IPR at Host Locations and the Internal Division of Innovative Labor within Multinational Enterprises

Drawing from the literature on how patents influence the efficient division of labor between firms, we study how the strength of intellectual property regimes (IPRs) at the host destination where R&D is offshored by a multinational enterprise (MNE) influences the division of innovative labor between the MNE’s headquarters and its international subsidiary. We argue that the internal division of innovative labor in an MNE is influenced by efficiency considerations, such as differences in the cost of talent across locations, and the potential threat of IP leakage due to weak IPRs at the host destination. We find that a stronger IPR at the host destination increases the participation of that country’s inventors. This IPR effect is greater when the R&D project is more relevant for the host market than when it is more relevant for the market of the MNE’s headquarters.