Intellectual property rights, multinational firms and technology transfers

Abstract Intellectual Property Rights (IPR) protect firms from imitation and are considered crucial to promoting innovation and technological diffusion. This paper examines the impact of IPR on import-sourcing decisions of multinational firms. We consider a framework in which firms offshore production of an intermediate good to another country. Firms can decide either to import the intermediate good from vertically integrated producers, or from independent suppliers. In both cases, offshoring part of the production process embodies a risk of imitation. The model predicts that, under reasonable parameter restrictions, stronger IPR disproportionately encourages the imports of intermediate goods through vertical integration. Using the US Related-Party Trade database, we find empirical evidence supportive of the positive link between level of IPR and the share of imports from vertically integrated manufacturers.