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Working Paper No. 13-07

Product Cycle Dynamics with Heterogenous Industries
Yuchen Shao
November 2013


This paper investigates a dynamic product-cycle model with industrial heterogeneity in R&D productivity when intellectual property rights are imperfectly protected. Northern firms might innovate to put forward quality frontier, or shift out relatively-old generations by the means of foreign direct investment (FDI). It is cheaper to manufacture in the South but entails a risk of imitation from local firms. Compared to the case without imitation, the measure of industries exhibiting product-cycle pattern gets narrowed. Stronger intellectual property protection in
the South is likely to expand this range and increase the average technology levels of goods transferred abroad. A panel of U.S. imports data from 1989 to 2006 is utilized to examine the major theoretical predictions.


JEL classification: F14, F23, F34
Keywords: Innovation, Intellectual Property Rights, Foreign Direct Investment, Heterogeneity