Intellectual Property Rights and Rent Protection in a North-South Product-Cycle Model

Intellectual Property Rights and Rent Protection in a
North-South Product-Cycle Model*

by


Fuat Şener †

Union College


July 2006



Abstract

This paper constructs a North-South product cycle model of trade and explores the global effects
of strengthening Southern Intellectual Property Rights (IPRs) protection. Northern entrepreneurs
undertake innovation, and Southern entrepreneurs undertake imitation. Successful innovators in
the North are engaged in rent protection activities to deter the innovation and imitation efforts of
their rivals. Endogenously determined rent protection activities remove the scale effects from the
growth structure. I find that a stronger Southern IPR regime reduces the rates of innovation and
imitation while leading to a larger North-South wage gap. With regards to multinationalization, I
find that a stronger Southern IPR regime raises both the fraction of Multinational industries and
the share of production shifted to the South within each Multinational firm.

Keywords: Patents, R&D, imitation, FDI, scale effects, endogenous growth,
JEL Classification: F12, F43, 031, O32, 034.

* I would like to thank the seminar participants at Columbia University, Union College, Midwest
International Economics Meetings, Southern Economic Association Meetings and American Economic
Association Meetings for helpful comments and suggestions. Further personal acknowledgements to be
inserted into this footnote. Part of this research was conducted while I was a visiting scholar in the
Economics Department of Columbia University. I thank them for their hospitality.
† Fuat Sener, Union College, Department of Economics, Schenectady, NY 12308,
E-mail: senerm@union.edu.

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1. INTRODUCTION
The TRIPS (Trade Related Aspects of IPRs) agreement, which has been signed under the WTO
(World Trade Organization) umbrella in 1995, initiated a process that called for establishing at least
minimum standards of IPR protection across the globe by 2006 the latest.1 Given the developed countries
(the North) had stronger IPR protection to begin with, it was effectively the developing countries (the
South) that were subject to the obligations dictated by TRIPS. With innovation mostly taking place in the
North and imitation mostly taking place in the South, many Southern countries were concerned that
TRIPS would essentially make Northern innovation more profitable at the expense of Southern imitation.2
In the meanwhile, TRIPs held the premise of accelerating technology transfer to the South through
increased Foreign Direct Investment (FDI).
TRIPS came after a decade of intense negotiations and resulted in noticeable shifts in IPR
regimes in the developing world. In the 1990-2000 period, the degree of IPR protection, as measured by
the Ginarte and Park index, of countries with income per capita levels below $10,000 has on average
increased by 56 percent (Table 1). In the five-year period following the TRIPS agreement, China
increased its measure of IPR protection from 1.55 to 2.48, and India increased its measure from 1.51 to
2.58. With advanced countries constantly pushing for increased global IPR protection and more countries
attaining full membership in the WTO, the movement towards stronger IPR protection is likely to
continue in the upcoming decades.3
To investigate the global consequences of increased IPR protection I construct a dynamic product
cycle model of trade with endogenous innovation, imitation and multinationalization. The North
specializes in innovation, and the South specializes in imitation. High quality products are first innovated
and manufactured in the North. Then production can shift to the South either through multinationalization
of Northern firms or imitation by Southern entrepreneurs. Further innovation by the North triggers a shift
of production back to the North. This product cycle framework—first proposed by Vernon (1966) and
later formalized by Segerstrom et al. (1990), Grossman and Helpman (1991c), among others—offers a
suitable setting to think about global IPR issues. My goal is to investigate the implications for innovation,
imitation, multinationalization and the North-South wage gap.
The model differs from the existing literature on three accounts. First, successful Northern
innovators can engage in rent protection activities to safeguard their innovations and thereby prolong the
duration of their monopoly power. Consequently, the framework for IPR protection has an endogenous

1 See Maskus (2000) for an extensive review of the literature on IPR protection in the global economy.
2 McCalman (2001) calculates that TRIPS imply substantial rent transfers from the South to Northern patent holders.
3 See Bhagwati (2005, pp. 182-85) for a discussion on the advanced countries’ efforts to promote stronger global
IPR protection under the WTO as well as in other bilateral/multilateral platforms.

