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The Effect of Intellectual Property Rights on international trade invesment

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  • 8/8/2019 The Effect of Intellectual Property Rights on international trade invesment

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    The Effec t o f In t e l l ec tua l P rope r ty R igh t son In te rna t iona l Trade and Inves tment

    By

    M i c h a e l J . F e r r a n t i n o

    c o n t e n t s: I. Introduction. II. Intellectual Property n the Multinational Firm.- III. Intellectual Property in the International Policy Mix: Some Stylized Facts. -IV. Modeling International Economic Flows. - V. Data. - VI. Results. - VII. Conclu-

    sions.

    I . I n t r o d u c t i o n

    The question of intellectual property rights (IPRs) has receivedincreasing attention in the arena of international economicpolicy. Industrial nations have placed IPRs on the agenda of

    the Uruguay Round of the General Agreement on Tariffs and Trade

    (GATT), 1 advocating t hat GAT T members exchange access to patentand cop yright protection for each other's firms in much the same wayin which they currently exchange access to the domestic goods mar ketfor each other' s firms. Such a policy, if adop ted, could extend theinternational recognition of intellectual property beyon d the countrieswhich currently adhere to the Paris Convention on patents and theBerne Conventi on on copyrights to embrace the near-global group o fGAT T members. Some developing countries, in resisting such a pol-icy, argue that an extension of international IPRs would harm their

    own technological progress and that they should continue to be freeto opt out o f the partial system of international IPRs provided by thecurrent conventions)

    Internat ional exchanges o f goods mar ket access represent steps inthe direction of free trade, a policy which possesses well-know n theo-retical argu ment s and some empirical evidence in its favor. The case

    Remark: The capable research assistance of Leola Ross and the helpful suggestions ofRobert Evenson, Bill Lesser and an anonymous eferee are gratefully acknowledged. Allerrors and omissions remain my own.I See GAO [1986], Bradley [1987] and Junz and Boonekamp [1991] for discussions.2 See Ranis [1979], Vaitsos [1976], Stewart [1977] and Evenson [1990] for discussions.

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    Ferrantino: Intellectual Prop erty Rights 301

    f o r in t e r n a t i o n a l e x t e n s io n o f I P R s h a s b e e n a rg u e d m o r e c a s u a ll y, i nt e r m s o f p r e v e n t i n g p ir a c y, b r o a d e n i n g t h e r e w a r d s t o i n v e n t iv e ac ti v -i t y, o r p r o v i d i n g a g o o d i n t e r n a t i o n a l b u s i n e s s c l i m a t e i n g e n e r a l ;f i rm s m i g h t n o t w i s h t o l o c a te i n c o u n t r i e s w h e r e t h e i r t e c h n o l o g i c a lo r m a r k e t a d v a n t a g e s a r e e a si ly c o p i e d . B u t it is b y n o m e a n s c l e a rt h a t t h e e x t e n s i o n o f I P R s a c r o s s n a t i o n a l b o r d e r s h a s e f fe c ts w h i c hpara l l e l t hose o f f r ee t r ade . Whi le f r ee t r ade gene ra l ly inc reases thed e g re e o f c o m p e t i t io n i n t h e i n t e r n a t io n a l m a r k e t , e x t e n s io n o f I P R si m p li es t h a t f i r m s p o s se s si n g d o m e s t ic m o n o p o l y p o w e r i n t h e u s e o fa p a r t i c u la r i d e a c a n m o r e e a sily e x t en d t h a t m o n o p o l y p o w e r o v e r -s ea s. T h e e x e rc is e o f i n t e r n a t i o n a l I P R s is t h u s p r i m a r i l y t h e p r o v i n c eo f t h e m u l t in a t i o n a l f ir m r a t h e r t h a n o f t h e a t o m i s ti c u n i ts a s s u m e din m u c h t r a d e t h e o r y.

    A l t h o u g h t h e r e is s o m e t h e o re t ic a l a n d d e s cr ip t iv e w o r k o n t h ero le o f in t e l l ec tua l p rope r ty in the mul t ina t iona l f i rm, the re i s l i t t l ed i r e c t e m p i r ic a l e v id e n c e o n e i t h e r t h e e x t e n t t o w h i c h i n t e r n a t i o n a lf lo w s o f t r a d e a n d i n v e s t m e n t a r e i n f lu e n c e d b y t h e i n t e r n a t i o n a lp a t t e r n o f I P R s u n d e r t h e s t at u s q u o o r t h e r o le w h i c h d ec is io n s a b o u tI P R s p l a y i n a c o u n t r y ' s c h o i ce o f i n t e r n a t i o n a l p o l i c y i n s t r u m e n t sg e n e r al ly. T h i s p a p e r s e e k s t o r e m e d y b o t h o f t h o s e g a p s . F i r s t, i ti m b e d s c o u n t r i e s ' c h o i c e s a b o u t m e m b e r s h i p i n i n t e r n a t i o n a l I P Rc o n v e n t i o n s a n d a b o u t d o m e s t ic p a t e n t p r o t e c t i o n in a b r o a d e r e m p i r -i c a l m o d e l o f t h e e x p o r t s a n d o v e r s e a s a f f i l i a t e s a l e s o f t h e U n i t e dS ta te s to i t s va r iou s t r ad ing pa r tne r s in 1982 . Th e e ffec ts o f IPR s o nt h e v o l u m e o f li c en s in g p a y m e n t s a n d r e c e ip t s o f U . S . o v e r s e as a f fil i-a t e s is e x a m i n e d . I n a d d i t i o n , e v i d e n c e o n t h e p a t t e r n o f c o u n t r i e s 'j o i n t d e c i s i o n s a b o u t t ar if fs , i n t e r n a t i o n a l I P R s , a n d p o l i c y t o w a r d sU.S. overseas aff i l ia tes i s presented .

    T h e p a p e r c o n s i s t s o f s ix s e c ti o n s . S e c t io n I I s u m m a r i z e s t h e p r e -v i o u s s t a t e o f d i sc u s s i o n c o n c e r n i n g t h e r o l e o f i n t el le c t u al p r o p e r t y i nt h e m u l t i n a t i o n a l f i r m . I m p l i c a t i o n s a r e d r a w n f o r t h e p o t e n t i a l e f -f e ct s o f c h a n g e s i n I P R p o l i c y o n s u c h f i r m s ' b e h a v i o r. S e c t io n I I Idesc r ibes the r e su l ts o f a jo in t c lus t e r ana lys is o f cou n t r i e s ' i n t e rna -t i o n a l I P R s a n d o t h e r i n t e r n a t i o n a l e c o n o m i c p o li ci es . S e c ti o n I Vd e s c r i b e s t h e t h e o r e t i c a l a n d e m p i r i c a l f r a m e w o r k f o r e s t i m a t i n gf lows o f in t e rn a t ion a l t r ade , o ve r seas a ffi li a te sal es , and in t e rn a t ion a lf lows o f roya l t ie s an d l icense f ees. Sec t ion V desc r ibes the d a ta an d i tsu s e . S e c t i o n V I p r e s e n t s t h e e m p i r ic a l r es u l ts o n i n t e r n a t i o n a l e c o -

    n o m i c flo w s , a n d S e c ti o n V I I d r a w s s o m e p r e l im i n a r y c o n c l u s io n s o nt h e p o l i c y o f e x t e n d i n g i n t e r n a t i o n a l I P R s b a s e d o n t h e e m p i r i c a lw o r k .

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    302 W eltwirtschaft liehes Archiv

    I I . I n t e l l e c t u a l P r o p e r t y i n t h e M u l t in a t i o n a l F i r m

    T h e e x i s te n c e o f t h e m u l t i n a t i o n a l f i r m i s w i d e l y a t t r i b u t e d t o t h ep o s s e s s i o n b y i n d i v i d u a l f i rm s o f s o m e f i r m - sp e c if ic a ss e ts w h i c h g i v et h e f ir m a s u f fi c ie n t a d v a n t a g e o v e r a fo r e i g n c o u n t r y ' s o w n d o m e s t i cf ir m s to c o m p e n s a t e fo r t h e d i s a d v a n t ag e s o f o p e r a t i n g o v e r s e a s )I n te l le c tu a l p r o p e r t y i n t h e f o r m o f p a t e n ts , t r a d e m a r k s , a n d c o p y -r igh t s ma y be v iewed e i the r a s a f i rm-spec i f i c a s se t it s e l f o r a s am e t h o d f o r p r e s e r v in g t h e v a l u e o f m o r e f u n d a m e n t a l f ir m - sp e c if icasse t s ( t echno logy, d i ff e ren t i a t ed p roduc t s , r epu ta t ion , e t c . ) .

    T h e e x p l o i t a t i o n o f f ir m - s p e ci fi c a s se t s b y t h e m u l t i n a t i o n a l f i r m

    m a y t a k e t h e f o r m s o f e x p o r ti n g , d ir e ct f o r e ig n i n v e s t m e n t ( D F I ) , o rl i c e n s i n g o f t h e a s s e t t o a n o v e r s e a s c o m p e t i t o r. T h e c h o i c e a m o n gt h es e v a r io u s m o d e s o f m a r k e t s e rv ic e h a s b e e n t h e s u b j e c t o f a ne x t en s i v e l i te r a t u r e b a s e d o n t h e O L I ( o w n e r s h i p , lo c a t i o n , i n t e rn a l -i za ti o n ) f r a m e w o r k o f D u n n i n g . 4 I n t h is f r a m e w o r k , f ir m s e x p o r t i fl o c a ti o n a l a d v a n t a g e s f a v o r p r o d u c t i o n i n th e i r h o m e m a r k e t . I f l o c a -t io n a l a d v a n t a g e s f a v o r p r o d u c t i o n i n a n o v e rs e as m a r k e t , t h e c h o ic eb e t w e e n D F I a n d l ic e n s in g h i n g e s o n w h e t h e r t h e a s s e t c a n b e s t b eexp lo i t ed by a rm s ' l eng th sa l es o f the a s se t t o o ve r seas f i rms ( li censing)o r b y i n t e r n a l i z a t i o n t h r o u g h t h e f i r m ' s o v e r s e a s s u b s i d i a r y ( D F I ) .T h e d e g r e e o f in t e ll e c tu a l p r o p e r t y p r o t e c t i o n c a n i n f lu e n c e t h e f i rm ' sa c t io n s b y a f fe c ti n g t h e p e r ce iv e d p r o b a b i li t y o f t h e v a r i o u s m o d e s o fm a r k e t s er v ic e, e it h e r r e la t iv e t o d o i n g n o t h i n g o r r e la ti v e t o e a c ho t h e r.

    G i v e n t h e p a r t i c u l a r n a t u r e o f I P R s , t h e r e a r e a t le a s t t h r e e c h a n -n e l s b y w h i c h t h e y m i g h t i n f l u e n c e m u l t i n a t i o n a l f ir m a c ti v it y :

    ( i) B y e n h a n c i n g t h e f i r m ' s s e c u r e s e lf - e x p l o it a ti o n o f it s k n o w l -e d g e - b a s e d a s s e t s v i a e x p o r t s o r F D I ;

    ( i i ) B y c r e a t in g a l eg a l f r a m e w o r k f o r t h e e n f o r c e m e n t o f l ic e n s in ga n d r o y a l ty c o n t r ac t s ; o r

    ( i i i ) B y a s t r a t eg y o f " p l a c e - h o l d i n g " u n d e r w h i c h f ir m s r e g is t eri n te l le c tu a l p r o p e r t y i n v a r i o u s c o u n t r i e s w i t h o u t e x p l o i t in g t h e i n t e l-l e ct u a l p r o p e r t y i n t h a t c o u n t r y. T h e m o t i v a t i o n f o r t h is is to r e d u c et h e p o t e n t i a l g e o g r a p h i c r a n g e o f c o m p e t i t i o n fo r t h e f ir m .

