Patent protection and the composition of multinational activity: Evidence from US multinational firms

This article examines how patent protection in developing countries affects the technology licensing strategy of US multinational firms and the associated technology transfer flows. Strengthening patent rights lowers appropriability hazards and so reduces the firms’ reliance on affiliated licensing as the more secure means of transfer (the internalization effect). However lower appropriability hazards also encourage the firms to increase the volume of technology transfer via licensing both within and outside the firm (the appropriability effect). Which effect prevails depends on the underlying technological complexity of the firms’ product. We find that a strengthening of patent protection in the host country increases the incentive to license innovations to unaffiliated parties. While unaffiliated licensing rises among all firms, the volume of affiliated licensing falls among complex-technology firms but rises among simple-technology firms. The positive appropriability effect on affiliated licensing is strong enough among simple-technology firms that the entire composition of their licensing further shifts towards affiliated parties. The results are significant for recent work on the internalization theories of multinational firms and the interaction between firm strategy and the institutional environment, as well as for patent policy in the developing world, where access to knowledge is critical.