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Keywords:

  • parallel imports;
  • process innovation;
  • pharmaceutical industry;
  • trade costs;
  • welfare;
  • intellectual property rights;
  • imitation

SUMMARY

This paper studies the impact of the re-importation of imitated pharmaceuticals as a by-product of an open policy toward parallel import (PI) on process innovation. Foreign investment by a firm to exploit a new unregulated market with weak intellectual property rights can give rise to imitation. These products can potentially re-enter the original country when PI is allowed influencing research and development (R&D) incentives. In an emerging economy with technologically heterogeneous firms, trade costs shift PI-related market share losses from the more to the less R&D efficient firm, inducing the former to strategically increase R&D. PI accompanied by tariffs also induces higher R&D effort by the technologically inferior firm when it results in an expansion of its sales abroad. A tariff on PI is most likely to increase welfare when the technological gap between the two firms at home is sufficiently large. Copyright © 2011 John Wiley & Sons, Ltd.