Intellectual property rights and foreign direct investment: A welfare analysis

•The purpose is to examine how intellectual property rights (IPR) protection affects innovation, foreign direct investment (FDI), and welfare analytically.•The model is a North-South quality-ladder model incorporating the exogenous imitation of technology and subsidy policies for both R&D and FDI.•For the interior steady state to be stable, either of the R&D or FDI subsidy rates must be positive.•Strengthening IPR protection promotes both innovation and FDI.•Strengthening IPR protection can improve welfare if initial IPR protection in the South is weak.

This paper examines how intellectual property rights (IPR) protection affects innovation and foreign direct investment (FDI) using a North-South quality-ladder model incorporating the exogenous and costless imitation of technology and subsidy policies for both R&D and FDI. We show that for the interior steady state to be stable, either R&D or FDI subsidy rates must be positive. Our findings also indicate that strengthening IPR protection promotes both innovation and FDI. Moreover, a strengthening of IPR protection can also improve welfare if the initial IPR protection in the South is weak and the R&D subsidy rate is not too high.