Intellectual Property Rights Enforcement in Imperfect Markets

We analyze intellectual property rights (IPR) enforcement in a developing country where information asymmetry between a foreign multinational and domestic consumers gives rise to the need for signaling by the multinational. The signaling distorts the multinational's entry decision even when IPR enforcement is perfect. Our analysis derives implications consistent with empirical observations: better IPR enforcement encourages the multinational's entry but exhibits an inverse U-shaped relation with their incentives to develop new technologies. Compared with perfect enforcement, moderately weak IPR enforcement, which does not fully deter copycats from stealing the multinational's technology, canbenefit boththe host country andthe multinational. Our analysisthus sheds new light into IPRpolicies in developing countries and cautions policy implications drawn from empirical studies.