While empirical evidence shows considerable innovative activities by the southern firms, these activities have been ignored in determining the relationship between Southern patentes regime and foreign direct investment (FDI) by the Northern firms. We show that wheter a stronger Southern patent regime increases a Northern firm's incentive for FDI depends on the innovative capability of the Southern firm, the degree of product differenciation and the transportation cost. If either the cost of Southern innovation is sufficiently low such that the Souther firm innovates irrespective of the Southern patent regime and the production strategy of the Northern firm, or the Southern patent regimee and the production strategy of the Northern firm, or the Southern firm's cost of innovation is moderate such that it innovates only under a stronger Southern patent regime, a stronger Southern patent regime may reduce the Northern firm's incentibe for FDI. For ofther costs of Southern innovation, a stronger Southern patent regume increases the NOrthern firm's incetive for FDI.