International intellectual property rights protection and economic growth with costly transfer

• Author: Kazuyoshi Ohki
• Date: 01 November 2017
• Published date: 01 November 2017
• DOI: http://doi.org/10.1111/roie.12298

ORIGINAL ARTICLE

International intellectual property rights protection

and economic growth with costly transfer

Kazuyoshi Ohki

Kanazawa University, Japan

Correspondence

Kazuyoshi Ohki, Faculty of Economics

and Management, Institute of Human

and Social Sciences, Kanazawa

University, Kakuma, Kanazawa 920-

1192, Japan.

Email: kazuyoshi.ohki@gmail.com

Abstract

This paper develops a product-cycle model with costly tech-

nology transfer, which requires resources from both the

North and the South. In the basic model, we show that

strengthening intellectual property rights (IPR) protection

induces a large technology transfer and narrows the North–

South wage gap. However, we obtain an ambiguous result

regarding the effect on economic growth, which depends

crucially on the size of the transfer cost. Although strength-

ening IPR protection induces a high growth rate when the

transfer cost is small, it can induce a low growth rate when

the transfer cost is large. In the extended model, in order to

examine what factors determine the transfer cost, we con-

sider the situation where the Southern firms may misbehave

and the Northern firms incur a cost to monitor them. We

show that the degree of investor protection and the degree of

morality in developing countries influence the size of the

transfer cost, which affects economic growth.

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INTRODUCTION

Since the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which requires

developing countries that are members of the World Trade Organization (WTO) to establish minimum

standards of intellectual property rights (IPR) protection, when a range of measures were signed in the

Uruguay Round, many studies have analyzed the effects of strengthening IPR protection in developing

countries. These studies typically construct a model consistent with the product cycle, as highlighted in

Vernon (1966). New goods are invented and production takes place initially in high-wage developed

countries. Subsequently, production shifts to low-wage developing countries, accompanied by technol-

ogy transfer. Technology diffuses from developed countries to developing countries through many

channels. Regardless of the channels, technology transfer involves substantial resource cost in both

countries. For example, when technology transfer takes place through foreign direct investment (FDI),

affiliates receiving technology will typically need to conduct R&D to absorb the technology and to

modify it for the local market, and multinational firms will need to train workers in developing

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C2017 JohnWiley & Sons Ltd wileyonlinelibrary.com/journal/roie Rev IntEcon. 2017;25:1130–1154.

Received: 12 June 2016

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Revised: 15 February 2017

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Accepted: 26 April 2017

DOI: 10.1111/roie.12298

countries and to acquire knowledge about foreign customs and regulations.

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When technology transfer

takes place through licensing, there is a negotiation cost incurred to establish an agreement. However,

many theoretical papers ignore the cost of technology transfer. In particular, no study has considered

that technology transfer involves a resource cost in both developed countries and developing countries.

This paper, therefore, develops a product-cycle model with costly technology transfer, which requires

resource use in both developed and developing countries.

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We assume that there are two countries in the world, the North and the South. New goods are

invented in the North, and inventors of the new good can earn a profit flow because they are protected

by perfect IPR protection in the North. They have an incentive to transfer technology to the South in

order to produce goods using Southern labor, whose wage is relatively low. They suffer, however, from

a one-off imitation risk and transfer cost. These trade-offs determine the amount of technology transfer

in the equilibrium. Then we analyze the effect of strengthening IPR protection. Strengthening IPR pro-

tection (decreasing imitation risk) induces a large technology transfer and narrows the North–South

wage gap. Strengthening IPR protection reduces imitation risk, which decreases the disadvantage of

transferring technology. Then, more inventors are willing to transfer technology and more production

shifts to the South, which induces increased demand for Southern labor. This reduces the North–South

wage gap. These results are consistent with models in related studies in which technology diffuses

through FDI or licensing. However, we obtain ambiguous results regarding the effect on economic

growth. Although strengthening IPR protection induces a high growth rate when the transfer cost is

small, strengthening IPR protection can induce a low growth rate when the transfer cost is large.

Strengthening IPR protection induces a production shift to the South, which is accompanied by a tech-

nology transfer. On the one hand, more production takes place in the South, which makes Northern

resources shift from production to R&D activities, which promotes economic growth. On the other

hand, more technology transfer takes place, which requires Northern resources. The resources used in

R&D will shift to the transfer activities, which impedes economic growth. If the former (latter) effect

dominates the latter (former) effect, strengthening IPR protection promotes (harms) economic growth.

Then the question is “What factors determine the transfer cost?,”which plays a key role in our

model. In the real world, it depends not only on the characteristics of the firms in the developed coun-

try such as the ability to conduct adaptive R&D and to accumulate knowledge, but also on the charac-

teristics of the host countries such as education level and the degree of maturity in the financial market.

With respect to the characteristics of the host countries, there are large gaps in terms of human capital

and the degree of maturity of legal systems, even within the developing countries. In our extended

model, we focus our attention on the role of monitoring activity to show that the characteristics of the

host countries affect transfer cost and consequently economic growth. Specifically, we introduce a

moral hazard framework.

We assume that for firms in developed countries to shift production to developing countries it is

necessary to cooperate with entrepreneurs in the developing countries, and that entrepreneurs have an

incentive to enjoy private benefits by misbehaving. These private benefits depend on the degree of

investor protection, the morals of workers in developing countries, and the monitoring by the firms

transferring the technology. When the degree of investor protection and the morals of laborers are low,

private benefits are high. Firms can reduce the private benefits of entrepreneurs by monitoring, which

involves a resource cost. Although the characteristics of host countries are not so important when the

degree of investor protection and the morals of laborers are sufficiently high, they have a crucial effect

on the transfer cost when the degree of investor protection and the morals of laborers are low because

firms must monitor entrepreneurs to ensure that they do not misbehave. The transfer cost is high if the

degree of investor protection and the morals of laborers in the host country are low. In this situation,

strengthening IPR protection impedes economic growth. This result implies that strengthening IPR

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