Can a Lagging Country Benefit from Strengthening Intellectual Property Rights Protection to Gain Technology Spillovers from FDI? (Xianzhong Yi)


To analyse the policy effects of strengthening IPRs in a lagging country to attract FDI and expect technology spillovers, this paper introduces the double trade-offs, between 1) attracting FDI and deterring international technology diffusion and 2) encouraging domestic innovation and suppression of domestic technology spillovers. It is shown that lagging country can attract FDI by strengthening IPRs protection, but not necessarily benefit. This is because (a) the relationship between IPRs protection and host welfare is inverted-U-shaped, resulting that stringent IPRs protection above the optimal level induces welfare transfer from home to abroad; and (b) any gains from tightening IPRs protection to attract FDI in additional industries may be offset by losses in industries with existing FDI due to different industrial technological capability. Even ignoring the industrial differences, the combining policies of the optimal IPRs protection and financial incentives can be more beneficial means than solely IPRs protection to attract FDI under weak technological capability. Only the optimal industry-specific IPRs protection can maximize the overall welfare. 
Working Paper