SUSTAINING THE GOOSE THAT LAYS THE GOLDEN EGG: A CONTINUOUS TREATMENT OF TECHNOLOGICAL TRANSFER
| Author | Michelle Connolly,Nelson Sá,Pietro Peretto |
| Date | 01 September 2009 |
| Published date | 01 September 2009 |
| DOI | http://doi.org/10.1111/j.1467-9485.2009.00495.x |
SUSTAINING THE GOOSE THAT LAYS
THE GOLDEN EGG: A CONTINUOUS
TREATMENT OF TECHNOLOGICAL
TRANSFER
Nelson Sa
´
n
, Michelle Connolly
nn
and Pietro Peretto
nn
Abstract
This paper proposes a simple model of the trade-offs perceived by innovating firms when
investing in countries with limited intellectual property rights (IPR). The model allows
for a continuous treatment of technology transfer and production cost gains occurring
through FDI. While it does not consider possible changes in rates of innovation caused
by changes in IPR in developing countries, it allows one to uncover a potentially non-
monotonic relationship between welfare and IPR in the recipient country.
I Intro ductio n
What is the optimal enforcement of intellectual property rights (IPR) in a small
and developing open economy? Is it no enforcement? Is it complete enforcement?
Does the optimal level depend on other factors? The answers to these questions are
crucially important to the growth and development of less developed economies.
Technology adoption indisputably contributes to output growth. The
majority of innovations (as measured by patents) occur in five countries in the
world. Without international technological diffusion these would be the few
countries to experience positive growth rates. Yet, the majority of countries in
the world do experience positive growth rates. This suggests that if technological
advance is a primary determinant of growth, international diffusion of
technology must be the driving force of growth in the vast majority of countries
in the world.
1
Consistent with this conclusion is the evidence that, relative to
developed countries (DC), less developed countries (LDC) rely more heavily on
technological diffusion from abroad than on domestic innovations to sustain
their productivity growth [Connolly (2003) and Lee (1995)].
2
n
Department of Economics, Vassar College, Poughkeepsie, New York, USA
nn
Department of Economics, Duke University, Durham, NC, USA
1
Eaton and Kortum (1996) show that even within OECD countries only the US benefits
more from domestic than foreign productivity growth.
2
Connolly (2003) finds that while imports of high technology goods is important to the
diffusion of technology in both developed and developing countries, the magnitude of this effect
is greater for developing countries. Moreover, the importance of high technology imports in
domestic production is greater for LDC than DC, as is the importance of domestic innovation.
Both results suggest that LDC rely more heavily than DC on trade and domestic R&D as
Scottish Journal of Political Economy, Vol. 56, No. 4, September 2009
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Journal compilation r2009 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
492
While the importance of international diffusion of technology is undisputed,
the specific mechanisms that regulate it – and the associated policy implications
– are not yet fully understood. With increasingly open markets, in particular,
understanding how IPR interact with alternative forms of technological
diffusion is very important.
This paper proposes a simple model of the trade-offs perceived by innovating
firms when investing in countries with limited IPR. Namely, we develop a model
which allows for a continuous treatment of technology transfer and production
cost gains occurring through FDI. The model does not consider possible
changes in rates of innovation caused by changes in IPR in developing countries.
It does, however, allow one to uncover the potentially non-monotonic
relationship between welfare and IPR in the recipient country.
II Literature Review
Maskus (2005) provides an exhaustive review of the theoretical and empirical
literature on the interaction between IPR and FDI and technology transfer.
Here, we focus on the empirical papers that study the link between IPR and
levels and types of FDI, technology transfer, and licensing, since these are the
mechanisms that we attempt to model.
While some papers such as Ferrantino (1993), Mansfield (1993), Maskus and
Eby-Konan (1994) have not been able to find significant effects of domestic IPR on
FDI within a country, more recent work [Maskus (1998), Lee and Mansfield
(1996), Javorcik (2004)] suggests that there is a positive effect of IPR on FDI.
Maskus (1998) considers a panel of 46 destination countries, using annual data
from 1989 to 1992. His results suggest that a 1% increase in patent protection
would lead to a 0.45% increase in the stock of US investments in that country. Lee
and Mansfield (1996) find evidence suggesting that perceptions of US firms of the
strength of a given country’s IPR positively affect the volume and composition of
US FDI in those countries. In particular, Lee and Mansfield find that FDI is more
heavily biased towards sales and distribution or rudimentary production and
assembly facilities when the recipient country is perceived to have weak IPR.
Javorcik (2004) looks at transition economies in the 1990s. She finds that among
sectors that traditionally rely heavily on IPR, countries with weak IPR experience
reduced FDI. Moreover, across all sectors, she finds that IPR affect the
composition of FDI. Specifically, weak IPR deter FDI in high-tech sectors and
generally tilt the focus from local production towards distribution of imported
goods. Both the Javorcik (2004) and the Lee and Mansfield (1996) studies,
therefore, suggest that, ceteris paribus, not only the quantity, but also the quality
of foreign investments improve in countries with stronger IPR.
In terms of technology transfers and licensing fees, both Yang and Maskus
(2001) and Branstetter et al. (2006) provide evidence of a positive role of IPR in
sources of productivity growth. Lee (1995) finds that the ratio of imported to domestically
produced capital goods in investment positively affects growth of income per capita in a cross-
section of countries from 1960 to 1985. When considering OECD and non-OECD countries
separately, Lee finds that this effect is greater for developing countries.
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Journal compilation r2009 Scottish Economic Society
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