[RETAG!!] Stronger IPR’s lead to an increase of tech transfer abroad within high-tech industry---high patent sensitive industries Canals and Şener 14 – Claudia Canals went to college at la Caiza, Spain with understanding of economics in trade. Fuat Sener went to college with PhD in economics, Union. https://minerva.union.edu:443/senerm/Research/Sener_Canals_Offshoring_IPR%20reform_JDE_2014_Final.pdf//HarrisC
We follow Branstetter et al. (2006) in identifying the countries that undertook patent reform. Their main criterion is whether or not there was an expansion or strengthening of patent rights along five dimensions: “1) an expansion in the range of goods eligible for patent protection, 2) an expansion in the effective scope of patent protection, 3) an increase in the length of patent protection, 4) an improvement in the enforcement of patent rights, and 5) an improvement in the administration of the patent system.” Branstetter et al. (2006) identify a total of 16 reforming countries and note that 15 of them expanded their patent rights protection along at least four of the five dimensions listed above. Table 1 provides the list of the reforming countries and the year of reform.9
How exactly does IPR reform affect manufacturing offshoring by US firms? One of the main concerns of globally-operating firms is the leakage of their proprietary technology via imitation, which can occur through labor turnover, contacts with local producers, or reverse engineering by local firms. With stronger IPRs in place, US firms can more effectively protect their technology against imitators and thus will feel more inclined to engage in technology transfer abroad. More specifically, firms who own both local and foreign production facilities will feel more secure in sharing their technology with their foreign affiliates and thereby increase their acquisition of intermediate goods from them. Similarly, firms who work with subcontractors abroad will feel more confident about sharing their technology and thus put in more orders of intermediate goods from them. In addition, local suppliers can respond to IPR reform by upgrading their technology to render a wider range of intermediate goods appealing to US firms.10 In short, IPR reforms reduce the threat of imitation, raise the returns from technology transfer and thus are likely to lead to more offshoring either within the boundaries of the firm or outside the boundaries of the firm.11.
In our econometric approach we follow Branstetter et al. (2006, 6 2011) and incorporate the broad measure of IPR reform as a binary variable, which takes the value of zero before reform and one in the year of reform and thereafter. Even though this dummy variable embodies the common features of the IPR reform along the five dimensions listed above, it obviously misses the heterogeneity of reform across countries and along finer dimensions. For example, it is possible that patent length and patent coverage can vary across countries and across industries even within the same country. To study the responsiveness of offshoring along these finer dimensions, one can code up industry specific patent laws across countries and conduct an empirical analysis. This is a fruitful avenue for further research but lies beyond the scope of the current paper.
Another point that is well established in the literature is that patent reforms may not have equal effects across industries. Basic intuition suggests that industries that rely more heavily on patents can give a larger response to IPR reform compared to industries that rely less heavily on patents. Mansfield (1995) argues that the strength of the IPR regime can be more important for industries such as drugs, cosmetic and healthcare products; chemicals; machinery and equipment; and electrical equipment. The same set of industries is also emphasized in Baldwin (1996). Most of the existing empirical IPR-trade papers incorporate this distinction between patent-sensitive and patent-insensitive industries in their empirical specification.12
In our empirical specification, we will capture this by following the industry classification of Branstetter et al. (2011, p.7), which is consistent with the classifications of other related studies, such as Maskus and Penubarti (1995) and Javorcik (2004), among others. To simplify labeling, we will henceforth refer to patent-sensitive industries as high-tech and patent insensitive industries as low-tech industries. Table 2 provides the complete breakdown of high-tech and low-tech industries.
Finally, it is also reasonable to expect that, in high-tech sectors, the response of intra-industry offshoring to IPR reform is larger than the response of broad offshoring to IPR reform. What could drive this? Intellectual property of a typical high-tech industry is more likely to be embedded in its intra-industry intermediates. Hence, once IPR reform takes place, firms in the high-tech industry are more likely to pursue offshoring of those intra-industry intermediates relative to offshoring of intermediates from the broad set of industries
To see this, consider an auto maker operating in industry 20 (hightech), producing some of its engine parts in-house domestically and importing some of them from its affiliate in China. Assume also that the automaker purchases GPS devices from industry 21 (high-tech) and steel from industry 6 (low-tech) both from domestic producers and third party producers in China. We conjecture that our auto maker, and for that matter a typical producer, would be relatively more familiar with the production technologies and also business strategies related to its own-industry intermediates (i.e., the engine in our example) compared to those related to the intermediates coming from other industries (i.e., GPS and steel in our example). Therefore, when China reforms its IPR policy, the automaker is more likely to pursue offshoring opportunities in its engine parts to China (either through its affiliate or a Chinese producer) in comparison to offshoring of the intermediate products from the other industries combined. Moreover, the response of broad offshoring measure to IPR reform is expected to be relatively diluted since broad offshoring contains lowtech industries that are less-sensitive to patent reform. To investigate whether intra-industry and broad offshoring intensities in high-tech industries respond to IPR reform differently, we construct both of these measures and use them in our regressions as the dependent variable.