Negative Effects of Intellectual Property Protection on Entry into Foreign Markets:Internal versus External Supply Decisions by Large Japanese and US Pharmaceutical Firms

Abstract

　　The existing literature has noted the negative effects of intellectual property protection (IPP) on trade volume when the market power effect dominates the market expansion effect. Given that both effects increase profits, IPP may induce entry without ambiguity. However, using product-level entry data for large pharmaceutical firms, we find that IPP has a negative impact on market entry. This suggests that IPP does not simply present companies with profitable opportunities. As IPP may influence firm entry strategy, we further investigate the mode of entry, whether internal (e.g., export or direct investment) or external (e.g., licensing or strategic alliances). The results indicate that internal supply is negatively related to IPP, whereas IPP positively affects external supply. This implies that firms facing infringement risk, fierce market competition, or a developed technology market in stringent IPP countries often rely on the external channel as their mode of entry.

JEL Classification Numbers:F14, O34, L24.