Cross‐Border Intellectual Property Rights: Contract Enforcement and Absorptive Capacity

Date01 May 2015
Publication Date01 May 2015
AuthorYingyi Tsai,Alireza Naghavi
Alireza Naghavi* and Yingyi Tsai**
This article studies the cross-border protection of intellectual property rights
(IPR) as an outcome of a contract obtained through a Nash bargaining process
between an innovative North and an imitative South. The level of disclosure
required in such contract is higher, the more capable is the South in copying if
bargaining breaks down. This raises questions about the suitability of universal
IPR standards through a single contract. The threat of a penalty in case of non-
compliance can, however, reduce the outside option of more advanced countries
and make a stricter IPR regime enforceable by harmonizing their interests with
relatively less developed nations.
Ever since the ratification of the Trade-related Aspects of Intellectual Property
Rights (TRIPS) agreement of 1994, discussions regarding the North-South
conflict over intellectual property rights (IPR) protection have assumed an
even higher degree of importance. Under the auspices of the World Trade
Organization (WTO), TRIPS requires, amongst other things, all member
countries to provide a minimum level of IPR protection regardless of the ori-
gin of the technology. In fact, this development emerges as a consequence of
complaints and lobbying undertaken by innovating firms in the North assert-
ing to have lost billions of dollars due to inadequate IPR protection regimes
in the South.
This article is motivated by the important policy issue that concerns cross-
border IPR protection agreed to by means of a contract, and its actual
enforcement in the South. In particular, the article emphasizes the role of a
single TRIPS document with an ex-ante optimal IPR stringency level that has
to apply to all countries, followed by ex-post country-specific enforcement
mechanism that depends on absorptive (imitation) capacity. The analysis
*University of Bologna
**National University of Kaohsiung
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12071, Vol. 62, No. 2, May 2015
©2015 Scottish Economic Society.
attempts to differentiate between the pre- and the post-contract periods,
between a multilateral platform and a bilateral negotiation game, and between
heterogeneous countries in the South that vary with respect to their absorptive
capacity. This sheds light on three unexplored aspects of IPR protection often
neglected in the literature: (1) the possibility of IPR protection with an opti-
mal level of spillovers obtained through a contract, (2) the implementation of
harmonized standards through a monitoring mechanism, (3) the role of heter-
ogeneity in the level of development in the South.
Economic literature on IPRs has so far mostly focused on trade and IPR
protection in the pre-agreement phase of TRIPS, treating the signing of the
treaty as equivalent to the enforcement of IPRs.
Evidence, however, shows
that in some regions the level of actual IPR enforcement does not coincide
with their commitments outlined in TRIPS. Little work exists to our knowl-
edge that investigates the actual post-TRIPS enforcement of IPRs. For exam-
ple, Javorcik (2004) presents evidence on the effect of IPRs and their actual
enforcement on the composition of foreign direct investment in transition
countries. Chiang (2004) shows that the efficacy of trade sanctions for alleged
IPR cross-border violation is limited to countries that manufacture and export
large values of potentially infringing goods. Thorpe (2002) undertakes an
analysis to study the implementation of TRIPS in developing countries.
On the theory side, Banerjee (2011) discusses monitoring as a successful
enforcement strategy to fight against piracy as long as the costs involved are
not too high. Some recent works have introduced the heterogeneity of south-
ern countries with respect to their absorptive capacity when studying the opti-
mal IPR policy. Kim and Lapan (2008) show that more efficient southern
countries prefer higher collective IPR protection than less efficient ones.
Ghosh and Ishikawa (2013) show the effect of endogenous investments in
absorptive capacity on the export/FDI decision of the northern firm and IPRs
in the South. To our knowledge, the bargaining aspect of a mutually agreed
IPR protection level determined endogenously through a North-South con-
tract has only been discussed in Lai and Qiu (2003), Tsai et al. (2004), and
Cai and Li (2011). Nevertheless, little or no attention has been paid in the
above-mentioned literature to the implementation of the agreed-upon level of
IPRs in the South and how this varies with the level of development.
We first endogenize the choice of cross-border IPR protection in the con-
text of negotiations. A Nash bargaining game is applied as a solution concept
to study the interactions between the North and the South. The analysis
uncovers the existence an optimal rate of spillovers as an interior solution.
This mutually agreed of limited level of legal disclosure without infringing the
product within the IPR framework depends on the outside option of the
South. The disagreement point is determined by the absorptive capacity of the
South to reverse engineer and imitate the product under no IPR enforcement.
See among others Chin and Grossman (1990), Deardorff (1992), Helpman (1993), Taylor
(1993), Vishwasrao (1994), Zigic (1998, 2000), Yang and Maskus (2001), Glass and Saggi
(2002), Grossman and Lai (2004), Mukherjee and Pennings (2004), Connolly and Valderrama
(2005), Naghavi (2007), Mukherjee and Ray (2007), and Leahy and Naghavi (2010).
Scottish Journal of Political Economy
©2015 Scottish Economic Society

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