Is Co-Invention an Opportunity for Technological Catch Up?

A Study on the Collaboration between Firms from Emerging countries and EU inventors

Elisa Giuliani

Dept. Economics& Management, University of Pisa
Via Ridolfi 10 - 56124 Pisa, Italy
Tel. + 39 050 2216280

Arianna Martinelli

LEM – Scuola Superiore Sant’Anna

Piazza Matiri della Libertá 33 - 56127 Pisa, Italy

Tel. +39-050-883314

RobertaRabellotti

Department of Political and Social Sciences, Università di Pavia

Strada Nuova 65 - 27100 Pavia

Tel. +39 0382 984038

THIS DRAFT 9TH SEPTEMBER 2014

Acknowledgments

We would like to thank Fabio Montobbio for useful comments and suggestions. This paper is an output of the project “The challenge of globalization: Technology driven foreign direct investment (TFDI) and its implications for the negotiation of International (bi and multilateral) Investment Agreements” funded by the Riksbank Foundation.

Abstract

Emerging countries such as Brazil, India and China (BIC) have recently experienced a rapid economic take-off, and their firms are internationalizing, with Europe attracting about a third of their direct outward investments. Such impressive dynamism has prompted scholars to investigate whether and how these countries are improving their technological capabilities.Analysts have recently looked at cross-border inventions as a way to tap into international knowledge and catch up.

In this paper, we analyse the extent to which BIC firms are involved in cross-border inventions with European Union (EU-27) actors, and compare the value and characteristics of such inventions with those of a sample of analogous domestic patents by BIC firms over the period 1990-2012. We find that inventions between BIC firms and EU actors are growing, though they are still limited in absolute numbers. Moreover, cross-border inventions are more valuable (higher quality, and higher impact on the generation of subsequent innovations across a variety of technological fields) than domestic ones, which suggests that they represent an opportunity for BIC firms to accumulate technological capabilities, get access to frontier knowledge, and appropriate the property rights of cross-border inventions involving European actors. We do also find that BIC Multinational Companies (MNCs) benefit more from international collaborations than BIC domestic firms, a result that may have to do with the fact that the former are more able to minimize coordination costs and to combine the skills of diverse inventors across the globe. This paper contributes to the understanding of the process of catching up by emerging country firms, also providing useful recommendations for policy.

Key words:Patents; Cross-border Inventions, Emerging Market Multinational Companies (MNCs), Brazil, China, India.

1.Introduction

Emerging countries such as Brazil, India and China (hereinafter BIC) have recently experienced a rapid economic take-off, with several projections suggesting that their aggregate GDP, together with that of Russia, is catching up and may surpass the one of industrialized economies in the next years (Michilova et al., 2013). The internationalization of BIC countries is also growing; their companies are increasingly involved in Global Value Chains and their share of the world stock of inward foreign direct investments (IFDI) has increased from 4.4% in 2000 to 7.5% in 2013, while BIC countries’ share of the world stock of outward foreign direct investments (OFDI) has shifted from 1% to 4% (UNCTAD, 2014).Europe attracts more than a third of OFDI from BRICS countries, attracted by the interest of emerging economies in European technological and commercial assets (UNCTAD, 2013).

Such impressive economic dynamism has prompted scholars to ask whether and how BIC and, indeed their firms, are progressing from production to innovation (Altenburg et al., 2008),improvingtheir technological capabilities. This is a very central issue in the analyses of countries’ catching up, because the degree to which their companies are capable to generate valuable innovations that are new to the world,may influence their future prospects of growth (Fu et al, 2011; Montobbio and Sterzi, 2013; Vivarelli, 2014). Data on innovation in BICshow increasing business R&D expenditures (especially in India and China), and an exponential growth of patent applications (Branstetter al., 2013).[1]Considering Chinese R&D expenditures for instance, their share on GDP has increased from less than 1% in 2000 to almost 2% in 2012.[2]Moreover, recent studies provide evidence that companies from emerging economies are becoming increasingly connectedto international production and innovation networks (Branstetter al. 2013; Chen et al., 2013). In particular, cross-border R&D collaborations between emerging countries’ firms and other international actors are attracting the attention of analysts for their capacity to spur the production of joint patents by emerging countries’ firms(Picci, 2010).

