It is shown that spillovers can enhance private returns to innovation if they feed back into the dynamic researchof the original inventor (Internalized spillovers), but will always reduce private returns, if theoriginal inventor does not benefit from the advancements other inventors build into the"spilled" knowledge (Externalized spillovers). I empirically identify unique patterns ofknowledge flows (based on patent citations), which provide information about whether"spilled" knowledge is reabsorbed by its inventor. A simple model of sequential innovationwith dynamic spillovers is developed, which predicts that market value and R&Dexpenditures should rise with Internalized spillovers and fall with Externalized spillovers.These predications are confirmed using panel data on U.S. firms between 1981 and 2001. Tothe extent that firms internalize some of the spillovers they create, the classicalunderinvestment problem in R&D will be mitigated and the central role of spillovers inpromoting economic growth will be enhanced.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0721.
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