Three essays on patent rights and the geography of cumulative innovation

Abstract

Technology diffusion is a key mechanism linking innovation to economic growth and social welfare. One well-documented observation is that technology diffusion is geographically and nationally localized. This localization effect was expected to diminish over the past few decades due to digitalization and globalization. However, a series of recent studies found an opposite and puzzling trend: technology diffusion indicated by patent citations has become more geographically and nationally bounded during 1980-2010. This finding contrasts strongly with predictions from the knowledge transmission costs and urges us to explore fundamental mechanisms underlying this puzzle. This dissertation presents three essays that examine the geography of technology diffusion and cumulative innovation from a legal perspective. The first chapter investigates the puzzle in the US context. I develop an analytic model considering how patent rights and their legal implications affect the geographic distribution of subsequent innovation and hypothesize that the localization of cumulative innovation becomes more salient when the patent regime gets stronger. I test this hypothesis exploiting a quasi-experimental regime change, the introduction of the Court of Appeals for the Federal Circuit in the US. Using a matched sample of 2,571,416 actual and control citations, I show evidence that subsequent innovation became more localized after this unexpected pro-patent regime shift. This chapter offers policy and strategic implications for technology diffusion. The second chapter examines the geographic trend of technology diffusion in a global context. Although prior studies found that international technology diffusion has become more nationally bounded, their results were solely based on patent citation records from the US patent office and thus subject to selection biases. In this chapter, I gathered a truly global patent dataset covering 47 million citations made by patents from 25 major patent offices worldwide during 1990-2010. Using a matching method to construct similar counterfactual citations to control for technology clusters, my results confirm that technology diffusion has become increasingly bounded by national borders during the recent era of globalization. The third chapter applies the legal perspective I developed in the first chapter to the international context and investigates how international IPR protection affects cumulative innovation. I theorize that when deciding on whether to follow a foreign technological trajectory, domestic firms consider hold-up threats and legal costs associated with cross-country patents. I hypothesize that after a pioneering foreign firm obtains a cross-country patent in a target country, citations to the patented technology from that country will decrease. This deterring effect is greater in target countries with stronger IPRs. Examining 37,914 and 25,388 inventions originating from Europe during 2001-2010 that were eventually patented in the US or China, I find evidence supporting the hypotheses. This chapter offers a novel perspective on how international IPR protection shapes innovation landscapes worldwide.