intellectual property rights protection and the surge in fdi in china

1、Intellectual property rights protection and the surge in FDI in ChinaTitus O. Awokuse *, Hong YinDepartment of Food and Resource Economics, University of Delaware, Newark, DE 19717, USAa r t i c l e i n f oArticle histor

2、y:Received 5 July 2008Revised 30 September 2009Available online 21 October 2009JEL classification:F23034Keywords:Intellectual property rightsPatent lawsFDIChinaDeveloping countriesa b s t r a c tAwokuse, Titus O., and Yi

3、n, Hong—Intellectual property rights protection and the surge inFDI in ChinaThere is scarcity of empirical studies focusing on the role of intellectual property rights(IPR) in attracting FDI into developing nations, espe

4、cially large economies with relativelystrong threat of imitation. This paper examines the contribution of IPR to the recent surgein China’s inward FDI. We consider two alternative measures of IPR and explore the possi-bi

5、lity that the effect of IPR protection on FDI may vary by the level of economic develop-ment. Using a panel data for 38 countries, the empirical results indicate that thestrengthening of IPR protection in China has a pos

6、itive and significant effect on FDI. Theresults also show that FDI from Hong Kong and Taiwan behaves differently from the FDIoriginating from other high-income countries. Journal of Comparative Economics 38 (2)(2010) 217

7、–224. Department of Food and Resource Economics, University of Delaware,Newark, DE 19717, USA.? 2009 Association for Comparative Economic Studies Published by Elsevier Inc. All rightsreserved.1. IntroductionChina has exp

8、erienced a phenomenal surge in its inflow of foreign direct investment (FDI) in the past two decades. While Asia receives the bulk of FDI flows to the developing world, China accounts for almost half of Asia’s share of g

9、lobal FDI (see Table 1). China’s FDI grew from virtually nothing in 1979 to $45.5 billion in 1998; and less than a decade later in 2006, its FDI inflow increased to $69.5 billion. FDI flow into China accounts for more FD

10、I than that of the entire African continent ($35.5 billion) and is just a bit behind all of Latin America ($83.8 billion) combined (see UNCTAD, 2007). Since 1993, it has become the largest recipient of FDI among developi

11、ng countries and the most popular destination of choice for multinational firms, second only to the United States. This substantial volume and growth of FDI to China naturally raises the question: what is the driving for

12、ce behind this growth? To this end, the sources and drivers of FDI in China have been studied extensively (Wang and Swain, 1995; Heid and Ries, 1996; Sun et al., 2002; Hsiao and Hsiao, 2004; Zhang, 2005; Du et al., 2008)

13、. However, very little empirical analysis has fo- cused on the impact of intellectual property rights (IPR) on FDI flow. This oversight could be partially attributed to data con- straint. Until recently, extended time se

14、ries data on the effects of the strengthening of China’s IPR laws was scarce. Furthermore, China’s recent patent laws reform and its past reputation as a very large developing economy with strong threat of imitation make

15、s it an interesting case study on the effect of IPR protection on FDI. Thus, it is timely to investigate the impact of IPR on FDI in China after a period of significant policy reforms to China’s IPR laws. Among developin

16、g countries, China is particularly suitable as a case study for analyzing the impact of IPR reforms on FDI flows. Surprisingly, China had no IPR protection before 1985. However, since the establishment of its first paten

17、t law in 19850147-5967/$ - see front matter ? 2009 Association for Comparative Economic Studies Published by Elsevier Inc. All rights reserved.doi:10.1016/j.jce.2009.10.001* Corresponding author.E-mail addresses: kuse@ud

18、el.edu (T.O. Awokuse), iris_yin@yahoo.com (H. Yin).Journal of Comparative Economics 38 (2010) 217–224Contents lists available at ScienceDirectJournal of Comparative Economicsjournal homepage: www.elsevier.com/locate/jceT

19、he main finding from this study suggests that the strengthening of IPR protection in China led to an increase in its FDI inflows. This paper’s empirical results further support the hypothesis that the strengthening of pa

20、tent laws has a market expansion effect. Furthermore, our results also show that FDI from Hong Kong and Taiwan behaves differently from the FDI originating from other high-income countries. Thus, this study provides much

21、 needed empirical evidence on the current debate regarding policy reforms in IPR regimes and its effects on technology transfer and trade with China. The remainder of the paper is organized as follows. Section 2 contains

22、 a brief review of literature on the impact of IPR on trade and FDI. Sec- tion 3 describes the model specifications and data sources. The last two sections contain a discussion of results and the con- cluding remarks.2.

