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The authors study the extent to which a country's strength of Intellectual Property Rights (IPR) protection mediates knowledge spillovers from Foreign Direct Investment (FDI). Following the opposing views in the IPR debate, they propose a negative effect of IPR strength on unintentional horizontal (intra-industry) knowledge diffusion, and a positive effect on intentional vertical (inter-industry) knowledge diffusion. Using a unique firm-level dataset of large, publicly traded firms in 22 (mostly) developed countries, they find partial support for these expectations. Strong IPR indeed reduces horizontal knowledge diffusion, while it stimulates backward (to suppliers) knowledge diffusion. Somewhat unexpectedly however, they also find that forward (to customers) knowledge diffusion decreases with IPR strength.
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