Knowledge spillovers and intellectual property rights

a r t i c l e i n f o JEL classifications: L26 O14 O16 O31 O33 O34 Keywords: Knowledge spillovers R&D intensity Entrepreneurship Intellectual property rights Copyright Legal formalism Knowledge spillovers are widely thought to be important for innovative activity, yet theory is ambiguous about the sign of the relationship. Assuming that knowledge spillovers are more easily exploited where intellectual property rights are weakly enforced, this paper uses country–industry data to uncover the link between knowledge spillovers and innovative activity, as well as the birth and death of enterprises. IPR enforcement disproportionately increases innovation spending in R&D intensive industries, as well as both rates of entry and exit. The results are robust to accounting for financial development, labor market ridigities and a number of other institutional factors. An intrinsic feature of knowledge is that it is non-rival and imperfectly excludable — see Romer (1990). Imperfect excludability is typically interpreted as a technological feature of knowledge that implies that new knowledge, once generated, may be used by agents other than the innovator — a feature commonly known as " knowledge spillovers ". The term " knowledge spillovers " may also refer to the ability of an agent to produce new knowledge by building on prior knowledge, possibly including the agent's own stock of knowledge. Thus, knowledge spillovers constitute a factor of technological opportunity — affecting the yield of innovative effort — and also of appropriability — affecting the ability of agents to capture the returns of their innovative effort. 1 Although theory suggests that knowledge spillovers across agents should be related to the quantity of innovative activity, the sign of the link between spillovers and innovation is ambiguous. On one hand, large spillovers might encourage innovation by providing would-be innovators with something to build upon or by allowing the rapid diffusion of new knowledge. On the other hand, large spillovers might discourage innovation because an innovator's competitors also benefit from the generation of new knowledge (be it through imitation or inspiration). In addition, whether new knowledge is primarily a substitute or a complement to existing knowledge is ambiguous too. Since incumbents are better positioned to have accumulated past knowledge , the impact of spillovers on entry and exit may also help refine the empirically relevant set of theoretical models for understanding the process of innovation. 2 A key observation made in Romer (1990) is that the impact of spillovers …