Innovation and Patent Protection: A Multicountry Study on the Determinants of R&D Offshoring

This paper looks at the role that intellectual property rights (IPR) protection plays in the decision of multinational corporations (MNCs) to locate their R&D activities abroad, a phenomenon which has been labelled in the literature as innovation offshoring. Do countries with stronger IPRs attract more offshored innovation? Do different types of innovation offshoring respond equally to IPR variations? Using a novel multicountry and multisector database gathering information on the innovation activity of more than 15,000 MNCs from all around the world, I am able to distinguish among two types of innovation offshoring: innovation carried out in nations different from the home country, where the firm undertakes production activities directly or indirectly through a subsidiary (commercial innovation), and research done in countries, where the MNC only collaborates with local firms or inventors, with no on-site production involved (external innovation). In order to better isolate the impact of property rights protection on R&D, my identification strategy takes into consideration IPR’s variation across industries. I find that firms tend to locate commercial innovation in countries with strong IPR protection. This is true especially for long life-cycle industries which rely longer on patents. In contrast, short life-cycle technologies with faster obsolescence rate (e.g. high-tech products) are less responsive to IPR protection. External innovation, on the other hand, is less affected by patent protection, suggesting other motives behind its location decisions.