Intellectual Property Rights and North-South Trade in a Differentiated Duopoly with Process Innovation

This paper examines models in which the Intellectual Property Rights (IPR) of Northern firms are protected and not protected in the South within a differentiated duopoly with process innovation. These models extend the work of Chin and Grossman (1990), who considered the case of perfect substitutes, by exploring different degrees of horizontal differentiation between goods. It is shown that (i) when two goods are substitutable but not perfect substitutes, the South can achieve higher national welfare when IPR remain unprotected, even if its share in world consumption is substantial, compared to when a duopoly outcome occurs under protection or when strategic predation occurs under protection. Moreover, in scenarios where two goods are substitutable but not perfect substitutes, the South can attain greater national welfare when IPR are unprotected compared to when the North would establish a monopoly position under protection, even in cases where the efficiency of the R&D process is high, provided that the substitutability of the goods is low; (ii) when two goods are substitutable but not perfect substitutes, the North can achieve greater national welfare when IPR of Northern firms are not protected in the South; and (iii) in situations where the goods are sufficiently differentiated, the enforcement of foreign IPR in the South does not result in enhanced global efficiency, even with substantial productivity gains through R&D.