The commercial value of basic knowledge depends on the arrival of follow-up developmentsmostly from outside the boundaries of the inventing firm. Private returns would depend onthe extent the inventing firm internalizes these follow-up developments. Such internalizationis less likely to occur as knowledge becomes more general. This motivates the historicalconcern of insufficient private incentive for basic research. The present paper develops anovel empirical methodology of identifying unique patterns of knowledge flows (based onpatent citations), which provide information about whether 'spilled' knowledge is reabsorbedby its inventor. Using comprehensive data on the largest 500 inventing firms in the US theclassical problem of underinvestment in basic research is confirmed: spillovers of moregeneral knowledge (and in this respect, more basic) are less likely to feed back to theinventing firm. This translates to lower private returns, as indicated by the effect of the R&Dstock of the firm on its market value.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0723.