Patent Protection and the Industrial Composition of Multinational Activity: Evidence from U.S. Multinational Firms

Using data on U.S. firms' technology licensing to local agents in developing countries, this paper examines the impact of patent protection on internal and arms-length technology transfer. The effects of protection vary across products according to their complexity. Consistent with theories of internalization, we find that patent reforms enable local firms to attract more arms-length technology transfer, especially of simple products which are relatively easy to imitate. Affiliated licensing also rises among simple products, but falls among complex products. The results withstand several robustness checks, including controlling for endogeneity by using colonial origin as an instrument, and are equally strong whether patent protection is measured by its intensity or by the timing of reforms. The results have significance for patent policy in the developing world, where access to knowledge is critical. Through arms-length technology contracts, proprietary knowledge diffuses beyond firm boundaries, enabling local agents to access not only the protected technology but also know-how.