Intellectual Property Rights and South-North Global Innovation Networks

Prarolo, Giovanni; Naghavi, Alireza; Comune, Maria Working Paper Intellectual Property Rights and South-North Global Innovation Networks Quaderni - Working Paper DSE, No. 764 Provided in Cooperation with: University of Bologna, Department of Economics Suggested Citation: Prarolo, Giovanni; Naghavi, Alireza; Comune, Maria (2011) : Intellectual Property Rights and South-North Global Innovation Networks, Quaderni - Working Paper DSE, No. 764, Alma Mater Studiorum - Università di Bologna, Dipartimento di Scienze Economiche (DSE), Bologna, https://doi.org/10.6092/unibo/amsacta/4477 This Version is available at: https://hdl.handle.net/10419/159603 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/3.0/ Intellectual Property Rights and South-North Global Innovation Networks Maria Comune Alireza Naghavi Giovanni Prarolo Quaderni - Working Paper DSE N°764 1 Intellectual Property Rights and South-North Global Innovation Networks† Maria Comune a , Alireza Naghavi b,* , Giovanni Prarolo b November 2012 Abstract This paper explores the role of IPR protection in the emergence of R&D linkages from newly emerging economies. Using data from a new survey on Chinese and Indian firms in the ICT sector, we find IPR protection to be key in the engagement of Southern firms in global innovation networks. A complementary exercise uses global bilateral patent data to investigate the location-specificity of IPR enforcement for this phenomenon. We find that a stringent IPR regime in the North (South) discourages (encourage) foreign patenting activities of firms in the South, suggesting that a global convergence of IPRs can stimulate Southern innovation. Keywords: Innovation, Intellectual property rights, Foreign patenting, R&D linkages, Southern innovation, ICT. JEL Classification: F2, O1, O3 a University of Siena. b University of Bologna. * Corresponding author. Postal address: Università di Bologna, Dipartimento di Scienze Economiche, Piazza Scaravilli 2, Bologna, 40126, Italy. Tel: +39 051 2098873; fax: +39 051 209 8040. E-mail address: alireza.nagh[email protected] † Research for this paper was partially funded by the European Community's Seventh Framework Programme (Project INGINEUS, Grant Agreement No.225368, www.ingineus.eu). The authors alone are responsible for its contents which do not necessarily reflect the views or opinions of the European Commission, nor is the European Commission responsible for any use that might be made of the information appearing herein. Special thanks to Stuart Graham, Lucio Picci and Marc Rysman for helpful comments and suggestions. 1. Introduction The growing demand for technology in an increasingly competitive global market is changing the geography of innovation. Today multinational enterprises (MNEs) seek not only to exploit their knowledge in other countries, but also to source technology internationally and tap into worldwide centers of knowledge (OECD, 2008a). We now observe a faster pace for the internationalization of R&D, a wider range of actors involved worldwide, and a greater scope of international innovative activities in the form of integrated networks. While most R&D investments still go to OECD countries (also referred to as North), non-OECD countries have attracted an increasing amount of R&D investments in recent years (OECD, 2008b). As knowledge starts to flow more freely across the globe, the heated debate on the puzzle regarding the protection of intellectual property becomes more complex. A survey by the Economist Intelligence Unit (EIU) in 2004 revealed that 84% of all executives perceive the lack of intellectual property rights (IPRs) protection in emerging markets as a challenge when outsourcing their R&D. Branstetter, et al. (2006) further provided solid evidence that IPR enforcement encourages Northern firms to increase their R&D activities abroad (in terms of foreign patent applications as well as R&D expenditure and royalty payments). But does the same motivation apply for firms from the South? The issue is no longer a duel between developed and developing countries. With Newly Industrialized Countries (NICs, also referred to as South) taking a lead in developing technologies of global standards, the view of the South towards IPRs has taken a new meaning. This paper sheds light on the development of innovation capacities and the internationalizing of R&D by the new class of firms in the South. It investigates the relevance of IPRs from a South-North perspective to study the incentives of actors in newly emerging economies to tap on to international knowledge networks. In so doing, we define different measures for R&D linkages to assess the degree to which Southern firms engage in global networks of innovation and find out how IPR protection contributes to or hampers this phenomenon. To address the issue we start by relying on a unique firm-level dataset built from a recently completed survey that has been specifically designed to gather information on firms’ behavior in terms of 3 international innovation activity. Across four continents, firms were asked to provide information about their experience with regulation, practices and jurisprudence around IPRs faced in the internationalization of their innovation activities. The survey selected ICT as the representative high-tech industry, and narrowed the interviews in this sector down to firms located in China and India. 