Product Lifetime: A Determinant of Entry Decision by Multinational Firms
Existing literature on the role of intellectual property rights (IPR) protection has painted an ambiguous picture about the size of the effects of stronger IPR on the choice of the multinational firm’s mode of entry into foreign market. Some empirical studies suggest that improving IPR in recipient countries will have higher effect on licensing, while others found larger effect on foreign direct investment (FDI). The available indices of protection only measure country-wide characteristics and do not pick inter-industry variation, while the data show significant differences in losses of US multinationals by industry. In this paper, we introduce and empirically estimate a new dimension to multinational firm’s decision to enter a foreign market—a parameter that reflects the length of positive profits that the firm can earn in various industries. We dub the estimated parameter a perceived time of rent extraction. The introduction of the time parameter allows us to differentiate the effects of stronger IPR on the entry modes in different industries and reconcile the ambiguity results in the literature. Particularly, strengthening IPR has higher impact on FDI in industries with shorter rent extraction time, while licensing is affected more than FDI in industries with longer rent extraction time.