Intellectual property protection, direct investment and technology transfer: Germany, Japan and the USA

In earlier papers, I found that the strength or weakness of a country's system of intellectual property protection seems to have a substantial effect, particularly in high-technology industries, on the kinds of technology transferred by many US firms to that country. Also, this factor seems to influence the composition and extent of US direct investment there, although the size of the effects seems to differ from industry to industry. The present paper extends these results in two ways. First, the analysis is expanded to include Japanese and German firms, which, of course, are responsible for massive direct investment in developing countries. Second, an econometric model is constructed to estimate the effects of the strength or weakness of intellectual property protection in a developing country on the amount of US direct investment there. The findings indicate that, in relatively high-technology industries like chemicals, pharmaceuticals, machinery, and electrical equipment, a country's system of intellectual property protection often has a significant effect on the amount and kinds of technology transfer and direct investment to that country by Japanese and German, as well as US, firms. Also, when a variety of relevant factors are held constant in an econometric model, the effects of such protection on US foreign direct investment are substantial and statistically significant.