Foreign Direct Investment, Technology Transfer and Protection of Intellectual Property Rights Beata Smarzynska Javorcik The World Bank

What does theory tell us? Dunning’s OLI paradigm Dunning’s OLI paradigm  Ownership advantages  Location advantages  Internalization advantages

Ownership advantages Large share of world R&D effort is conducted by MNCs, mostly in home countries Large share of world R&D effort is conducted by MNCs, mostly in home countries MNCs spend large amounts on advertising MNCs spend large amounts on advertising MNCs possess valuable brand names MNCs possess valuable brand names  Coca-Cola (valued at 70 billion dollars)  Microsoft (65 billion)  IBM (52 billion) => MNCs want to protect knowledge/technology/ brand names

Location advantages Market size (population size, income per capita) Market size (population size, income per capita) Factor costs (labor costs, natural resources) Factor costs (labor costs, natural resources) Business climate Business climate  protection of property rights, including IPRs  corruption  taxation  labor and environmental standards => IPR protection as ONE of the many elements of business climate

Internalization advantages Determine choice between FDI and licensing Determine choice between FDI and licensing Stronger IPR protection => higher likelihood of licensing rather than FDI Stronger IPR protection => higher likelihood of licensing rather than FDI

Empirical evidence on the link between IPRs and FDI Volume Lee and Mansfield (1996), Smith (2001) Lee and Mansfield (1996), Smith (2001)  positive correlation between the strength of IPR protection on the volume of US FDI But no significant results in Ferrantino (1993) and Primo Braga and Fink (2000) But no significant results in Ferrantino (1993) and Primo Braga and Fink (2000) => mixed evidence on IPRs and volume of FDI

IPR and composition of FDI Some sectors are more reliant on formal IPR protection than others Some sectors are more reliant on formal IPR protection than others  For instance, unauthorized used of technology is less likely in sectors requiring high amount of investment, such as automobiles Weak IPR protection deters FDI inflows into IPR sensitive sectors (Javorcik, forthcoming) Weak IPR protection deters FDI inflows into IPR sensitive sectors (Javorcik, forthcoming)  drugs, cosmetics, healthcare products  chemicals  machinery and equipment  electrical equipment => IPR protection matters for foreign investors in certain sectors

IPRs and purpose of FDI projects Firm survey (Mansfield 1994) – the importance of IPR protection depends on the nature of the investment project Firm survey (Mansfield 1994) – the importance of IPR protection depends on the nature of the investment project  sales and distribution - 20% of investors consider IPRs to be important  rudimentary production / assembly - 30%  manufacturing %  R&D - 80%

IPRs and purpose of FDI projects Evidence from Eastern Europe and the former Soviet Union (Javorcik, forthcoming) Evidence from Eastern Europe and the former Soviet Union (Javorcik, forthcoming)  An increase in IPR protection shifts foreign investors preference away from projects focusing solely on distribution and towards setting up manufacturing activities

What matters for FDI is Enforcement High incidence of corruption => weak enforcement High incidence of corruption => weak enforcement  Corruption acts as a tax on foreign investors, deterring FDI inflows (Wei, 2000)  Corruption shifts investors’ preference away from wholly-owned subsidiaries and towards joint ventures (Javorcik and Wei, 2001)

Technology transfer and entry mode Empirical studies find that investors with sophisticated technologies and valuable brand names are more likely to set up wholly-owned subsidiaries (WOS) than joint ventures (JVs) (Stopford and Wells, 1972; Javorcik, 2001) Empirical studies find that investors with sophisticated technologies and valuable brand names are more likely to set up wholly-owned subsidiaries (WOS) than joint ventures (JVs) (Stopford and Wells, 1972; Javorcik, 2001) Technologies introduced into JVs in developing countries are 3-4 years older than those introduced into WOS (Mansfield and Romeo, 1980; Lee and Mansfield, 1996) Technologies introduced into JVs in developing countries are 3-4 years older than those introduced into WOS (Mansfield and Romeo, 1980; Lee and Mansfield, 1996) More movement of staff (managers, technicians) accompanied transfer of technologies to WOS than to JVs (Ramachandran, 1993) More movement of staff (managers, technicians) accompanied transfer of technologies to WOS than to JVs (Ramachandran, 1993) => Corruption may have implication for the entry mode and thus technological content of investment projects

Why should we care? MNCs account for a large share of the world’s R&D effort MNCs account for a large share of the world’s R&D effort MNCs as a channel of technology transfer to host countries MNCs as a channel of technology transfer to host countries  MNC subsidiaries have higher productivity than domestic firms  Mixed evidence on intra-sectoral spillovers from FDI (strong results for developed countries but mixed conclusions for developing economies)  Positive evidence of inter-sectoral spillovers from FDI (i.e., spillovers from MNCs to their local suppliers)

Conclusions IPR protection is ONE of the many elements of business climate affecting FDI inflows IPR protection is ONE of the many elements of business climate affecting FDI inflows IPR protection affects particularly IPR protection affects particularly  investors in high tech sectors which rely heavily on patent protection  manufacturing and R&D projects (but little impact on assembly or distribution) => Implications of IPR protection for technology transfer through FDI