Cross-Border Institutions and the Globalization of Innovation

Abstract

We identify strong cross-border institutions as a driver for the globalization of innovation. Using 67 million patents from over 100 patent offices, we introduce novel measures of innovation diffusion and collaboration. Exploiting staggered bilateral investment treaties (BITs) as shocks to cross-border property rights and contract enforcement, we show that signatory countries increase technology adoption and sourcing from each other; they also increase R&D collaborations. