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RELAXING INTELLECTUAL PROPERTY RIGHTS MAY INCREASE GROWTH Countries that already receive a significant amount of foreign direct investment (FDI) could relax their laws on intellectual property rights and experience greater growth as a result, even if foreign direct investment falls. That is the main finding of research by Mila Kashcheeva, to be presented at the Royal Economic Society’s 2012 annual conference. Using data from a sample of 103 countries between 1970 and 2009, the study finds that although FDI and intellectual property rights have positive effects on economic growth for most countries, stronger intellectual property rights mitigates the growth effect of FDI such that there may come a point when less FDI and more lax intellectual property rights are better for the economy. If a country has a location advantageous for FDI and is capable of attracting a significant amount of it even with a lax intellectual property rights regime, the benefit of attracting additional FDI might be outweighed by the cost of reduced flow of technology. This is because domestic firms will not be able to imitate foreign technology as easily. These findings may help explain why there is still a lot of variation in the strength of intellectual property law among countries, even in Europe. The author argues that this is because ‘the benefits of IPR reform are not manifest, especially for developing countries that rely heavily on foreign technology and lack their own innovative capacity.’ More… The empirical analysis of this research suggests that if a country is able to attract a significant amount of foreign direct investment (FDI) without appealing to the intellectual property rights (IPR) policy tool, by relaxing IPR protection the total production in that country might be increased. For example, if a country has a location advantageous for FDI and is capable of attracting a significant amount of it even with a lax IPR regime, the benefit of attracting additional FDI due to strengthened IPR protection might be outweighed by the cost of reduced flow of technology from all attracted foreign capital to domestic investors, as domestic firms cannot freely imitate foreign technology when IPR protection is strong. This may explain almost two decades after the ratification of TRIPS agreement by the members of WTO that indented to strengthen countries’ IPR protection, there is still a lot of variation in the strength of IPR protection among the countries, surprisingly even in Europe. Simply because the benefits of IPR reform are not manifest, especially for developing countries that rely heavily on foreign technology and lack their own innovative capacity. The predictions that follow from an extensive body of theoretical literature that has emerged to tackle the question of welfare implications of IPR reform are ambiguous. More recent endogenous growth models argue that the extent FDI attracted by an economy under a certain set of conditions determines the economic impact of IPR reform. These models predict that the larger is the FDI channel of international technology diffusion compared to the imitation channel, the more likely it is that stronger IPR laws increase production in the IPR-reforming country. But both firm- and industry-level evidence suggest that stricter IPR laws increase industrial development, especially among multinational firms in technology-intensive industries. This study examines whether the impact of tighter IPR on GDP and TFP growth is different for countries with different levels of FDI, because general equilibrium considerations might offset or even reverse the partial equilibrium effects found by the micro literature. Using dynamic panel data techniques and a sample of 103 countries over 1970-2009, the study finds that although FDI and IPR have positive effects on economic growth for most of the countries, stronger IPR mitigates the growth effect of FDI. Moreover, at the highest observed levels of FDI, it appears that more lax IPR increases the growth rate. The mitigating impact of IPR on the growth effect of FDI works through factor accumulation as well as improvements in total factor productivity. These empirical findings are consistent with the theory in terms of punctuating the importance of the level of FDI in determining the overall effect of IPR reform. But it might first appear that the results contradict the prediction of the endogenous growth models that the larger is the FDI channel of technology transfer, the more likely it is that the stronger IPR laws increase production in the IPR-reforming country. In fact, other exogenous factors that might attract FDI are not considered by these models. At the same time, according to these models stronger IPR protection increases the cost of acquiring knowledge from all attracted FDI. Hence, if a country is able to attract significant amount of FDI even without strong IPR protection, IPR reform might hurt the overall production of that country. This result does not contradict the main theory and is supported by the empirical findings of this paper. ENDS ‘The role of intellectual property rights in the relation between foreign direct investment and growth’ by Mila Kashcheeva Contact: Mila Kashcheeva Email: [email protected] +1 (864) 557-2633