    I wi l l focus p r imar i ly on ( i ) and( i i ) . A l t h o u g h p l a c e - h o l d in g iss o m e t i m e s a ll e g ed t o t a k e p l a c e, i t w o u l d b e d i f f ic u l t t o i d e n t if y e m p i r -i ca ll y s in c e th e r e a s o n s f o r a n y g i v e n f i r m ' s a b s e n c e f r o m a n y g i v e n

    3 See Caves [1982] and Helleiner [1989] for overviews.4 See Dun ning [1979] for an expo sitionand Ethier [1986], Ho rstmann and M arkusen[1987] and Ferrantino [1991] for examples o f analytical applicationsof this idea.

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    Ferrantino: IntellectualProperty R ights 303

    c o u n t r y a r e p o t e n t ia l l y f a r m o r e n u m e r o u s a n d d i f fi c u lt t o c o n t r o l f o rt h a n t h e c o r r e s p o n d i n g r e a s o n s f o r a f i r m ' s p r es e n c e.

    Co ns id e r f i rs t the po ten t i a l e ffec t o f IP R s o n a f i rm ' s secure sel f-exp lo i t a t ion o f a s set s. I f the f i rm se rv ices a m ark e t en t i r e ly by expor t s ,t h e n t h e s i g n if ic a n ce o f I P R s i s m i n i m a l . A n y c o n s u m e r w h o b u y s t h ep r o d u c t c a n p o t e n t i a ll y " r e v e r s e -e n g i n e e r " th e p r o d u c t a n d e s ta b l is hc o m p e t i n g , i m i t a t iv e p r o d u c t i o n ; b u t i f t h e g o o d h a s b e e n s h i p p e d t ot h e m a r k e t i n q u e s t i o n a t l ea s t t h e p r o d u c t i o n p r o c e s s i t s e lf is o v e r se a sand d i ff i cu l t to obse rve d i rec t ly by po ten t i a l imi ta to r s .

    I f c o n s id e r a ti o n s o f p r o d u c t i o n a n d s h i p p in g c o st s f a v o r a c t u a lp r o d u c t i o n i n a c e r ta i n c o u n t r y, t h e n t h e p r i m a r y e f f ec t o f I P R s i s t oi n f lu e n c e t h e c h o i c e b e t w e e n D F I a n d l ic e ns in g . S t r o n g I P R s w i llp r o b a b l y f a v o r l i ce n si ng , w h i le w e a k I P R s w i ll p r e d i s p o s e t h e f i r m t oa p o l i c y o f D F I . T h i s is b e c a u s e a s y s t e m o f I P R s i s n ec e s s a ry to t h ee n f o r c e m e n t o f t h e li c en s in g c o n t r a c t . W i t h o u t c o n t r a c t u r a l o r o t h e rm e a n s o f r e g u l a t i n g t h e l i ce n s ee 's b e h a v i o r, t h e l ic e n se e m a y b e h a v eo p p o r t u n i s t i c a l ly, e r o d i n g t h e v a l u e o f t h e k n o w l e d g e - b a s e d a ss e t t othe l i censor [Con t rac to r, 1985; W i l li amso n , 1985] . One ex am ple o f th i sis o u t r i g h t t h e f t o r i m i t a t i o n o f t h e l ic e n se d t e c h n o l o g y u n i n t e n d e d b ythe l icensor. The r i sk o f such p i racy i s the g rea tes t in coun t r i e s w i tha h i g h c a p a c it y to a b s o r b n e w t e c h n o l o g y b u t w h i c h m a k e l a rg e n e tp a y m e n t s o n t h e i n t e r n a t i o n a l t e c h n o l o g y m a r k e t s [ E v e n s o n , 1 99 0].A n o t h e r c a s e , a n a l y z e d b y H o r s t m a n n a n d M a r k u s e n [ 1 9 8 9 ] , i s t h efac t tha t the l i censee has inad equ a te incen t ives to p rese rve the l i cen-s o r 's r e p u t a t i o n , p a r t i c u la r l y in t h e c a s e o f t r a d e m a r k s o r g o o d s a s s o -c ia ted wi th h igh l evel s o f adver t i s ing . In e i the r case D F I he lps tom a i n t a i n d i r e c t c o n t r o l o f t h e k n o w l e d g e - b a s e d a s se t. I t m a y b e o b -j e c te d t h a t w e a k I P R s h a r m D F I i n th a t t h e y p r o v id e i n a d e q u a t e sa fe -g u a r d s a g a i n s t lo s s o f t e c h n o l o g y t h r o u g h i n d u s t r i a l e s p i o n a g e o r t h e

    h i r i n g a w a y o f e m p l o y e e s o f t h e f o r e i g n s u b s id i a ry ; b u t i f c o n d i t i o n sw e r e t h a t b a d , l ic e n s in g w o u l d a l m o s t a l w a y s b e e v e n w o r s e f o r t h ef i rm.

    A n o t h e r w a y i n w h i c h w e a k I P R s m a y e n c o u r a g e D F I i nv o lv e s t h ep o s s ib l e c o s t a d v a n t a g e i n t r a n s m i t t in g t h e t e c h n o l o g y t o a n o v e r se a ss u b s i d ia r y a s c o m p a r e d t o a l ic e ns ee , s in c e w e a k I P R s i m p l y h i g h e rl egal cos t a s soc ia ted w i th e s t ab l ish ing and po l i c ing an a rm s ' l en g thre la t ionsh ip . Th i s e ffect is p rob ab ly und er ra te d ; a s Teece [1977] hass h o w n , e v e n i n t r a f i rm t r a n sf e r s o f t e c h n o l o g y a r e o f t e n s u r p r is i n g ly

    cos t ly.O n t h e o t h e r s id e , a s t r o n g s y s t e m o f I P R s c a n b e e x p l o it e d b o t h

    b y t h e h o s t c o u n t r y g o v e r n m e n t e s ta b li sh i ng t h e I P R s a n d t h e f i rm s

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    o p e r a t i n g u n d e r t h ei r j u r is d i c ti o n . C o u n t r i e s m a y , f o r e x a m p l e , u s es t r o n g I P R s a s p a r t o f a p o l i c y o f e n c o u r a g i n g l ic e n si n g , if t h e y b e l ie v et h a t s u b s i d i a r ie s o f f o re i g n f ir m s a r e li k e ly t o i m p o r t m o r e a n d h a r mt h e c o u n t r y ' s f o r e i g n e x c h a n g e p o s i t i o n [ Ve r n o n , 1 9 9 0 ] . T h e a d v a n -t a g e s o f e n f o r c e a b l e l ic e n s in g a r r a n g e m e n t s t o f ir m s e x t e n d w e l l b e y -o n d t h o s e a c c r u i n g f r o m t h e a b i l it y t o e s ta b l i s h e f f e c ti v e r e l a t io n s h i p sw i t h l o c a l p a r t n e r s , s w h i c h a r e t h e b e n e f i t s a s s u m e d b y t h e u s u a la n a l y s i s o f l ic e n s in g a s a n a r m s ' - le n g t h r e l a ti o n s h i p . T h e p r i m a r y u s eo f li ce n s es a n d r o y a l t ie s b y U . S . f i r m s i s t o t r a n s f e r f u n d swithinv a r i o u s b r a n c h e s o f fi rm s r a t h e r t h a n t o r ec e iv e r e v e n u e s f r o m a r m s ' -l e n g t h t e c h n o l o g y s a le s . I n 1 9 8 2 , o v e r 7 8~ o f t h e $ 7 b i l li o n in r o y -a lt ie s a n d l ic e n s e fe e s r e c e i v e d b y U . S . f i rm s f r o m o v e r s e a s r e p r e s e n t e dp a y m e n t s b y o v e r s e a s a f f il ia t e s to t h e i r U . S . p a r e n t f ir m s . 6

    T h e s e i n t e r n a l p a y m e n t s , i n v o l v i n g a s t h e y d o t r a n s f e r s o f f o r e i g ne x c h a n g e , w i ll g e n e r a l l y b e p e r m i t t e d b y f o r e i g n g o v e r n m e n t s o n l y a sp a r t o f a r ra n g e m e n t s g e n e r al ly a c c e p t a b l e in t h a t c o u n t r y ' s l eg a l s y s-t e m ; t h u s , s t r o n g I P R s a r e l i k e l y t o e n h a n c e t h e f i r m ' s a b i l i t y t ot r a n s f e r f u n d s i n t e r n a l ly a c r o s s b o r d e r s . T h i s , i n tu r n , g i v es f i rm s a ni n c r e a s e d a b i l i ty t o e n g a g e i n t ra n s f e r p r i c in g f o r t a x a v o i d a n c e . P a y -m e n t s f o r t e c h n o l o g y a re b e t t e r s u it e d to t r a n s f e r p r ic i n g t h a n g o o d s

    s h i p m e n t s s i n c e t h e r e a r e u n l i k e l y t o b e g o o d a r m s ' l e n g t h p r i c e s f o ru n i q u e t e c h n o l o g i c a l as s e ts . K o p i t s [1 9 76 ] e s t i m a t e d t h a t a r o u n d 2 5 %o f ro y a l t y p a y m e n t s f r o m i n d u s tr ia l c o u n t r ie s t o U . S . p a r e n t s a n d1 3 % o f r o y a l ty p a y m e n t s f r o m L D C s r e p re s e n te d c o n c e a l ed r e m it -t a n c e s o f p r o f i ts . I n t h e c a s e o f U . S . f ir m s , t h e s e i n c e n t i v e s g i v e ri set o i n c r e a s e d p a y m e n t s f r o m m o s t o v e r s e a s s u b s i d i a r i e s t o p a r e n t s ,s i n c e t h e U . S . is a r e la t iv e l y l o w - t a x c o u n t r y. T h e r e i s s o m e e v i d e n c et h a t m u l t in a t i o n a l s s u b s t i tu t e b e t w e e n o v e r t r e p a t ri a t io n o f p r o f it sa n d " r e p a t r i a t i o n b y l ic e n se f e e s " q u i t e e as i ly a s c o u n t r i e s a l te r t h e ir

    r e la ti v e p o l ic y s t a n c e t o w a r d s t h e t w o m e t h o d s o f r e p a tr i at io n . 7

    5 One o f these ben efits is the ability to engage in reciprocal exchanges of technologywith foreign firms through licensing [Telesio, 1979].6 Ad apted from U .S. Department of Com merce,Survey of Current Business, Sept.1983, p. 39. The U .N. Centre for Transnational Co rporation s [1987; cited by Stewart,1990] estimates the percentage o f foreign techno logyreceipts wh ich are internal to firmsto exceed90% for W est Germ any in the mid-1980s, but to be lower than the U .S. figurefor Jap anese and U.K . firms. Lipsey et al. [1990], using evidence on paym ents of U.S.affiliates to their parents fo r tech nolog y, conclude that while all affiliates are highly

    dependen t on their parents for technology, U .S. affiliates in L D Cs may be relativelyless so.7 E no s [1989] estimated the proportion of paym ents for technology (excluding thepurchase o f capital goods) which were directly related to D FI (e.g., repatriation o f

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    Ferrantino: Intellectual Property Rights 3 05

    I n s u m m a r y, i n t e r n a t i o n a l v a r i a t io n s i n t h e re l at iv e s t r e n g th o fI P R s a r e u n l ik e l y to h a v e a g r e a t i m p a c t o n t h e a r m s ' l e n g th e x p o r t so f f o r e ig n f ir m s . C o u n t r i e s w i t h s t r o n g I P R s m a y r e d u c e e x p o r t s f r o mt h e m u l t i n a t i o n a l f i r m ' s h o m e c o u n t r y t o i t s s u b s i d i a r i e s , b o t h b ye n c o u r a g i n g l i ce n si ng a n d b e c a u s e w e a k I P R s m a y i n d u c e t h e s u b -s i d ia r y t o c o n c e a l m o r e o f i ts p r o d u c t i o n p r o c e s s b y l o c a t in g i t o u t s i d et h e c o u n t r y. W e a k I P R s a r e l i k el y t o e n c o u r a g e d i r e c t f o r e ig n i n v e st -m e n t i n c a s es w h e r e s o m e s o r t o f l o c al p r o d u c t i o n u s i n g t h e f ir m ' sk n o w l e d g e - b a s e d a s s et s is c l ea r ly i n d i c a te d . S t r o n g I P R s w i ll b e a s s o -c i a t e d w i t h g r e a t e r f l o w s o f l ic e n s e f e e s a n d r o y a l t i e s , b o t h i n t e r f i rma n d i n t r a f i r m .

