Intellectual Property Rights and the Quality of Transferred Technology in Developing Countries

• Author: Yingyi Tsai,Lei Yang,Arijit Mukherjee
• Date: 01 February 2016
• DOI: http://doi.org/10.1111/rode.12218
• Published date: 01 February 2016

Intellectual Property Rights and the Quality of

Transferred Technology in Developing Countries

Lei Yang, Yingyi Tsai, and Arijit Mukherjee*

Abstract

This paper addresses the effects of a stronger patent system in developing countries on the quality of

transferred technology and welfare. We show that a stronger patent system can reduce the quality of

licensed technology. The presence of technology licensing may encourage the developing country to

adopt a stronger patent system compared with the situation where licensing is not an option.

1. Introduction

Does patent reform attract better foreign technology? Assuming a higher imitation

cost under a stronger patent system, Helpman (1993), among others, argues that a

stronger patent system reduces technology flows from technologically efficient

countries to technologically inefficient countries. Yang and Maskus (2001) show

that stronger patent protection increases imitation costs but decreases technology

transfer costs, yet the latter effect dominates, and a stronger patent protection

attracts better technology.

1

The aforementioned papers provide important insights, but ignore the strategic

interactions among firms that often occur today. We show in an international

duopoly setting that a stronger patent system’s ability to attract better technology

depends on the strength of two factors: (i) its effect on the technology transfer cost

and (ii) the effect on knowledge spillover. A stronger patent system decreases

(increases) quality of the technology to be transferred in the reforming country if

its effect on knowledge spillover is stronger (weaker) than its effect on the

technology transfer cost.

Our results are in contrast to Yang and Maskus (2009) showing that a stronger

patent system attracts better technology by reducing the technology transfer cost.

Although their result is intuitive, they ignored the knowledge spillover reducing

effect of a stronger patent system. Our findings are also in contrast to the general

equilibrium model of Yang and Maskus (2001) where the effect on the technology

transfer cost dominates the knowledge spillover effect.

We further show that a stronger patent system decreases welfare of the reforming

country if its negative effects on the quality of the transferred technology and

reservation payoff of the domestic firms are stronger than its positive effect on the

technology transfer cost. Stronger intellectual property rights (IPR) may induce a

foreign firm to shift from exporting to technology licensing and may induce the

reforming country to adopt stronger IPR compared with the situation with no

*Tsai: Department of Applied Economics, National University of Kaohsiung, Taiwan. Tel: +886-7-

5919189; Fax: +886-7-2169365; E-mail: yytsai@nuk.edu.tw. Yang: Faculty of Business, The Hong Kong

Polytechnic University, Kowloon, Hong Kong. Mukherjee: Nottingham University Business School, UK,

CFGE, Loughborough University, UK, CESifo and INFER, Germany, and RCIE, City University of

Hong Kong, Hong Kong.

Review of Development Economics, 20(1), 239–249, 2016

DOI:10.1111/rode.12218

©2016 John Wiley & Sons Ltd