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component. Second, at the steady-state equilibrium, the rates of innovation, imitation and
multinationalization remain constant despite positive population growth. Therefore, the model provides
an empirically relevant setting that is not subject to the scale effects critique of Jones, an issue which
received relatively sparse attention in the relevant product-cycle literature. 4,5 Third, the steady-state
innovation rate is a function of the fraction of resources allocated to R&D. Hence, the model predicts
fully-endogenous Schumpeterian growth, an outcome which is consistent with the empirical evidence
provided by Ha and Howitt (2006) and Zachariadis (2003, 2004) as discussed in detail in section 3.10.
I incorporate rent protection activities in the spirit of Dinopoulos and Syropoulos (2006), who
were the first to incorporate such activities into a closed economy growth model. In my North-South
product cycle model, successful Northern innovators conduct two types of rent protection activities:
innovation-deterring activities aimed at reducing the innovation success of Northern rivals (as in
Dinopoulos and Syropoulos) and imitation-deterring activities aimed at reducing the imitation success of
Southern rivals (a new line of rent protection stemming from the North-South structure). Empirical
evidence on the nature and extent of rent protection activities are detailed in the following section. Taylor
(1993) was the first to model firm-level activities aimed at raising imitation barriers in a static North-
South partial-equilibrium setting. To my knowledge, no attempt has been made in the literature to account
for these activities in a dynamic North-South general-equilibrium setting; hence, the paper seeks to fill in
this gap.
In terms of modeling, I depart from Dinopoulos and Syropoulos (2006) by proposing a rate of
return maximization approach to the optimal choice of rent protection activities. Compared to Dinopoulos
and Syropoulos, this approach offers a much simpler two-step process and hence constitutes one of the
main analytical contributions of the paper. This new method can be easily utilized to investigate further
issues in dynamic settings where institutions evolve endogenously and firms play an active role in
governing this process.
I begin the paper by developing a basic product-cycle model with endogenous innovation and
imitation. I find that a strengthening of Southern IPR protection, in the form of an increase in imitation
resource requirement, reduces the rates of both Southern imitation and Northern innovation and leads to a
rise in the North-South wage gap. I then extend the basic model to allow for endogenous
multinationalization (FDI) as an additional channel of technology transfer. In this setting, success in

4 Early endogenous growth models predicted a positive relationship between the rate of innovation and the scale of
an economy, measured by the size of the population. In two influential papers, Jones (1995a, 1995b) forcefully
argues that this prediction, pinned down as the scale effects property, is inconsistent with the post-war time series
evidence from industrialized countries.
5 See Dinopoulos and Segerstrom (2005a, 2005b), Parello (2005) and Grieben (2006) for scale-free North-South
models.

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multinationalization implies a complete shift of production to the South within the firm. In other words,
the degree of production fragmentation within the multinational firm is set to one in an exogenous fashion
as in Glass and Saggi (2002) and Branstetter et al (2005b). With endogenous FDI and exogenous
fragmentation, I again find that strengthening Southern IPR protection reduces the rates of innovation and
imitation, and raises the North-South wage gap. With regards to multinationalization, I focus on two
indicators. The first is the rate of multinationalization measured by the success probability in technology
transfer times the fraction of Northern industries. The second is the fraction of Multinational industries in
the global economy. I find that strengthening Southern IPR protection increases the fraction of
Multinational industries despite reducing the rate of multinationalization.
Lastly, I endogenize the extent of fragmentation within each multinational firm. This brings the
model closer to the real world and allows me to study the intra-firm response to IPR regime shifts. To my
knowledge this is the first such attempt in the R&D-based product-cycle literature. When both
multinationalization and fragmentation decisions are endogenous, I once again find that a strengthening of
Southern IPR protection reduces the rates of innovation, imitation, and multinationalization while raising
the North-South wage gap. Moreover, I find that a stronger Southern IPR regime increases not only the
fraction of Multinational industries (the extensive margin) but also the portion of production shifted to the
South within each multinational firm (the intensive margin). Numerical simulations reveal that the
quantitative responses of multinationalization indicators are much larger in the case of endogenous
fragmentation vis-à-vis exogenous fragmentation.
In all three versions, the reduction in the rates of both innovation and imitation, and the widening
North-South wage gap emerge as robust results. Hence, the paper predicts that TRIPs can hinder
technological progress not only for the South but also for the North. At the same time, TRIPS can be a
force of wage divergence between the North and the South. With regards to multinational firm activity,
the paper’s predictions are more optimistic. TRIPS can foster shifting of production to the South via
multinationals—at both extensive and intensive margins. The model thus provides theoretical foundations
for the empirical evidence provided by Branstetter et al. (2005a, b).6 Using firm level data, Branstetter et
al. (2005a, b) investigate the responses of US multinational firms to IPR reforms in sixteen developing
countries. They find that multinational firms respond to stronger IPR protection by increasing the scope
of their activities measured by sales, employment, affiliate R&D activity and intra-firm royalty payments.