2 The novelty of the survey data used here compared to others on the IPR issue, such as the surveys by EIU on outsourcing innovation, is that it emphasizes the viewpoint of the South by interviewing executives from China and India. Our empirical findings suggest that a credible IPR regime can influence Southern firms’ engagement in the internationalization of R&D. More specifically, IPRs tend to matter more for the participation of domestic Southern firms in global R&D collaborations. Moreover, it proves more relevant for the offshoring or outsourcing of innovation in the hardware segment of the ICT sector. As instructive as firm-level surveys can be in understanding the behavior of individual firms, they generally tend to lack important information on a global scale. In this particular case, the survey results underline the need for a reliable IPR protection system also for innovative firms in newly emerging countries. But is the blessing of a strong IPR regime for Southern firms uniform across the globe, or is IPR protection viewed as location-specific? What is the impact of a 17000 patent portfolio held by Motorola (later bought by Google in August 2011 to protect HTC and Samsung who produce phones based on Google's Android software) on South-North R&D? Can the patent system be used to block South-North R&D, as Apple tried in April 2011 by suing Samsung in the US and subsequently claiming against it to prevent the imports of Galaxy Tab 10.1 and Galaxy Smartphones in Germany, Ireland, Netherland, Sweden and UK? 3 To study the above unexplored issues, we use an empirical gravity model designed to capture the extent of NICs involvement in the internationalization of innovation activity in OECD countries. Using the number of patents that NICs nationals file in OECD patent offices as the variable of interest, we estimate the impact of country and country-pair specific variables such as IPR protection in both countries, together with 2 This is partly driven by the survey design, which lets each partner-country select one sector of particular economic relevance. A description of the firm-level survey design and implementation is provided in Appendix 1. 3 Kwong, R. and Jung-a, S., “Google’s Motorola deal a boon for Asia”, Financial Times, 16 August 2011; Zeman, E., “Apple wins another round against Samsung in Germany”, Information week, 09 September 2011. 4 standard gravity model specific controls such as distance, GDP per capita, common language and common border dummies. Using data on patents filed by nationals from 14 NICs in 31 OECD countries, we show that the location of IPR enforcement is crucial for South-North innovative activities. In particular, South-North foreign patenting is positively related to domestic IPR enforcement, whereas enforcement in the receiving country discourages patent applications from NICs. The effect of IPR protection on the internationalization of R&D for economies in the catch-up phase is therefore heterogeneous and location-specific. The positive impact of a strong domestic IPR regime in countries that have overcome the developing stage works in a similar manner as in advanced economies. IPRs create incentives to innovate, promote growth and allow Southern firms to enter into the world market for knowledge through global innovation networks. The negative impact of IPR protection in the North for the entry of Southern patents can be associated to patent blocking. The latter is caused by defensive patenting (to avoid being ‘invented around’) or by a market power effect that obstruct entry by new firms, and the consequent difficulty faced by firms from NICs with less advance technologies to obtain patents in countries with a tougher IPR regime. Also, we use the degree of ICT-specificity of exports to parallel our firm-level analysis and confirm the crucial importance of IPR protection for international innovation activities of Southern firms, primarily for the hardware segment of the ICT sector. This study contributes to the literature by considering the issue of IPRs from a new perspective by accounting for today’s rapidly growing knowledge economies. Essentially, the conclusion drawn from the results reinforce the positive implications of IPR harmonization for the internationalization of Southern innovation. However, the empirical findings reveal that a more complex mechanism of harmonization is required for this to be effective in catch-up economies, placed in a limbo state between the developing and the developed world. In particular, the results suggest that a convergence of IPR enforcement in the two regions, that is weakening (strengthening) the level in the North (South), can be beneficial for Southern innovation. This is slightly but meaningfully different from the TRIPS obligations that requires the South to upgrade its IPR regime to the standards in force in the North. 5 The reminder of the paper is organized in the following way: the next section gives a number of stylized facts on recent patenting activities in major emerging economies along with a short literature review. Section 3 presents survey data and the related empirical analysis. In section 4 we report methodology, data, and results for the cross country estimation. Section 5 concludes. 2. Intellectual Property Right Standards and Innovation 2.1. Stylized facts: Recent trends in emerging economies The increase in the ‘propensity to patent’ 4 by 20 percent in less than 20 years in OECD countries is generally attributed to technological change, economic transformations, and a shift of patent policy since the 1990s (OECD, 2004). The same trend has occurred in emerging economies after reforming their legal framework of IPR protection according to WTO standards. In 1985, the total number of patents granted in China (including both domestic and foreign patents and, not only inventions, but also utility models and industrial designs) was only 138: 20% was claimed by non-residents, but no patents for inventions were claimed by Chinese residents. Even if this number increased by seven hundred times in 1999, Chinese domestic enterprises were still not considered innovative compared to their foreign counterparts (Sun, 2003). The total amount of patent applications in China today exceeds 7 million ranking as the third largest patent office in the world and fourth in terms of Patent Cooperation Treaty (PCT) filings (WIPO, 2011). 5 In some new technical areas, such as digital communication, telecommunication and high-speed trains, 20% of the total of PCT applications have come from China in the years 2008-2010 (Tian, 2011). China accounts for 3.5% of triadic patents and aims to join the top five countries receiving triadic patents by 2015 (Zhao, 2006). The first Patent Law came into force in China in 1985 and the two major rounds of modifications occurred in 1992 and 2000. 4 That is, the number of patents taken per dollar or euro of R&D, assuming the productivity of R&D constant. 5 In 2009, SIPO received 17% of world patent applications, following only USPTO with 25% and JPO with 19%. While, the share of world PCT applications at WIPO by Chinese nationals is 7,5%, after US (27,4%), Japan (19,6%) and Germany (10,7%). 