IPR Law Protection and Enforcement and the Effect on Horizontal Productivity Spillovers from Inward FDI to Domestic Firms: A Meta-analysis.
| Verfasser | Christopoulou, Danai |
| Posten | RESEARCH ARTICLE |
1 Introduction
This study investigates the role of national Intellectual Property Rights (IPR) systems and particularly the strength of IPR law protection and the effectiveness of public IPR enforcement (e.g., judiciary, customs) in stimulating horizontal productivity spillovers from inward Foreign Direct Investment (FDI) to domestic firms. The strength of a host country's IPR system can determine the level of IPR risk that foreign Multinational Enterprises (MNEs) face when investing in the country and an MNEs decision to engage in the transfer of technological assets to a local subsidiary, invest in R&D activities, and license its IPR to domestic companies (Branstetter et al. 2007; de Faria and Sofka 2010; Smarzynska-Javorcik 2004a). Foreign MNEs strive to avoid having their IPR infringed in a host country since this can enable the domestic competitors to upgrade their capabilities while escaping heavy investments in R&D (Cappelli et al. 2014; Liang 2017). Foreign MNEs therefore are more likely to transfer high value technological IPR assets in countries where IPR protection is strong and public enforcement is effective. This in turn will impact the productivity of domestic firms through technology licensing and/or spillovers via e.g., observation and imitation (Berry 2017; Pavlfnek and Zizalova 2014). The strength of the IPR system of a host country is generally expected to determine the extent to which domestic firms can access and exploit the IPR assets of foreign MNEs and the degree to which foreign MNEs can efficiently appropriate the economic returns from their innovations (deFaria and Sofka 2010; Teece 1986; Zhao 2006).
The strength of IPR systems depends on two distinct elements of a country's institutional environment, the strength of IPR law protection and the effectiveness of public IPR enforcement (Peng et al. 2017a). Existing studies on the effect of national IPR systems on inward FDI horizontal productivity spillovers to domestic firms however, focus solely on the effect of IPR law protection (Arora 2009) and are therefore likely to suffer from biased results. Studies ignoring the effect of the strength of public IPR enforcement are likely to systematically overestimate the effect of IPR law protection strength (Papageorgiadis and Sofka 2020). This could also explain the mixed results in the existing literature, such as the finding of negative (Irsova and Havranek 2013), positive (Yi et al. 2015), and insignificant (Smeets and de Vaal 2016) effects on FDI horizontal productivity spillovers from inward FDI. Focusing on only one element of IPR systems in their empirical modelling but arguing for the importance of IPR systems overall, existing studies de facto assumed that both IPR law protection and the effectiveness of public IPR enforcement developed equally over time and have a uniform effect on inward FDI horizontal productivity spillovers. This leads to biased estimates of the effect of IPR law protection in each respective study and the mixed findings across studies and hence handicaps research narratives of the impact of IPR protection on inward FDI horizontal productivity spillovers to domestic firms.
The contemporary context of IPR systems internationally after the signing of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement in 1995 is substantially different to the way it is theorized in the existing literature. Although most countries have significantly increased the availability of IPR law protection in their IPR systems after TRIPS, the effectiveness with which the IPR laws and legal mechanisms are enforced in practice by public authorities continues to be questionable for many countries (Athreye et al. 2020; Papageorgiadis and McDonald 2019; Peng et al. 2017a, 2017b). This is because although the TRIPS agreement requires signatory countries to provide a number of specific legislative procedures in relation to enforcement mechanisms, it does not set any obligations/requirements regarding how effectively IPR laws are enforced by relevant public agents in practice (WTO 2017). Therefore, while most WTO countries nowadays offer IPR law protection that is generally comprehensive (Park 2008; Peng et al. 2017a), the levels of effectiveness of public IPR enforcement continue to vary significantly between countries (Brander et al. 2017; Papageorgiadis and McDonald 2019).
