Endogenous knowledge flows and sequential innovation : implications for technology diffusion, incentives for R&D and firm performance
This thesis introduces dynamic considerations and shows that knowledge spillovers (hereafter, spillovers) can also enhance the private returns to innovation (thus, reduce private obsolescence), should they feed back into the dynamic research of the original inventor. However, spillovers will always reduce private returns (thus, intensify private obsolescence) if the original inventor does not technologically benefit from the advancements other inventors build into its spilled knowledge. The contribution of this thesis broadens the concept of private returns to innovation, by distinguishing between static and dynamic returns. Static returns are defined as the stream of profits directly associated with a single invention, whereas dynamic returns also consider the expected stream of profits the firm can receive from the subsequent developments of its knowledge. We develop a conceptual framework as well as an empirical methodology that allow us to identify unique patterns of knowledge diffusion, which are defined as lines of research (they are empirically identified as unique sequences of patent citations). We classify the lines of research as two types, based on the feedback they yield to their inventors. A line of research is defined as Internalized, if knowledge returns to the boundaries of its inventor, after having been advanced by other firms, whereas a line of research is defined as Externalized, if knowledge does not return to the boundaries of its inventor, after having been advanced by other firms. We find a substantial firm-level variation in the ability to reabsorb spilled knowledge, even within four-digit industries. This variation translates to differential private returns to innovation, where firms that enjoy a more Internalized and less Externalized pattern of diffusion capture higher private returns, as indicated by the effect of their R&D on their market value. Moreover, we estimate a R&D equation and find preliminary evidence suggesting that firms adjust their R&D expenditures according to their ability to reabsorb their spilled knowledge. Firms that enjoy a more Internalized and less Externalized pattern of diffusion on average invest more in R&D. We show that firms are able to internalise dynamically some of their knowledge that spills to other firms. To the extent that such internalisation occurs, the underinvestment problem in R&D will be mitigated.