Intellectual Property Rights and Foreign Direct Investment: The Optimal Policy with Technology Adoption

Intellectual property rights (IPR) protection policies in Southern countries play a crucial role in the product cycle by restricting Southern firms from imitating products developed by Northern firms. In this paper, we incorporate the Southern government’s political decision into a North-South model, where foreign direct investment (FDI) from the North results in technology leakage to the South through imitation. We analyze the optimal IPR-protection policy in the South to show that the Southern government selects the least stringent level that still successfully attracts Northern FDI. We demonstrate that this result holds in a model with heterogeneous Northern firms.