    I I I. I n t e l l e c t u a l P r o p e r t y i n t h e In t e r n a t i o n a l P o l i c y M i x :S o m e S t y l iz e d F a c t s

    A c c o r d i n g t o t h e an a l y s is a b o v e , t h e s tr e n g t h o f I P R s p r i m a r i l ya f fe c t s t h e m a r g i n b e t w e e n l i ce n s in g a n d o t h e r m e t h o d s b y w h i c h t h em u l t i n a t i o n a l f i r m m a y e x p l o i t i ts f i rm - s p e c i f i c a s s e ts . H o w e v e r, i fc o u n t r i e s h a v e p r e f e r e n c e s a s t o w h e t h e r m u l t i n a t i o n a l s w i l l s e l l t h e mg o o d s , s e l l t h e m t e c h n o l o g y, o r e s t a b l i s h f a c t o r i e s , t h e y a r e l i k e l y t oe x p r e s s th e s e p r e f e r e n c e s t h r o u g h a w i d e r a n g e o f p o l i c ie s c o n c e r n i n gt r a d e a n d f o r e i g n i n v e s t m e n t . T h u s , a d e c i s i o n o n I P R p o l i c i e s , s u c ha s t h e d e c is i o n t o j o i n o r a b s t a i n f r o m t h e P a ri s c o n v e n t i o n , p o t e n -t ia l ly c o m p l e m e n t s o r s u b s t i t u t e s f o r a c e r ta i n " d o s e " o f ta r if f s o rd i r e c t i n v e s t m e n t p o l ic y. To e x p l o r e t h is p o s s ib i l it y, m e a s u r e s o f n a -t i o n a l p o l i c ie s r e g a r d i n g t r a d e , d i r e c t i n v e s t m e n t b y f o re i g n e r s , a n dt h e i n t e r n a t i o n a l d i m e n s i o n s o f I P R p o l i c y w e r e g a t h e r e d f o r a n u m -b e r o f c o u n t r i e s , w i t h t h e i n t e n t o f c l a s s if y i n g t h e s e c o u n t r i e s i n t o an u m b e r o f o v e r a ll p o l i c y re g im e s .

    profits rather than licensing) as 14.7% for In dia in 19 69-79, 27 .4% for So uth Koreain 1962 -81 an d 4 8.3% for the Philippines in 1969 -79. Thus, a h eavier reliance onlicensing is associated w ith a m ore restrictive policy stance on D FI and vice versa. InIndia, the tightening regulation of D FI in the 1970s was accom panied by a fourfoldincrease in the nom inal rupee value o f remittances by foreign com panies operating in

    India betwe en 1970 -71 and 1981 -82. O f these remittances, the proportion accou ntedfor by royalties and technical knowh ow fees increased from 2 7.1% in 1970-71 to71.9% in 1980-81, w ith the rest consisting of profits, interest and dividends [TataServices L td. , 1989].

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    O n e d i m e n s i o n o f t r a d e p o l ic y is c a p t u r e d b y t h e a v e r a g e t ar if f,m e a s u r e d a s t h e r a ti o o f i m p o r t t a x r e v e n u e s c o l le c t e d b y c o u n t r y i t ot o ta l i m p o r t s o f c o u n t r y i f o r 19 82 . 8 T h e U . S . D e p a r t m e n t o f C o m -m e r c e ' s 1 98 2 b e n c h m a r k s u r v e y o f U . S . d i r e ct in v e s t m e n t o v e r s e asa s k e d e a c h o v e r s e a s a ff il ia te o f a U . S . f i rm w h e t h e r it b e n e f i te d f r o me a c h o f f o u r t y p e s o f i n c e n t i v e s ; t a r i f f i n c e n t i v e s ,9 t ax incen t ives ,s u b s id i e s a n d o t h e r i n c en t iv e s ; a n d w h e t h e r it w a s s u b j e c t to e a c h o fs e v e n ty p e s o f r e st r ic t io n s ; m a i n t a i n i n g a c e r t a in n e t f o r e i g n e x c h a n g ep o s i t i o n (u s u a ll y n o n e t o u t f lo w ) , u s i n g a m i n i m u m i n p u t o f l o ca lm a t e r i a ls , h a v i n g a m i n i m u m p e r c e n t a g e o f l o c al e q u i t y, u s i n g a m i n -i m u m a m o u n t o f lo c al la b o r, e x p o r ti n g a m i n i m u m a m o u n t , r e q u ir e-m e n t s t o t r a n s f e r t e c h n o l o g y t o l o c a l f ir m s , a n d i m p o r t i n g a m a x i -m u m a m o u n t . F o r e a c h c o u n t r y, t h e i n te n s it y o f i n ce n ti v es a n dres t r i c t ions f aced by U.S . ove r seas a ff i l i a t e s i s expressed as the pe r-c e n t a g e o f f i r m s r e p o r t i n g t h a t t h e y w e r e s u b j e c t t o t h e i n c e n t i v e( r e st r ic t io n ) a s a p e r c e n t a g e o f t h e f i r m s a n s w e r i n g t h e q u e s t i o n . 1 ~T h e c o u n t r y ' s p o s i t i o n o n i n t e r n a t i o n a l r e c o g n i t io n o f in t e ll e c tu a lp r o p e r t y w a s c a p t u r e d b y a s er ie s o f d u m m y v a r ia b l es r e p r e s e n t i n gm e m b e r s h i p in t h e P a ri s C o n v e n t i o n o n p a t e n ts , t h e B e r n e C o n v e n -t io n o n c o p y r i g h ts , a n d t h e U n i o n f o r t h e P r o t e c t i o n o f Va r ie tie s o f

    P l a n t s , a s o f I 9 8 8 [ E v e n s o n a n d L e s s er, 1 99 0]. E a c h o f th e s e c o n v e n -t io n s p e r m i t s n a t i o n a l s o f t h e s i g n a t o r y c o u n t r i e s ac c es s to r e c o g n i t io no f t h e i r in t e ll e c tu a l p r o p e r t y ( e. g. , b y r e g i s t r a t io n o f p a t e n t , c o p y r i g h to r t r a d e m a r k ) i n a l l s i g n a t o r y c o u n t r i e s o n t h e s a m e t e r m s a s l o c a lp e r s o n s .

    s Import tax revenues are from IMF, Government Finance Statistics,various issues;imports are from IM F Direction o f T rade Statistics,various issues. In a few cases theimplicit tarif f is calculated for the most recent year prior to 1982 with available data;for most countries the implicit tari ffis relatively stable over time. This measure does notcapture the trade-deterrent effect of tariffs on specific commodities so high that theyprohibit imports altogether; this flow is partially compensated for in that the measureis easily constructed.9 These may include low tariffs on the affiliate's own imports or high tariffs directedat the affiliate's competitors in the foreign market.10 There may be a little more informat ion contained in the proport ion of non-respon-dents per country. The correlation across countries between the proportion of non-respondents and the proportion of firms answering "yes" among those volunteering"yes-or-no" responses to questions about incentives and restrictions is 0.302 with astandard deviation of 0.039. This implies that non-respondents are more likely thanrespondents to be subject to incentives and restrictions and try to conceal the fact.

    However, attempts to reconstruct the true proportion of "yes" respondents, based onreasonable assumptions about the behavior of non-respondents revealed that the rela-tive scores o f countries are substantially unaffected by the presence o f non-responsebias.

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    In a l l, t hen , each c ou n t ry is cha rac te r i zed by f i f teen in te rna t iona leconomic po l i cy va r i ab les ; one t a r i f f , e l even incen t ives and res t r i c -t i o n s o n d i re c t i n v e s t m e n t (w h i c h a l so r e fl ec t e le m e n t s o f t r a d e a n dt e c h n o l o g y p o l i c y ) a n d t h r e e i n d i c a t o r s o f m e m b e r s h i p i n i n t e r n a -t iona l IPR agreements . In a l l , t he above da ta were ava i l ab le fo r 45c o u n t r ie s , w h i c h a r e d i s t in g u i s h e d p r i m a r i l y b y t h e f a c t t h a t t h e y a r e" s t u b " c o u n t r i e s i n t h e C o m m e r c e D e p a r t m e n t b e n c h m a r k s u r v e y,hav in g a su ff i c i en t nu m be r o f U .S . over seas a ff il ia t e s to ha ve sepa-ra te ly t abu la ted da ta in the su rvey o f incen tives an d res t ri c t ions . Byt h e n a t u r e o f t h e b e n c h m a r k s u rv e y, t h e U n i t e d S t a te s is a ls o e x c l u d e df r o m t h e s a m p l e . T h e v e c t o r o f 1 5 p o l i c i e s w a s t h e n a n a l y z e d b yc lus te r ana lys i s accord ing to W ard ' s m e th od [see e .g . , Ever i tt , 1980],w h i c h g r o u p s o b s e r v a t i o n s a n d c l us te r s b y m i n i m i z i n g th e w i t h in - c lu s -t e r s u m o f s q u a r e s a t e a c h g e n e r a t i o n o f cl u st e ri n g .

    Th e resu lt s o f the c lus te r ana lys is a re sum m ar ize d in Tab le 1 ,w h i c h r e p o r t s t h e u n w e i g h t e d c o u n t r y m e a n s f o r e a c h t h e f i n a l n i n ec lus te r s r em ain ing a f t e r the 36 th genera t ion o f c lus te r ing , and F ig -u re 1 , wh ich l is ts the m em ber s o f the n ine c lus te r s a long w i th the t r eed i a g r a m s h o w i n g t h e s u p e r- c l u s te r r e la t i o n s h ip s a m o n g t h e c l u s te r s.T h e n a m e s a p p e n d e d t o t h e c lu s te rs a r e f o r m n e m o n i c p u r p o s e s o n l yand a re m ea n t to be sugges t ive o f geograph ica l o r h i s to r i ca l cha rac te r-i st ic s o f m o s t m e m b e r s o f e a c h c lu s te r.

    T h e r e su l ts o f t h e c l u s te r a n a ly s is c a n b e s u m m a r i z e d i n t h r e estyl ized facts:

    (1) Broa dly speaking, the in ternat ional econom ic pol ic ies of devel-oped countr ies are mar ked ly di fferent than those of developing coun-tries.

    T h e b e s t t w o - c l u st e r g r o u p i n g i n t h e d a t a is t h a t w h i c h p la c e s t h ec lu s te r s " O E C D " , " E u r o - N I C s ' " a n d " S o u t h e r n N I C s " i n o n e l arg e" d e v e l o p e d c o u n t r i e s " c lu s t e r a n d t h e c lu s te r s " S m a l l P o r t s " , " L a t i nA m e r ic a " , "A f r i ca " , " A s i a n N I C s " , " E m p i r e " a n d " I n d i a " i n o n el a rg e " d e v e l o p i n g c o u n t r i e s " c l u s te r. I n m o s t c a se s , t h e c o u n t r i e s i nt h e " d e v e l o p e d c o u n t r i e s " c l u s t e r h a v e h i g h e r p e r c a p i ta i n c o m e s t h a nt h o s e in t h e " d e v e l o p i n g c o u n t r i e s " c l u st er. I n t h e a r e a o f o v e r la p ,Arg en t ina , Greece , I s rael , S ingapo re and So u th Af r i ca have re l a tive lyl o w in c o m e s i n th e f ir s t g r o u p , a n d M e x i c o , P a n a m a , P o r t u g a l , S o u t hK o r e a , t h e U n i t e d A r a b E m i r a te s , a n d Ve n e z ue la h a v e r e la t iv e ly h i g hi n c o m e s in t h e s e c o n d g r o u p .

