1 ECA Technology Absorption and Technological Development: What Can We Learn from Patent Data? Lee Branstetter Carnegie Mellon University and NBER June 17, 2008

2 Quote from a skeptic: Paul Krugman “…knowledge flows, by contrast, are invisible; they leave no paper trail by which they may be measured or tracked, and there is nothing to prevent the theorist from assuming anything about them that she likes.” - P. Krugman, Geography and Trade, 1991

3 WRONG! Patents provide rich information on technological development, even in “follower” countries And (some) patents can even provide direct measures of technology absorption Patents can be quite useful in filling in the gaps in our knowledge surrounding technological development and technology absorption in ECA and other developing regions

4 The two faces of R&D Seminal paper by Cohen and Levinthal Argued that technology absorption requires active learning effort on the part of recipient firms Most successful technology absorbers invest in the technology they seek to understand Investments in “absorptive capacity”

5 The pyramid of technological development

6 The base of the pyramid is hard to measure… The simplest kind of technological development: absorption, without modification, of technology that is well known and commonplace in the West. This is essentially imitation, and it typically does not involve formal licensing agreements, extensive use of foreign technical experts, or significant investments on the part of the absorbing firm

7 But measurement gets easier as absorption gets more sophisticated... More sophisticated firms will strategically invest in the absorption of foreign technology, and modify it to fit the local context. This will require incremental innovation on the part of the absorbing firm. Firms and industries at this stage will often engage in formal technology licensing and the use of external consultants. They will also generate incremental inventions, some of which may be patented.

8 The more advanced stages can be examined with patent data... As firms and industries grow in technical prowess, they will intend to engage in more substantive modification of foreign technologies and begin to develop some of their own. This activity is often reasonably well measured by patent data.

9 Including those stages that involve real innovation And our study suggests that some ECA firms and industries are even participating in the creation of new technology for the global market, often in cooperation with foreign partners.

10 Most patents represent “incremental” innovation Nonspecialists often believe patents are reserved for “breakthrough” inventions But, even in the West, the vast majority of patented inventions are quite incremental in nature This has been demonstrated by expert studies of the technical content of patents as well as studies of the distribution of patents’ economic value.

11 The most successful “technological followers” engaged in vigorous incremental invention at an early stage Even in the mid-1960s, Japan was already generating large numbers of (mostly) incremental patents As Taiwan and Korea followed in Japan’s footsteps, they began to ramp up their patenting rapidly in the 1980s and early 1990s More recently, India and China have substantively increased their patenting The World Bank has used patents to study the technological development of other developing regions

12 Patents as an indicator of knowledge absorption and technological development in ECA Careful examination of ECA-generated patents provides a detailed look into the absorption/innovation process Can view trends over time Can see where ECA absorption and incremental innovation is concentrated in geographic space and technology space Inventors and firms are named in patent documents Patent citations link ECA inventions to the foreign and local knowledge upon which the inventor builds

13 ECA patenting in the EPO,

14 U.S. patent grants for ECA, China, and India

15 ECA patenting by country,

16 “International coinvention” is increasingly important in ECA patenting A large fraction of ECA patents are made up of multinational inventor teams We call this phenomenon “international coinvention” Much of it takes place under the auspices of Western multinationals Are ECA inventors increasingly participating in an international division of R&D labor? We also see growth in international coinvention in India and China

17 International coinvention in the ECA 7

18 International coinvention in ECA

19 ECA coinvention with advanced OECD countries

20 International coinvention in Russia

21 Top 10 Russian generators of U.S. patents

22 Patent citations as indicators of knowledge flows U.S. patent applicants are required to “make appropriate citations to the prior art” on which they build An analogy can be drawn between patent citations and the citations that appear in an academic paper The citations received by ECA patents provide an indication of their technological impact The citations made by ECA patents provide an indication of the knowledge base from which the ECA inventors draw

23 Patent citations in ECA vs. Comparator Regions

24 The differences are statistically significant!

25 Policy implications The growth of ECA patenting is decelerating, even as Chinese and Indian patenting accelerates Indigenous ECA patenting continues to lag in quality, quantity, and connectedness to the global state of the art Multinational R&D in ECA raises the quality and quantity of ECA patenting ECA inventors are participating in international coinvention networks, a phenomenon worthy of further study

26 Next steps – peering into the coinvention process Patent data identify the ECA and Western members of international inventor teams We propose to interview (some of) these inventors, survey others What are the dynamics of invention inside an international inventor team? Are ECA inventors graduating from “coinvention” to “invention”?