Introduction

Alex Boome:

Good day to our audience from around the globe. Welcome to the Hinrich Foundation Trade Book Talk. I'm Alex Boome, Trade Education Program Director here at the Foundation. Today, we're pleased to be in discussion with Dr. Siyao Li. She's the author of Closing the Institutional Gap: How foreign investors shape domestic institutions in Emerging Markets. It's from the Cambridge University Press.

Conventional wisdom suggests that multinational companies in emerging markets either passively adapt to the weak rule of law or strictly rely on external dispute mechanisms, like international arbitration. Siyao's book offers a compelling new paradigm, which shows MNCs are active as political and institutional actors. They use their intangible assets and home governance diplomatic power to reform domestic legal frameworks and drive on-the-ground enforcement.

As MNCs and their foreign direct investment are important drivers of global trade, we are fortunate to have with us Dr. Siyao Li, who's an Assistant Professor of international affairs at the University of Pittsburgh's School of Public and International Affairs. She holds a PhD in political science from the University of Pennsylvania and a master's degree in statistics from the Wharton School. Her research explores FDI, international trade politics, and business-government relations. Siyao, welcome and thank you for joining us.

Siyao Li:

Thank you very much, Alex, for the introduction, and thank you to the Hinrich Foundation for this invitation. I'm delighted to be here to share about my book.

Big Idea & Origin Story

Alex Boome:	Let's start with the broader question behind your research. For a long time, the international investment literature argued that firms rely primarily on bilateral investment treaties or offshore arbitration to manage institutional risk in emerging markets. You offer evidence of a more direct approach. What motivated you to write this book?
Siyao Li:	In terms of the literature, there were two broad motivations. The first is that the literature tends to focus on how firms use external institutions, like international investment dispute settlement, to protect their property when investing in countries with a relatively weak rule of law. It also tends to focus more on the protection of physical assets. However, I was observing the rise of intangible assets in global economic activity. Intangible assets include technological innovation, intellectual property, and software investments. These components comprise an increasing share of the market value of firms and are located at the highest value-added activities in global supply chain networks. The existing literature doesn't adequately address how intangible assets are protected. This is especially true in the legal literature on intellectual property protection, which establishes that intellectual property is protected through individual laws in each individual jurisdiction. It is a very territorial approach to protection. Even in international institutions like the World Trade Organization, where trade-related aspects of intellectual property rights are protected through multilateral agreements, the legal enforcement and interpretation ultimately rest on individual jurisdictions. For example, powerful multinational firms like Bayer and Monsanto must go through long and costly processes to protect their patent rights in domestic courts in emerging markets such as India and Brazil. The literature doesn't quite explain why powerful multinational corporations would choose to undergo this ordeal and use domestic institutions. The second motivation has to do with how indirect expropriation occurs for technological assets that are attractive to host countries and brought into emerging economies by multinational firms.
Alex Boome:	In some ways, the technology is way farther ahead than the legal frameworks and protection opportunities for these corporations.
Siyao Li:	Exactly, especially on the international institution front. This underscores just how important domestic institutions and the bargaining between the host state and multinationals are within the domestic arena.