    I n t h e a g g re g a t e , t h e " d e v e l o p e d c o u n t r i e s " g r o u p t e n d t o i m p o s el o w e r ta r if fs , f e w e r r e s tr i ct io n s o n i n b o u n d D F I , a n d a r e m o r e l ik e lyt o j o i n i n t e r n a ti o n a l I P R a g r e e m e n t s th a n t h e " d e v e l o p i n g c o u n tr i e s "

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    Table 1 - Po l i cy C lus t e r s (unwe igh ted coun t ry means )

    Cluster name IncentivesTariff Tariff Tax Subsidy Otherrate incentives incentives incentives

    OEC D .011 .039 .211 .165 .053Small Ports .063 .122 .133 .020 .037Southern NICs .032 .153 .400 .153 .105Latin Amer ica .084 .182 .220 .099 .089Eu roN ICs .051 .170 .463 .334 .195Africa .151 .222 .165 .014 .067Asian NI Cs .104 .301 .395 .071 .124"Emp ire" .035 .253 .399 .208 .161India .362 .198 .435 .233 .253

    Restrictions

    Foreign Material Local Labor Exportexchange input equity minimum minimumbalance minimum minimum

    OE CD .004 .002 .010 .034 .002Small Ports .007 .008 .019 .078 .017

    Southern NICs .006 .012 .015 .044 .021Latin Amer ica .030 .020 .140 .190 .025Euro NICs .038 .013 .028 .089 .066Africa .009 .023 .244 .213 .005Asian NICs .026 .059 .207 .209 .043"Emp ir e" .087 .045 .029 .190 .137India .060 .047 .536 .174 .070

    Restrictions Memberships

    Technology Import Paris Berne UPOVtransfer maximum Convention Convention

    OECD .012 .002 1.00 1.00 0.77Small Ports .043 .000 0.00 0.00 0.00Southern NICs .024 .015 0.83 0.67 0.33Latin America .088 .014 0.38 1.00 0.00Euro NICs .051 .008 1.00 1.00 0.75Africa .311 .013 1.00 0.33 0.00Asian NICs .105 .030 0.33 0.00 0.00"Emp ir e" .089 .113 1.00 1.00 0.00India .153 .081 0.00 1.00 0.00

    Note: Tariff rates are ad valorem. - "Incentives and Restrictions" indicate thefraction of firms to which the policy applies. - "Memberships" are the fraction o fcountries in the cluster which are members.

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    Ferrantino: Intellectual Pro pe rty Rights 309

    Figure 1 - Clusters of Countries by International Economic Policies(tariffs, inbound foreig n investment, international intellectual pro perty

    rights)

    I '"1mall Ports

    "Empi re"

    Lat in Am er ica Euro NIC s

    I

    O E C D

    ISouthern NICs

    . . . . . . .i I

    India Asian N IC s Africa

    Cluster membershipI . O E C D : Belgium, Ca nad a, D enm ark, Finland, France, Italy, Jap an , Netherlands,

    Norway, Sweden, Swi t~r land , U K, W. Germ any2 . Sma l l Po r t s :Jama ica, Liberia, P anam a, Un ited Ara b Emirates3. Southern NICs:Argentina, Australia, New Zealand, Singapore, South Africa

    4 . La t i n Amer i ca :Chile, Colombia, Mexico, Philippines, Peru, Thailand, Trinidad&Toba go, Venezuela5 . Eu ro N ICs : Greece, Ireland, Israel, Spain6. Africa: Egypt, Indonesia, Nigeria7 . As i an NICs :Ecuador, Malaysia, South Korea8. "Empire" : Brazil, Portugal, Turkey9. India: IndiaCluster n am es are fo r identification pu rpos es only,

    group . T here i s cons ide rab le over lap in the a rea o f incen tives fo r D F I ,however. Th i s may be because the g rea te r in t r ins ic des i re o f somepo ore r coun t r i e s to o ffe r incen tives i s cou n te rb a lanc ed by the g rea te ra b i li ty o f s o m e o f t h e m o r e a f fl u e n t c o u n t r ie s ( p a r t ic u l a rl y t h e S o u t h -e r n N I C s a n d E u r o N I C s ) t o b e a r t h e f is ca l c o s ts n e c e ss a r y t o o f f e rsuch incent ives .

    (2) Within broad d evelopmental categories, there is a tendency fo rcountries in geographic pr ox im ity to develop similar policies.

    Wi t h i n t h e l a rg e " d e v e l o p e d - c o u n t r y " d u s t e r, t h e c o u n t r i e s i n" O E C D " ( p ri m a ri ly N o r t h e r n a n d W e st er n E u r o p e, p lu s Ja p a n ) h a v ethe lowes t l evel o f t a r i ff p ro tec t ion and the lowes t leve l o f in te rven t ionw i t h D F I ( b o t h b y i n c e n ti v e a n d r e st ri c ti o n ). T h e " ' E u r o N I C s " ( al lMedi te r ranean bas in coun t r i e s excep t I r e land) have h igher l eve l s o f

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    310 We l t w i r t s c h a f t l i c h e s A r c h i v

    i n t e r v e n t i o n w i t h D F I a s w e ll a s ta r i f f p r o t e c t i o n . T h e " S o u t h e r nN I C s " ( fiv e o f s ix o f w h i c h a r e i n th e f a r S o u t h e r n H e m i s p h e r e ) h a v ea n i n t e r m e d i a t e l ev e l o f t a r if f p r o t e c t i o n a n d D F I i n t e r v e n t i o n b u t a r em o r e l ik e ly th a n o t h e r s in t h e l a rg e " d e v e l o p e d - c o u n t r y " g r o u p t oa b s t ai n f r o m i n t e rn a t i o n a l I P R a g r e e m e n t s.

    W i t h i n t h e s i x " d e v e l o p i n g - c o u n t r y " c lu s te r s, s i m i l ar t y p e s o f v a ri -a t i o n c a n b e d e t e c te d . F i v e o f th e s e v e n c o u n t r i e s i n th e " L a t i n A m e r-i c a " g r o u p a r e i n f a c t in L a t i n A m e r i c a , w h i l e tw o o f t h e f iv e o t h e rL a t i n A m e r i c a n c o u n t r i e s a r e i n t h e " S m a l l P o r t s " g r o u p w h i c h i sm o s t c l o s el y c l u s te r e d w i t h L a t i n A m e r i c a . T h i s s u g g e s ts t h a t a c o n -v e rg e n c e o n i n t e r m e d i a t e d e g re e s o f ta r if f s a n d D F I i n t e r v e n t i o n s a n da h i g h e r te n d e n c y t o a b s t a i n f r o m D F I t re a t ie s is t y p i c al o f t h e g e o -g r a p h i c re g i o n . T h e " A f r i c a " c l u s t e r c o n t a i n s t h r e e c o u n t r i e s , t w o o fw h i c h a re A f r i c a n , b u t is u n d e r r e p r e s e n t e d d u e t o t h e f a c t t h a t t h ere l at ive ly sma l l nu m be r o f U .S . ove r seas a ffi li a te s in m os t Af r i canc o u n t r ie s e x c lu d e th e m f r o m t h e " s t u b " g r o u p . H o w e v e r , n o n - s t u bc o u n t r ie s in s u b - s a h a r a n A f r i c a a l so s h a r e t h e " A f r i c a " c l u s te r c h a r-ac ter i st ic s o f r e la t ive ly h igh t a ri f fs , i n ves tm en t r e s t r i c tions fo cus ing o nt e c h n o l o g y tr a n s fe r a n d l oc a l e q u i ty m i n i m u m s ,11 a n d a d h e r e n c e t ot h e P a r i s c o n v e n t i o n .

    (3) Co untr ies ' choices o f in ternational IP R pol ic ies have been a tleas t pa r t ly independent o f the res t o f thei r in ternat ional eco nom ic pol icyregimes.

    T h e c o n n e c t i o n b e t w e e n a d h e r e n c e t o I P R t re a t ie s a n d t h e le v el o fd e v e l o p m e n t is o n l y a r o u g h o n e . S i m i l a rl y, t h e r e is n o a u t o m a t i cl i n k a g e b e t w e e n t h e d e c i s io n o n I P R t re a t ie s a n d o t h e r e l e m e n t s o f t h ep o l i c y m i x . A d h e r e n t s t o I P R t r ea t ie s i n c l u d e b o t h l o w - t a r if f( " O E C D " , " E u r o N I C s " , " E m p i r e " ) a n d h ig h - ta r if f c lu s te rs( " A f r i c a " , a t l e as t f o r t h e P ard s C o n v e n t i o n c o u n t r ie s ) w h i l e n o n - a d -

    h e r e n ts i n c lu d e h i g h - ta r if f ( " I n d i a " , " A s i a n N I C s " ) a n d l o w - t ar if fc lus t e r s ( "Sm al l Po r t s " ) . S imi la rly, t he re a re exce p t ions to the a s soc i-a t i o n o f laissez-fairep o l i c i e s t o w a r d D F I w i t h a d h e r e n c e t o I P Rtr ea tie s. A m o n g a d h er e n ts , " S o u t h e r n N I C s " a n d " E u r o N I C s " o f fe rs t r o n g t a x i n c e n ti v e s a n d s u b s id i e s, w h i l e " A f r i c a " c l u s te r m e m b e r so f f e r s t r o n g r e s t ri c ti o n s , a n d " S m a l l P o r t s " c o u n t r i e s p a i r n o n - a d h e r-e n c e t o I P R t r e a t i e s w i t h a h i g h d e g r e e o flaissez-fairei n fo re igni n v e s t m e n t p o li ci es .

    11 T h i s c a n b e in f e r re d f r o m t h e C o m m e r c e D e p t . d a t a o n t h e " O t h e r S u b - S a h a r a nA f r i c a " a g g r e g a t e . T h e s t a t e m e n t s o n t a ri ff s a n d I P R s c a n b e c o n f i r m e d b y i n s p e c ti n gi n d i v id u a l c o u n t r y d a t a .

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    Fer ra n t ino : In te l l ec tua l P rop er ty R igh t s 311

    In shor t , whi le the re a re sys temat ic r e la t ionsh ips be tween coun-t r i e s ' e c o n o m i c a n d g e o g r a p h i c a l c i r c u m s t a n c e s a n d t h e i r i n t e r n a -t iona l eco nom ic po l ic ies , these re la t ionsh ips v a ry by the type o f po l i cy.Th is in tu rn im pl ies tha t IP R po l ic ies a re no t s imple p rox ies fo r t a r i ffpo l i c ies o r DFI po l i c ies in c ross -coun t ry ana lys i s and tha t severa lpo l i cy measures can be used toge the r in the empi r i ca l ana lys i s o fi n t e r n a t i o n a l e c o n o m i c f l o w s w i t h o u t r u n n i n g u n d u e r i s k o f m u l t i -co l l inea r i ty. G eog raph ic c lus te r ing in tu rn impl ies tha t the D F I p o l i cym e a s u r e s d e r i v e d f r o m " n o n - s t u b " a g g r e g a t e s i n t h e C o m m e r c eD e p a r t m e n t s u r v e y ( " o t h e r L a t i n A m e r i c a " , " o t h e r s u b - S a h a r a nAfr ica" , e t c . ) can be reasonab ly used as p rox ies fo r the po l i c ies o find iv idua l non-s tub coun t r i e s in those reg ions , thus add ing to thee ffec t ive s ize o f the samp le fo r the ana lys is o f in te rna t ion a l eco no m icflows.

    IV. M odel ing International Econ om ic Flow s 12

    T h e m e t h o d u s e d h e re is a n a d a p t a t i o n o f t h e g ra v i ty m o d e l a sor ig ina l ly deve loped in L inne m an n [1966], Le am er an d S te rn [1970],a n d A n d e r s o n [ 19 79 ]. T h e m e t h o d m a k e s u s e o f th e s o - c al le d A r m i n g -t o n a s s u m p t i o n [ A r m i n g t o n , 1 9 6 9 ] t h a t g o o d s a r e d i f fe r e n t ia t e d ind e m a n d b y t h e i r c o u n t r y o f o r i g i n , s o t h a t e a c h c o u n t r y p r o d u c e s au n i q u e g o o d . F o r t h e p r e s e n t p u r p o s e i t w i ll b e n e c e s s ar y t o c o n s i d e ro n l y t w o g o o d s; a " U . S . g o o d " a n d a " n o n - U . S . g o o d " w h i c h is a na g g r e g a t e o f a ll t h e o t h e r n a t i o n a l g o o d s . F u r t h e r m o r e , I a s s u m e t h a ti t is n o t n e c e s sa r y f o r th e " U . S . g o o d " t o b e p r o d u c e d i n t h e U n i t e dS t a t e s a n d e x p o r t e d t o o t h e r c o u n t r i e s . R a t h e r, t h e " U . S . g o o d " i sde f ined as the good p roduced by U.S . f i rms wi th the i r f i rm-spec i f i ct e c h n o l o g i c a l k n o w l e d g e . F o r e i g n d e m a n d f o r th e U . S . g o o d c a n b esa ti sf ied e i the r by exp or t s f rom the U .S . o r b y a ff il ia t e s o f U .S . f irmsl o c a t e d i n th e c o u n t r y.

