Intellectual property rights, southern innovation and foreign direct investment

While empirical evidence shows considerable innovative activities by the Southern firms, these activities have been ignored in determining the relationship between Southern patent regime and foreign direct investment (FDI) by the Northern firms. We show that whether a stronger Southern patent regime increases a Northern firm’s incentive for FDI depends on the innovative capability of the Southern firm, the degree of product differentiation and transportation cost. If either the cost of Southern innovation is sufficiently low such that the Southern firm innovates irrespective of the Southern patent regime and the production strategy of the Northern firm, or the Southern firm’s cost of innovation is moderate such that it innovates only under a stronger Southern patent regime, a stronger Southern patent regime may reduce the Northern firm’s incentive for FDI. For all other costs of Southern innovation, a stronger Southern patent regime increases the Northern firm’s incentive for FDI.