23、Literature reviewThe nature of the linkages between IPR protection and global direct investment is ambiguous and has been a source of much debate and controversy. Disagreements persist on whether stronger IPR protection

24、stimulates or discourages FDI flows to developing countries (for a review see Shatz et al. (2000)). Depending on a nation’s IPR regime, multinational firms can serve a foreign market by choosing among several options: ex

25、ports, FDI, joint ventures and licensing. While some theoretical studies have shown that stronger IPR protection stimulates innovation, the effect on FDI could be either positive or negative (Chin et al., 1988; Helpman,

26、1993). Stronger IPR protection could have a positive effect and result in an increase in FDI by reducing the threat of imitation by local firms and thereby ensuring high returns to the investment in research and devel- o

27、pment of foreign firms. In contrast, the strengthening of IPR protection may have a negative effect on FDI if it results in an increase in the monop- oly power of foreign firms. When faced with less competition from loca

28、lly produced imitation products, multinational firms may attempt to maximize profits by reducing affiliate output and sales (Maskus and Penubarti, 1995; Smith, 1999, 2001). Furthermore, stronger IPR protection could also

29、 discourage FDI if multinational firms choose to license instead of increasing FDI. In contrast to low-tech producers, firms investing in heavy knowledge-based industries may be more sensitive to IPR protection concerns

30、(Mansfield, 1995; Markusen, 2001; Javorcik, 2004). Thus, the relationship between IPR protection and FDI remains an empirical question that has yet to receive adequate attention. In recent years, many empirical studies h

31、ave examined the factors influencing FDI flows to transition economies such as Central and Eastern European Countries and China. The studies focusing on European transition economies usually found that traditional determ

32、inants (e.g., market potentials, factor costs, and distance) and transition-specific factors (e.g., levels and methods of privatization and EU membership) help to attract FDI (Carstensen and Toubal, 2004; Bevan and Estri

33、n, 2004). Comparatively, empirical studies focusing on China tend to place more emphasis on fundamental economic factors such as market size, labor and investment costs. In a study focusing on the drivers of FDI into Chi

34、na over 1978–1992, Wang and Swain (1995) found that GDP, wages, and trade restrictions have a positive effect while interest rates and exchange rates appear to have a negative effect on FDI. Similarly, Heid and Ries (199

35、6) investigated the determinants of FDI location decision in 54 Chinese cities and found that FDI is mostly attracted to Chinese cities that have strong industrial base and excellent infrastructure. In another study, Sun

36、 et al. (2002) analyzed the determinants of FDI across China’s thirty provinces from 1986 to 1998 and found that the key drivers of FDI have changed over time. Hsiao and Hsiao (2004) also examined why China has attracted

37、 so much FDI and found that about 50% of China’s FDI originated in Hong Kong and Taiwan. Zhang (2005) asked why a very large portion of China-bound FDI comes from Hong Kong and Taiwan. They found that the characteristics

38、 of FDI from the major developed nations (EU, US, and Japan) are different from those of Hong Kong and Taiwan. Also, several studies have inves- tigated other aspects of FDI in China. Some authors explored how FDI is a p

39、roductive input spurring China’s recent economic growth (Chen et al., 1995; Wu, 2000; Yao and Wei, 2007). Although many authors have analyzed the effect of various economic determinants of FDI, very few have examined the

40、 role of IPR as advocated in this study. Lee and Mansfield (1996) authored one of the first empirical investigations of the pos- sible linkage between a developing country’s IPR protection system and the volume and compo

41、sition of US FDI in that coun- try. Their empirical evidence indicates that the strengthening of IPR protection has a positive effect on FDI inflows. In a more recent study, Javorcik (2004) examined the effect of IPR on

42、the composition of FDI for a group of transition economies in Eastern Europe and the former Soviet Union. The study concludes that weak IPR protection has a negative effect on FDI in technology-intensive sectors. Similar

43、ly, Nunnenkamp and Spatz (2004) investigated the IPR-FDI linkage using sectorally disaggregated FDI data for a large sample of host countries and found that stronger IPR protection played a positive role in attracting FD

44、I. In China’s case, while qualitative analyzes on the role of IPR on its economy abound, data-driven empirical studies have been relatively scarce. Recently, Du et al. (2008) investigated the relationship between regiona

45、l economic institutional fac- tors (i.e., property rights protection and contract enforcement) and the locational choice of US multinational firms in China.1Their results, based on a panel data set (1993–2001), suggest t

46、hat US multinationals prefer investing in the regions that have1 This current analysis differs from Du et al. (2008) as our study is not just limited to US. FDI into China, but it’s more comprehensive in scope by analyzi

47、ngpanel data for 38 countries. In this paper, we also explored the possibility that the effect of IPR protection on FDI may vary by the level of economicdevelopment in the FDI source nation. This emphasis is in contrast