched by Yuan Wang and Huanxing Yang (both Ohio State University, Department of Economics) with some interesting insights.
In their article ‘Foreign Direct Investment Cycles and Intellectual Property Rights in Developing Countries’ Wang and Yang distinguish between short and long run effects of IPR in developing countries.
Their model generates FDI cycles:
“[N]ew FDI, which brings new generations of products, occurs only when the technology gap between the South and the North exactly reaches some threshold. The FDI cycle length captures how frequent new FDI occurs, and in general determines the technology gap between the North and the South. Within this framework, we identify the short run effect and the long run effect of South IPR. In the short run (within each FDI cycle), a stronger IPR tends to discourage imitation and reduce South welfare. However, in the long run (across FDI cycles), a stronger IPR tends to reduce the FDI cycle length (FDI becomes more frequent) and increase South welfare.”
The authorse gave the following example of a FDI cycle in the automotive industry Volkswagen Passat’s production in China (see more here):
“Volkswagen Passat B2 was introduced in Europe in 1981. Its variant Santana has been produced in China since 1986, and another variant Quantum was produced in Brazil from 1985 to 2002. In late 1980s, new generations of Passat, B3 and B4, were introduced in Europe (1988) and North American (1990). But they were never produced in China, and Volkswagen started to produce them in South America only after 1995. However, shortly after the newer generation of Passat, B5, was introduced in 1996 in Europe, Volkswagen started to produce it in China. ”
However, the big improvements in IPR in China came in the run up to WTO membership in 2001 and afterwards, so this example is probably in need of an update.
The conclusion of the study confirms previous findings that developing countries, and especially least-developed countries, each have different IPRs requirements to maximize their welfare.
According to Wang and Yang:
the “North does not always benefit from an increase in the Southern IPR. This is because an increase in the Southern IPR might reduce the equilibrium cycle length. In this case, FDI would occur more frequently, which reduces the expected length of the monopoly of any existing FDI, or the competition among different generations of the Northern FDIs is intensified.”