IP Rights in Vulnerable Markets

Firms work around weak IP laws to safeguard ideas. ISB’s Anand Nandkumar breaks down their approach.

How do multinational firms use project selection and organisational strategies to protect R&D in countries with weak Intellectual Property Regimes?

International trade has grown alongside a surge in the number of multinational firms (MNFs) conducting research and development overseas, particularly in India and China. According to a survey by The Economist,  over 80% of the new research and development (R&D) centres set up by Fortune 1000 firms are in these two countries. The trend persists despite concerns over weak IPR regimes, driven largely by the need to access talent and knowledge in these regions. In the same survey, 84% of managers indicated that a weak IPR regime was a major impediment to conducting R&D in these countries.

So, how do MNFs conduct R&D in host countries like India and China despite concerns about their inability to protect innovations?

Managing R&D offshoring in weak IPR regimes

One of the ways in which MNFs manage it is by carefully selecting projects that involve knowledge which is less likely to be leaked to competitors. To determine when IPR matters for offshoring R&D, we first examined whether projects sent to countries with weak IPR differ from those offshored to nations with stronger legal protections. We studied whether the strength of a country’s IPR affects offshoring R&D activity, and if so, for which kinds of activities. We distinguished between home projects, whose outcomes are likely to be used in the country where the MNF is headquartered, and host projects, whose results are more likely to be used in the host country. Since leakage typically occurs when key inventors are hired by rivals, it is essential to assess the extent to which rivals in the host country can exploit an MNF's ideas.

Our research concludes that MNFs can offshore R&D to destinations like India and China despite the relatively higher risk of knowledge leakage, thanks to project selection and organisational mechanisms that protect both patentable and unpatentable knowledge. 

If rival firms in the host country are more likely to expropriate and utilise ideas from host projects than from home projects—often targeted at more sophisticated customers in the MNF’s home country — then home projects should be less prone to leakage. It would be reasonable to assume, therefore, that such projects are less affected by the strength of the host country’s IPR.

Using the number of inventors from the host country who participated in innovation as a proxy for the extent of offshoring, we examined whether the number of inventors from an offshore location was lower on projects prone to leakage compared to those that were not. We also compared projects offshored to countries with strong IPRs (such as the UK and Germany) with those offshored to countries with weak IPRs (such as India and China).

Impact of IPR on nature of R&D project

Our results suggest that the strength of the IPR in a host country matters only when the outcomes of the offshored R&D effort are likely to be used in the host country. When outcomes are likely to be used in the MNF’s home country, IPR strength does not matter. For example, Texas Instruments (TI) set up an R&D centre in India in the 1980s, when the country’s patent laws were weak. Our results, supported by interviews with managers, suggest that it was practical for TI to offshore R&D to India if the results were intended for use in the US, where the risk of IP leakage to competitors was low.

We further explored whether the strength of IPR in the host country influenced the nature of the R&D projects offshored there. Specifically, we examined whether projects offshored to countries with weak IPR regimes systematically differed in two ways — the extent to which they built on prior knowledge belonging to the same MNF or involved internal knowledge-based projects, and the extent to which the output of the R&D effort was likely to be firm-specific.

While MNFs are less likely to offshore internal knowledge-based R&D projects, they are more inclined to offshore firm-specific projects to countries with weak IPR. This is crucial for understanding how MNFs manage to offshore R&D to destinations like India and China through sophisticated project selection mechanisms. 

Mitigating knowledge leakage

In another project, we explored additional organisational mechanisms that MNFs use to mitigate the threat of knowledge leakage when offshoring R&D to countries with weak IPR regimes. Our focus was on understanding the organisational mechanisms firms use to protect unpatentable knowledge from leaking to rivals in host countries. Through interviews with managers in India, China and the US, as well as survey data from R&D centres in India, we identified six organisational mechanisms that help MNFs protect unpatented knowledge.

Our research shows that MNFs adopt a variety of organisational mechanisms to prevent or delay leakage when the host country’s legal IPR is weak. This provides another strategy through which MNFs can offshore R&D to destinations like India and China despite the relatively higher risk of knowledge leakage. These studies demonstrate that MNFs use a combination of project selection and organisational mechanisms to compensate for weak legal IPR in host countries.

While it is widely believed that MNFs may be unwilling to conduct offshore R&D in locations prone to leakage, our research suggests otherwise.

The organisational and project selection mechanisms discussed earlier give MNFs the confidence to prevent both patentable and unpatentable knowledge from leaking to rivals. As a result, offshoring R&D becomes feasible even when legal mechanisms to protect knowledge are weak or non-existent. This suggests that strategies to protect knowledge that are effective in the West, where legal institutions are relatively stronger, may need to be rethought or adapted when MNFs operate in the East.

Disclaimer: This article was first published in ISBInsight on March 29, 2016. It has been repurposed to be made available here.

Author: ISB Editorial Team