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Working Paper No. 05-08

IPRs and Tariff Policies: East-West Joint Ventures
Xiaofei Vivian Yang
November 2005


I develop a two-period two-country model of joint ventures and technology transfer. A multinational enterprise (MNE) transfers advanced technology to a local firm through a joint venture. Based on the transferred technology, the local firm may invest in R&D to invent the next period technology. I investigate the incentives for recipient countries to strengthen intellectual property rights (IPRs) and how stronger protection affects the local-partner R&D investments. I also study how IPRs and tariffs interact in this competition.

In the model, the initial IPRs level, local bargaining power, and local innovation ability jointly determine the optimal IPRs policy of the local government. With weak initial IPRs, developing countries would prefer to establish even lower protection. When IPRs are stronger than a threshold level, both source (developed) countries and recipient (developing) countries would prefer even stricter protection. When the local joint-venture partner has low bargaining power and high innovation ability the recipient government would favor low IPRs protection. However, under high bargaining power and inefficient innovation, strengthening IPRs would be the ideal policy. I also find that at different tariff rates these payoffs to stronger IPRs would change. Two nations with the same IPRs but unequal tariffs may have opposing opinions about the gains from stricter rights, with more open economies preferring laxer protection.