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CEP discussion paper
Intellectual property and the organization of the global value chain
Stefano Bolatto, Alireza Naghavi, Gianmarco I. P. Ottaviano and Katja Zajc Kejzar January 2020
Paper No' CEPDP1673:
Full Paper (pdf)

JEL Classification: F12; F14; F21; F23; D23; L22; L23; L24; O34

Tags: sequential production; intellectual property; intangible assets; appropriability; stage complementarity; upstreamness; firm organization; outsourcing; vertical integration

This paper introduces the concept of intangible assets in a property rights model of sequential supply chains. Firms transmit knowledge to their suppliers to facilitate input customization. Yet, to avoid knowledge dissipation, they must protect the transmitted intangibles, the cost of which depends on the knowledge intensity of inputs and the quality of institutions protecting intellectual property rights (IPR) in supplier locations. When input knowledge intensity increases (decreases) downstream and suppliers' investments are complements, the probability of integrating a randomly selected input is decreasing (increasing) in IPR quality and increasing (decreasing) in the relative knowledge intensity of downstream inputs. Opposite but weaker predictions hold when suppliers' investments are substitutes. Comprehensive trade and FDI data on Slovenian firms' value chains provide evidence in support of our model's predictions. They also suggest that, in line with our model, better institutions may have very different effects on firm organization depending on whether they improve the protection of tangible or intangible assets.