A Welfare analysis of global patent protection in a model with endogenous innovation and foreign direct investment

Abstract

This paper constructs a North–South quality-ladder model in which foreign direct investment (FDI) is determined by the endogenous location choice of firms, and examines analytically how strengthening patent protection in the South affects welfare in the South. Strengthening patent pro-tection increases the South’s welfare by enhancing innovation and FDI, but it also allows the firms with patents to charge higher prices for their goods, which decreases welfare. However, the model shows that the former positive welfare effect outweighs the latter negative effect. Moreover, intro-ducing the strictest form of patent protection in the South, that is, harmonizing patent protection i