When it comes to intellectual property (IP) and economic development, a similar paradox to the “chicken or egg” dilemma exists: while many economists argue that strong IP protection is essential to attracting foreign direct investment (FDI), others say FDI is inevitable in developing countries and IP protections are subsequently pursued at the behest of stakeholders like firms, labor, and foreign governments. Which argument is more compelling?
Conventional wisdom suggests that only developing countries with strong IP enforcement mechanisms can successfully attract FDI. As a study from 2014 summarizes the consensus view with regard to Brazil, China, and India:
Th[e] change toward strengthening IPR [intellectual property rights] protection in developing countries is likely to have a great impact on innovation and foreign direct investment (FDI) in these countries for several reasons. For example, strengthening IPR protection in a developing country makes it difficult for local firms to copy products developed by other firms and decreases the risk of technology imitation in that country. Thus, strengthening IPR protection is likely to influence the decision of a firm with advanced technology on whether to transfer production to a developing country. In addition, a decrease in imitation changes the monopolistic rent that the inventor of a good can earn, which is likely to influence R&D activities by firms in developed countries.
Putting aside the desirability of monopoly rents for IP-holding firms, the argument is easy to follow: 1) firms don’t want their IP to be “stolen,” 2) developing countries move to implement rules to reduce IP theft by enforcing copyright claims, shutting down counterfeiting operations, prosecuting patent violations, etc. and 3) with their concerns assuaged, businesses move to invest in said countries.
This explanation, however, fails to explain the fact that extensive FDI is pursued even in countries with weak IP protections. Developing/transitioning economies accounted for four out of the top five countries with FDI inflow in 2017 according to the 2018 UNCTAD World Investment Report, and only one of those four is in the top ten of the 2018 U.S Chamber International IP Index rankings for effective IP architecture.
This evidence supports an alternative theory, namely that FDI will occur in developing economies regardless of whether or not IP protections are in place, and such investment incentivizes stakeholders to pursue stronger IP protections.
The recent history of China is just one example of extensive FDI leading to calls for increased IP enforcement. Regarding the case of China, a study authored by Peter K Yu argues:
Intellectual property protection in the country remains inadequate and ineffective, and it is unlikely that foreign firms were attracted to China because of its intellectual property system. Instead, firms often relocate to China to take advantage of the lower production costs and the emerging market. To many of these firms, the lower costs and the promise of an enormous market would easily make up for the losses incurred by ineffective intellectual property protection. While these firms certainly welcome greater intellectual property reforms, they do not find stronger protection a prerequisite for obtaining profits in the first place. In fact, many major Western firms—like Coca-Cola, Kodak, Motorola, Procter & Gamble, and Siemens—have already been enjoying substantial profits for years despite serious piracy and counterfeiting problems. Thus, instead of seeing strong intellectual property protection as the necessary precursor to profitability, they see it more as a means to ‘increas[e their] already acceptable profit ratios’.
This argument is additionally convincing when one considers that China was surpassed only by the U.S. in overall FDI inflows in 2017 as ranked in the previously mentioned UNCTAD report, a significant fact given its comparatively new IP laws (which are not nearly as “weak” as some suggest.)
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