To Copy or not to Copy: Intellectual Property Rights, Imitation, and Trade

Empirical literature has largely concluded that increasing intellectual property rights (IPRs) leads to increased trade as firms see the value of their goods (and the ideas embodied in them) increase. These exercises, however, fail to incorporate the changing incentives of developing country firms to reallocate resources from imitative to innovative efforts. I develop a theoretical and empirically tractable Ricardian trade model to test how increasing intellectual property right standards affect trade flows and the composition of industrial development in both developed and developing countries. Using Mexico as an “average” developing economy, I find that a moderate increase in IPR standards leads to an 8% increase in imports from the United States and a 30% increase in Mexican firms choosing to reallocate resources from imitation towards innovation. These results suggest that the increase in trade and Mexican research capacity more than offsets any loss associated with foregone imitation.