Patents, Appropriate Technology, and North-South Trade

We consider the differential incentives of the North and the South to provide patent protection to innovating firms in the North. The two regions are assumed to have a different distribution of preferences over the range of exploitable technologies. Due to the scarcity of R&D resources, the two regions are in potential competition with each other to encourage the development of technologies most suited to their needs. This provides a motive for the South to provide patent protection even when it constitutes a small share of the world market and hence has strong free riding incentives otherwise. A benevolent global planner will set equal rates of patent protection only when it weights the welfare of the two regions equally. We find that the comparative statics of the Nash equilibrium exhibit considerable ambiguity. Numerical simulations in the benchmark case yield the following results: (i) when the technological preferences of the two countries become more similar, the level of patent protection provided by the South is reduced; (ii) when the relative market size of the South is increased, the South enhances its patent protection. In both cases, the level of Northern patents is relatively insensitive.