Foreign direct investment and intellectual property rights: evidence from the knowledge-capital model

Titus O. AwokuseThis thesis analyzes the relationship between FDI and IPR protection based on a panel data of U.S. affiliates sales in 50 countries from 2000 to 2008. Although many studies have investigated the effect of IPR protection on FDI, few of them have estimated whether the effect will vary by the type of FDI or the type of product sectors. In this thesis, these two problems are addressed respectively. First of all, a recently developed knowledge-capital (KC) model is adopted. The knowledge-capital model allows for the simultaneous existence of both horizontal FDI motivation and vertical FDI motivation. By incorporating the IPR protection into the KC model, how IPR protection will influence FDI and how the influence will vary by the type of FDI are estimated. In addition, both aggregated and disaggregated data are used in this thesis although most of the existing studies only focused on aggregated data. Data from total manufacturing are applied to represent the aggregated level while data from seven manufacturing sub-sectors are used to conduct the disaggregated analysis. It is expected that IPR protection will influence multinational activities differently based on the type of sectors. Particularly, stronger IPR protection could have more effect on technology-intensive industry. To better capture the cross-sectional and time-series variations in the data, panel data regression methods including fixed effects estimation, random effects estimation and Hausman-Taylor instrumental variable estimation are used to analyze the data. According to the empirical results, the basic predictions of the knowledge-capital model are affirmed that horizontal FDI will be stimulated by larger market size, greater similarities in market size and relative factor endowments, lower investment cost and higher host-country trade cost, while vertical FDI will be encouraged by larger market size, larger difference in market size and relative factor endowments and lower host-country trade cost. The results also indicate that the effects of basic FDI determinants in the knowledge-capital model will vary by the type of FDI. In terms of IPR protection, it shows statistical significance in most of the cases. However, stronger IPR protection could increase FDI with a market expansion effect in some sectors while decrease FDI with a market power effect in other sectors. Therefore, IPR protection plays a crucial role in FDI decisions but its effect is ambiguous. Furthermore, the results indicate that the effect of IPR protection on FDI will vary by the type of FDI and the type of sectors. The strengthening of IPR protection will have a stronger effect on horizontal FDI relative to vertical FDI and tighter IPR protection will also have more effects on FDI in the technology-intensive sectors.University of Delaware, Department of Agriculture and Resource EconomicsM.S