Firms can protect R&D investment in risky intellectual property environments, study finds

LAWRENCE — Conventional wisdom deems that firms investing in research and development, or R&D, activities in countries lacking strong intellectual property rights protection are exposing themselves to unnecessary risk.

"In our research, we discover a scenario that allows us to say 'not always,'" said Minyoung Kim, assistant professor of strategic management and international business in the University of Kansas School of Business.

According to his recent research, there are circumstances under which these R&D activities can be protected, despite the quandary that firms typically face.

"Many countries with weak intellectual property rights protection can offer firms excellent and rare resources such as rainforests or ideal populations in which to study specific diseases. However, these firms need to be able to appropriate or capture the value from their investments," he said. "We see firms moving forward with such investments every day, but how do we make sense of it when these same resource-rich environments can lead to intellectual property leakage and imitation by competitors?"

Examples of firms moving forward in entering countries that do not have strong intellectual property rights protection include the American pharmaceutical firm Pfizer, which has invested $14 million in Chile to launch the Center of Excellence in Precision Medicine that focuses on the development of new genome-based diagnostic technologies for cancer. Additionally, Apple is investing $1 billion in a new R&D center in Vietnam and joins other high-profile firms already in the country, such as Samsung, Hewlett-Packard and Panasonic.

In their recent study, titled "Fearlessly Swimming Upstream to Risky Waters: The Role of Geographic Entry in Innovation," published in the Journal of Management Studies, Kim and his team studied the activities of 142 leading global pharmaceutical firms for the period of 1997 to 2006.

The researchers looked at the geographic entry patterns of the companies' upstream R&D activities and their downstream commercialization activities, such as manufacturing, marketing and distribution channels for their innovative products.

The team found that when firms operate at the regional level in their downstream commercialization activities, the complementarity between their upstream R&D activities and the downstream commercialization activities can assist in the protection of the firm's upstream R&D activities.

For example, marketing and selling pharmaceuticals in a particular region can help protect the firm's R&D activities in countries in the same region. In other words, a firm's regional downstream commercialization activities offer an alternative mechanism for protecting their intellectual property in countries that lack strong intellectual property rights protections.

"The regional downstream commercialization activities allow the firm to capture the value it creates in countries within that region that are without strong intellectual property rights protection," Kim said. "So, say a competitor steals another firm's upstream intellectual property. For the competitor to profit from this theft, it must also have all of the downstream commercialization activities and tailor them to the upstream R&D — a process that will take a significant amount of time."

In this example, the regional downstream commercialization activities serve as a barrier to imitation by effectively mitigating or eliminating the risk of intellectual property rights infringement, he said.  

"Our research should encourage managers to reconsider countries they have previously avoided as potential new grounds in which to expand their companies' innovation practices. It is very difficult from a firm's perspective to ask a host country to change or improve its intellectual property rights regime. However, using this type of regional strategy, firms don't have to rely on a host country's institutional protection for intellectual property rights," Kim said. "A firm can develop its own regional strategy that can replace a host country's weak intellectual property rights regime."

Kim's co-authors on the study are Curba Lampert of Florida International University, Timothy Hubbard of the University of Notre Dame; Raja Roy of the New Jersey Institute of Technology and George Leckie of the University of Bristol.

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