Contracts, Intellectual Property Rights, and Multinational Investment in Developing Countries

The institution and enforcement of property rights and contracts have been an important policy issue for the developing countries, the transition economies, and the developed countries in the 1990s. This has led to the development of a literature on technology transfer and how property rights might affect such transfers and host-country welfare. Much of this literature is non-strategic, with large numbers of northern' innovative firms and southern' imitators, and focusses on endogenous R&D and imitation levels. This paper takes a different and complementary approach, developing a strategic model in which local managers learn the multinational's technology and can defect to start a rival firm. If contract enforcement leads the MNE to shift from exporting to producing inside the host country, both the host country and the MNE are better off. If the MNE had established a subsidiary prior to the establishment of enforcement, the host country is indifferent or worse off by enforcement. In the latter case, rents are transferred from the local manager to the MNE.