Essays on the protection of intellectual property rights and North-South technology transfer

One of the subjects under discussion at the Uruguay Round for the last 4 years has been the introduction of strengthened protection of intellectual property rights (IPR\u27s) in underdeveloped countries. This issue has polarized countries into the rich, Northern countries who undertake R&D and stand to lose from lack of enforcement of IPR\u27s, and Southern countries which are more concerned with acquiring goods at lower prices than with encouraging R&D. Recent literature has also argued that there are few incentives for Southern countries to enforce protection of IPR\u27s. The infringement of intellectual property rights by Southern underdeveloped countries can pose a significant risk for foreign innovators wishing to license the production of new techniques to these countries. The first essay examines this problem in an asymmetric information context, where only the Southern country knows whether patents will be protected or not. The incentives of the Southern country to protect patents depend on what share of the profits from licensing they are allowed to retain. If the South is allowed to keep some of its profits, then depending on the probability with which it can imitate, the South may have an incentive to protect patents. In the second chapter, I develop a model of technology transfer where the Northern firm has the choice of exporting, licensing, or producing through foreign direct investment (FDI), some new product. The Southern government\u27s incentives to protect patents or to allow FDI are examined in an asymmetric information game where the innovating firm does not know whether the South can imitate the technology or not. The theoretical results suggest that internalizing foreign production through FDI allows the Northern firm to reduce the risk of imitation through licensing. If the Northern firm can choose between all three strategies, FDI will be optimal when there is a high probability of imitation. Empirical evidence also supports the conclusion that licensing is not significantly affected by patent policy in the South, there being a positive correlation between countries which allow patent infringements and those with the highest ratios of licensing to FDI. The third essay examines the welfare issues involved when the innovation to be licensed is a cost reducing process innovation. We find that licensing contracts consisting of up front fees alone may preferred by Southern countries to imitation, in fact, these contracts tend to maximize world welfare as well. The optimal patent policy for Southern governments may not be patent infringement but some restrictions on the form of licensing contracts. When process innovations are compared with product innovations, with the same cost structure, we find that since product innovations are never licensed, it may not be optimal for patent protection to cover new products