Edwin L.-C. Lai

International intellectual property rights protection and the rate of product innovation

Abstract Using a dynamic general equilibrium model of the international product cycle we found that the effects of strengthening intellectual property rights protection (IPP) in South depend cricially on the channel of production transfer from North to South. Stronger IPP in South increases the rate of product innovation, production transfer and Southern relative wage if foreign direct investment is the channel of production transfer, but has opposite effects if production is transferred through imitation. Stronger IPP can be more broadly interpreted as any incentive given by South to encourage Northern FDI.

The North's Intellectual Property Rights Standard for the South?

We build a multi-sectoral North-South trade model to analyze international intellectual property rights (IPR) protection. By comparing the Nash equilibrium IPR protection standard of the South (the developing countries) with that of the North (the developed countries), we find that the former is naturally weaker than the latter. Moreover, we show that both regions can gain from an agreement that requires the South to harmonize its IPR standards with those of the North, and the North to liberalize its traditional goods market. This demonstrates the merits of multi-sectoral negotiations in the GATT/WTO.

Intellectual property rights protection and endogenous economic growth

The main purpose of the paper is to examine the impact of intellectual property rights (IPR) protection on economic growth and welfare. To achieve this aim, we make use of an expanding-variety-type RD whereas in the case of under-protection, the welfare losses can be substantial. ? 2002 Elsevier Science B.V. All rights reserved.

Adjustment costs and gradual trade liberalization

Abstract This paper analyzes dynamic bilateral trade liberalization between two large countries. Trade liberalization causes the importable sector of each country to shrink and thereby causes reallocation of labor between sectors. Assuming that each moving worker must pay a fixed adjustment cost, a country has to bear a total adjustment cost which is linear in the amount of moving workers. We derive the most-cooperative, self-enforcing trade liberalization path, and find that in general trade liberalization is gradual. We also find that trade adjustment assistance that compensates workers for relocation out of the protected sector will accelerate the pace of trade liberalization.

Credit Constraints, Quality, and Export Prices: Theory and Evidence from China

This paper examines the relationship between the credit constraints faced by a firm and the unit value prices of its exports. The paper modifies Arkolakis’s (2010) model of trade with heterogeneous firms by introducing endogenous quality and credit constraints. The model predicts that tighter credit constraints faced by a firm reduce its optimal prices as its choice of lower-quality products dominates the price distortion effect resulting from credit constraints. However, a competing theory based on the alternative assumption that quality is exogenous across firms would predict completely opposite results: Prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data, Chinese firm-level data from the National Bureau of Statistics of China (NBSC), and Chinese customs data strongly supports the predictions of the endogenous-quality model. Moreover, the predictions of the exogenous-quality model are supported by using quality-adjusted prices in regression analysis. In addition, we confirm the mechanism of quality adjustment: firms optimally choose to produce lower-quality products when facing tighter credit constraints.

The product cycle and the world distribution of income A reformulation

Abstract This paper uses a North-South trade model with skilled and unskilled labor to study the effect of labor supply on the world distribution of income. The world rate of innovation is endogenized. An increase in the supply of unskilled labor in a country lowers its steady-state relative wage (which is consistent with Krugmans result), while an increase in supply of skilled labor in a country raises its steady-state relative wage (which is consistent with Grossman-Helpmans result) when the elasticity of substitution between goods is sufficiently large. Both Krugmans and Grossman-Helpmans models are special cases of this unified model.

Protection of trade for innovation: the roles of Northern and Southern Tariffs

Abstract Using a North–South trade model with innovation and imitation, we investigate the interaction of intellectual property rights (IPR) protection and trade protection. We show that unlike a Southern tariff, a Northern tariff supplements IPR protection and is not necessarily a beggar-thy-neighbor policy. The globally optimal Northern tariff increases as IPR protection in the North or the South decreases. Global welfare may rise as Northern tariff increases, but necessarily declines as Southern tariff increases. This suggests that pushing for freer trade in the South is more urgent than in the North in innovation-intensive sectors where IPR protections are weak in both regions.

International Protection of Intellectual Property: Corrigendum

In our recent paper (Grossman and Lai, 2004), we studied the incentives that governments have to protect intellectual property in a trading world economy. We considered a world economy with ongoing innovation in two (or more) countries that differ in market size and in their capacity for innovation. In Section IV, we compared the strength of patent protection in an efficient world agreement with harmonized rates of protection to the strength of patent protection in a Nash equilibrium with policies chosen by two welfaremaximizing governments. We claimed in Proposition 5 that, as long as the elasticity of substitution between human capital and labor in the research activity is no greater than one, then efficient harmonization requires a strengthening of patent protection in both the North and the South, and that the North must gain while the South may gain or lose. Unfortunately, there was an error in our proof. It is correct that, for all elasticities of substitution no greater than one ( 0), efficient harmonization requires a strengthening of patent protection in the South and in the world as a whole. Moreover, patent protection in the North must be stronger in an efficient agreement with harmonization than in the Nash equilibrium if the elasticity of substitution between human capital and labor in R&D is equal to one ( 0). However, if the elasticity of substitution between labor and human capital is less than one, efficient harmonization may require a weakening of patent protection in the North. When MN MS, HN HS, and 0, a sufficient condition for the North to gain from efficient harmonization is HN / HS MN / MS.

Competition for foreign direct investment in the product cycle

Abstract The paper develops a dynamic model of the North–South product cycle, in which Northern firms continuously transfer production to two Southern countries through foreign direct investment (FDI). The technologies of Northern multinationals are eventually imitated by Southern firms. The competition among Southern countries for FDI through R&D, trade, FDI and intellectual property rights policies are examined. A Southern country’s subsidy to attract inward FDI benefits its production workers at the expense of those in other Southern countries. However, a Southern country’s import tariffs against the North benefit the production workers of all Southern countries.

Invoicing Currency in International Trade: An Empirical Investigation and Some Implications for the Renminbi

To play the role of a unit of account, an international currency must be a currency widely used to invoice international trade. This paper investigates the determinants of the use of currency in trade invoicing and evaluates the potential of the renminbi for the denomination of cross-border transactions in the Asia-Pacific region. In particular, we develop a simple model and establish the evidence showing that there is a convex relationship between the invoicing share of a currency and the economic size of its issuing country because of a coalescing effect and thick market externalities. We use the ratio of the foreign exchange turnover share of a currency to the global GDP share of its issuing country as a proxy for the size of thick market externalities, which we argue reflects capital account openness, financial development, and exchange rate stability of a country. This ratio is very small for the renminbi compared with that for established international currencies. Our quantitative analysis suggests that the renminbi can be a major invoicing currency in the region only if China sufficiently opens up its capital account and liberalizes its financial sector. We also draw a parallel between the renminbi and the euro and forecast the invoicing share of the renminbi in the Asia-Pacific region if the renminbi market attained the same degree of thickness as the euro.