Patents, Innovation, and Imitation in a North–South Model With Increasing Product Variety

To understand the relationship between patent protection and technology transfer across countries and to equip policymakers with insights to balance innovation promotion and technology dissemination, this paper investigates the cross‐country effects of patent protection on relative wages, innovation, technology transfer, and welfare in a North–South model with variety expansion. In this dynamic general equilibrium model, firms in the North perform innovative R&D, while firms in the South perform imitative R&D for technology transfer. Innovation occurs through the invention of new varieties of goods, and IPR protection is modeled in the form of patent breadth. We find that strengthening patent protection in the North permanently raises the relative wage between the North and the South, permanently decreases the rate of technology transfer, and temporarily increases the northern innovation rate. Conversely, strengthening patent protection in the South permanently reduces the relative wage, permanently increases the rate of technology transfer, and temporarily boosts the northern innovation rate. Calibrating this model to US–China data, our quantitative analysis reveals that when a country unilaterally strengthens patent protection, its domestic welfare increases. However, when both countries strengthen patent protection bilaterally, the South experiences a welfare gain while the North suffers a welfare loss.