6 In India, the Patents Act 1970 was amended in 1999, 2002 and 2005. The stagnant level of patent applications in the country saw a marked change with a peak in 1997. 6 After 1999, a sharp decrease of first filing in the country was experienced. This has been attributed to the country becoming signatory to the PCT in 1998 after which both national and foreign inventors preferred to file PCT applications directly, designating India as one of the countries for the national phase (Ganguli, 2004). PCT applications by Indian inventors and industries registered a sustained growth up to 43% in 2001. 7 Today, the country stands higher than Japan, Korea and China in terms of patent filing abroad relative to resident patent applications (WIPO, 2011). Trends in ICT-related patent applications to the European Patent Office (EPO) show that India ranked second after China between 1995 and 2003. Over the period 2004-2007, the country presented the highest average growth rate in terms of patent applications (26.3%) reaching almost 37 thousand applications in 2008 (WIPO, 2010). If we consider the share of Indian and Chinese inventors in PCT applications by foreignowned firms, the countries rank respectively 1 st and 5 th in the world, that is, 65% of Indian and 43.9% of Chinese inventors contribute to foreign-owned patent applications. Indian IT sector is estimated to aggregate revenues of US$88.1 billion in 2011, with the software and service sector, excluding hardware, accounting for 86.4%. 8 Conversely, China accounts for 14.6% of the global electronics hardware production (Bhattacharya and Vickery, 2010). Indeed, the large share of Chinese patent applications in ICT-related areas is associated with the considerable focus on ICT hardware production (van Welsum and Xu, 2007). 2.2. Related literature: Theoretical background The theoretical framework behind our empirical tasks and findings is built on existing literature with the purpose of showing how IPR protection may encourage or hamper innovation and the internationalization of R&D. 6 This can be mostly attributed to Indian accession to the WTO-TRIPS and the implementation of the transitional mailbox procedure before extending patent protection on pharmaceutical products. 7 WIPO Magazine 10, 2002. 8 NASSCOM cited by India Brand Equity Foundation, 2011. 7 A priori, IPR protection in the destination country could have either a positive or a negative impact on foreign patents: according to Allred and Park (2007), a positive effect of IPR protection on patenting in developed countries comes from increased appropriability of invention and a market expansion effect (i.e. a larger market creates innovation spillovers, so that new innovations are easier to produce), while negative effects can derive from defensive patenting or market power effect. 9 About the effect that IPR protection level in the origin country could have on innovation, Picci (2010) suggests that poor IPR protection could result both in less internationalization of innovation (due to standard appropriability considerations) or more, if the branches of MNEs located in NICs patent innovations in their headquarters. The literature on the positive impact of IPR enforcement on innovation at home is abundant and rather well-known. The protection of patents provides firms with a temporary monopoly power and increases their incentives to innovate. 10 In the context of newly emerging economies, a strong IPR regime at home further helps disseminate the created knowledge by allowing firms to accumulate governance capabilities and better manage R&D agreements abroad. This can for instance be due to lower transaction costs a firm has to incur to protect itself from risk of opportunism by a third party (Martínez-Noya and García-Canal, 2011). Perhaps, the less obvious side of the story is the impact of IPR protection abroad in the internationalization of R&D. On the one hand, protection in the host country could reduce imitation risks faced by multinationals and induce them to engage in foreign R&D activities by outsourcing innovation (Lai, Riezman and Wang, 2009). On the other hand, and perhaps more relevant in the viewpoint of today’s rapidly-growing knowledge emerging economies, a stringent regime in the North can discourage the entry of foreign patents by creating a more concentrated market impeding entry by new firms (Boldrin and Levine, 2008). Increased incentives by Northern firms to engage in defensive patenting, most common in the ICT industry, is another channel suppressing R&D linkages (Hall and Ziedonis, 2001). As suggested by 9 For specific case studies on how this mechanism has affected the catch-up process in Korea see Lee and Kim (2010). 10 See Maskus (2000) for a thorough discussion of the literature and the basics. 14 business environment and its relevance for the internationalization of R&D activities. However, its lower significance when considered in concomitance with other factors, under different definitions of R&D linkages, or if observed for specific sub-sectors may confirm that stronger IPRs must be embedded in a broader set of complementary initiatives, such as human capital development, to be effective. Last but not least, they may indicate that there are emerging trends or new factors affecting innovation and decisions regarding the internationalization of R&D activities. The survey analysis, as limited to the two world largest emerging economies, bolster the general critics to the theoretical literature of North-South models (Park, 2008b). It represents an attempt to fill the gap in the literature on IPR and international innovation on Southern innovator sectors and Southern markets that represent a relevant share of Northern firms’ world market. However, it cannot be used to advance policy considerations neither regarding the global IP reform that took place since the mid-1990s in Southern countries nor the ongoing debates and controversies that touch on the issue of IPRs in the Northern markets (Jaffe and Lerner, 2004). We therefore proceed to a more general analysis that employs global data in the next section. 