The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology Transfer
Source: Kevin H. Zhang, Theory and Evidence Regarding Multinational Enterprises
and International Trade
THE ROLE OF INTELLECTUAL PROPERTY RIGHTS IN ENCOURAGING FOREIGN DIRECT INVESTMENT AND TECHNOLOGY TRANSFER
KEITH E. MASKUS 0
0 Professor of Economics, University of Colorado, Boulder. 1. Examples of developing countries that have strengthened their IPR regimes include Republic of Korea , China, Taiwan, Argentina, and Mexico. See U.N. C
The global system of intellectual property rights (IPRs) is undergoing profound change as we approach the next century. Recently numerous developing countries significantly strengthened their IPR regimes.1 Regional trading arrangements, such as the North American Free Trade Agreement (NAFTA)2 and a series of Partnership Agreements under negotiation between the European Union and various Eastern European and Middle Eastern nations,3 now pay significant attention to IPR issues. Most important of these agreements is the multilateral Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Under the terms of TRIPS, current and future members of the World Trade Organization (WTO) must adopt and enforce strong, non-discriminatory minimum standards of intellectual property protection. While considerable controversy persists over international means of protecting key information
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technologies, including databases and electronic information transfer,
there is nevertheless an evident commitment to achieving strong
protection in these areas.4
This global trend toward markedly stronger IPR protection is
not surprising when viewed in the context of economic globalization,
which is the transcendent commercial and political force of this era.
Globalization is the process by which national and regional markets
become more tightly integrated through the reduction of
governmental and natural barriers to trade, investment, and technology flows.5
In this global economy, the creation of knowledge and its adaptation
to product designs and production techniques are increasingly
essential for commercial competitiveness and economic growth.6 But this
process acquires growing political saliency in light of the fact that the
international mobility of capital and technology has risen
significantly relative to that of most types of labor.7 Therefore,
globalization tends to reward creative and technically skilled workers and to
place its largest pressures on lower-skilled workers.8
When discussing globalization, it is important to distinguish
between the mechanisms, the channels, and the outcomes. The
mechanisms by which markets become more integrated include changes in
both natural forces and government policies.9 Key trends in natural
forces associated with various forms of technological changes consist
of reductions in international transportation costs, improvements in
global communications, and massive increases in computational
power permitted by the microprocessor.10 Equally important are
changes in government policies that allow international firms greater
access to domestic markets.11 This improved market access has been
a central feature of policy making in many emerging economies in
the 1990s through both unilateral policy reform and adherence to
regional and multilateral trade agreements.12
The channels through which globalization affects economies
include expanded trade in merchandise and services, product and
technology licensing, greater international portfolio investment, and
foreign direct investment (FDI).13 FDI, the establishment or acquisition
of production subsidiaries abroad by multinational enterprises
(MNEs), is particularly important because it is a source of capital and
knowledge about production techniques.14
In truth, these channels are responses to globalization, but, at
least in the public eye, are generally viewed as detrimental to the
ultimate outcomes of the process.15 These outcomes include, in the first
instance, stronger tendencies toward arbitrage of international prices
of goods and tradable services and greater access by consumers and
firms in each liberalizing country to new and more varied products
and technologies on international markets.16 In turn, those initial
outcomes result in stronger competition, reductions in domestic
market power of formerly concentrated industrial concerns, re-allocation
of economic resources into areas of greatest comparative advantage,
declining production costs in sectors with increasing returns to scale,
and contraction or elimination of uncompetitive firms.17 This last
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sult, what economists label “firm exit,” is a key source of efficiency
gains in liberalizing economies, but it also leads to strong political
forces against deregulation.18
Over the long term, stronger competitive forces encourage
adoption of frontier technologies and the development of high-quality,
differentiated products for both domestic and export markets.19
Meeting rigorous quality demands is particularly important to bre (...truncated)