6 Branstetter et al (2005b) also provide theoretical foundations for their empirical findings using a variety-expansion
based North-South growth model. However, their model exhibits scale effects and does not allow for endogenous
fragmentation.

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The related literature on IPRs has expanded substantially in the past decade. 7 The paper most
closely related to the present work is the influential work of Glass and Saggi (2002) which was the first to
offer a product-cycle model with endogenous innovation, imitation and FDI. From a theoretical
perspective, my paper differs from Glass and Saggi (2002) on three accounts. First, I incorporate rent
protection activities and offer a scale-free product cycle model. Second, I consider a more flexible
product-cycle scheme by allowing for Northern entrepreneurs to target all industries in the continuum.
Third, I allow for the possibility of endogenous fragmentation within each multinational firm. In terms of
results, there are both commonalities and major departures. Like this paper, Glass and Saggi (2002) also
find that strengthening Southern IPR protection reduces the rates of innovation and imitation. However,
in their imitation-only model, the tighter IPR regime reduces the North-South wage gap, and in their
imitation/FDI model it exerts no influence on the wage gap. In the context of the imitation/FDI model,
this stark difference stems from my considering of imitation-deterring activities (as detailed in Section
4.8). Lastly, I find that a stronger Southern IPR regime increases the proportion of Multinational
industries, whereas Glass and Saggi (2002) predict a decline in this measure.
The paper is organized as follows. Section 2 provides evidence on innovation and imitation
deterring activities. Section 3 introduces the basic model with endogenous innovation and imitation.
Section 4 extends the basic model to allow for endogenous multinationalization. Section 5 adds
endogenous fragmentation within-multinationals. Section 6 concludes. It should be noted that the
extensions are presented in an incremental fashion to facilitate the paper’s comparison with the existing
literature. Proofs of all propositions are relegated to Appendices (available at
http://www1.union.edu/~senerm/ and from the author upon request).
2. EMPIRICAL EVIDENCE ON RENT PROTECTION ACTIVITIES

7 The first generation scale-dependent growth models offer mixed results on the effects of stronger IPRs protection.
Grossman and Helpman (1991a and 1991b) consider settings with endogenous innovation and imitation. In their
quality-ladders growth model (1991a), they find that the effects of strengthening Southern IPR protection may differ
depending on the extent of differences in R&D productivity among Northern entrepreneurs. In their variety-
expansion growth model (1991b), they find that stronger IPR protection in the South decreases the rates of
innovation and imitation. Extending the quality-ladders model with endogenous innovation and imitation to allow
for FDI, Glass and Saggi (2002) find that stronger Southern IPR protection leads to lower rates of innovation,
imitation and FDI. Using a variety expansion model with similar structure (endogenous innovation/imitation/FDI)
Branstetter et al (2005b) have challenged the results of Glass and Saggi (2002). Their numerical simulations showed
that increased IPR protection in the South may stimulate innovation and FDI. In a recent paper, Glass and Wu
(2006) provide a comparative analysis of the quality-ladders vs. variety expansion models with exogenous imitation.
Taking a slight departure from this literature, Taylor (1994) constructs a North-South model that incorporates the
Ricardian continuum goods framework into a quality-ladders growth setting. He finds that symmetric treatment of
IPRs can lead to a more efficient allocation of world resources and thereby foster growth and multinational activity.
See also Helpman (1993) for a model that investigates the transitional welfare effects of increased Southern IPR
protection and also Young and Maskus (2001) for a model that considers licensing as the channel of North-South
technology transfer.

