Gravity for Cross-border Licensing and the Impact of Deep Trade Agreements: Theory and Evidence

We examine whether deep regional trade agreements (RTAs) facilitate cross-border technology transfer. The mode of technology transfer we focus on is licensing. We first derive a micro-founded structural gravity model for cross-border licensing from a model in which heterogeneous firms choose to supply their goods to foreign markets through export, foreign direct investment, or licensing. We show several comparative statics results regarding the effects of changes in the fixed costs of serving the destination country, the freeness of trade, and the strength of intellectual property rights (IPR) protection on bilateral flows of licensing revenues. We then empirically test our theoretical predictions using data on cross-border flows of royalties and license fees for 49 countries in the period 1995–2012. Various dummy variables and indexes are used to capture the impact of shallow and deep RTAs on cross-border licensing. Consistent with our theoretical predictions, we find that improved access to the destination market through a deep RTA and stronger IPR protection through an RTA with legally enforceable IPR provisions and technologyrelated provisions increase bilateral flows of licensing revenues. By contrast, a shallow RTA without IPR provisions does not increase cross-border licensing revenues.