Intellectual property rights, product complexity and the organization of multinational firms

Abstract

This paper studies how the Intellectual Property Right (IPR) regime in destination countries influences the way multinationals structure the international organization of their production. In particular, we explore how multinationals divide tasks of different complexities across countries with different levels of IPR protection. The analysis studies the decision of firms between procurement from related parties and outsourcing to independents suppliers at the product level. It also breaks down outsourcing into two types by distinguishing whether or not they involve technology sharing between the two parties. We combine data from a French firm-level survey on the mode choice for each transaction with a newly developed complexity measure at the product level. Our results confirm that firms are generally reluctant to source highly complex goods from outside firm boundaries. By studying the interaction between product complexity and the IPR protection, we obtain that (i) for technology-sharing-outsourcing IPRs promote outsourcing of more complex goods to a destination country by guaranteeing the protection of their technology, (ii) for non-technology-related-outsourcing IPRs attract the outsourcing of less complex products that are more prone to reverse engineering and simpler to decodify and imitate.

Product innovation by supplying domestic and foreign markets

“…Since, in our work, we do not investigate the determinants of firms' boundaries, we depart from the global sourcing literature that focuses on the determinants of firms' offshoring modes (i.e. the "make or buy" decision: vertical integration vs. outsourcing to a foreign country) and looks in particular at either the role of international property rights protection in the destination countries (Glass and Wu, 2007) or the technological content of the goods (Acemoglu et al, 2010), or both (Naghavi et al, 2015). Nevertheless, our model is related to these papers, because it focuses on what we call the "innovation boundaries," and we deal with the issue of which of the two partners adapts the intermediate good.…”

A simple index of innovation with complexity

“…However, it does not say much about the complexity of each product or service. An ideal measure of industry level complexity would take into account both the number of inputs used to produce a specific product (Hidalgo and Hausmann 2009;Nunn 2007), as well as the complexity of the tasks involved to produce it (Naghavi, Spies, and Toubal 2015). For illustration purposes, in this paper I use the normalized index of Naghavi, Spies and Toubal 2015…”

“…For the complexity weights, I use the normalized complexity index by Naghavi, Spies, and Toubal (2015). 1 Then, I generate a complexity-weighted sum of patents and exports, and I normalize the two sums to a [0,1] scale using the min-max method.…”

Relationship‐specific Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers

“…Canals and Şener () show that US firms substantially expand their intra‐industry offshoring activities in high technology industries as a response to IPR reforms in the host countries. Naghavi et al () further show that technology‐sharing outsourcing of more sophisticated goods by French multinationals take place in countries with better IPR enforcement. Despite clear evidence on technology transfer, however, controversies on the appropriateness of IPR protection in the developing and emerging world persist.…”

“…Moving to technological complexity, Acemoglu et al (2007) provide a theory to show that contract enforcement stimulates the adoption of more complex technologies through the firms' choice of suppliers. In a similar context, by using French firm-level data Naghavi et al (2015) provide evidence that firms outsource more complex technologies to countries that ensure stronger IPR protection. Our work can also be related to this context.…”