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What exactly defines rent protection activities and how important are they in the real world,
especially in a North-South context? Rent protection activities can involve patent enforcement, practicing
trade secrecy, lobbying the government to promote stronger IPR protection, engaging in corrupt activities
to influence the legal/political system, and so on. Dinopoulos and Syropoulos (2006) present anecdotal
evidence for such activities from a wide range of companies including Coca-Cola, Microsoft, Intel,
DuPont, and others. Levin et al. (1987) and Cohen et al. (2000) provide systematic survey based evidence
from US manufacturing industries, showing that firms rely heavily on patents and trade secrecy, among
other methods, to appropriate rents from their innovations. Patent enforcement and litigation involve
substantial costs which are comparable to R&D expenditures. According to AIPLA (1997) the direct legal
costs of patent litigation range between $1.0 and $3.0 million (in 1997 dollars) for each side through the
trial. Lerner (1995, p. 470) calculates that the direct costs of patent suits started in 1991 is expected to
equal 27 percent of total R&D expenditures of US companies in that year. Time series analysis of Somaya
(2002, Figures 3 and 5) suggests that patent litigation has been pervasive in all six broad industries as
classified by the USPTO.8 Patent litigation efforts can be quite effective. In a survey of biotech firms
Lerner (1995) finds that 55 percent of small firms and 33 percent of large firms cite litigation as a
deterrent to innovation. Levin et al. (1987) report that patents raise imitation costs by 40 percentage
points for new drugs, 25-30 percentage points for new chemical products and 7 to 15 percentage points
for electronics products. These figures are in line with the results from an earlier study by Mansfield et al.
(1981).
Imitation-deterring activities in a North-South context are also empirically relevant phenomena.
Lanjouw and Cockburn (2000) examine the lobbying activities of US companies and report that such
activities heavily influenced the US government’s efforts in promoting IPR protection in both bilateral
and multilateral negotiations. 9 A case in point is the US pharmaceutical industry which had a lobbying
and campaign contribution budget in 1999 and 2000 of $197 million. The industry has a total of 625
registered lobbyists—more than the number of Congress members. Confidential documents obtained by
the New York Times show that for the year 2004 its trade group, Phrma, has set aside $17.5 million out of
a budget of $150 million “to fight price controls and protect patent rights in foreign countries and in trade
negotiations”.10 Reporting in the popular press suggests that the industry’s lobbying efforts have been

8 Somaya (2002) reports that the total number of patents suits filed in the US between 1986 and 1995 is 12954 with
the following breakdown: 895 (design), 1889 (chemicals), 1366 (drugs and medical technology), 2757 (electronics,
computer, optical and nuclear), 3576 (mechanicals) and 2461 (others) .
9 See also Bhagwati (2005, pp. 182-85). A number of multinational associations, funded mostly by Northern
industries, actively promote global IP protection [for an extensive list see www.ipmenu.com/iporganisations.htm].
Of course, national trade associations can also be involved in advocating global IP protection.
10 See New York Times, November 4, 2001, “A Muscular Lobby Rolls Up Its Sleeves”, 3.1; and New York Times,
June 1, 2003, “Drug Companies Increase Spending on Efforts to Lobby Congress and Governments”, 1.33.

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effective. For instance, during the 2002 US Congress Elections, the drug industry has reportedly provided
more than $50 million to Republicans and one quarter of this amount to Democrats in various forms of
campaign contributions. Following the November 2001 WTO Doha agreement, which allowed the
developing countries to ignore patent protection and import generic drugs when faced with acute diseases,
the drug industry has turned to the Congress for help, citing concerns about the ambiguous language in
the agreement—in particular the lack of specific names for acute diseases. In response, 34 Congress
members (comprised of both Democrats and Republicans) along with two dozen drug company CEOs
signed individual and group letters to Mr. Zoellick, the US trade representative, urging for clarification of
the language in a way that addresses the industry’s concerns.11
Patent litigation cases in the South involving Northern companies have been on the rise and
appear to be receiving more attention recently. The most publicized North-South patent litigation case
was probably the case between South Africa and the international drug industry. In 1997, following the
outburst of the AIDS epidemic, the South African government passed a law which allowed the
importation and domestic production of generic drugs without the consent of the original patent holder. In
February 1998, 39 major international drug companies, including four AIDS drugs producers Merck,
Glaxo Smith Kline, Bristol-Myers Squibb, Boehringer Ingelheim GmbH and Abbott, filed a law suit
claiming that the law violates international treaties. The hearing of the law suit was opened in March 2000
in a South African court. After a one year legal procedure with heavy media exposure, the law suit was
eventually dropped in April 2001, mostly in response to pressure from international and domestic AIDS
activists.12 Other examples of North-South patent suits include Lego, Intel, Microsoft, Adobe, Unilever in
China, and Pfizer in Russia (see various issues of Managing Intellectual Property).13 With substantial
demand for patents, trademarks and copyrights in the South by foreigners (Maskus et. al., 2004), law
firms in many developing countries now offer a wide range of services in intellectual property related
areas.14

