Relationship-Specific Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers
Quaderni - Working Paper DSE N° 985
25 Pages Posted: 13 Jan 2015
Date Written: January 12, 2015
Abstract
This paper examines the impact of intellectual property rights (IPR) enforcement on multinationals' choice of input suppliers and industry profits in a host economy. The framework consists of suppliers with heterogeneous capabilities who must engage in a relation-specific investment to customize intermediate inputs upon a transfer payment by final producers.
An outsourcing contract with better technologically-endowed suppliers requires a lower transfer and generates a higher surplus. Stronger IPR enforcement leads firms to self-select into better quality suppliers on average by reducing their outside option. Weak legal institutions instead make it possible for a larger range of suppliers, including the less capable ones, to form partnerships by granting them a larger outside option. A better IPR environment is more likely to harm lagging countries where the technology distribution is characterized by less capable suppliers.
Keywords: International outsourcing, Supplier heterogeneity, Relation-specifi c investment, Intellectual property rights enforcement, Outside option, Customization, Technological capability
JEL Classification: O34, L24, F21, F23, O32, L22, D23
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