International collaborations involving co-inventions (hereinafter ‘cross-border inventions’) are considered to be a valuable channel through which knowledge is transferred from developed to developing countries (Montobbio and Sterzi, 2011 and 2013), not least because they are often characterized by intensive knowledge sharing over a long period of time (Alnuaimi et al., 2012), and by face-to-face interactions between inventors with different level of technological competences, which in turn facilitates international knowledge spillovers (Agrawal et al., 2006; Fleming et al., 2007a). Furthermore, some studies have shown that patents deriving from the international collaboration of inventors are more valuable and important, than those produced by individual and isolate inventors (Bercovitz and Feldman, 2011; Fleming et al. 2007b; Singh and Fleming, 2010), since collaboration brings knowledge variety and sparks creativity (Fleming et al., 2007b; Reagans and Zuckerman, 2001; Weitzman, 1998). This means that cross-border inventionsmay be a way through which emerging economies can accumulate technological capabilities, and catch up with advanced countries.

In spite of their potentially positive developmental impact, cross-border inventions have so far been poorly analysed in the context of emerging economies. Most evidence is aboutR&D collaborations among firms and inventors in advanced countries (e.g. Leiponen and Helfat, 2011; Penner-Hahan and Saver, 2005), and such studies focus almost exclusively on US patents and patentees (Breschi and Lissoni, 2009; Furman et al., 2005; Singh, 2008), with hardly any evidence on Europe. When developing/emerging countries are taken into account this is often with a focus on advanced countries’ firms operations in such countries (Alnuaimi et al. 2012; Branstetteretet al. 2013; Chen et al., 2013; Montobbio and Sterzi, 2011; 2013), while no research has analysed the nature of cross-border inventions from the perspective of developing/emerging country firms.

In this paper, we address this gap in the existing literature by analysing the extent to which BIC firms are involved in cross-border inventions with European Union (EU-27) actors. We compare the value and characteristics of such cross-border inventions with those of a sample of analogous domestic patents by BIC firms over the period 1990-2012. Moreover, we distinguish between BIC Multinational Companies (MNCs) and BIC domestic firms (DFs) (i.e. BIC firms with no foreign direct investments), and assess the differences in the value and characteristics of cross-border and domestic inventionsbetween these two types of firms.

Our analysis reveals that cross-border inventions between BIC firms and EU actors are growing, though they are still limited in absolute numbers. Moreover, cross-border inventions are more valuable (in terms of higher quality and higher impact on the generation of subsequent innovations across a variety of technological fields) than domestic ones, suggesting that they represent an opportunity for BIC firms to accumulate technological capabilities, access to frontier knowledge, and, not least, appropriate the property rights of collaborative inventions involving European actors. We do also find that BIC MNCs benefit more from international collaborations than BIC DFs, explaining this difference with the better ability of MNCs to minimize coordination costs and combine the skills of diverse inventors across the globe. As a whole, ourfindings contribute to understand the role that emerging economies play in the global innovative landscape,providing recommendations for international development policies.

The paper is organized as follows: Section 2 outlines the conceptual framework; Section 3 explains the methodology and how the different measures are operationalized; Section 4 presents the empirical evidence and Section 5 concludes.

2. International R&D Collaborations and Cross-border Inventions as a Source of Technological Catching Up for Emerging Countries

European countries are one of the most important targets for BIC firms wishing to acquire technologies, and other strategic assets (Giuliani et al., 2013; UNCTAD 2013a).As a consequence, European stakeholders are worried about the loss of control on their strategic assets while at the same time this represents an unprecedented opportunity for BIC countries to catch up and to accumulate technological capabilities. Indeed, such investments are a way through which international knowledge spillovers can be generated, as illustrated by earlier studies (Alnuaimi et al. 2012; Branstetter, 2006; Branstetteretet al. 2013; Chen et al., 2013;Montobbio and Sterzi, 2011; 2013).