Part 1: Intangible Assets & Sequential Theory

Alex Boome:	Let's jump into it. In chapters 1 and 2, you highlight themes around physical and intangible assets. To start us off, I have a two-fold question. First, why are intangible assets uniquely vulnerable to expropriation in emerging markets? Second, how does holding this leading-edge technology influence an MNC's leverage with an emerging market host government?
Siyao Li:	When we think about emerging markets, they are rapidly developing economies. This means the rules and governance surrounding foreign economic flows are constantly evolving in response to the country's domestic and international interests. Foreign investors face expropriation risks on intangible assets because of how attractive the technology is for economic development. The host government might be motivated to absorb the technology as fast as possible to catch up with leading countries. In the course of trying to control and regulate technology for their own national development, this could impinge on the intellectual property rights of multinational corporations. The tricky thing about the expropriation of intangible assets is that it is oftentimes indirect. International investment law is relatively good at protecting against direct expropriation by the state, where there's a direct transfer of ownership. Indirect expropriation falls short of that and could occur through bureaucratic obstruction.
Alex Boome:	Could you give us an example of what type of technology we're talking about? What are they after?
Siyao Li:	One example that appears frequently in the news is pharmaceuticals, specifically the patents and trade secrets underlying the production knowledge of cutting-edge medicine. In the pharmaceutical industry, firms from the Global North put great emphasis on pushing for stronger protection of their patent rights in emerging markets because of these potential expropriation risks. Another example of indirect expropriation involves national patent authorities. They have the discretion to grant and revoke patent rights for multinational firms operating in their jurisdictions. They might use that authority to discriminate against foreign patents and invalidate them, even when the patent should legally stand in that jurisdiction.
Alex Boome:	How does holding that technology influence the MNC's leverage in a host government? Bayer is a huge firm, but you're dealing with a national government. How does that work?
Siyao Li:	I argue in my book that because technology and know-how are highly attractive to the host country, firms gain a unique advantage when bargaining over the treatment of their assets. This derives from a couple of factors. First, the nature of intangible assets makes them relatively mobile compared to physical assets, so firms have an easier time moving them to avoid expropriation. Second, technology becomes outdated relatively fast; the cycles of updating and upgrading are short. For the host country to continue accessing the latest cutting-edge technology, they often find it beneficial to cut back on expropriation and allow the multinational firm to operate for a longer period. Furthermore, because these multinational firms possess valuable know-how, they have leverage with their home governments. They can ask their home governments to use diplomatic channels to negotiate with host countries and apply diplomatic pressure to change intellectual property protection on the legislative and regulatory sides.
Alex Boome:	In the book, you discuss the sequential theory of institutional change, divided into the commitment stage and the implementation stage. Could you explain that theory and provide examples of how those two stages work in practice?
Siyao Li:	I propose a sequential theory of institutional change, meaning there is a sequencing of de jure and de facto intellectual property protection in host countries. First, at the state-to-state level, multinationals can urge their home governments to negotiate with host states on intellectual property protection. These commitments generate momentum for host states to revise legislation, resulting in de jure changes to laws on the books. I term this the commitment stage. Host governments promise legal reforms to attract investment, but they may have incentives to subsequently slacken or renege on those commitments once the investment is in the country. However, the commitment serves as public information that empowers interest groups, such as multinational firms, to hold the government accountable. This leads to the second stage. Multinational firms operating day-to-day in the host country have an informational advantage regarding how implementation is actually progressing. They use political strategies to engage directly with the host state to drive the implementation of these commitments. Essentially, foreign firms transition from mobilizing their home governments to acting as enforcers pushing for commitments on the ground
Alex Boome:	Is this model cyclical, or is it strictly linear? How does it look in practice?
Siyao Li:	I see this as a cyclical process with an information feedback loop. While firms push for implementation on the ground, they collect information about host country practices. They then provide that feedback to their home governments for a renewed round of negotiation at the state-to-state level. The issue points and demands might change, triggering a new round of this sequential framework. In terms of the timeframe, it differs depending on the practices involved. Trade agreements can take a few years to negotiate at the state-to-state level, and then the states might take a year or so for domestic ratification before reaching the implementation stage.
Alex Boome:	Where do domestic interest groups and local competitors fit into this dynamic when overseas multinationals push for stronger rights?
Siyao Li:	The strength of domestic interest groups informs the degree to which host governments will resist changes to intellectual property reform at either the commitment or implementation stage. You have domestic interest groups that oppose reform because it goes against their interests. We see powerful lobbying coalitions, such as piracy groups in Thailand and Argentina, successfully stall more stringent copyright laws in their respective countries. On the other hand, there are pro-reform coalitions in host countries that pressure their governments to comply with intellectual property demands. We saw this in Mexico, where they over-complied with intellectual property rules in the North American Free Trade Agreement in the 1990s. The Mexican export sector was eager to access the American market and knew they had to push their country to abide by these IP rules first.
Alex Boome:	It's interesting that vested local interests sometimes align with MNCs and international agreements to push for a better environment to attract FDI. That's a positive outcome.

Part 2: Empirical Evidence & Case Studies (China & Vietnam)

