Trade secrets hurt foreign investment

There are several important factors which affect the incidence of foreign investment. The size of the local market, valuation factors, geography, bilateral trade and regulatory regime are all important factors that affect a multinational company’s decision to invest abroad (see, e.g., Erel et al. (2012), and Alfaro (2017)). Another important determinant is the degree of intellectual property rights (IPR) protection in the host economy. Stronger protection can entice foreign investment by lowering the risk of having the investors’ intellectual property misappropriated (Maskus (2000), Javorcik (2004), Branstetter et al. (2006), Ivus et al. (2016, 2017), and Noon et al. (2019)). Contrary to the conventional wisdom, in this paper we document that there is a small, negative impact of an important aspect of IPR – trade secrets protection – on the overall incidence of inbound FDI across U.S. states. We also show that such protection has, in fact, contrasting effects on the main modes of establishment entry. While trade secrets protection has a large positive effect on the incidence of greenfield projects, it surprisingly has a large negative impact on the incidence of cross-border M&A deals.