Multinational Firms and International Knowledge Diffusion: Evidence using Patent Citation Data

This paper addresses three questions: (i) Are multinational firms (MNCs) really better than markets at transferring knowledge across borders? (ii) How actively do MNCs exchange knowledge with their host countries? (iii) Do they contribute as much to local knowledge as they learn from their host countries? To answer these questions, I analyze data on citations for over half a million patents from 4,400 firms and organizations from six countries, covering all manufacturing sectors. I estimate the probability of individual knowledge flows, as measured using patent citations, through a weighted maximum likelihood estimation approach for choice-based samples. Cross-border knowledge flows within the same MNC are found to be several times stronger than those between different entities even within the same country. Interestingly, these intra-MNC flows are equally strong in both directions between the home base and the foreign subsidiaries. Turning to intra-national knowledge flows, foreign MNC subsidiaries learn more from domestic entities than they contribute to host country knowledge, though this pattern differs across countries and industries. Knowledge flows from host countries to MNCs are in fact as strong as those between domestic entities, showing that MNC subsidiaries are not disadvantaged by their foreign affiliation. Finally, parent firms of MNCs with a higher fraction of innovative activity located abroad also learn more from other countries, suggesting that overseas innovation can increase an MNC’s overall absorptive capacity for foreign knowledge.