Foreign Direct Investment Cycles and Intellectual Property Rights in Developing Countries

This paper develops a quality ladder model in which the technology gap between the North and the South is endogenously determined. Foreign direct investments (FDI) occur cyclically: New FDI arrives if and only if the technology gap reaches some threshold. A stronger intellectual property rights (IPR) in the South discourages imitation and reduces the FDI cycle length. A smaller market size and more imitating firms in the South tend to enlarge the FDI cycle length. The social welfare of the South is decreasing in the FDI cycle length, but is decresing in IPR strength given cycle length. The optimal IPR strength balances these two effects, and it is non-monotonic in the market size and increasing in the number of imitating firms. JEL Classification: F21; O31; O34