In this paper the effect of host country intellectual property rights (IPRs) protection on location choice is analyzed, by using firm-level panel data on Swedish multinational enterprises (MNEs).
The data are separated into two sub-samples; for the 1970s and 1990s. The empirical model used is the conditional logit model. An index on patent strength is used as a measure of the host countries’ level of IPRs protection. Other variables controlled for include country-specific variables such as GDP, GDP per capita, skills, taxes, as well as a distance variable and the parentspecific variables on R&D-intensity and an interaction between IPR index and R&D-intensity. The results for the measure of IPR protection differ between the two time periods, with statistically significant negative estimates for the 1970s, and positive but statistically insignificant estimates for the 1990s. A possible interpretation of the result may be that MNEs substitute FDI for arm’s length agreements such as licensing.
Intellectual property rights (henceforth IPRs) have in the past two decades gained increased economic and political importance. This is, among other reasons, due to the fact that the global economy is increasingly dependent on knowledge-based industries.1 The growing interest in IPRs is being mirrored in IPRs being introduced as part of regional trading arrangements. The most important attempt to harmonize protection of IPRs across nations is the Agreement on Trade- Related Intellectual Property Rights (henceforth TRIPS). The TRIPS emerged from the Uruguay Round in 1995 and became one of the pillars of the World Trade Organization (henceforth WTO).2 According to TRIPS, WTO members must adopt and enforce minimum standards of IPR protection.3 IPRs are national or territorial in nature and do consequently usually not operate outside the national territory where they have been settled. This implies that differences in IPR regulations may serve as a factor in the location choice of multinational enterprises
In this thesis, I will use firm-level data on Swedish MNEs to study whether their choice of where to operate their foreign affiliates is affected by the host country’s system of protecting IPRs. By applying firm-level data, the study differs from some earlier studies on the impact of IPR system in the decision process of an MNE, since these have focused on FDI inflows on an aggregate level.8 The data which is to be used is a panel firm-level dataset collected by the Research Institute of Industrial Economics (IUI).
The data is on Swedish manufacturing firms with foreign production affiliates, covering six years between 1970 and 1998.9 As a measure of IPR protection, I will employ an index developed by Ginarte and Park (1997) on strength of patent rights. This index is one of the most commonly used measures of IPR protection. It is worth mentioning, however, that the measure only is based on laws on the books and does not measure their enforcement, which is a drawback of this index. Furthermore, the measure only confines the part of IPR protection that is covered by patents. Because of its large coverage, the Ginarte-Park index is despite these drawbacks considered to be the most useful measure of IPR protection for the purpose of this study. The years covered by the index are 1960-2000 in intervals of five years (1960, 1965, 1970 etc.).10
The location choice of Swedish MNEs and the potential impact of host countries’ patent regimes on this choice will be estimated with a conditional logit model with presence of Swedish affiliate activity as the dependent variable. In short, the purpose of the model is to define a probability for a Swedish MNE of executing FDI in a country given the host country’s level of protection of IPR, which in the case of this study is mirrored in the host country’s level of patent strength. The dependent variable will be a presence indicator that takes the value of one if there is at least one majority-owned Swedish manufacturing affiliate in the respective host country.11 As independent variables, I will use location-specific variables, but will also include regressors such as geographical distance between host country and home country (Sweden) as well as a parentspecific variable and an interaction variable.
International agreements on IPRs
IPRs are national or territorial and created by national laws and countries. Countries do consequently have to reach agreements when their residents seek protection for their intellectual assets in other countries. The interest in reaching agreements on an international level as to strengthening IPR protection in the developing world has been of high political priority and has been pushed forward by business interests and lobbying in the developed world with the U.S. as leading proponent. A.3 in Appendix gives an overview of the different instruments and agreements for protecting IPRs. The international treaties in place prior to the TRIPS agreement generally covered different types of IPRs and aimed at establishing and maintaining minimum standards for IPRs for member countries.
There is a fairly long history of the emergence of international agreements on IPRs. Most of the international conventions have been managed by the World Intellectual Property Organisation (henceforth the WIPO), which was established in 1967. The Paris Convention for the Protection of Industrial Property dates as far back as 1883 and the Berne Convention for the Protection of Literary and Artistic Work was made in 1886.52 Both the Paris Convention and the Berne Convention were supported and observed by many countries and considered to be the major international treaties on IPRs.
Thesis By Jenny Dickson, Stockholm School of Economics