    F o r c o n c r e t e n e ss , l et th e s h a r e o f c o u n t r y j ' s n a t i o n a l i n c o m ew h i c h is sp e n t o n U . S . g o o d s b e r e p r e s e n te d b y

    O~= Oj(Y~,N~) , (1)

    w here Yj i s to ta l g ross dom es t i c p rod uc t a nd Nj i s pop u la t ion . I t i se x p e c t ed t h a t i f d e m a n d f o r U . S . g o o d s i s e l as ti c w i t h r e s p e c t to G D P,t h e n 0 0ff0 Y j> 0 a n d i f l a rg e c o u n t r i e s a r e m o r e a u t a r k i c , 0 0 J ~ N j < 0 .

    12 Add i t iona l is sues re la t ing to the spec i f ica t ions p resen ted h e re a re deve loped inD e n e k a m p a n d F e r r a n t i n o [ 1 99 0].

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    312 Weltwir tschaf t l iches Archiv

    G ive n spec i f ic va lues fo r Yj and N j , th i s is equ iva l en t t o a s sum ing t ha te a c h c o u n t r y h a s w e a k l y s e p a r a b l e C o b b - D o u g l a s p r e f e re n c e s o v e rU . S . a n d n o n - U . S , g o o d s . L e t E j a n d F~ r e p r e s e n t t h e p o r t i o n s o fc o u n t r y j ' s d e m a n d f o r U . S . g o o d s s ati sf ie d b y e x p or ts o f U . S . g o o d sa n d p r o d u c t i o n i n c o u n t r y j b y U . S . o v e r s ea s a f fi li at es f o r c o u n t r y j ' sm a r k e t . I t f o ll o w s t h a t

    E j + = 0 j r j . ( 2 )

    F u r t h e r , t h e a c tu a l u n i t v o l u m e o f s al es o f " U . S . g o o d s " i n c o u n -t r y j i s r ep re se n t ed by 0 j Y /P~, wh e re P j i s t he d e l i ve r ed p r i ce o f U .S .g o o d s in c o u n t r y j . L e tP v s= 1 , i .e . l e t t he U .S . p rod uc t ion cos t s o f t heg o o d b e f o r e f o r e i g n s h i p m e n t r e p r e s e n t t h e n u m e r a i r e . T h e n , l e t t h ec o s t s o f d e l iv e r in g t h e U . S . g o o d t o v a r i o u s c o u n t r i e s i n c r e a s e w i the c o n o m i c d is t a n ce . E c o n o m i c d i s ta n c e c a n b e i n c r e a s e d e i th e r b ye c o n o m i c p o li c ie s w h i c h in h ib i t t h e f l o w o f g o o d s o r b y n a t u r a l m e a n s( long sh ipp ing d i s t ance , d i s s imi l a r i t y o f l angu age and cu l t u r e , e t c .) .T h e t y p e s o f t h e s e v a r ia b l e s , a n d t h e w a y in w h i c h t h e y r e l a te t o t h ed e l i v e r e d p r i c e , w i l l v a r y a s b e t w e e n e x p o r t s a n d s a l e s b y o v e r s e a ss u b s id i a ri e s. I n t h e c a s e o f o v e r s e a s s u b si d ia r ie s , a c t u a l p r o d u c t i o nc o s ts w ill v a r y t o o , a n d t hi s m a y b e c a p t u r e d b y t h e c o m p a r a t i v e r a t ioo f fo re ig n an d U .S . un i t l ab or cos t s . Th us , l e t ~/~. d~j) an d 0tj/~ ( g )r e p r e s e n t t h e r e l a ti v e d e l iv e r y c o s ts o f e x p o r t s a n d f o r e i g n s u b s i d i a ri e ss e rv in g th e m a r k e t o f c o u n t r y j w i th U . S . g o o d s , w i t h ~ a n dr e p re s e n ti n g s u it a b le v e c t o r s o f e c o n o m i c d i st a n c e a n d g o v e r n m e n tp o l i c y v a r i a b l e s a n d 9 b e in g a d e c r e a s i n g f u n c t i o n o f t h e r a t i o o ff o r e i g n a n d U . S . u n i t l a b o r c o s ts . T h e n , t o t a l e x p o r t v o l u m e is0J~(Y~ ,Nj) Y/~/~.( ~ ) a n d t o t a l l o c a l s al es b y U . S . s u b s i d i a r ie s l a i nco un t ry j a re eq ua l to ~( Y j ,N ~) Y/c t /~ . (df j) . 1"

    13 Restricting attention tolocal sales of U .S . subsidiaries in country j deliberatelyignores the possibility hat som e U.S . subsidiaries sell o third countries k. In fact, betterthan two-thirds of the sales of U.S . overseas subsidiaries are in the local market. Iexclude third-country sales from the analysis because (i) although the data are goodenough to separate local sales from third-coun try sales it is not possible o trace the finaldestination o f third-country sales with sufficient precision to be useful and(ii) if third-coun try sales could be traced, their volum e would depend on characteristics of bo th theproduc ing and consum ing countries, thus adding substantially to the complexity of theproblem.14 The superscripted categories of U .S. dem and 0Band O can be considered as aggre-

    gates of the foreign dema nds for individual U.S , goods, divided into those which areexported in equilibrium and those which are produced on location by U.S . subsidiariesin equilibrium. The functional forms of 0E Y,N) and Or (Y, N) are likely to be system at-ically different. U.S . goods subject to sizable econom ies of scale in p roduction are m ore

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    Fer ran t ino : In te l lec tua l P rop er ty R igh t s 313

    A s s u m i n g lo g - l in e a r f u n c t i o n a l f o r m s f o r 0E a n d O , t h e d e m a n df u n c t i o n s f o r U . S . e x p o r t s to c o u n t r y j (E ~) a n d U . S . f o r e i g n p r o d u c -t ion in cou n t ry j (F j) can be spec i f ied fo r e s t ima t ion purp ose s a s

    l n E j= lnA - - 3Ed ; +fltE ln Yj + fl2E nN j + eE (3)a n d

    lnF~ = l n B - t S F d ~ + f l t r l n Y ~ + f l 2 r l n N j - - f l 3 1 n L ~ + e F,(4)

    in wh ich d~ (dJ') a re the v ec to r s o f eco nom ic d i s t ance va r i ab les fo rexpo r t s and fo re ign p r od uc t ion respec tive ly, wi th b E an d t5F represen t -i n g th e i r c o r r e s p o n d i n g p a r a m e t e r v e c t o rs ;L j is the r a t io o f fo re ign toU.S . un i t l abor cos t s , andA, B , 6r', 6F, firE , fl2g, fltF,f l 2 F,an d f la arep a r a m e t e r s t o b e e s t i m a t e d . T h e s i g n p a t t e r n o f t h e e q u a t i o n a b o v e issuch tha t a ll the pa ram ete r s a re expec ted to have pos i t ive va lues a slong as the d i s t ance va r i ab les a re spec i f i ed to be inc reas ing in eco-no m ic d i s t ance , ex cep t f12~, f l2F wh ich a re expec ted to t ake nega t ivevalues .

    A n a d d i t i o n a l c o m p l i c a t i o n a ri se s f r o m t h e f a c t t h a t s o m e e x p o r t sa r e n o t f o r f in a l d e m a n d b u t a r e i n t e n d e d a s in p u t s i n t o t h e p r o d u c -t ion p rocesses o f U .S . f i rms overseas . Den o te these expo r t s a s " t r ans -fe r expor t s " (T j) and res t r ic t the de f in i t ion o f E~ in (3) to expo r t s fo rf i n a l d e m a n d , o r " a r m s ' - l e n g t h e x p o r t s " . Wi t h d a t a o n t r a n s f e r e x -p o r t s a n d t o t a l e x p o r t s t h e v o l u m e o f a r m s ' - l e n g t h e x p o r t s c a n b eread i ly iden t i f i ed . Le t t r ans fe r expor t s be a va r i ab le p ropor t ion o fU.S . f i rm s ' o ut pu t in co un try j , i .e . Tj= ~bj F~, w i th S j be ing a log- l inearfunc t ion o f the na t iona l cha rac te r i s t i c s desc r ibed above . Th i s g ivesr is e t o a n e s t i m a t i n g e q u a t i o n f o r t r a n s f e r e x p o r t s a s

    lnT ~= l n C + tSTd5 + f l lT ln Yj + f l2TlnN j + f13 ln L j+ lnF j + e r . (5)

    T h e o r y d o e s n o t g iv e a n y p a r t i c u l a r g u i d a n c e a s t o t h e s ig n s o f t h ecoeff ic ients in (5) , except tha t the coeff ic ient on lnFj i s impl ic i t lycon s t ra ined to o ne . In p rac t i ce , th i s is ach ieved by us ing In (T /F j ) as thed e p e n d e n t v a r ia b le . E q u a t i o n s ( 3 ) - ( 5 ) m a y b e e s t i m a t e d j o i n t l y b yseem ing ly unr e la ted reg ressions . Th i s is a use fu l p roc edu re s ince the rea re l ike ly to be u nob se rv ed va r i ab les w hich ra ise o r low er the overa l lvo lu m e o f U .S . ac t iv i ti e s in cou n t ry j ac ross a l l t h ree ca tegor ies o fact ivi ty.

    l ike ly to conc en t ra te p rod uc t ion in the ho me ma rke t , whi le goo ds wi th smal le r econo-mies o f sca le a re l ike ly to h ave in te rna t iona l ly d i s t r ibu ted p rodu c t ion . T he p a r t i cu la radva n tage o f U .S . dom es t i c sca le econom ies in p rom ot ing ex por t s to sm al l coun t r i esim plie s th at 80E/0Nj < 00~/ON~.

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    314 W el twi r t schaf tl i ches Arch iv

    E s t i m a t i o n o f v a r i o u s f l o w s o f r o y a l t i e s a n d l ic e n s e f e es r e l a t e d t oU . S . o v e r s e a s a f fi l ia t e s i s c a r r i e d o u t in a m a n n e r a n a l o g o u s t o ( 5 ),c h a n g i n g t h e d e p e n d e n t v a r i a b le . T h i s a s s u m e s t h a t c h a r a c te r is t ic s o fh o s t c o u n t r i e s m a i n l y a f f ec t t h e " l i ce n s in g i n t e n s i t y " o f p r o d u c t i o n .H o w e v e r, in t h e s p e c i f ic a t i o n f o r li c en s e f e e a n d r o y a l t y e q u a t i o n s , t h ed e p e n d e n t v a r i a b l e is ta k e n a s t h e r a ti o o f th e r o y a l t y f l o w t o a f fi li a tes a le s , 15 a n d t h e v a r i a b l e l n F i s d r o p p e d f r o m t h e r i g h t - h a n d s i d e,m a k i n g i t a s e m i l o g a ri t h m i c s p e c if ic a t io n . T h i s i s d o n e t o a c c o m o d a t et h e l ar g e n u m b e r o f c o u n t r i e s w h i c h r e p o r t z e r o v a lu e s o f r o y a l t yr e c e ip t s a n d p a y m e n t s f o r t h e ir U . S . o v e r s e a s a f fi l ia t es .

