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Relationship-Speci c Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers

Listed author(s):
  • A. Naghavi
  • S. Peng
  • Y. Tsai

This paper examines the impact of intellectual property rights (IPR) enforcement on multinationals’ choice of input suppliers and industry profits in a host economy. The framework consists of suppliers with heterogeneous capabilities who must engage in a relation-specific investment to customize intermediate inputs upon a transfer payment by final producers. An outsourcing contract with better technologically-endowed suppliers requires a lower transfer and generates a higher surplus. Stronger IPR enforcement leads firms to self-select into better quality suppliers on average by reducing their outside option. Weak legal institutions instead make it possible for a larger range of suppliers, including the less capable ones, to form partnerships by granting them a larger outside option. A better IPR environment is more likely to harm lagging countries where the technology distribution is characterized by less capable suppliers.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp985.

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Date of creation: Jan 2015
Handle: RePEc:bol:bodewp:wp985
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