Patent Laws and Innovation Selection in the Global Firm

This paper provides evidence that offshore patent laws influence global firms’ innovation decisions. Within a simple model of multinational production, we find that a novel consequence of imitation risk is that firms innovate selectively, directing investments in product development toward relatively short-lived varieties that are difficult to imitate prior to obsolescence. A key implication of firms’ selective product development is that patent reforms tend to increase not only innovation by firms, but also the average economic lifetime of the products they develop—both to extents varying non-monotonically across industries according to rates of underlying technological obsolescence. Using detailed data on U.S. patent grants and citations during 1976–2006 and U.S. multinational firms’ affiliate innovation investment during 1982–2009, we find empirical regularities consistent with these hypotheses. ∗Department of Economics, University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706, [email protected]; †Department of Economics, University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706, [email protected]. The statistical analysis of firm-level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed are those of the author and do not reflect official positions of the U.S. Department of Commerce. The Bureau of Economic Analysis has reviewed this paper prior to release to ensure that data confidentiality is not unintentionally compromised.