Alex Boome:	Turning to Chapter 4, you explore how multinationals use the U.S. Trade Representative's Special 301 review process as an institutionalized information channel to convert private commercial concerns into state diplomatic pressure. Could you walk us through that process and its implications?
Siyao Li:	The USTR's Special 301 is an annual review of foreign countries' intellectual property practices, started in 1981. It is one of the most established regular channels the United States uses to push for changes in foreign IP practices. It begins with a public comment process where the USTR opens up to feedback. Business groups and industry associations use this to engage in informational lobbying, providing extensive information about IP practices abroad and expressing their preferences for changes in foreign markets. The USTR takes this information and annually generates a tiered watch list of countries that violate U.S. intellectual property interests, ranked by the severity of the violations. In my analysis, I measure the textual similarity of the public comment documents submitted by business groups against the final watch list document issued by the USTR. Using cosine similarity, I found that the similarity trends upward over time. This demonstrates that business groups effectively translate their preferences into the final policy issued by the USTR. Through further statistical analysis, I found that the USTR tends to integrate the preferences of the more economically and strategically important business groups. These firms play a key informational role in shaping policy at the home government level. The home government then takes those preferences to negotiate with host countries, pushing them to change IP practices according to U.S. interests.
Alex Boome:	The USTR has been quite busy in the last few years. Do you see any impact from the actions the U.S. is taking regarding trade agreements?
Siyao Li:	It is a very powerful trade tool. Taking the case of China, I traced archives of IP negotiations between the U.S. and China from 1990 onwards. Even in that early period, the Special 301 review process was actively used to bring China to the negotiation table, accompanied by the threat of trade sanctions if China did not change its laws in accordance with U.S. preferences. In the early 90s, China made a series of changes to its intellectual property legislation, complied with international treaties on copyrights and patents, and established more modern IP frameworks. Fast forward to the Phase 1 trade agreement between the U.S. and China; China updated its corpus of intellectual property law following the agreement in 2020. However, this also highlights the limitations of state-level engagement: commitments and legal changes can be produced, but enforcement typically lags behind. In 2020, the USTR launched another Section 301 investigation to evaluate how well China was abiding by the Phase 1 agreement on the implementation side.
Alex Boome:	We will have to wait and see how that plays out. You mentioned the case of General Electric in the book. Could you give us some color on how they navigated local courts?
Siyao Li:	I had the opportunity to interview management at General Electric China during the early years of China's IP institution building. Multinationals can play a very important role as institutional actors in emerging markets. General Electric entered the Chinese market before its intellectual property protection apparatus was fully in place and played a notable role in institutional building. They participated in closed-door meetings with government agencies writing IP laws and offered training sessions for Chinese officials, lawyers, and judges who would be part of the IP governance structure. They also made significant political investments to align the firm with the development priorities of the host country to seek better treatment. GE was one of the earliest foreign firms to establish a major research and development center in Shanghai. For 10 to 15 years, that project was regarded as the flagship example of valuable foreign direct investment in China.
Alex Boome:	They got in early and aligned their interests with the Chinese government. Now, looking at another rising trade powerhouse, Vietnam. How does the institutional evolution in Vietnam compare with China? Are MNCs employing the same playbook in Southeast Asia's emerging markets?
Siyao Li:	I put China and Vietnam in the same chapter because I saw similarities in their institutional evolution. Both experienced relatively closed economies before opening up and developing a modern IP protection system. China's reform began in 1979, with its first patent law in 1984. Vietnam's economic reforms launched in 1986, and it enacted its civil code to protect intellectual property in 1996. In both cases, foreign lawyers were involved in educating bureaucrats on establishing a modern legal system for IP rights. Today, business associations affiliated with the government act as major conduits between the business community and the state. Firms engage in these associations similarly across both countries. First, firms test out new laws via implementation channels like local courts to figure out what needs improvement, sending that feedback to the associations. Second, firms engage extensively with government officials through meetings and white papers. Third, they collect information on enforcement to interact with both home and host governments to resolve issues. The chairman of the Quality Brands Protection Committee in China noted that businesses are on the front lines of using these laws daily, and their legislative input is based on practical enforcement needs. In Southeast Asia, these strategies are being carried out through branches of the American Chamber of Commerce and European associations. The strength of these strategies depends on the foreign firms' penetration in the market. Vietnam's trajectory is even more influenced by foreign investors than China's. Vietnam has a high-profile Vietnam Business Forum where the Prime Minister and key ministers listen and respond to inputs from foreign business associations. I do not observe a similarly regular high-level forum between top government officials and the foreign business community in China.
Alex Boome:	It's amazing that they are so open and listening, which is critical to Vietnam's rapid development as they move up the value chain.