    V. D a t a

    T h e v a r i a b le s a n d s o u r c e s u s e d i n t h e r e g r e s si o n s e c t i o n o f t h ep a p e r a r e s u m m a r i z e d i n Ta b l e 2 . A l l e c o n o m i c d i s t an c e v a r i a b l e s( s h i p p i n g d i s t a n c e , p h o n e s , r i s k , l a n d l o c k e d s t a t u s , " c o l o n y " s t a t u s ,a n d t h e v a r i o u s p o l i c y v a r i ab l e s ) w ill b e s e en t o h a v e b e e n t r a n s f o r m e ds o t h a t a z er o v a l u e c o r r e s p o n d s w i t h z e r o e c o n o m i c d is t a n c e a n dp o s i t i v e v a l u e s a r e a s s o c i a t e d w i t h p o s i t i v e e c o n o m i c d i s t a n c e ( a n dt h u s f e w e r i n t e r n a t io n a l t r a n s a c ti o n s , i n a c c o r d a n c e w i t h ( 3 ) - ( 5 )a b o v e ) . F o r e x a m p l e , p e r s o n s p e r p h o n e is u s e d a s a p r o x y f o r c o m -m u n i c a t i o n s i n f r a s t r u c t u r e r a t h e r t h a n p h o n e s p e r p e r s o n . I n o r d e r t or e nd e r t he d a t a f r o m t h e U .S . D e p a r t m e n t o f C o m m e r c e b e n c h m a r ks u r v e y o n U . S . o v e r s e a s a f fi l ia t e s m o r e s u i t a b l e , t h r e e o t h e r v a r i a b l ec o n s t r u c t i o n t e c h n i q u e s w e r e e m p l o y e d . T h e s e a r e d e s c r ib e d b e l o w.

    F i r st , it s e e m e d d e s i ra b l e t o h a v e a s u m m a r y m e a s u r e o f t h e o v e r -a ll p o l i c y s t a n c e o f a c o u n t r y t o w a r d f o r e ig n i n v e s t m e n t t o u s e a s ap o l i c y v a r i a b l e i n fl u e n ci n g e c o n o m i c d i st a n c e. T h e i n d i v id u a l c o u n t r ym e a s u r e s u s e d t o g e n e r a t e Ta b l e 1 p r o v i d e 11 s u c h m e a s u r e s ; f o u rr a t e s o f i n c e n t i v e a n d s e v e n r a te s o f r e s t ri c t io n , a s m e a s u r e d b y t h ep e r c e n t a g e o f U . S . f i r m s e x p e r i e n c i n g t h e i n c e n t i v e o r re s t r i c ti o n o u to f t h o s e a n s w e r i n g t h e q u e s t i o n . I n o r d e r t o c o n d e n s e t h e s e i n t o as i ng l e m e a s u r e , l etI jkd e n o t e t h e p r o p o r t i o n o f U . S . a ff il ia t es in c o u n -t r y j r e c e iv i n g i n c e n t iv e k , w i t h R jz b e i n g a n a l o g o u s l y d e f i n e d f o r

    15 Bo th here and in eq uation (5), the relevant measure of affifiate sales is total affiliatesales, rather than local affiliate sales. Lo cal affiliate sales is the approp riate dep enden tvariable in (4) since theoretically it is the relev ant analogu e to arm s'-length exp orts. But

    flows n suppo rt o f affiliate sales (transfer exports, license and royalty flows) should beprop ortiona te to the total affiliate sales regardless o f their final destination. Since I useFj to denote either total or local affiliate sales depending on the p articular regression,this is an impo rtant distinction to k eep in mind.

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    F e r r a n t i n o : I n t e l le c t u a l P r o p e r t y R i g h t s 3 1 5

    Ta b l e 2 - Va r ia b le D e f i n i ti o n s a n d D a t a S o u r c e s

    A R M E X 8 2

    A F L O C S L

    E X T O A F

    Royalties &license fee s

    D e p e n d e n t Va r i a b l e s :L o g o f t o t a l e x p o r ts f r o m U . S . t o c o u n t r y j i n 1 9 82 ( I M F ,Directiono f Trade Statist ics) m inus EXTO AF.L o g o f s a le s o f U . S . o v e r s e as a f fi l ia t e s i n t h e l o c a l m a r k e t ( U . S .D e p a r t m e n t o f C o m m e r c e ,1982 Benchmark Survey).Lo g of ex por t s o f U .S . f i rms to the i r ov erseas a ff i li a t es CLI.S . De-p a r t m e n t o f C o m m e r c e,1982 Benchmark Survey).Paym ents an d rece ip t s o f U .S . overseas a ffi l i a tes to / f rom a f l 'f l ia t eda n d n o n - a f f il i a te d f i rm s ( U . S . D e p a r t m e n t o f C o m m e r c e ,1982Benchmark Survey).

    Distance

    Phones

    Risk

    Landlocked

    "'Colony"

    Europe

    E c o n o m i c D i s t a n c e Va r i a b l e s :N a v i g a b l e s h i p p in g d is t a n c e fr o m a m a j o r f o r e i g n p o r t t o e i t h e rN e w Yo r k , S a n F r a n c i s c o o r N e w O r l e a n s ( w h i c h e v er is c l o se r ), inn a u t i c a l m i l e s. S e t e q u a l t o z e r o f o r C a n a d a a n d M e x i c o(Reed'sNew Marine Shipping Tablesa n d U . S . D e p a r t m e n t o f th e N a v y,Distance Between Ports).P e r s o n s p e r t e l ep h o n e , a d a p t e d f r o m K u r i a n [ 19 84 ].100 min us a me asure o f po l i t i ca l r i sk fo r June 1984 . Ran ges f rom 0( leas t ri sky) to 100 (mo s t r i sky) a f t e r r esea l ing ( In te rn a t iona l Re-p o r t s G r o u p ,International Country Risk Guide,a s c i te d i n K r a y e n -bue hi [1985]) .A d u m m y v a r i a b l e w h i c h t a k e s o n t h e v a l u e 1 i f t h e f o r e i g n c o u n t r yi s l and lock ed and 0 o the rwise .A d u m m y v a r i a b l e f o r t h e E n g l i sh - s p e ak i n g c o l o n i a l n e t w o r k .Equa l s 0 fo r the Uni ted K ingd om , fo rmer Br i t ish co lon ies , L iber ia ,P a n a m a a n d t h e P h i l i p p in e s a n d e q u a l s 1 o th e r w is e .A d u m m y v a r i a b l e w h i c h t a k e s o n t h e v a l u e 1 f o r t h o s e c o u n t ri e s o nt h e E u r o p e a n c o n t i n e n t a n d 0 o t h e r w i se .

    Tar i ff

    Regime

    FX Regime

    Paris

    Berne

    P o l i c y D i s t a n c e Va r i a b l e s :I m p o r t t a r i f f r ev e n ue s a s a p r o p o r t i o n o f i m p o r t s ( I M EGovernmentFinance Statistics,var ious y ears ).Con s t ruc ted f ro m f i rms ' su rvey responses regard ing incen t ives andres t r i c t ions fo r fo re ign f i rms . High er scores re f lec t more res t r i c tiveregimes. S ee text .A m e a s u r e o f c o u n t r ie s ' a t t e m p t s t o r e g u l a t e t h e n e t f o r ei g n ex -c h a n g e p o s i t i o n o f t h e i r h o s t e d f o r e ig n f i rm s , a n a l o g o u s t oRegime.See text .D u m m y v a r i a b l e s e t e q u a l t o I f o r c o u n t r ie s w i th m e m b e r s h i p i n t h ePar i s Conv en t ion [Evenson and Lesse r, 1990].D u m m y v a r i a b l e s e t e q u a l t o 1 f o r c o u n t r ie s w i th m e m b e r s h i p i n t h eBerne Conve n t ion [Evenson and Lesse r, ib id. ] .

    ( Ta b le c o n t i n u e d n e x t p a g e )

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    316 Weltwirtschaftliches Archiv

    Table 2 - (con t inued)

    Number o fmemberships

    Duration o fpatent

    Labor Cost

    Popu~twn

    GDP

    P o l i c y D i s t a n c e Va r i a b l e s :Total memberships in the Paris Convention, Berne Convention andUnion for the Protection of Varieties of Plants (UPOV); rangesfrom 0 to 3 (adapted from Evenson and Lesser, ibid.).Legal length of patent in years [Evenson and Lesser, ibid.].

    O t h e r I n d e p e n d e n t Va r i a b l e s :The ratio of foreign to U.S. unit labor costs in 1982, using compen-sation per worker (International Labour Organization, Yearbooko fLabour Statistics)and output per head [Summers and Heston,1988]).Log of population of the foreign country in 1982 [Summers andHeston, ibid.].Log of gross domestic product in U.S. dollars [Summers and Hes-ton, ibid.].

    restri ction /. T hen a measure o f the overall foreign investmen t regimefor count ry j is

    ( L 'k R 'k ~ , f Z 'k l , )R e g i m e j = l o g \ ( 1 / j ) Z i ~ . k R i k , ] - - ,o g t - ( 1 / ~ - - f f ~ , ls k .(6)

    The terms in brackets are th e ratio o f each coun try 's total restric-tion a nd incentive scores to the average for all countries and thus havean expected value o f 1. R e g i m e jthus has an expected value of 0 andis rough ly symmetric arou nd 0. Positive values of R e g i m ecorrespondto more restrictive regimes than average and vice versa.

    The da ta on incentives and restrictions were used to co nstru ct twoadditional measures for the purpose of analyzing flows of transfer

    exports. This was done in order to test the hypothesis th at these flowsmigh t be responsive to governmen ts' concerns tha t foreign firms con-tribute to or at least not harm the country's net foreign exchangeposition. Accordingly, a measure of the overall foreign exchangeregime facing U.S. mu ltin atio nals in cou ntr y j was constr ucted as

    F X R e g im e j= lt,~ - - (7)~ . ( 1 / J ) Z j Z ' , F ~ k . ,] '

    where Fjk deno tes the subset of Rjk consisting of restrictions on mini-mum exports, restrictions on maximum imports and restrictions onthe firm's overall foreign exchange balance. Similarly, the ta riff mea-sure used for tra nsfer exports was adjus ted to reflect the fact tha t some

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    Ferrantino: Intellectual Prope rty R ights 317

    f i rm s a r e o f f e r e d t a r if f i n c en t iv e s . U n d e r t h e a s s u m p t i o n t h a t a t a r i f fi ncen t ive i nc ludes t he r i gh t o f the f i rm to im po r t du ty f r ee , 16 a m ea -s u r e o f th e e x p e c t e d t a r i f f f a c in g U . S . f ir m s ' t r a n s f e r e x p o r t s i n t oc o u n t r y j is

    E X P T a r i f f = Ta r i ff (1 - - T I j ) , (8)

    w h e r e Ta r i f f i s t h e m e a n a d v a l or e m t a r i ff o n c o u n t r y j ' s i m p o r ts a n dT I is t h e p r o p o r t i o n o f U . S . f i rm s i n c o u n t r y j r e p o r t i n g t h a t t h e yrece ived t a r i f f i ncen t ive s .

    F o r c o u n t r i e s w h o s e i n c e n t i v e s a n d r e s t r i c t i o n s w e r e n o t s e p a -r a te l y t a b u l a t e d in th e b e n c h m a r k s u r v e y ( th e " n o n - s t u b " c o u n tr ie s ) ,t he i r " R e g i m e " s c o r es ar e t a k e n t o b e t h o s e o f t h e r e p o r t e d a g g r e g a t et o w h i c h t h e y b e l o n g ( e. g. , t h e " R e g i m e " s c o r e f o r Z a i r e is t h a t f o r" o t h e r A f r i c a " , f o r U r u g u a y is t h a t f o r " o t h e r S o u t h A m e r i c a , , e t c .) .T h i s s e e m s a se n s i b le u s e o f t h e a v a i l a b l e d a t a , b o t h b e c a u s e t h ec o u n t r y ' s d a t a c o n t r i b u t e s t o t h e a g g r e g a t e d a t a a n d s i n c e ( a s S e c -t i on IV su gges t s ) pa r a l l e l ism o f po l ic i e s am on g s imi l a r ly s i t ua t edc o u n t r i e s ( g e o g r a p h i c a l l y a n d e c o n o m i c a l l y ) im p l i es t h a t i f t h e in d i-v i d u a l c o u n t r ie s ' s c o r e s w e r e o b s e r v e d , t h e y w o u l d c lu s t e r a r o u n d t h el a rge r agg rega t e .