4. IPRs and Internationalization of Southern R&D: Macro-level Analysis In this section we try to generalize the firm-level findings to the country level, in particular to a setting consisting of time-varying data on country pairs. Essentially, we are interested in examining the impact of IPRs on South-North R&D linkages. To this end, we look at the filing of patents in OECD patent offices by researchers resident in NICs, using IPR protection in both NICs and OECD countries as the main explanatory variable. We start by a brief description of the main data before turning to the empirical methodology and the results. 4.1. Patent data and IPR measures The variable for patent applications (PAT) has been constructed using data from the World Intellectual Property Organization (WIPO). Patent applications may refer to (i) PCT applications by NIC nationals designating one or several OECD countries to seek protection or (ii) direct filing in an OECD country by NIC 15 residents (Paris Route). 19 We believe the foreign patenting activities of the South could at least partially capture the idea of the internationalization of innovation activity in the spirit of what we have highlighted earlier: this would include a (team of) researcher(s) working at the NIC-located branch of a MNC that files a patent through its headquarters in an OECD country. 20 The complete WIPO dataset has information on 189 countries of origin of applicants and 139 countries (and groups of countries, such as the African Intellectual Property Organization or the European Patent Office) that host a patent office. 21 Information is available for years 1995-2008, so we construct averages for three periods: 1995-1999, 2000-2004 and 2005-2008, hereafter referred to as 1995, 2000 and 2005 respectively. The theoretical number of observations should be 1302, coming from 14 NICs, 31 OECD countries and 3 time periods. However, 3 countries are coded as both NIC and OECD (South Africa, Mexico and Turkey) so we exclude these pairs. The number of observations we have for the empirical work is therefore 1293 and for 649 of them the number of patents is positive. The distribution of PAT has a strong positive skew: it takes values between 0 and 3563.25, the average number of patents is 20.45, the median is 0.75 and standard deviation is 154.2. 22 Looking at the time dimension, the number of patents filed more than doubles every five years: in 1995 mean of PAT is 6.39, in 2000 it is 15.87 while in 2005 is 39.87, suggesting a remarkable increase in the international collaboration in patenting activity. The rise in average patents is due to both the intensive and extensive margin. The latter refers to the number of zeroes, that 19 A detailed explanation of South-North foreign patenting is provided in Appendix 2. 20 One could argue that foreign patenting could also represent for instance Chinese researchers working in Chinese firms who seek protection in a foreign market. However, over 90% of foreign (primarily OECD and the Asian NICs) applications for Chinese invention patents have claimed foreign priority, suggesting that patent applications had earlier been filed for the inventions with foreign jurisdictions (Hu, 2010). 21 Since WIPO registers the residence of the first applicant of a patent, our measure could underestimate the real measure of patents whose applicants’ reside in a country different by that of patent office. This is the case of multiple applicants of different residence, with the first applicant residing in the same country of the patent office in which the patent is filed. 22 The number of patents can take fractional values because we take the average across years. 16 represents country pairs that are not collaborating: they are 20%, 16% and 13% in the 1995, 2000 and 2005 period, respectively. 23 We have a measure of IPR protection from Park (2008a) for both the origin and the destination country. The IPR index ranges between 0 and 5 and it is constructed adding five zero-to-one components relative to (i) the patentability of different industrial sectors, (ii) the membership in international treaties, (iii) the duration of protection, (iv) the type and number of available enforcement mechanisms and (iv) the type and number of restrictions on patent rights. 24 The IPR index for the 14 NICs shows a mean equal to 3.17 and a standard deviation of 0.87. The pattern that it shows for the three periods is in line with the overall pattern that Park (2008a) spots for the whole sample of countries for which he constructed the index: it is increasing over time and the standard deviation is decreasing, indicating a convergence of IPR protection among NICs. In particular, mean and standard deviations are 2.52 and 0.81, 3.33 and 0.79 and 3.67 and 0.56 in the 1995, 2000 and 2005 periods, respectively. Turning to OECD countries, the IPR index is overall larger than that of NICs: it shows a mean of 4.19 and a standard deviation of 0.51. This indicates not only higher protection of IPRs, but also more compressed values of the index among OECD countries. The time pattern is similar to that of NICs: the index is increasing, though more moderately, and its standard deviation is decreasing over time. 25 4.2. Methodology and other variables Given the nature of our analysis, i.e. looking at the determinants of R&D linkages from NICs to OECD countries, we make use of an oriented empirical gravity model. 26 Rather than considering bilateral flows, the 23 We take 5-year averages for two reasons. First, data for the IPR protection index are only available for 5-year intervals and second, even if we had data on a yearly basis, IPR protection varies slowly in general, with large jumps when agreements are set in place: taking the averages helps to smooth out these irregular movements. 24 The technical details related to the construction of the index can be found in Park (2008a). 25 Mean and standard deviations are 3.95 and 0.61, 4.23 and 0.48 and 4.38 and 0.29 in the 1995, 2000 and 2005 periods, respectively. 26 Our framework partially draws from Yang and Kuo (2008). However, their analysis is limited to the 4 contiguous years of 1995-1998 and do not study South-North relations, but bilateral relation between 30 selected WIPO members. While their aim is to uncover the influence of trade and IPRs in the destination country on outward patenting activities, we focus on the IPR regime on both sides of the activity and its harmonization between the country pairs. 