Intellectual property rights and US offshoring behavior

This paper empirically investigates the role of Intellectual Property Right (IPRs) protection in affecting US industry-level offshoring behavior. We construct measures of US industry-level offshoring by considering two modes of offshoring. The first is related-party offshoring intensity, which captures the value of intermediate goods imports within the boundaries of the firm per dollar production. The second is third party (non-related party) offshoring intensity, which captures the value of intermediate goods imports outside the boundaries of the firm per dollar production. For each offshoring measure, we also differentiate between intra-industry offshoring (i.e., offshoring within the same industry) and broad offshoring (i.e., offshoring from all industries).

We construct US offshoring data for 23 industries by using bilateral import trade data and input-output tables. For IPR protection we use an index for 121 countries constructed by Walter Park. The time span of our data set, 2002-2012, is constrained by the availability of the bilateral trade data. We perform regression analysis to examine the relationship between our four measures of US offshoring and IPR protection. In our regressions, we include industry, country and year fixed effects, along with other control variables.

In our first set of specifications, we treat all industries as being equally responsive to IPR changes. We find that all offshoring measures increase with increased IPR protection with the exception of related-party offshoring. However, the results are not robust to including country-specific time trends

In our second set of specifications, we classify industries as high-tech (patent sensitive) and low-tech (patent insensitive). We find that in high-tech industries, all offshoring measures respond positively to increased IPR protection. These results are robust to including country-specific time trends. In low-tech industries, however, only third-party broad offshoring and third party intra-industry offshoring respond positively to IPR reform. Moreover, these results are not robust to including country-specific time trends.

In our third set of specifications, we regress the ratio of related-party offshoring to total offshoring for both broad and intra industry offshoring measures. Our objective is to test whether the mode of offshoring has shifted towards related-party or third party following IPR changes. We find that there was no significant change in the ratio of related-party to total offshoring. These insignificant results hold for both broad and intra-industry measures and also for both low-tech and high-tech industries.