    S e c o n d , t h e v a l u e s o f s o m e d e p e n d e n t v a r ia b l e s f o r s o m e c o u n t r ie sa r e s u p p r e s s e d b y th e D e p a r t m e n t o f C o m m e r c e f o r d is c l os u r e re a -s o n s . W h e n t h e d is c l o s u r e o f d a t a f o r a c o u n t r y i n v o l v e s t h e p o t e n t i a lf o r d is c l o s in g t h e d a t a o f in d i v i d u a l f i rm s , C o m m e r c e w i ll s u p p r e s s t h ed a t a f o r t h a t t a b l e ce ll ( c o u n t ry / i n d u s t r y, c o u n t r y / t y p e o f p a y m e n t ,e t c. ) a s w e ll a s a t le a s t o n e o t h e r d a t a p o i n t i n e a c h r o w a n d c o l u m n .B y a p r o c e s s o f e x p lo i t in g t h e r o w a n d c o l u m n s u m s , i t is u s u a l l yp o s s i b l e t o p r o v i d e g o o d e s t i m a t e s o f th e s u p p r e s s e d d a t a a t le a s t t oone s ign i f ic an t f i gu re and o f t en t o m ore . t 7

    F i n a l l y, i n t h e r e g r e s s i o n s e x p l a i n i n g p a y m e n t s a n d r e c e i p t s o fr o y a l t ie s a n d l ic e n se f e es , t h e d e p e n d e n t v a r i a b l e s h a v e b e e n w e i g h t e db y i n d u s t r y, a s s ig n i n g t o e a c h i n d u s t r y t h e w e i g h t i t p o s s e s s e s i n t h eo v e r a l l U . S . p o r t f o l i o o f f i x ed a s s e ts i n o v e r s e a s a f fi li a te s b u t k e e p i n g

    16 It could well be the case that "tariff incentives" take the form of agreements by hostgovernments to impose tariff barriers against third-country competitors in the hostmarket rather than as concessions for the firm's own imports into the host co untry. Inprinciple, the two typ es of incentives cannot be distinguished by the da ta; how ever, it

    seems likely that the v oluntary rates o f reporting wou ld be lower for the tariff barriersthan the tariff reductions.17 In som e cases, flaws in the Commerce Departm ent algorithm perm it reconstructionof the suppressed values through force of logic alone.

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    318 Wel twir tsc haf t l ic hes Archiv

    t he r a t io o f , e.g ., roya l ti e s and fees pa id by a ff i li a te s o f ind u s t ry j inco un t ry i t o f ixed asse ts o f a ff i li a te s o f indu s t ry j i n co un t ry i, con-s t a n t. T h e r a t i o n a l e f o r t h i s is t h a t a s u b s t a n t ia l a m o u n t o f i n t e r c o u n -t ry var ia t ion in l icense fees an d royal t ies o f U.S. oversea s aff i lia tes i sc e r t ai n l y d u e t o t h e i n d u s t r y c o m p o s i t i o n o f i n v e s t m e n t s i n e a c h c o u n -t r y r a t h e r t h a n t o t h e n a t u r e o f I P R p o l ic y p e r se . T h i s c a n b e i ll us -t r a t e d b y a f e w e x a m p l e s. C h e m i c a l f ir m s a c c o u n t e d f o r o n l y 4 .2 0 %of asse t s o f U .S . over seas a ff il ia t e s in 1982 , bu t were r e spo ns ib le fo r1 8 .6 5 % o f t h e c o r r e s p o n d i n g p a y m e n t s f o r l ic e ns es a n d r o y a lt ie s a n d1 9 . 31 % o f t h e r e c e ip ts . N o n - e l e c tr i c a l m a c h i n e r y f ir m s a c c o u n t e d f o r2 .55% of a s se ts an d 32 .22~ o f pay m ents fo r li censes an d roya l ti e s; bycon t ras t , pe t ro le um a ffi li a te s he ld 14 .48~ o f a s se ts bu t m ad e on ly0 . 8 1 % o f r o y a l t y p a y m e n t s a n d h a d o n l y 1 .1 5 % o f r e ce ip ts . S in c e th ed i s t r ib u t i o n o f U . S . i n v e s t m e n t s in c o u n t r y j b y i n d u s t r y is la rg el y af u n c t i o n o f c o u n t r y j ' s c o m p a r a t i v e a d v a n t a g e , i t is d e si ra b le t o c o n -t ro l fo r the indus t ry d i s t r ibu t ion when t e s t ing fo r the e ffec t s o f na -t io n a l I P R s . I h a v e a l s o a n a l y z e d t h e r a w ( u n w e i g h t e d ) f lo w s f o r c o m -p a r i s o n p u r p o s e s .

    ~ . R ~

    A l arg e n u m b e r o f v a ri a n ts o f th e s y s te m o f e q u a t io n s ( 3 ) - ( 5 ) w e r ee s t im a t e d . S i n c e t h e m a i n g o a l i s t o f i n d o u t w h e t h e r c o u n t r i e s ' I P Rr e g im e s h a v e a s u b s t a n t i a l im p a c t o n e i th e r t h e v o l u m e o f U . S . f i rm s 'sa les overseas o r the fo rm of those sa les , the va r i an t s p rese n ted he refocus on IP Rs . Tab le 3 desc r ibes the base l ine e s t im a t ion o f the sys temw i t h o u t I P R s . Ta b le 4 c o m p a r e s t h e b a s e li n e to s e v en v a ri a n ts , e a c ho f w h i c h a d d s a n I P R v a r ia b l e t o e a c h o f th e t h r e e e q u a t io n s . T h ed i ffe rence am on g the va r i an t s a r i ses f ro m the d i ffe r ing de f in i tions o fthe IP R var i ab le . Tab le 4 a l so inc ludes the va lues o f the o the r po l i cycoeff ic i en ts a s soc ia ted wi th a pa r t i cu la r d e f in i t ion o f the IP R var i ab le .T h i s c o m p a c t p r e s e n t a t i o n i s m a d e p o s s i b l e b e c a u s e t h e n o n - p o l i c ycoeff ic i en ts a re m os t ly insens i tive i s to the inc lus ion o r exc lus ion o ft h e I P R v a r ia b l es a n d e n a b l e s a f o c u s o n t h e m o r e i n t e r e st in g q u e s t i o nof s imu l tane i ty o f po l i ci e s.

    A l l v a r i a b l e s o t h e r t h a n p o p u l a t i o n , G D P a n d u n i t l a b o r c o s ten te r a s eco nom ic d i s t ance va r iab les. A s such , we expec t the m ( in

    is Some fluctuation o f the coefficients on log populat ion and log GNP occurs whenIPR variables are changed. This is on the order of 10-20% of the absolute values ofthese coefficients and never changes the conclusions abou t their sign.

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    F e r r a n t i n o : I n t e l l e c t u a l P r o p e r t y R i g h t s 3 1 9

    Tab le 3 - Baseline Est imates fo r 3-equation Gravity System ( N = 77)(no IPR variables)

    Intercept

    Distance

    Phones

    Risk

    Landlocked

    "'Colony"

    Europe

    I n Population

    I n G D P

    Tariff

    Expec ted t a r i ff

    Regime

    FX Regime

    Unit labor cost

    R 2

    E q . ( 1 ) E q .( 2 )I n A R M E X 8 2 in A F L O C S L

    E q . ( 3 )In E X T O A F

    - - 7 . 6 3 * * * - - 6 . 3 4 * - - 1 . 1 4( 4 . 2 6 ) ( 1 . 9 3 ) ( 0 . 5 2 )

    2 . 4 4 E - 4 * * * 3 . 3 7 E - 4 * * * 1 . 0 7 2 - 4 * *( 5 . 2 1 ) ( 5 . 3 5 ) ( 2 . 5 6 )

    - 7 . 4 4 E - 5 - - 3 . 1 3 2 - 4 * * - - 9 . 3 2 2 - 5( 0 . 7 3 ) ( 2 . 2 6 ) ( 1 . 0 3 )

    . 0 1 2 9 . 0 4 3 0 * * * . 0 1 0 5( 1 . 4 9 ) ( 3 . 4 4 ) ( 1 . 2 9 )

    1 . 1 5 " * * . 25 3 - - . 0 1 9 5( 3 . 3 2 ) ( 0 . 5 4 ) ( 0 . 0 6 )

    . 4 5 5 * * . 9 6 5 * * * . 2 9 0( 2 . 0 6 ) ( 3 . 2 5 ) ( 1 . 4 7 )

    . 8 1 3 * * 1 . 4 5 * * * . 4 9 6 *( 2 . 6 0 ) ( 3 . 4 3 ) ( 1 . 8 2 )

    - - . 3 3 7 " * - . 1 4 6 - - . 1 0 4( 2 . 0 9 ) ( 0 . 4 2 ) ( 0 . 4 6 )

    1 . 1 2 " * * 1 . 0 7 " * * . 1 4 7

    ( 7 . 0 4 ) ( 3 . 2 1 ) ( 0 . 6 0 ). 5 7 8 2 . 7 2 -

    ( 0 . 4 1 ) ( 1 . 4 7 )

    - - 3 . 0 8 * *( 2 . 0 9 )

    . 7 3 6 " * *( 3 . 9 5 )

    - - - . 0 5 9 8

    (0.44)- - - . 7 0 6 " * - . 1 6 1

    ( 2 . 2 6 ) ( 0 . 7 6 )

    . 8 3 3 . 8 1 0 . 9 3 4

    Note: t - s t a t is t i c s i n p a r e n t h e s e s . - * * * S i g n i f i c a n t a t 1 % . - * * S i g n i f i c a n t a t 5 % . -* S i g n i f i c a n t a t 1 0 % .

    a c c o r d a n c e w i t h ( 3 ) - ( 5 ) a b o v e ) t o h a v e a p o s i ti v e si g n w h e n e c o n o m i cd i s ta n c e i s in c r e a s in g a n d a n e g a t iv e s i g n w h e n e c o n o m i c d i s ta n c e i sdec reas ing . A c lose pe rusa l o f Tab le 2 r evea ls t ha t each o f t he d i s t ancev a r ia b l es h a s b e e n t r a n s f o r m e d s o t h a t v a l u e s o f 0 c o r r e s p o n d t o z e r oeconomic d i s t ance and inc reas ing va lues r ep resen t i nc reas ing eco -n o m i c d i s t a n c e . T h i s s i g n c o n v e n t i o n s h o u l d b e k e p t i n m i n d w h e nin terpre t ing the regress ion tab les .

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    3 2 0 W e l t w i r t s e h a f t l i e h e s A r c h i v

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    Ferrantino: IntellectualProperty Rights 321

    I n m o s t c a s e s t h e e s t i m a t e d c o e f f ic i e n ts h a v e r e a s o n a b l e s ig n s a n dv a l u es . B o t h a r m s ' - l e n g t h e x p o r t s a n d l o c al a f f il ia t e s a le s a r e r o u g h l yu n i t -e l a s ti c w i t h r e s p e c t t o t o t a l G N P. T h e c o e f f i c ie n t f o r p o p u l a t i o nis s ig n i f ic a n t a n d n e g a t i v e f o r a r m s ' - l e n g t h e x p o r t s b u t n o t s i g n i f ic a n tf o r l o c a l a f fi li a te s a le s. I f p o p u l a t i o n c a p t u r e s n a t i o n a l e c o n o m i e s o fs c a l e , t h i s m a k e s s e n s e s i n c e s c a l e e c o n o m i e s f r o m p r o d u c i n g i n t h eU . S . m a r k e t a n d e x p o r t i n g a r e c o u n t e r e d b y l oc a l sc a le e c o n o m i e s ,b u t l oc a l sc a le e c o n o m i e s c a n b e c a p t u r e d b y U . S . f i rm s p r o d u c i n gl o ca l ly. T h e c o e f f i c ie n t o n u n i t l a b o r c o s t i s o f t h e w r o n g s i gn a n ds ign i f i can t ; t he re a r e more U .S . a ff i l i a t e s a l e s i n h igh un i t l abo r cos tm a r k e t s t h a n i n t h o s e w i t h lo w u n i t l a b o r c o st s. T h i s p r o b a b l y m e a n st h a t t h e d e m a n d f o r g o o d s p r o d u c e d b y U . S . a f f il ia t e s i s i n c o m e - e l a s -t ic a n d t h a t i t i s d i f fi c u l t t o s e p a r a t e t h e s u p p l y a n d d e m a n d e f f e ct s .