17 standard practice in gravity estimation of trade flows (see, for example, Frankel and Rose, 2002) or international invention activity (see Picci, 2010), we specifically look at the number of patents filed in the patent office of an OECD country (the destination country) whose first applicant resides in a NIC (the origin country). 27 Succinctly, our dependent variable PAT ijt is the (log) average number of patents filed in the time period t by an applicant residing in country i in the patent office of country j, where index i runs over 14 NICs and j runs over the 31 OECD countries. 28 Note the different pools from which i and j are taken and that, in general, PAT ijt ≠ PAT jit . The empirical model we estimate, written in general terms, is the following: PAT ijt = G t + D i + D j + β1 X it + β2 Y jt + β3 Z ij + β4 W ijt + u ijt (2) The monadic terms X it and Y jt include time-varying variables common to origin and destination countries, respectively. In particular they include IPR it and IPR jt , as well as variables only specific to either one or the other set of countries. 29 Among the monadic variables there are logs of GDP per capita and population: instead of having only GDP as mass variable, we separate size (population) and development (GDP per capita) effects in the spirit of Head et al. (2010), so to better interpret our results. We expect that both GDP per capita and population in the origin country should have a positive effect on innovation activity, including the filing of patents abroad. We also have the counterpart of the variable human resources used in some specifications of our firm-level analysis. That is, the Barro and Lee (2010) data on the share of 25+ year old people holding at least tertiary education in both the original and the destination countries. We are less 27 We decided to look at the number of patent applications instead of granted patents because has the advantage of allowing an analysis of more recent data. Indeed, although any application is published by eighteen months after the date of filing or the earliest priority date, the patent grant procedure takes about three to five years from the date of the application. 28 Countries officially considered as NICs are: Brazil, China, India, Mexico, Malaysia, Philippines, Thailand, Turkey and South Africa (Mankiw, 2007). In our definition of NICs, we also included countries around which consensus in the economic literature is not yet reached. They are Argentina, Chile, Egypt, Indonesia and Russia, (Paweł Bożyk, 2006). OECD countries are Austria, Australia, Belgium, Canada, Switzerland, Czech Republic, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece, Hungary, Ireland, Iceland, Italy, Japan, Korea, Luxemburg, Mexico, Nederland, Norway, New Zealand, Poland, Portugal, Sweden, Slovakia, Turkey, USA and South Africa. 29 According to Baldwin and Taglioni (2006), we should include a full set of country times year fixed effects, but the short time variability would make it impossible to have enough degrees of freedom. 18 interested with trade-related issues because of endogeneity concerns and the lack of a theoretical underlying prior on their effects. 30 The matrix Z ij includes all the time-invariant dyadic variables, collected by CEPII and used by Head et al. (2010). We use (log of) distance between i and j, commonality of borders and commonality of language. These variables have proved to have strong explanatory power in gravity equations for trade flows, foreign direct investments and services. With this respect we want to compare the elasticities of the internationalization of innovation activities. The term W ijt collects dyadic time-variant variables, specifically it will be the squared distance between IPR protection in country i and country j at time t, that should capture the impact of harmonization of the IPR regime within each country pair. The term G t is a common year-specific factor and we use year dummies to capture for it. Similarly, D i and D j take into account country-specific fixed effects. To look at specialization in the ICT sector, first recall from the previous section that the greatest percentage of respondents requiring more stringent IPR regulations were the Chinese firms. This could be driven by China’s ICT sector’s specialization in hardware production, which may rely on patent protection more than the software segment. To control for this, we will use the share of exported goods belonging to the ICT sector interacted with the IPR protection Index among other controls. We use the share of exported goods belonging to the ICT sector in 2000, obtained from World Bank’s World Development Indicators, to account for the extent to which NICs are concerned about IPR protection. 31 As discussed above, ceteris paribus the more the production mix is biased toward technological goods, instead of software, the more IPR protection should be a factor that fosters innovation, since issues of appropriability of patents are more relevant. This measure varies a lot across NICs, ranging between 0% of Chile to 69% of Philippines. Within this group, India scores 1.4% while China 18.9%. 30 Picci (2010) finds no systematic effects of FDI measures on innovative collaboration, concluding that “The internationalization of productive activities and the internationalization of inventive activities are still two quite distinct sides of the globalization coin.” 31 The definition of this variable is: “Information and communication technology goods exports include telecommunications, audio and video, computer and related equipment; electronic components; and other information and communication technology goods. Software is excluded.” 19 4.3. Empirical Results We start estimating the parameters of equation (2) in a parsimonious specification. The idea is to first pin down the values that the coefficients of the standard independent variables used in empirical gravity model take, so to compare our results with those established in literature. Our results are collected in column 1 of Table 4, where OLS are performed using a specification in which distance, dummies for common language and common border, population and GDP per capita are included among the controls. In all the specifications reported in Table 4, the dependent variable is the log of number of patents, so only country pairs showing a positive number of patents are included in the sample. As in all the following specifications, two (out of three) time dummies are included, together with NICs and OECD country dummies. 