Entry, reputation and intellectual property rights enforcement

Abstract

We examine how reputation concerns induce a multinational to partly withhold its entry into a developing country under weak intellectual property rights (IPR) enforcement. Equilibrium IPR violations are shown to arise only in the presence of such concerns. Holding constant a multinational's incentive to innovate, better IPR enforcement encourages entry but reduces social welfare. The multinational's incentive to innovate may be inversely U-shaped in the strength of IPR enforcement. If timed properly, however, stronger IPR enforcement can foster innovation without compromising social welfare. Testable implications concerning observable IPR violations are derived.