11 For further details including the specific contribution amounts received by some signatory Congress members,
see Wall Street Journal, February 6, 2003, “U.S. Flip on Patents Shows Drug Makers' Growing Clout”, A.4.
12 For an unfolding of the events during the trial, including the lobbying efforts of drug companies, the involvement
of non-governmental organizations, see Wall Street Journal, March 2, 2001 “Patents Pending: AIDS Epidemic
Traps Drug Firms in a Vise: Treatment vs. Profits”, A1.
13 Some cases have also found coverage in the popular press. See, for instance, Fortune, October 2, 2000,
“Knocking out the knock offs”, 213-214 for a detailed analysis of the case between a Danish furniture maker “Bo
Concept” and its Chinese imitators. See Wall Street Journal, January 2, 1996, “Texas Instrument (TI) sues to force
Samsung to pay patent fees”, B2, for a patent infringement case between two electronic companies, TI of US and
Samsung of Korea, on memory chips.
14 The web site http://www.ipmenu.com/, provides a global guide to IP law firms and patent attorneys in a total of
125 countries, including many developing countries ranging from Vietnam to El Salvador.

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It should be noted that obtaining global coverage for a patent by itself may involve substantial
costs. It is estimated that for a single invention the total cradle to grave costs of patent coverage in 52
countries is roughly $472,414 [Berrier, 1996]. The costs range from a high of $40,000 in Japan to a low
of about $2,000 in South Africa with an average of $9,085. To get a rough idea of the total costs involved,
consider the total number of US patent applications filed by US residents in 2000, which was equal to
175,582. Using numbers from Berrier (1996) one can calculate that seeking only 5 year global protection
for half of these patents, on top of the US protection, would imply a cost of $14.44 billion.
In most of the developing countries patent litigation may still be problematic due to
underdeveloped legal infrastructure. However, evidence from China suggests that firms can rely on
alternative channels. In China, IP owners can pursue their cases via two actions: judicial action and
administrative action [Clarke (1999) and Maskus et al. (2004)]. When pursuing judicial action, the
plaintiff can take the case to the court and follow the litigation procedure. When pursuing administrative
action, the plaintiff requests administrative authorities to take appropriate measures, which may lead to
organizing raids and then imposing sanctions (fines, imprisonment or disgorgement of illicit profits).
Clarke (1999) states that in China “most foreign complainants of IPR infringement use whatever
administrative remedies are available instead of resorting to courts and private remedies as the former are
quicker, cheaper, and generally more effective”. To pursue administrative action, foreign companies
usually hire investigation or law firms to make the case to various Chinese government organs.15 Clarke
(1999, p.34) points out that administrative action is prone to corruption to the extent that any other
government action is. Hence, its frequent utilization over the litigation route can be suggestive of
significant corrupt activities. In any case, either by hiring legal firms and/or bribing government officials,
both judicial and administrative actions entail significant costs for intellectual property owners.

The bottom line is that i) Northern firms engage in activities to safeguard their intellectual
property ii) These activities are observed in a Northern as well as in a North-South context iii) These
activities are costly but appear to be effective. Hence the motivation for modeling rent protection
activities in a North-South growth setting.
3. THE MODEL WITH ENDOGENOUS IMITATION
I first construct is a quality-ladders model similar to Grossman and Helpman (1991a) with
endogenous innovation and imitation. The world economy consists of two countries the North and the
South, indexed by i ∈ {N, S}. The variables and parameters with no country index are common to both
countries. Each country has a fixed number of identical households, normalized to one. Let L0i denote the

15 See Managing Intellectual Property, Sep. 2003, “How to Litigate in China”, p.1.

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size of the population and also the labor force of country i at time zero. Each country’s population grows
at a rate of n > 0. Thus, the size of the population in country i at time t equals L0ient.
3.1. Household behavior
The consumer’s optimization is standard in the literature and hence I will be brief.16 In each
country, the representative household maximizes the utility function

