|The Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: Evidence from Transition Economies
|Javorcik, B. S.
|Javorcik, B. S. (2004). The composition of foreign direct investment and protection of intellectual property rights: Evidence from transition economies. European economic review, 48(1), 39-62.
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|About the Data
|1405 firms that answered questions about their undertaken and planned investments in Eastern Europe and the former Soviet Union. The information collected mostly between 1989–1994.
Firms from the oil, gas, and coal sector were excluded from the sample.
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While existing literature examined the impact of intellectual property protection on the volume of foreign direct investment (FDI), little is known about its effect on the composition of FDI inflows. This paper addresses this question empirically using a unique firm-level data set from Eastern Europe and the former Soviet Union. It finds that weak protection deters foreign investors in technology-intensive sectors that rely heavily on intellectual property rights. Moreover, the results indicate that a weak intellectual property regime encourages investors to undertake projects focusing on distribution rather than local production.
Main Results of the Study
The paper tested two hypothesis:
- FDI in sectors relying heavily on protection of intellectual property is likely to be deterred by a weak IPR regime, not necessarily true for FDI inflows in general.
- In countries with weak protection of intellectual property, investors may be more inclined to engage solely in distribution activities rather than in local production.
- Regarding the first hypothesis, the data indicates that investors in sectors relying heavily on protection of intellectual property are deterred by a weak IPR regime in a potential host country. There is also some evidence that weak
IPR protection may discourage all investors, not just those in the sensitive sectors.
- Regarding the second hypothesis, the lack of IPR protection deters investors from undertaking local production and encourages them to focus on distribution of imported products. Interestingly, this effect is present in all sectors, not only those relying heavily on IPR protection
Policy Implications as Stated By Author
Increased IPR attracts FDI, so if developing countries wanted to increase FDI, they could increase the strength of their IPRs.
Coverage of Study
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