My dissertation book project Closing the Institutional Gap: Protecting Technology in Foreign Direct Investment explains why and how multinational corporations (MNCs) shape and use domestic institutions in countries with relatively weak rule of law to protect their investments in technology. In such contexts, existing explanations focus on international institutions to provide firms with external sources of protection from host state expropriation. By contrast, I argue that international institutions offer limited coverage for foreign firms. Instead, firms seek to enhance domestic institutions in host countries to protect their investments.
Technology and know-how are major drivers of economic growth and national competitiveness and are prized possessions of nation states. Yet, despite significant risks of losses associated with their technology investments, firms from developed countries continue to invest substantial amounts in developing countries where protections from the rule of law are weak. In such settings, how are their investments protected? I argue that MNCs seek protection for their assets through a “two-level bargaining” strategy that leverages home government strengths and host government channels for institutional change.
At the state-to-state level, home governments motivated by MNC demands negotiate with host states for strengthened IP protection. At the firm-to-state level, MNCs use political strategies to engage directly with the host state to seek better property protection. Through an original dataset of US government engagement with foreign countries on intellectual property issues and related industry inputs, I show that the strength of the home country channel is conditional on the degree to which a home state has economic leverage over a host state. To assess the firm-to-host government channel, I have collected an original dataset of firm political strategies in China to test whether MNC strategies lead to better outcomes in China’s IP courts. The quantitative analysis is supplemented by semi-structured interviews I conducted with business managers, government officials, and lawyers on this topic.
Further, I show that MNC strategies reshape domestic laws and institutions. Leveraging cross-country technology investment data and an instrumental variable method, I provide robust evidence that foreign technology investments from a home country is associated with higher levels of intellectual property protection in a host country. I illustrate how private actors can act as institutional entrepreneurs using a case study of General Electric’s activities in China. I distinguish between de jure institutional change in terms of IP laws, and de facto institutional change in terms of enforcement levels, and empirically show that the more immediate effects of state-to-state bargaining are limited to de jure effects. Overall, foreign direct investment “closes the gap” between the levels of institutions of home and host countries, thereby contributing to rule of law in the latter.
Manuscript available upon request
University-wide winner, 2020 GAPSA-Provost Fellowship Award for Interdisciplinary Innovation
The Teece Award for empirical interdisciplinary dissertation research, UPenn