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Knowledge Flow and Sequential Innovation: Implications for Technology Diffusion, R&D and Market Value

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  • Sharon Belenzon

Abstract

It is shown that spillovers can enhance private returns to innovation if they feed back into the dynamic research of the original inventor (Internalized spillovers), but will always reduce private returns, if the original inventor does not benefit from the advancements other inventors build into the "spilled" knowledge (Externalized spillovers). I empirically identify unique patterns of knowledge flows (based on patent citations), which provide information about whether "spilled" knowledge is reabsorbed by its inventor. A simple model of sequential innovation with dynamic spillovers is developed, which predicts that market value and R&D expenditures 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. To the extent that firms internalize some of the spillovers they create, the classical underinvestment problem in R&D will be mitigated and the central role of spillovers in promoting economic growth will be enhanced.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0721.

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Date of creation: May 2006
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Handle: RePEc:cep:cepdps:dp0721

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: market value; patents; R&D and spillovers;

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Cited by:
  1. Liu, Kun & Arthurs, Jonathan & Cullen, John & Alexander, Roger, 2008. "Internal sequential innovations: How does interrelatedness affect patent renewal?," Research Policy, Elsevier, vol. 37(5), pages 946-953, June.
  2. Jessica C. Stahl, 2010. "Mergers and sequential innovation: evidence from patent citations," Finance and Economics Discussion Series 2010-12, Board of Governors of the Federal Reserve System (U.S.).
  3. Katharine Rockett, 2009. "Property Rights and Invention," Economics Discussion Papers 663, University of Essex, Department of Economics.

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