32 Distance shows an elasticity of -0.59 that is comparable with the upper bound found by Picci (2010), even though he uses a different measure for patents. Language proves to be an important determinant, while the common border dummy does not, probably because of the low variability: only 11 out of 649 observations report a one. Size measures (population) of origin and destination country have a positive impact and comparable magnitudes, while income per capita has a positive effect in the origin country and negative in the destination. Referring to GDP per capita, the former effect could be the result of higher human capital and/or higher R&D spending, measures that are usually associated with higher GDP per capita. On the contrary, GDP per capita in the destination country negatively impacts on international patenting activity. This could be driven by the fact that NICs tend to collaborate with countries that are more similar to them in terms of the level of development. 33 [Table 4 about here] 32 These dummies already control for a lot of variation: a regression that uses only those delivers an R 2 of 0.74. 33 A regression using the squared difference of GDP per capita of origin and destination country, rather than the two separate variables, gives a negative and significant coefficient. 20 In column 2 we introduce the IPR protection indices for both origin and destination country. The IPR protection index for the origin country is positive but not significant, while the one for destination is negative and strongly significant. We will take this into account in specifications that use the distance between IPR protection indices within each country pair. Note that the introduction of the indices results in the loss of significance of GDP per capita in the destination country, that could be due to the high correlation of this variable with the IPR index (0.70). Though this high correlation was expected, it is not so high to introduce collinearity issues. Even if it poses, to some extent, problems in correctly attributing the effects of IPR and GDP per capita on patents, it seems that IPR is a better predictor of patenting activity. The results we obtain are opposite to those obtained in Yang and Kuo (2008), who find a positive and significant relation between IPR regime of the destination country and foreign patenting activity that takes place there. The negative effect could be a symptom of increasing strategic uses of patent protection by Northern firms, for instance, to restrain the power of suppliers by owning key technology elements in another part of the technological chain or to build a thicket of patents around a key patented invention to block competitors (Guellec et al., 2007). This may block access to important technologies needed mainly by Southern firms to realize their own innovations. Also, since NICs are on average less technologically advanced than OECD countries, the former may find it easier to patent an innovation in OECD countries with weaker IPR regimes. This occurs because the technological frontier of the most developed OECD countries is difficult to reach, therefore few patent filings are recorded. Column 3 adds the interactions of the IPR protection index with the share of exported goods belonging to the ICT sector in 2000 for NICs. As highlighted above, countries like China, whose production (and therefore exports) is oriented toward ICT goods, should benefit comparatively more from the protection of IPR. As expected, the interaction between the share of exports in ICT sector and the IPR protection index in NICs is positive and strongly significant. 34 In column 4 we replicate the last results excluding country pairs involving China or India, two countries that host many headquarters of MNCs. In these cases PAT would be a spurious mix between genuine cross-border innovation collaborations and 34 The direct effect of the share of ICT cannot be estimated because it is collinear with NICs’ country fixed effects. 21 innovations carried on within China (India) by Chinese (Indian) MNCs that only register their innovations in foreign patent offices, subsequent to filing a domestic patent. Results hold, but are less significant in some cases possibly due to the smaller sample size. Column 5 adds tertiary education measures for both origin and destination country to the specification in column 2, trying to further address the findings on human resource requirements obtained at firm level. Only education in the origin country turns out to be positive and significant. In another specification, not reported, we also add the interaction term between tertiary education and ICT, paralleling the regression in column 3, but results remain unchanged. In column 6 we replicate the specification in column 1 using the squared distance between IPR protection indices within each country pair instead of the two IPR indices. This variable is negative as expected but not significant at conventional levels. [Table 5 about here] Table 5 uses different specifications and alternative estimation techniques in order to check the robustness of our findings. Our main concern with the results obtained is that half of the observations are dropped because PAT takes a value equal to zero, causing a missing value for its logarithm. Also, different from the case of bilateral trade flows, PAT is a count variable, for which the Poisson estimator has been suggested, see Picci (2010) and Santos Silva and Tenreyo (2006) among others. In column 1 we report results for the Poisson version of the specification 2 in Table 4. The distance variable is precisely estimated and the point estimate is around 0.3. Signs previously found are consistent, while now the IPR protection in NICs becomes positive and strongly significant. The significance being driven by the inclusion of more than 600 zeroes in the analysis suggests that IPR protection works at the extensive margin. Our explanation is that MNCs open up research branches in NICs only if IPR protection is strong enough, while once research branches are operative, the level of IPR protection plays a limited role in defining the intensive margin of innovation activity. 