Cross-Border Institutions and the Globalization of Innovation

Abstract

This paper identifies weak cross-border institutions as an important constraint on the geographic boundaries of innovation. We construct novel measures of innovation diffusion and collaboration at the country-pair level using 70 million patents from more than 100 patent offices. Exploiting the staggered signing of Bilateral Investment Treaties (BITs) as shocks to cross-border contract enforcement and property rights, we show that signatory countries significantly increase technology adoption and sourcing from each other after the signing of a BIT. They also increase R&D collaborations, resulting in the convergence of their technologies. The effects are particularly strong for countries with weak domestic institutions, technological laggards, and for process innovation. Increases in the mobility of financial and human capital are the key channels.