Intellectual Property Rights and the productivity effects of MNE affiliates on host-country firms

• IPR protection moderates the productivity effects of MNEs on host-country firms.
• Local MNE suppliers are positively affected through increased knowledge transfers.
• Local MNE customers are negatively affected through increased MNE monopoly power.
• Low-IPR host countries benefit from MNEs through a superior input effect.
• High-IPR host countries with strong anti-trust policies benefit most from MNEs.

In this paper we investigate the impact of increased Intellectual Property Rights (IPR) protection on the productivity effects that MNE affiliates exert on local host-country firms. Conceptually, we argue that IPR protection has two opposing effects: On the one hand, it weakens the productivity effects through reduced knowledge spillovers and increased monopoly power of MNE affiliates. On the other hand, it strengthens productivity effects through increased knowledge sharing (with local suppliers) and higher quality products and processes produced and used by MNE affiliates. Given these opposing forces, the net outcome is an empirical matter. Using a sample of 81,299 local firms in 17 countries, we find that increased IPR protection strengthens backward (to supplier) productivity effects and weakens forward (to customer) productivity effects. These moderating effects of IPR protection are only observed in industries that strongly rely on patents to protect intellectual property. The results suggest that increased IPR protection leads to increased knowledge sharing with local suppliers, yet also to increased monopoly power over local (corporate) customers.