Abstract

Many countries have strengthened their patent laws over the past 20 years as they have implemented their WTO intellectual property obligations. This benefits American firms, many of which lobbied for the establishment of enforceable intellectual property rights within the WTO framework. It is often assumed to be unambiguously beneficial for American workers at these firms. However, it may be that American workers who produce goods embodying patented technology were better protected when the level of patent protection offered in the U.S. was higher than that offered in countries with lower production costs. The rationale is straightforward – firms that rely on patent protection may have been more inclined to produce domestically when producing overseas was more likely to result in intellectual property theft and competition from infringing goods. As intellectual property protection strengthened in countries with lower production costs, outsourcing may have become more feasible.This paper tests the hypothesis that U.S. firms have been more likely to outsource production of patent-intensive intermediate goods from countries with stronger patent laws. A series of regressions demonstrate that this was indeed the case for three broad patent-intensive industries between 1997 and 2010, a time when both the strength of intellectual property rights and outsourcing were on the rise. Controlling for variables related to factor costs, gravity model determinants, and institutional quality, as well as time, industry, and country fixed effects, an increase in a country’s score on the Ginarte-Park Patent Index was associated with a significant increase in U.S. imports of intermediate goods from that country. The degree to which patent protection affected these trade flows differed by industry. As individual countries adjusted the level of patent protection they provided during this time, firms in those countries found themselves shipping more intermediate goods from these industries to the U.S.