Institutions, Development, and Patterns of Trade

This study investigates how easing international transactions through im- proved legal institutions can result in divergent trade patterns for different economies. We provide evidence that the level of development governs the relevance of intellectual property rights (IPR) institutions in determining a country’s comparative advantage. While IPR protection changes the composi- tion of OECD exports towards IP-intensive sectors, contract enforcement is the key driver of specialization of non-OECD exports in relation-specific inputs. The findings suggest a concentration of innovation activities in the OECD, with non-OECD countries serving as potential outsourcing destinations. We exploit information on IPR reforms over time to show the robustness of our results through both an instrumental variable and a difference-in-difference approach. We extend the analysis to a bilateral framework to show that better IPR quality could nevertheless encourage technology transfer by encouraging imports of IP-intensive goods into non-OECD countries.