Foreign Direct Investment and Intellectual Property Protection in Developing Countries

This paper theoretically and empirically analyzes spillovers related to intellectual property rights (IPRs) in developing countries, and investigates how these spillovers influence the desirability of IPRs reform. I extend existing general equilibrium North-South product cycle models with endogenous innovation, foreign direct investment (FDI), and imitation to include multiple Southern countries, together constituting a developing region. I find that the potential benefits of strengthened IPRs through unilateral reform, namely increased FDI inflows, spills over to all countries in the region, creating an incentive to maintain weak IPRs and free-ride on the IPRs of others. However, a reciprocal IPRs reform throughout the region, such as the TRIPS agreement required, prevents free-riding and improves welfare throughout the developing region. I argue that this analysis suggests a powerful justification of the TRIPS agreement as a harmonization of IPRs among developing countries, which successfully allows developing countries to achieve mutual benefit from collective reform, in a way that a unilateral reform can not.