    R e c a l l i n g t h a t t h e e c o n o m i c d i s t a n c e v a r ia b l e s h a v e a l l b e e n d e -f i n e d s o a s t o h a v e a n e x p e c t e d p o s i ti v e s i gn ( l a rg e r v a lu e s o f t h ev a r i a b le s s h o u l d i n c r e a s e e c o n o m i c d i s ta n c e ) , t h e s e v a ri a b l e s h a v e al a rg el y s a t is f a c t o r y p e r f o r m a n c e . I n c r e a s e d s h i p p i n g d i s t a n c e i n h i b i tsb o t h a r m s ' - l e n g t h e x p o r t s a n d a f fi li a te s a le s a n d r e d u c e s t h e s h a r e o fa f f i l i a t e s a l e s a c c o u n t e d f o r b y t r a n s f e r e x p o r t s . I n c r e a s e d p o l i t i c a lr i sk impac t s ove r seas a ff i l i a t e s a l e s bu t has no s ign i f i can t impac t one x p o r t s ; b e i n g l a n d l o c k e d i n h i b it s e x p o r t s b u t h a s n o i m p a c t o n a f fi l-i a te sa le s. C o u n t r i e s f r o m t h e A n g l o - U . S . " c o l o n i a l " o r A n g l o p h o n es p h e r e e n j o y r e d u c e d t r a n s a c t i o n s c o s t s o f d o i n g b u s i n es s f o r b o t hexp or t s a nd ove r seas a ff i l ia t e sa l es , a l t ho ug h the e ff ec t i s g rea t e r fo ra ff i li a t e s a le s . Ove ra l l , Eu rop ea n co un t r i e s a r e s ign i f i can t ly m or e d i s-t a n t t h a n w o u l d o t h e r w i s e b e e x p e c t e d , p o s s i b ly b e c a u s e o f t h e l a rg en u m b e r o f n e a r b y t r a d i n g p a r t n e r s. 19 P h o n e s p e r c a p i t a ( h e re a c t u a l lyp e r s o n s p e r p h o n e ) h a v e t h e w r o n g s ig n in t h e e q u a t i o n f o r f o re i g na f fi li a te s al es , g iv i n g t h e a p p e a r a n c e t h a t U . S . m u l t i n a t i o n a l s p r e f e rc o u n t r i e s w i t h b a d p h o n e s e r v i c e . T h i s i s p o s s i b l y a n o t h e r c a s e i nw h i c h i n c o m e e l a s ti c i ty e ff e c ts a r e d i f f i c u lt to u n t a n g l e f r o m t h e v a r i -a b le . S i n c e u n i t l a b o r c o s t s a r e i n c o m e - e l a s ti c a n d p h o n e s p e r c a p i t aa re a s we l l, t he se two coe ff i c i en t s pa r t i a l l y o ff se t eac h o the r.

    19 The variableEEC (= 1 for EEC membersas of 1982, else 0) w as tried in place ofEurope and was no t significant. The co efficientfo r Europe cannot therefore be anartifact of EEC policies alone. The trade diversion caused by E EC and EFT A jointlyagainst the U .S. may explain the export coefficient,but there is no com pelling heoreti-cal reason why the coefficient n the equation for affiliatesales should be significant.

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    32 2 W eltwirtschaftliches Arc hiv

    W i tho u t co ns ide r ing IPR po l ic ies , i t appears tha t r e s tr i ct ive po l i -c ies aga ins t d i rec t inves tment (he re mod e led as inc reas ing econ om icdis tance) do in fac t res t r ic t inves tment . Rest r ic t ions on the fore igne x c h a n g e re g i m e f ac in g U . S . m u l t in a t i o n a l s d o n o t a p p e a r t o i n f lu -ence the in tens i ty o f t r ans fe r expor t s in the i r p roduc t ion . Pe rhapssurpr i s ing ly, expec ted t a r i ff s appear to mat te r fo r t r ans fe r expor t s(h igh expec ted ta r iff s r educe t r ans fe r expor t s a s a p rop or t io n o f a ffi l-i a t e sa les ) bu t t a r i ff s do no t appear to reduce a rms ' - l eng th expor t ss igni f icant ly. This i s unl ike ly to be du e to the d i fference between tar i ffsan d expected tar iffs; g iven the low perce ntag e of tar i ff incent ives (seeTab le 1 ) the rank ing o f coun t r i e s by e i the r va r iab le i s s imi la r. Th eresu lt cou ld be due pa r t ia l ly to the fac t tha t pos t -Tok yo ro un d overa l lt a r i ff l eve ls we re low. In pa r t , the m easure o f t ar iff s used he re does no tcap tu re the e ffect o f abso lu te ly p roh ib i t ive t a ri ff s s ince these genera tem o r e r e v en u e . It m a y b e t h a t t h e i m p o r t s o f U . S . f ir m s o v e r se a s f r o mthei r home fac i l i t ies are suff ic ient ly pr ice- inelas t ic to be favoredtargets for revenue tar i ffs , ye t suff ic ient ly pr ice e las t ic to induce theresu lt show n, tha t h igh t a r iffs l ead to ve r ti ca l d i s in tegra t ion o f U .S .f i rms.

    Tab le 4 cons ide rs the e ffect s o f ad d ing IP R var iab les to the sys temi n Ta M e 3. T h e r e w e r e n o p r i o r e x p e c t a ti o n s a s t o w h e t h e r I P R s w e r epo l icies tha t inc reased o r dec reased econo m ic d i s t ance , so I hav e no tt rans fo rmed the va r iab les ; pos i t ive s igns imply tha t an IPR measureac t s to inc rease economic d i s t ance ( reduce in te rna t iona l f lows) andv ice ve r sa . The l a rges t impac t o f these va r iab les appears to be ont rans fe r expor t s. C oun t r i e s wi th s t rong IPR s t end to h ave an inc reasedeco no m ic d i s t ance fo r t r ans fe r expor t s , e .g . the f low o f t r ans fe r ex -por t s a s a p ro po r t ion o f overseas a ff il i at e sa les i s r educed . T h i s i s t ruem o s t c l e a rl y i f t h e m e a s u r e o f I P R s is m e m b e r s h i p i n t h e P a r is C o n -v e n ti o n , m e m b e r s h ip i n t h e B e r n e C o n v e n t i o n , to t al n u m b e r o f m e m -b e r sh i p s o r B e r n e m e m b e r s h i p i n te r a c te d w i t h p a t e n t d u r a t io n . C o u n -t ri e s wi th lon ger pa ten t d ura t ion s a re c lose r in econo m ic d i s t ance wi threspect to th e U.S . w i th respec t to a rm s ' - l eng th expor t s , whi le overseasa ffi li a te sa les a re g rea te r to Berne me m bers w i th lon ger pa ten t l eng ths .Par i s Con ven t ion m em bers have , ce ter is pa r ibus , l e ss than two- th i rdso f the ov erseas affi l ia te sa les of U.S. f i rm s bu t the effect i s no t s t ro ngstatistically.

    Th e s igns and va lues o f o the r p o l i cy coeffi c ien t s a re l a rge ly robu s tto th e inc lus ion o f IPRs , wi th the excep t ion o f the e ffec t o f expec tedta ri ff s on t r ans fe r expor ts . A t t r ibu t ing reduce d t r ans fe r expor t s to thepresence o f IPRs weakens the ab i l i ty to a t t r ibu te reduced t r ans fe r

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    F e r r a n t i n o : I n t e l le c t u a l P r o p e r t y R i g h t s 323

    exports to high expected tariffs. For six of seven IPR measures, thecoefficient on transfer exports no longer achieves a 10% level of sig-nificance. 2~

    If countries with weak IPRs receive more transfer exports thancountries with strong IPRs, and there is no clear impact of IPRs onU.S. overseas affiliate sales, there is reason to question the idea thatthe U.S. government acts in the interest of U.S. firms and workerswhen it promotes strong IPRs. The result can be explained if the maineffect of weak IPRs is to increase the costs o f transferring technologyfrom U.S. home offices to the overseas subsidiary. Exporting a largershare of components from the U.S. helps because less production isbeing done overseas, less proprietary knowledge about production isbeing transferred, and there is thus less intellectual property a t risk.

    An alternate hypothesis to explain the results is that both coun-tries' decisions about the strength of their IPR regimes and firms'decision about the degree of vertical integration to use in a specificcoun try are endogenous ly determined by a third variable, namely thecountry's scientific and technological capability. Firms tend to locatephases o f the production process according to the levels o f labor skillrequired - the lower the local skill level, the fewer will be the appro-priate stages of final assembly to be located in the country and themore "high-tech" components will need to be imported. On the otherhand, countries with low technological skill will no t invent much andbe more reliant on technological imitation, thus less likely to voluntar-ily opt for a strong IPR regime. To test this hypothesis would requirean omnibus variable capturing both technical skills of manual laborand local inventive capacity - it is not easy to think o f a reasonablecandidate variable.

    In order to check the robustness of firms' switching source loca-tions in direct response to IPR considerations, an additional equationwas estimated.21 Here the dependent variable is the ratio of total U.S.exports to country j to total U.S. sales in country j, or exports(arms'-length exports + affiliate local sales). The independent vail-

    20 Here i t ma y be no ted tha t a l l t he s ign i f icance t e s t s p resen ted m ake use o f the two- ta i lt e s t, wh ich imp oses a m ore d i ff i cu l t hu rd le fo r s ign i f icance bu t a s sum es no p r io rexpe c ta t ion o f the s ign . In the case o f expec ted t a r if f s and t r a ns fe r expor t s , i t m ay bea rgued tha t t r ade theory l eads to the expec ta t ion tha t expec ted t a r i f f s r educe t r ans fe r

    expor t s ( inc rease econo mic d i s t ance ) so tha t a on e - t a i l ed te s t o f th i s expe c ta t ion i s ap -p ropr i a t e . I f t h i s v iew i s t aken , fou r ( an d nea r ly five ) o f the seven IPR va r i ab les leavethe co e ff i c ien t fo r expec ted t a r if f s s ign i f i can t ly pos i t ive a t 10% .21 I am g ra te fu l to an an on ym ou s r e fe ree fo r th i s sugges t ion .

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    3 2 4 W e l t w i r t s c h a f t l i c h e s A r c h i v

    a b le s a r e t h e s a m e a s in Ta b l e 3 ab o v e , o m i t t in g p h o n e s a n d u n i t l a b o rc o s t b e c a u s e o f th e i r u n s a t i s f a c to r y p e r f o r m a n c e a b o v e . A g a i n , t h ev a r i o u s I P R v a r ia b l es a r e a d d e d o n e a t a t im e . Ta b le 4 a t h u s m i r r o r sTab les 3 an d 4 , ana lyz ing the exp or t source ra t io de f ined abov e as thede pe nd en t va r i ab le . H ere , a pos i t ive s ign on a d i s t ance va r i ab le (o r anI P R v a r i a b l e ) m e a n s t h a t t h e v a r i a b l e t e n d s t o i n c r e a s e t h e c o s t s o fe x p o r t s re la t ive to a ll l oc a l p r o d u c t i o n , a n d a n e g a t i v e si g n m e a n s t h a tloca l p roduc t ion i s s imi la r ly d i sadvan taged re la t ive to expor t s .

    Ta b l e 4 a r e in f o r c e s t h e c o n c l u s i o n s o f Ta b l es 3 a n d 4 . L a n d l o c k e ds t a tu s a n d h i g h G D P l e a d to l o c a l p r o d u c t i o n ; h i g h l o


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