Working Paper No. 02-14

Intellectual Property Rights and Multinational Firms' Modes of Entry
Thitima Puttitanun
October 2002

ABSTRACT

This paper studies the relationship between intellectual property rights (IPR) of a country and the modes of entry to the country by multinational firms. A model is developed that allows firms with new technologies to choose among three modes of entry: exporting, foreign direct investment (FDI), and licensing. Firms in the recipient country may imitate the technology under any of these entry modes, and their abilities to do so depend both on the nature of each entry mode and on the level of IPR protections in that country. Empirical analysis is conducted for entries by U.S. firms on the 1995 disaggregated data of 135 industries in 62 countries. Using a multinomial logit regression model, it is shown that while stronger IPR increases total entries by multinational firms, it especially enhances the location advantage of FDI and licensing. Unlike the findings in the literature, however, strong IPR impacts positively on FDI more than on licensing. This internalization incentive is reduced in high R&D industries where imitation may become more difficult.

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