Intellectual Property Rights Protection, Complexity and Multinational Firms

This paper examines theoretically the impact of host intellectual property rights (IPR) protection and complexity on MNEs' investment decision to the South in order to explain why large amount of foreign direct investment (FDI) flows to low IPR protecting China and other emerging economies. There are two key assumptions, imitation cost are positively related to complexity and imitation cost is higher when imitating a product designed only for foreign market than those for host market. In the model, a strengthening of IPR protection in the South raises an MNE's profit and stimulates inward FDI and licensing simultaneously, and stronger IPR protection will also induce more higher complexity production transfered to the South. Furthermore, as cost-oriented FDI is less sensitive to host IPR protection, developing host countries with low IPR protection can attract relatively more cost-oriented FDI. The model implies that strengthening of IPR protection can help emerging economies attract more complex and market-oriented FDI.