U(t)i = ∫ ∞ L0i e – (ρ – n)t log ui(t) dt
,
for
i = N, S,
(1)
0

where ρ is the subjective discount rate with ρ – n > 0. The term log ui(t) represents the instantaneous
utility of each household member
1

log
u
j
i(t) ≡
log

[

∫
Σ λ
x
,


for i = N, S,

(2)
i
ω
(j, t)]d
,
ω
0

j
where xi(j,ω,t) denotes per capita demand for a product with quality j in industry ω at time t, and λ > 1
measures the size of improvements in quality.
Let ci(t) stand for per capita consumption expenditure. Treating product prices as given, the
representative household allocates ci(t) to maximize ui(t). Products enter the instantaneous utility function
symmetrically; thus, the household spreads ci(t) evenly across product lines. In addition, products within
each industry are perfect substitutes; hence, the household purchases only the product with the lowest
quality-adjusted price. The resulting per capita demand for product line ω is xi(ω,t) = ci(t)/p(ω,t), where
p(ω,t) is the market price for the purchased product.
Given the static demand functions, the household’s dynamic problem is simplified to maximizing
∫ ∞ N0i e – (ρ – n)t log ci(t) dt,

for
i = N, S,

(3)
0

subject to the intertemporal budget constraint B& (t) = W
i
i(t) + r(t)B i(t) – c i(t)Li(t), where Bi(t) denotes the
financial assets owned by the household, Wi(t) is the household’s wage income and r(t) is the
instantaneous rate of return in the global market. This exercise gives the familiar differential equation
c& ( t )

i
= r(t) – ρ ,




for i = N, S.
(4)
c (t)
i
At the steady-state equilibrium, ci remains constant; thus, r(t)= ρ. The transitional dynamics of the model
are analytically intractable; hence I restrict attention to steady states, an approach which is adopted by the
entire North-South growth literature summarized in footnote 7. I henceforth drop the time index for the
variables that remain constant at the steady state.
3.2. Labor and activities

16 See Dinopoulos and Segerstrom (1999) and Glass and Saggi (2002) among others for details.

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Labor is the only factor of production and is immobile across countries. In each country, the labor
force consists of general-purpose and specialized workers. The proportion of general-purpose labor in
country i is given by (1 – si) and that of specialized labor is given by si, where si ∈ (0, 1). In the North
there are three types of activities: innovation, manufacturing of final goods and rent-protection. General-
purpose workers can be employed in manufacturing or innovation, whereas specialized workers are only
employed in rent protection activities.17 In the South, there are three types of activities: imitation,
manufacturing of final goods and rent protection. General-purpose workers can be employed in
manufacturing or imitation, whereas specialized workers are only employed in rent protection.
3.3. Product Markets
The world economy consists of a continuum of structurally-identical industries indexed by ω ∈
[0, 1]. In the North, entrepreneurs participate in innovation races to discover the technology of producing
next generation products, which are of higher quality than the existing ones. In the South, entrepreneurs
participate in imitation races to acquire the technology of producing current generation products, which
refer to the existing top-quality products manufactured in the North. In the product markets, free trade
prevails. Producer firms compete to offer the lowest quality-adjusted price given their state of technology
and regional factor prices. Northern entrepreneurs target their innovation efforts at all industries in the
continuum. Southern entrepreneurs target their imitation efforts only at industries with Northern
producers.18
In both countries, production of one unit of final good requires one unit of general-purpose labor,
regardless of the quality level of the manufactured good. Let wLN represent the wage rate of general-
purpose labor in the North. Normalize the wage rate of general-purpose labor in the South to 1. Hence,
unit cost of production is wLN in the North and 1 in the South. In equilibrium, positive rates of innovation
and imitation require that λ > wLN > 1. Whenever a higher quality product is discovered by a Northern
entrepreneur, the technology of producing the previous generation product becomes available to all
followers in the global economy.19 Such a structure implies that Northern followers cannot effectively
compete in product markets, since they will be undercut by their Southern counterparts.

17 With specialized labor, I basically mean lawyers, lobbyists and other individuals who possess rent-protection-
activity-specific expertise which is not applicable to manufacturing or R&D. This particular labor assignment
scheme is also adopted in the closed economy model of Dinopoulos and Syropoulos (2006).
18 If a Southern firm targets an industry with a Southern producer and becomes successful in its imitation efforts, the
two Southern producers with identical cost functions and product qualities will emerge. Due to price competition,
the profits of both firms will be driven down to zero. Thus, no Southern firm has an incentive to target a Southern
market.
19 See Glass (1997) for a detailed discussion on the instantaneous diffusion of inferior technology. This assumption
has been adopted in both North-South and North-North contexts. For the former, see Glass (1997), Glass and Saggi
(1998), Sayek and Sener (2006) and for the latter, see Dinopoulos and Segerstrom (1999).

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