This paper provides a theoretical foundation to explain the empirical ambiguity in the nexus between intellectual property rights (IPR) protection, FDI flow and ownership structure. First, to address the ambiguity of the impact of IPR on FDI flow, FDI in vertically-related production stages is considered. The multinational enterprise (MNE) with sophisticated technology sets up a subsidiary in the host country to produce and sell final goods there. The MNE obtains intermediate goods either by in-house production or outsourcing. By considering technology spillovers from MNE to local rivals, this paper finds that IPR enforcement in different tiers has different effect on FDI flow. If IPR enforcement is mostly placed on the upstream tier, then stronger IPR protection increases FDI flow because it raises MNE’s incentive to build an upstream affiliate (self-sourcing). However, if IPR enforcement is alternatively placed mostly on the downstream tier, stronger IPR raises the MNE’s likelihood of outsourcing and thus has negative effects on FDI flow. Second, in contrast to literature, this paper finds that the likelihood of equity joint venture (JV) with an existing local firm is not positively correlated with IPR strength. It is assumed that wholly-owned investment and JV are indifferent in technology spillovers when IPR protection is entirely absent or is ultimately strong. Otherwise, JV results in higher technology spillovers. This paper argues that the MNE prefers wholly-owned investment to JV when IPR strength is sufficiently strong. Aforementioned results are supported by an empirical study, which employs the data from Taiwanese multinational manufacturing enterprises in 2006.
