Intellectual Property Rights and Bilateral Intra-Industry Trade Flows: An Intuitive Framework

Abstract

The intention of this paper is to provide "for the first time" a conceptual framework on how a level of IPRs is linked to bilateral intra-industry trade (IIT) flows. The proposed analysis of the relationship between IPRs and IIT of this paper is couched in a simple and intuitive framework that answers a positive question of how intellectual property rights (IPRs-) induced market expansion, and market power effects are related to the horizontal and vertical intra-industry trade flows. The proposed intuitive framework introduces a demand-side approach and a supply-side approach in explaining the link between IPRs and intra-industry trade (IIT) flows. The supply-side approach explores how a country’s IPRs affect its own exports (supply). In contrast, the demand-side approach examines the effect a country’s IPRs have on its own imports (demand). The presented conceptual framework of this paper provides intuitive evidence that in determining bilateral intra-industry trade (IIT) flows in a two-country world, the demand approach posits that bilateral trade flows may increase or decrease due to improvements in IPRs in the importing destination country, while the supply-side approach states that the bilateral trade flows may also increase or decrease due to strong (high) IPRs in the exporting country. Furthermore, the simultaneous effects of both supply and demand on bilateral intra-industry trade flows are simultaneously needed in explaining the effects of strengthening the level of the IPRs on bilateral intra-industry trade flows (IIT).