Patent Enforcement, Innovation and Welfare

This paper analyzes how the Southern patent enforcement affects the Northern firm's choice of licensing, subsidiary production or exports for serving the Southern market, and the innovation rate in the North and ultimately the welfare in the South. We show that for imperfect patent enforcement, licensing contract leads to more innovation in the North relative to subsidiary or exports. When both subsidiary and exports are very costly options, no patent enforcement in the South is best for the South. However, when either subsidiary operation or exports can be organized cheaply, the Southern government chooses some positive degree of patent enforcement. We also establish that strengthening of patent enforcement in the South may lead to more licensing and less subsidiary operations or exports.