In this paper we contribute to the literature by integrating the public IPR enforcement element into the study of the effect of IPR systems on horizontal productivity spillovers from inward FDI to domestic firms. We do so by building on and extending the meta-analytical databases of horizontal productivity spillovers to domestic firms from inward FDI and approaches developed by Meyer and Sinani (2009) and Irsova and Havranek (2013). First, we introduce in the established theoretical and empirical frameworks the distinct effect of the strength of public IPR enforcement element of IPR institutions on horizontal productivity spillovers from inward FDI to domestic firms. The incorporation of the public enforcement element of IPR systems allows us to disentangle the effect of IPR enforcement from that of IPR law protection on horizontal productivity spillovers from inward FDI. We find that both the strength of public IPR enforcement and IPR law protection have a significant positive effect on horizontal productivity spillovers from inward FDI. This finding confirms the importance of considering the distinctive direct effect of public IPR enforcement strength on horizontal spillovers from inward FDI and international technology transfer, as accentuated by Arora (2009), Maskus (2004), and Brander etal. (2017).
Second, we contribute to the literature by conceptualizing and identifying the moderating role of public IPR enforcement strength on the effect that the strength of IPR law protection has on the horizontal productivity spillovers from inward FDI to domestic firms. Our empirical finding reveals that the effectiveness of public IPR enforcement has a negative moderating effect, indicating that in countries where both IPR law protection and public IPR enforcement are strong, the domestic firms may experience less horizontal productivity spillovers from inward FDI because foreign firms are able to exercise market power and stifle the competition from domestic firms (Fisher and Oberholzer-Gee 2013). This finding suggests that the diverging assertions and empirical findings of the previous studies probably relate to the uncaptured indirect effect of the second element of IPR systems in those studies. By identifying this distinctive moderating role of the strength of public IPR enforcement on the effect of the strength of IPR law protection, we gather important implications for policy making. The strengthening of both IPR law protection and public IPR enforcement in a host country are expected to boost horizontal productivity spillovers from inward FDI to domestic firms. However, policy makers need to monitor closely the strengthening of IPR protection and enforcement in their country and seek to timely identify when the productivity spillovers start to be hindered by the potential existence of a technological monopoly of MNEs. This can be done through the monitoring of the overall functioning of specific industries by e.g., monitoring the number of IPRs owned by MNEs, large firms or/and business groups and the number of IPR litigation cases taking place within an industry. It can also be done by reducing the strength of IPR law protection (e.g., shorten the protection period) in areas where moderate protection is expected to be more conducive for innovation and firm productivity growth (Brander et al. 2017) or increasing the maintenance fee for patents that are not practiced, but owned for pre-emptive purposes.
2 Background to IPR Systems
IPR systems comprise of two distinct elements: (a) IPR protection and (b) public IPR enforcement (Khoury et al. 2014; Peng et al. 2017a). The IPR protection element relates to the availability of IPR law as this appears in the statutes of a country's legislative framework. The range of IPR law in a country determines which intellectual assets can receive IPR protection, the duration of IPR protection (e.g., typically 20 years for patents) and the available legal sanctions that can be used by IPR enforcement agents (OECD 2014). For example, IPR law in a country determines the level and range of fines that IPR infringers may be sentenced with if convicted for IPR violation. Countries offering strong IPR protection generally provide legislative frameworks that offer IPR protection coverage to a wide type of IPR assets and a wide number of legal enforcement mechanisms for use by the IPR enforcement agents (Ginarte and Park 1997). In contrast, weak IPR law protection relates to the provision of some IPR protection however, protection may not be available for many other types of IPR that receive protection in other countries. There are differences in the availability and range of IPR law protection between countries internationally such as country specific legal exemptions or lack of IPR law availability for specific IPR assets e.g., the patentability of software and plant and animal varieties (Park 2008). Therefore, while IPR owners may be awarded IPR protection in one country they may not be able to register and protect their rights in another country. In addition, the available laws related to the enforcement of IPR may not provide a range of legal options to IPR enforcement agents to carry out their operations effectively. For example, this can relate to the potential lack of legislation that allows IPR enforcement agents to award and enforce preliminary injunctions in IPR infringement cases. The way that law is enforced (or not) in practice is distinct to the existence of law on the books since enforcement depends on the behaviour of public agents (Dixit...
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