Doing R&D in Countries with Weak IPR Protection: Can Corporate Management Substitute for Legal Institutions?

Multinationals are increasingly conducting R&D in countries such as India and China, where intellectual property rights (IPR) protection is still very weak. This paper examines this puzzle. The argument is that weak IPR leads to low returns to innovation and thus low prices of innovative talents. Multinational firms who possess not only the capabilities to utilize these talents, but also the internal organizational structures to protect the intellectual properties will therefore find it attractive to conduct R&D at those locations. Following a series of interviews in major multinational R&D centers in China, a stylized model of the above is presented to capture the interaction between firm strategies and institutional environment. Empirical findings from a sample of 1567 US-headquartered innovating firms are consistent with the hypotheses that (i) technologies developed in weak IPR countries are used more internally, and (ii) firms doing R&D in weak IPR countries have tighter internal technology structures. The results suggest that firms are using strong internal linkages to substitute for the inadequate external institutions. And by doing so, they can take advantage of the arbitrage opportunities presented by the institutional gaps across countries.