22 In column 3 we add education variables to the previous specification. As in the OLS case, tertiary education in origin country is positive and significant and now also education in the destination country has a positive effect, even if ten times lower than the effect in the country of origin. In column 3 we replicate specification reported in column 4 of Table 4. There is little change with respect to the results in column 1 and the interaction term, as for the OLS case, is positive and strongly significant. In column 4 we substitute the two distinct measures of IPR protection (in NICs and OECD countries) with the distance between IPR indices within country pairs, as done in column 6 of Table 4. The coefficient is again negative but it is now strongly significant, suggesting the extensive margin of patent production to also be at play when the convergence of IPR regimes promotes outward innovation from the South. Finally, in column 5 we estimate the previous specification by means of the negative binomial method, that should improve estimates when the dependent variable is over-dispersed (Hausman et al., 1984), i.e. the variance to mean ratio is greater than one, as it is in our case. Results are broadly confirmed, together with the gain in significance of the positive effect of population in OECD countries. 5. Conclusions This investigation can be viewed as an initial attempt to explore the different roles IPRs can play for the globalization of Southern innovation with respect to the location of enforcement. While the debate on the protection of IPRs has often been placed in a ‘North-South’ perspective, this paper addresses innovation that originates in the South. The investigation attempts to answer the question whether stronger IPR protection at home and away or its cross-borders harmonization could stimulate the internationalization of R&D from the South. Using both survey-based data on Chinese and Indian firms in the ICT sector and country-level data on the foreign patenting activities of NICs in OECD countries, our analysis confirms IPRs to play varying roles in the formation of global innovation linkages. While the survey data stresses the importance of IPRs, our country level analysis reveals that they could indeed have a negative impact in foreign patenting by NICs. The firm-level tests pointed out the relatively higher importance of IPRs for domestic firms to engage in 23 global innovation networks, whereas the macro-study showed the necessity of a strong IPR regime at home for MNE research branches to be operative there in the first place. Our evidence confirms the reliance of the ICT industry, particularly the hardware segment, on IPRs when engaging in the international outsourcing and offshoring of innovation or in patenting activities abroad. In contrast, strong IPRs in the North deter R&D activities originating from the South by blocking patents. South-North R&D linkages should hence be at their peak if we observe a convergence of protection levels in the two regions. By convergence of IPR protection levels we do not necessarily mean the need for relaxing IPRs in the North and upgrading them in the South, but a convergence of IPR systems. That is, reaching a rallying point in the implementation of an effective IP policy to encourage the participation of each country in international innovation activities and the diffusion and use of new technology across countries. A starting point could be cooperating for the development of reciprocal legal and technical tools aimed at lowering barriers to foreign-patenting activities and improving the quality and transparency of the global patent system in general. APPENDIX 1 - Survey Design and Implementation The survey was administered online from November 2009 to June 2010 by the INGINEUS project, 35 after significant work in designing and pre-testing the questions. The overarching goal of the survey was to establish the presence of global innovation networks: how global, how innovative and how networked the sample was. Each institute chose the survey delivering method according to past experiences and knowledge of the best methods utilised in the country for high response rates. 36 Indeed, it was delivered electronically by mail or link, by face-to-face interviews, through telephonic interviews or by written mail. 35 INGINEUS is an international research project funded by the European Commission that studies global innovation networks. It involves 14 research institutes and universities in seven European countries plus Brazil, China, India and South Africa. For further information on INGINEUS project please see www.ingineus.eu. 36 For instance, in both China and India, the survey was run mostly through face-to-face interviews or telephone interviews give the low electronic response rate experienced. 30 Park, W.G. 2008b. Intellectual Property Rights and International Innovation, in Keith E. Maskus (Eds.) Intellectual Property, Growth and Trade, vol. 2 of the series Frontiers of Economics and Globalization, Elsevier, 2008, pp. 289-327. Picci, L., 2010. The Internationalization of Inventive Activity: A Gravity Model using Patent Data. Research Policy 39, 1070-1081. Santos Silva, J.M, Tenreyro S., 2006. The Log of Gravity. The Review of Economics and Statistics 88, 641-658. Sun, Y., 2003. Determinants of Foreign Patents in China. World Patent Information 25, 27-37. Tian, L., 2011. Meeting of International Authorities under the Patent Cooperation Treaty (PCT) Working Group: Chinese Patent Documents, WIPO PCT/MIA/18/12. van Welsum, D., Xu, T., (Eds.) 2007. OECD Working party on the Information Economy: Report. Is China the new centre for offshoring of IT and ICT-enabled services?, OECD. WIPO, 2010, World Intellectual Property Indicators 2010. WIPO, Geneva. WIPO, 2011, World Intellectual Property Report: The Changing Face of Innovation. WIPO, Geneva. Yang C.H., Kuo N.F., 2008. Trade-Related Influences, Foreign Intellectual Property Rights and Outbound International