The literature on international knowledge flows has so far analysed different channels of knowledge spillovers, particularly trade and foreign direct investments (FDI) (Grossman and Helpman, 1991; Lee, 2006). Far less attention has been paid to international R&D collaborations between emerging countries’ firms and other international actors,apart form some recent attention to the growing involvement of emerging countries’ firms in blue-sky innovative projects and to the increasing quality of their innovations (Chen et al., 2013; Picci, 2010). Yet, the extent to which BIC engage in technological collaborations through which they enhance the innovativeness of emerging countries’ firms is still largely unknown.

On conceptual grounds, there is not full agreement about the impact of international R&D collaborations on the quality of innovations comingout from them(Alnuaimi et al. 2012; Furman et al., 2005; Penner-Hahan and Saver, 2005; Singh, 2008). On the one hand, some scholars believe that R&D collaborations bring about innovations of better quality, because they allow the combination of diverse knowledge and competences, available at the level of different inventive teams (Levinthal and March, 1993; March, 1991). On the other hand, other scholars have pointed at the high coordination costs and at the difficulties in knowledge integration existing when different international inventors and/or R&D unitscollaborate,suggesting that innovations carried out by isolated inventive teams can be more efficient and of higher value (Furman et al., 2005; Grant, 1996; Singh, 2008). Such contrasting views reflect on the discussion about how cross-border inventionscontribute to the technological catching up process of emerging countries’ firms.

(a) Cross-border and Domestic Inventions

To investigate whether international collaborations generate better quality innovations than domestic ones,Alnuaimi et al. (2012) study intra-firm collaborative patents in the US semiconductor industry. They explore the contribution of inventors from developed countries R&D units to innovations produced by subsidiaries of the same firm located in developing countries, finding that international collaborations have a positive impact on the quality of the patents, measured as the number of patent citations received. However, this study also confirms the difficulty of the inventive teams to effectively absorb and combine external knowledge, and casts doubts on the capacity of such collaborations to promote the accumulation of technological capabilities in developing countries.

In the same vein, Branstetter et al. (2013) investigate Chinese and Indian inventors and find that cross-border inventions (i.e. those involving inventors from countries’ other than Indian and/or China) are more valuable (in terms of received citations), than domestic patents produced by inventive teams in India or China and involving no international collaborations. Nevertheless, this study does also suggest that inventors from India and China are mainly involved in less important innovations (e.g. adaptation of existing technologies), whereas R&D units located in developed countries do the most valuable discoveries.

Similarly, other studies point at the fact that international collaborations between developing and advanced countries’ inventors can produce higher quality innovations, as compared to domestic collaborations, but they also show that most of the innovative R&D units located in developing countries are subsidiaries of developed countries’ MNCs (Alnuaimi et al., 2012; Montobbio and Sterzi, 2011).

All in all this evidence is interesting, but it leaves open the question of whether cross-border inventions are beneficial for emerging countries’ firms, and, at the same time, it puts at the centre of this conundrum the importance of the differences existing across emerging countries’ organizations involved in cross-border inventions.

(b) Cross-border Inventions by Emerging CountryFirms

While previous research has focused on advanced country MNCs operating in developing countries (Alnuaimi et al. 2012; Branstetteretet al. 2013), a new generation of emergingcountry firms has demonstrated exceptional capacities to catch up with leading firms. The examples of ZTE and Huawei Technologies, two of the biggest and most successful China’s high tech companies is representative: in 2013 they are respectively the second and the third top patent applicants in the world.[3] Godinho and Ferreira (20013) investigate the IPR strategy of these two MNCs and conclude that both firms have developed dynamic capabilities in innovation by investing strongly in R&D. and this investment has reflected in a dramatic growth of patent applications.

