Discussion Paper

No. 2016-5 | February 03, 2016
IPR Protection and Optimal Entry Modes of Multinationals


The present paper develops a model to analyze the relationship between modes of entry of a Multinational Corporation (MNC) in a vertically differentiated market in a Less Developed Country (LDC) to the Intellectual Property Rights (IPR) protection policy adopted by the LDC government. The MNC has two options of entry: fragment production structure and shift assembling unit to LDC, or shift entire production to LDC with full technology transfer. The MNC incurs investment to control the copying of the original product by a commercial pirate in the two modes of entry. The results show that the optimal anti-copying investment is inversely related with the IPR protection rate chosen by the LDC government. The government may or may not monitor in equilibrium. However, government monitoring may not result in complete deterrence of piracy. Further, the MNC shifts complete production to LDC with full technology transfer if the transport-cost of sending semi-finished product from developed country to LDC is above a critical level, otherwise a fragmented mode of entry takes place with assembly-line FDI in LDC.

JEL Classification:

L11, O33, O34, O38


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Cite As

Tanmoyee Banerjee and Nilanjana Biswas (2016). IPR Protection and Optimal Entry Modes of Multinationals. Economics Discussion Papers, No 2016-5, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-5

Comments and Questions

Anonymous - Invited Reader Comment
March 03, 2016 - 08:24

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Anonymous - Invited Reader Comment 2
March 14, 2016 - 08:08

The paper by Banerjee & Biswas addresses a very important issue: the relationship between government’s choice of IPR protection and the optimal mode of entry by an MNC in a vertically differentiated market, with the possibility of piracy. The paper is well written with well thought out arguments. The mathematics ...[more]

... is rigorously worked out . The structure of the model is complex, which gives rise to multiple subgame perfect Nash equilibria. However, the authors provide intuitive explanations for most of the results, which makes the paper very much accessible to the reader. All possible equilibria are discussed in great detail. The authors also carry out a numerical exercise to give possible parameter values for which we get alternative regimes. I found some results very interesting. For instance the result that if the pirate’s quality is above a certain level, his profit will fall with further improvement in quality opens up very interesting possibilities. It implies the pirate will deliberately keep his quality below a certain level to reduce competition and choose serve the lower end of the market. I have one suggestion. In several results a high value of θh seems to play a very important role, but it is not very clear why. The authors should explore the intuition behind the role of θh in more details. This will enrich the paper.

Tanmoyee Banerjee - Reply to Invited Reader Comment 2
March 16, 2016 - 08:19

see attached file

Anonymous - Referee Report 1
March 17, 2016 - 08:14

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Tanmoyee Banerjee - Reply to Referee Report 1
March 21, 2016 - 08:44

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Anonymous - Referee Report 2
March 29, 2016 - 09:02

see attached file