Patenting, Research Policy 37, 446-459. Zhao, M. 2006. Conducting R&D in Countries with Weak Intellectual Property Rights Protection. Management Science 52 , 1185-1199. Table 1: Distribution across national samples of GIN and OUT. Source: Authors’ calculation based on INGINEUS survey. China India Brazil Denmark Estonia Germany Norway South Africa Sweden TOTAL GIN=1 35,80% 56,17% 21,74% 34,69% 52,94% 41,51% 29,83% 45,24% 47,69% 42,55% OUT=1 11,11% 43,21% 23,19% 20,41% 17,65% 45,28% 13,26% 25% 25,64% 25,93% Table 2: IPRs as determinants of global R&D linkages for Chinese and Indian ICT sector. OLS estimations. In columns 2 and 4 dummies for the region of origin of firms' innovation partners are added. Robust standard errors in parentheses. (***) p-value < 0.01, (**) p-value <0.05, (*) p-value <0.1 (1) (2) (3) (4) Dep. Variable GIN OUT GIN OUT IPR 0.177 (0.042)*** 0.080 (0.036)** 0.169 (0.058) *** 0.050 (0.048) China -0.186 (0.041)** -0.309 (0.034)*** -0.155 (0.043)*** -0.280 (0.036)*** HR 0.089 (0.051)* 0.190 (0.042)** foreign 0.320 (0.075)*** 0.160 (0.070)** IPR*foreign -0.176 (0.094)* -0.079 (0.088) hardware 0.002 (0.041) 0.108 (0.036)*** -0.022 (0.041) 0.105 (0.037)*** constant 0.443 (0.045)*** 0.321 (0.041)*** 0.337 (0.045)*** 0.248 (0.048)*** Obs 567 567 544 544 R-sq. 0.0698 0.1425 0.1154 0.1542 32 Table 3: IPRs as determinants of global R&D linkages for ICT sub-sectors. OLS estimations. In columns 2 and 4 dummies for the region of origin of firms' innovation partners are added. Robust standard errors in parentheses. (***) p-value < 0.01, (**) p-value <0.05, (*) p-value <0.1 (1) (2) (3) (4) Dep. variable GIN OUT GIN OUT IPR 0.171 (0.060)*** -0.008 (0.043) fIPR 0.198 (0.060)*** -0.065 (0.053) IPR*hardware -0.015 (0.083) 0.157 (0.074)** fIPR*hardware -0.070 (0.083) 0.153 (0.049)** hardware -0.020 (0.064) 0.003 (0.057) 0.010 (0.059) 0.017 (0.057) China -0.172 (0.042)*** -0.293 (0.035)*** -0.225 (0.042)*** -0.297 (0.036)*** foreign 0.205 (0.045)*** 0.102 (0.042)** 0.217 (0.045)*** 0.108 (0.042)*** constant 0.398 (0.053) *** 0.347 (0.049)*** 0.415 (0.048)*** 0.388 (0.035) *** Obs 544 544 544 544 R-sq. 0.1031 0.1525 0.1043 0.1471 33 Table 4: Determinants of strengthening South-North formation of GINs. OLS estimations. All specifications include monadic country dummies and time dummies. Standard errors in parentheses. (***) p-value < 0.01, (**) p-value <0.05, (*) p-value <0.1. (1) (2) (3) (4) (5) (6) Dep. Variable Log(PAT) Log(PAT) Log(PAT) Log(PAT) Log(PAT) Log(PAT) DIST_ij -0.59 (0.08)*** -0.59 (0.08)*** -0.58 (0.08)*** -0.49 (0.09)*** -0.59 (0.08)*** -0.59 (0.08)*** COM_LAN_ij 1.11 (0.15)*** 1.12 (0.15)*** 1.13 (0.15)*** 1.25 (0.17)*** 1.13 (0.15)*** 1.12 (0.15)*** COM_BOR_ij 0.00 (0.31) 0.01 (0.31) 0.03 (0.31) 0.19 (0.32) 0.03 (0.31) -0.00 (0.31) POP_it 6.99 (1.73)*** 6.44 (1.84)*** 5.14 (1.85)*** 4.88 (2.06)** 5.14 (1.93)*** 6.37 (1.79)*** POP_jt 8.49 (2.25)*** 7.74 (2.25)*** 6.69 (2.25)*** 5.09 (2.64)* 7.47 (2.25)*** 8.59 (2.25)*** GDP_pc_it 1.04 (0.23)*** 1.07 (0.22)*** 1.02 (0.23)*** 0.74 (0.29)** 0.90 (0.24)*** 1.05 (0.22)*** GDP_pc_jt -1.08 (0.40)*** -0.49 (0.43) -0.49 (0.43) -0.69 (0.50) -0.47 (0.43) -1.00 (0.41)** IPR_it 0.05 (0.11) -0.01 (0.11) -0.23 (0.18) 0.05 (0.11) IPR_jt -0.77 (0.21)*** -0.72 (0.21)*** -0.65 (0.25)*** -0.78 (0.21)*** ICT_IPR_it 1.54 (0.49)*** 1.83 (0.59)*** EDU_it 0.12 (0.06)** EDU_jt -0.02 (0.02) dist_IPR_ijt -0.04 (0.03) Obs. 649 649 632 476 649 649 R 2 0.79 0.80 0.81 0.78 0.82 0.80 34 Table 5: Determinants of South-North formation of GINs. Poisson (1-4) and Negative Binomial (5) estimations. All specifications include monadic country dummies and time dummies. Standard errors in parentheses. (***) p-value < 0.01, (**) p-value <0.05, (*) p-value <0.1. (1) (2) (3) (4) (5) Dep. Variable PAT PAT PAT PAT PAT DIST_ij -0.27 (0.02)*** -0.27 (0.02)*** -0.28 (0.02)*** -0.27 (0.02)*** -0.63 (0.07)*** COM_LAN_ij 0.53 (0.04)*** 0.53 (0.04)*** 0.54 (0.04)*** 0.55 (0.04)*** 1.06 (0.13)*** COM_BOR_ij 0.19 (0.10)* 0.16 (0.10) 0.17 (0.10)* 0.17 (0.10)* -0.05 (0.28) POP_it 2.98 (0.56)*** 1.29 (0.58)** 3.52 (0.56)*** 3.50 (0.57)*** 7.41 (1.74)*** POP_jt 1.86 (1.07)* 6.18 (1.33)*** 2.92 (1.07)*** -0.02 (0.98) 5.65** (2.30) GDP_pc_it 1.33 (0.08)*** 1.10 (0.08)*** 1.08 (0.08)*** 1.30 (0.08)*** 1.27 (0.22)*** GDP_pc_jt -0.99 (0.16)*** -1.56 (0.20)*** -0.97 (0.16)*** -0.65 (0.15)*** -1.08 (0.39)*** IPR_it 0.61 (0.02)*** 0.59 (0.03)*** 0.43 (0.03)*** IPR_jt -0.41 (0.13)*** -0.37 (0.13)*** -0.49 (0.13)*** EDU_it 0.20 (0.02)*** EDU_jt 0.02 (0.00)*** ICT_IPR_it 3.29 (0.15)*** dist_IPR_ijt -0.12 (0.01)*** -0.07 (0.03)*** Obs. 1293 1293 1293 1293 1293 Pseudo-R 2 0.95 0.95 0.95 0.95 0.43 35 Table A1: Response rates and total sample distribution by sector, country and R&D activity. Sector/country dataset responses response rate (%) % over total sector obs. R&D active firms % of R&D active firms over national sample China 9119 243 2.7 26 181 74.5 Estonia 121 17 14 1.8 2 11.8 Norway 519 179 34.5 19.1 53 29.6 India 1287 324 25.2 34.7 195 60.2 Sweden 1662 171 10.3 18.3 76 44.4 Total EU 2302 367 15.9 39.3 131 35.7 Total emerging economies 10407 567 5.4 60.7 376 66.3 Total ICT 12709 935 7.3 100 507 54.2 Denmark 210 49 23.3 37.1 5 10.2 Norway 2 2 / 1.5 0 / South Africa 325 81 24.9 61.4 27 33.3 Total EU 212 51 24 38.6 5 9.8 Total emerging economies 325 81 24.9 61.4 27 33.3 Total Agro-processing 535 132 19.6 100 32 24.2 Brazil 43 241 69 28.6 46.6 17 24.6 Germany 963 53 5.5 35.8 31 58.5 South Africa 2 2 / 1.4 0 / Sweden 168 24 14.3 16.2 13 54.2 Total EU 1131 77 6.8 52 44 57.1 Total emerging economies 243 71 29.2 48 17 23.9 Total Automotive 1374 148 10.8 100 61 41.2 TOTAL EU 3645 495 13.6 - 180 36.4 TOTAL emerging economies 10975 719 6.6 - 420 58.4 TOTAL 14620 1214 8.3 - 600 43 The Brazilian sample was extracted from the Annual Registry of Social Information (RAIS), a registry of social and balance sheet information collected by the Brazilian Labour and Employment Ministry. The total number of firms classified in the automotive sector in Brazil is 2,625. Out of these, 233 companies are located in the state of Minas Gerais and, of these, 107 (46%) have employed in 2008 30 workers or more. From the dataset all automotive firms from the state of Minas Gerais were selected, provided the firm declared over 30 employees. 