With this in mind, this paper focuses on firms from BIC analyzing the difference existingin the value and characteristics of cross-border vs. domestic inventions betweenBIC MNCs and BIC domestic firms with no direct investments in other countries (DFs).[4]The rationale for distinguishing between BIC MNCs and DFs is that their capacity to take advantage of international collaborations(vis à vis domestic ones) may be different. Through their established networks abroad, MNC headquarters are expected to be morecapable in controlling and coordinating foreign collaborators – both within and outside their own company, and thus they may exploit more effectivelythe knowledge coming from such external sources (Montobbio and Sterzi, 2013). Hence,BIC MNCs may be in the condition to take advantage of the diverse knowledge pools coming from international collaborations, while keeping coordination costs to a minimum (Regnér and Zander, 2011). In contrast, the global reach of BIC DFs may be more limited and therefore these firms may incur in higher coordination costs when engaging in international collaborations, which in turn may impact negatively on their innovative outcome (Montobbio and Sterzi, 2013).

Hence, we expect that BIC MNCs and DFs would be able to benefit differently from international collaborations, and therefore the innovative outcome of such collaborations – in the context of this paper measured in terms of the value and characteristics of patents - is also likely to vary.

3. DATA AND METHODOLOGY

3.1.Data

The empirical analysis is based on the European Patent Office (EPO) patent applications, retrieved from the PATSTAT database. Information contained in PATSTAT is ideal for tracking BIC-EU collaborations, because it also includes data about the country of residence of the inventive team and therefore it allows the identification of both domestic and cross-border inventions. The initial sample is constructed by searching in PATSTAT the universe of BIC-EU cross-border inventions and that of BIC domestic patents. Cross-border inventions are identified considering all patents, whose inventive team is composed by BIC inventors and at least one EU inventor; whereas domestic patents are those, whose inventive team is composed only by inventors from each single BIC country (e.g. for China by only Chinese inventors).[5]

The initial sample includes a total of 15,828 EPO patent applications of which 3,370 are cross-border inventions and 12,458 are domestic patents.[6] Since we are interested in domestic and cross-border inventions owned by BIC firms, we identify the subset of patents with at least one BIC assignee (i.e. the entity that has the right to economically exploit the invention disclosed in the patent). PATSTAT provides patent applicants’ names as they appear on the patent document and a number of steps are needed for cleaningand harmonizing them.In this work we focus on applicants with more than 5 patents in PATSTAT, for whom we have proceeded to manually harmonize the name, by, first, removing all the punctuation, the special characters, and the legal status of the companies, second, by matching assignee’s name with the ORBIS-Bureau van Dijk database, and, thirdly, by comparing the address reported on the patent and the one available in the ORBIS-Bureau van Dijk database.

Based on the information provided by ORBIS-Bureau van Dijk, each applicant is classified on the basis of the following assignees’ types:

  1. BIC MNCs: Headquarter or subsidiary of a private BIC MNC;
  2. BIC DF: BIC firms with no direct investments in foreign countries.

The final sample of patents includes a total of 5,215 patents: 4,210 owned by BIC MNCs and 1,005 owned by BIC DF.

From PATSTAT, we have retrieved other relevant information for all the domestic and cross-border inventions. Namely, the year in which the patent is filed, the technological class indicating the technological domain of the patent, the number of different countries in which the patent is valid. We have also gathered information related to the citations included and the citations received; in particular, we have collected the number of citations to previous patents, the number of citations to previous scientific literature (i.e. the so-called non-patent literature) and the number of citations received by subsequent patents. We use this information to construct our control variables (see below).

3.2.The variables

To account for the value and characteristics of both cross-border and domestic inventions we consider fourpatent-level variables, which are standard in the patent literature (see Table 1 for a summary of how these variables are operationalized). Table 2 reports the summary statistics for the variables and the correlation table is presented in the Appendix.

More specifically, patent valueis measured as:

NUM CITATION (i.e. forward citations): it measures the technological importance of the patents. This indicator is extensively used in the literature as it correlates to several other measurements of the patent value (Trajtenberg, 1990; Jaffe and Trajtenberg, 2002; Gambardella et al. 2008). In the citations count we consider both the self-citations by the assignee and the citations by others. In fact, both can be considered as a signal for patent importance, even if the former might indicate that the patent is important for internal innovations;