Part 3: Informal Institutions & Future Outlook

Alex Boome:	Moving to informal institutions, including facilitation fees or bribery. Based on your survey experiments, how effective are anti-corruption laws like the U.S. Foreign Corrupt Practices Act in deterring foreign firms from relying on informal channels?
Siyao Li:	I find that laws like the U.S. Foreign Corrupt Practices Act are effective, provided they are strongly enforced. They do deter firms from engaging in bribery in host markets. However, in Chapter 6, I used a survey experiment with business managers in the UK to examine if IP protection strategies change based on the transparency of lobbying channels in emerging markets. I showed different groups information about a firm investing in either a low-corruption host country or a high-corruption host country. This allowed me to measure differences in responses attributed to the host country's corruption levels. I found that bribery is reported as a viable strategy for IP protection in developing countries with weak institutions. Furthermore, in high-corruption scenarios, respondents indicated that firms rely less on their home country institutions for IP protection. I didn't find that firms use the host government's formal channels less. Overall, in contexts with more bribery and less transparent firm-government interactions, firms substitute away from home country channels towards host country channels, both formal and informal. Depending on the enforcement of anti-corruption laws by their home country, firms may or may not be deterred from engaging in bribery to secure their property rights.
Alex Boome:	As we move into the concluding themes in Chapter 7, we're witnessing a fragmentation of the global trade environment where multilateral rulemaking at the WTO is stalled, replaced by bilateral deals, industrial subsidies, and national security restrictions. What are the broader development implications for host governments in the Global South as they seek to attract foreign investment while safeguarding their policy autonomy?
Siyao Li:	Governments in the Global South must respond to two types of imbalances. First, at the country level, there is a power imbalance between the Global North and the Global South in negotiating trade and investment agreements. This is more acute at the bilateral level, where the action is gravitating, because Global South countries lack alternative ways to form coalitions and strengthen their bargaining power. Second, at the firm level, Global North firms hold the proprietary technologies and IP rights to cutting-edge advancements, placing Global South firms at a disadvantage. This concentration of technology will become a more acute issue as Global South governments try to navigate their economic development. There is a trade-off between attracting technological know-how by accommodating multinational firms and preserving policy space to increase domestic economic competitiveness. This ties into the discussion around strategic autonomy. The key challenge is how to strategically leverage foreign direct investment while using industrial policy toolkits to bargain from a position of strength and develop domestic industries.
Alex Boome:	Given the vast variety of scenarios across the Global South, will this largely depend on a country-by-country basis, or are there general themes?
Siyao Li:	That requires country-to-country evaluation. It depends on each country's resource endowments and its position in the global supply chain. Governments are aware of the available policy toolkits; the hard issue is applying those policies to the specific circumstances of their own economy.
Alex Boome:	On a brighter note, you write that these institutional changes benefit foreign firms but also reshape how domestic laws impact local markets and domestic firms. Could you explain the upside?
Siyao Li:	International firm activity can strengthen the rule of law. Regulatory changes in IP rules do not exclusively apply to firms from a specific country; they apply to all third-country firms and domestic firms operating in that host country. A stronger, more transparent rule of law with less arbitrary property protection generally benefits all businesses. However, improvements to intellectual property laws also create more competition for domestic firms, stripping away administrative protection and forcing them to respond to foreign capital. There is a positive message, but the relationship between the rule of law and development implications is nuanced.
Alex Boome:	Looking at China's massive global expansion, how has their experience with IP issues impacted their companies as they go abroad?
Siyao Li	This is a key focus for my next research agenda—looking at global-going Chinese firms and how their IP practices develop abroad given their highly competitive positions in industries like electric vehicles. Because Chinese firms now hold unique technological advantages, their preferences for IP protection will increasingly mirror those of the Global North firms I studied. They will try to devise contracts to protect their proprietary technology against domestic firms in the countries they enter. They will also have to navigate technology transfer demands in developed markets, which is a new dynamic. We are seeing an emerging market country that has gained new technological advantages rapidly expanding its global economic footprint.

Final Takeaway

Alex Boome:	What's the one key takeaway you hope trade practitioners, business leaders, and policymakers will take away from Closing the Institutional Gap?
Siyao Li:	The key takeaway is that private firms are not just institutional takers; they are active institutional shapers. Large multinational firms don't just invest in business in their host markets; they invest in domestic institutions. While international trade agreements can bring about commitments to reform, private actors are crucial for domestic enforcement. I hope my book adds to the story of international trade by highlighting the domestic institutional side and demonstrating how trade is sustained through the constant shaping of rules by foreign firms.
Alex Boome:	Thank you. A very powerful and timely synthesis. For our researchers and students, Closing the Institutional Gap offers extensive insights and references that establish it as a quality resource for years to come. Siyao, thank you.
Siyao Li:	Thank you very much, Alex. Thank you again for the invitation.
Alex Boome:	This concludes our Hinrich Foundation Trade Book Talk. To our viewers and listeners around the world, thank you for watching, and goodbye for now.