Vertical technology transfer and the implications of patent protection

Significant amount of vertical technology transfer occurs between developed and developing country firms, yet the literature on intellectual property rights did not pay much attention to this aspect. We show that whether or not the incumbent and the entrant final goods producers are from the same developed country, patent protection in the developing country raises developed-country welfare if (i) patent protection in the developing country deters entry in the final goods market, (ii) the marginal cost difference between the incumbent and the entrant final goods producers is sufficiently small, and (iii) the marginal cost difference between the incumbent and the entrant developing-country firms is sufficiently high.