Influence of Patent Policy in the South on the Research and Development of the North: Exploration of the Foreign Direct Investment Channel

• Date: 01 March 2015
• DOI: http://doi.org/10.1111/jwip.12029
• Author: Ruchi Sharma
• Published date: 01 March 2015

Influence of Patent Policy in the South on the

Research and Development of the North:

Exploration of the Foreign Direct Investment

Channel

Ruchi Sharma

School of Humanities and Social Sciences, Indian Institute of Technology Indore, India

Developing countries have harmonized and subsequently strengthened their patent regime to comply with the Trade

Related Intellectual Property Rights agreement. Theory suggests that developing countries benefit from strong patent

protection as such rights shift innovation in developed countries to meet the needs of the South. Empirical studies,

however, do not support this hypothesis in its entirety. There is an inter-link between research and development in the

North, foreign direct investment flows, and patent rights in the South that remains unexplored in the empirical studies.

As the South provides strong patent protection, innovating firms based in the North shift production to the South,

releasing resources in the North for R&D. Consequently, FDI outflows to the South along with its patent protection

determine R&D undertaken in the North. This study verifies this hypothesis by performing a two-stage least square

model on a panel of 78 developing countries from 1990–2010, to study the impact of their patent regimes on FDI

inflows from developed countries and consequently on respective R&D expenditure. This empirical analysis shows a

positive impact of the South's patent protection on innovation in the North.

Keywords patent policy; r&d expenditure; trade related intellectual property rights agreement

The Context

Developing countries have harmonized and subsequently strengthened their patent regimes to comply with

the Agreement on Trade Related Intellectual Property Rights (TRIPs) under the aegis of the World Trade

Organization (WTO). The ensuing changes are expected to stimulate innovation and facilitate technology

transfer to developing countries. According to Article 7 of TRIPs that enunciates its objective, IPRs should

contribute “… to the promotion of technological innovation and to the transfer and dissemination of

technology …” A strong patent regime incentivizes research and development (R&D) resources by

ensuring the appropriability of the investment. R&D investments are essentially concentrated in the global

North and are allocated according to demand considerations. Access to the global South's market opens

new vistas for innovations in the North since needs, tastes and preferences differ between both regions.

Strong patent protection in the South ensures that innovators successfully capture the market and recoup

their investments made in R&D of new products to cater to the needs of the South. Grossman and Helpman

(1991) also advocate that the international economic environment impinges upon incentives that firms in

specific countries have to invest in the creation of knowledge. Studies that focus on the empirical impact of

the patent policy of the South on the innovation in the North do not show any significant results. One

possible explanation for the same could be the complexity of the relationship that can be explained through

foreign direct investment (FDI) channels.

Compliance with TRIPs benefits developing countries as strong patent rights open the market for

technology and facilitates its transfer from developed countries through FDI routes or other modes of

transfer.

1

Strong patent policy in the host country attracts FDI by ensuring returns to intangible assets of

multinational enterprises (MNEs). Empirical studies do not support this hypothesis in its entirety but

©2015 John Wiley & Sons Ltd 29

The Journal of World Intellectual Property (2015) Vol. 18, no. 1–2, pp. 29–40

doi: 10.1111/jwip.12029