Parallel Imports and Innovation in an Emerging Economy

This paper studies the consequences of parallel import (PI) on process innovation of Örms heterogeneous in their production technology. In an international setting where foreign markets di§er with respect to their intellectual property rights regime, a move by a technologically inferior Örm to exploit a new unregulated market can result in imitation and PI. The impact of PI on innovation is determined by the degree of heterogeneity between Örms and trade costs. Increasing trade costs shifts from the market share losses brought by PI from the more to the less productive Örm. This induces the former to invest more in R&D. At this point, sales in the foreign market become a determinant of the R&D decision by the technologically inferior Örm. For low levels of Örm heterogeneity, PI increases output by this Örm targeted for the unregulated market, hence increases its Innovation e§orts. A tari§ policy accompanied by opening borders to PI only increases welfare when the technological gap between the two Örms are su¢ ciently large.