Intellectual property rights, distance to the frontier, and R&D: evidence from microdata

Using firm-level data for 28 transition countries in Eastern Europe and Central Asia over the 2002–2009 period, this paper analyzes whether differences in the functioning of intellectual property rights (IPRs) systems—measured along various dimensions, including de facto enforcement and de jure patent and copyright protection—affect a firm’s propensity to engage in R&D activities. We estimate the likelihood of engaging in R&D as a function of a firm’s distance from the relevant technological frontier and of the country’s IPRs system. In line with previous literature, we find that (i) firms closer to the technological frontier are more likely to engage in formal R&D activities and (ii) stronger IPRs systems, because they protect returns from R&D activities from imitation, are more effective in promoting investment in R&D. Moreover, when the strength of an IPRs system interacts with the distance to the technological frontier, its effect is no longer significant, ceteris paribus. This is the most striking result of our study. When we examine the semi-elasticity of the strength of IPRs with respect to a firm’s distance from the technological frontier, a weak yet positive impact on the firm’s likelihood to engage in R&D is observed for very inefficient ones, whereas this becomes negative and weakly significant when firms are on the technological frontier.