After several years of research in the field of international trade and intellectual property rights, Hamid Beladi, UTSA economics professor and associate dean of research for the UTSA College of Business, and his co-authors have determined that if a developing country strengthens its intellectual property rights policies, its local firms will be in a better position to specialize in and accept international research and development (R&D) contracts.
This finding fills a gap in the international trade policy literature by offering a new perspective on the importance of intellectual property rights affecting R&D activities in developing countries. The current literature discusses only the need for developing countries to strengthen their intellectual property rights to support local innovation, economic growth and technology.
In recent decades, increasing globalization has created an environment in which businesses rely on suppliers located in different countries to assist them with different stages of production. Today’s multinational firms are under increasing pressure to reduce their R&D costs. In the same way that a wireless phone company based in the United States might outsource all or part of its customer service to a developing country to save costs, large multinational firms now are outsourcing the R&D phase of their new innovations to local firms in developing countries.
In the pharmaceutical industry, for example, the largest multinationals, such as Merck, Eli Lilly and Johnson & Johnson, are partnering with firms in developing countries such as India, China and Brazil to carry out sophisticated drug research and clinical testing.
The information technology industry also has witnessed the rapid expansion of offshore R&D outsourcing. Many multinational IT firms, including Dell, Motorola and Philips, are not only purchasing wireless phones from Asian developers but also many of the newest services available for mobile use.
“The question we wanted to answer was how these local firms could make adjustments to their intellectual property rights policies to be better prepared to work with multinational firms without getting taken advantage of,” said Beladi. “Ultimately, our theory supports both the local and multinational firms in this era of internationalization of R&D activities.”
Beladi and his co-authors suggest that strengthening intellectual property rights can have the following benefits on developing countries:
- Both local firms and multinationals will begin to specialize in one stage of R&D, creating a “specialization effect”
- Local firms that once were considered imitators or a threat to multinational firms will switch their position and become innovators or subcontractors of multinationals.
- It increases the chance multinationals will subcontract R&D with local firms. This “subsidizing effect” is beneficial to both local and multinational firms.
- Local firms will move into a better bargaining position and multinational firms are able to save significant costs by contracting their R&D to local firms.
- Multinationals may increase their Foreign Direct Investment in a developing country by adding offshore R&D subsidiary companies within the developing country.
The researchers’ findings will be forthcoming in a leading academic journal. Beladi hopes to be able to use the findings to influence policymakers in developing countries.
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