Imitation and Innovation Driven Development under Imperfect Intellectual Property Rights

One of the main channels through which intellectual property rights (IPRs) influence a country's economy is through their impact on innovation. However, North-South models usually constrain the South to imitative activity which generates a detrimental effect of stronger IPRs on southern welfare by construction. Further, this assumption does not account for the increasing R&D efforts in developing countries in the last decades. To study the effects of IPR protection conditional on a country's development, we present a North-South variety model which allows for original southern R&D activity and imitation specifically targeted to southern innovations. We find that the effects of IPRs depend crucially on the stage of development of a country in terms of R&D activity. In particular, we show that strengthening IPRs promotes southern R&D, increases southern real consumption and decreases the wage gap between North and South if IPRs pass a threshold level. Below this threshold, an increase in IPRs may fail to promote R&D while decreasing real consumption and wages in the South.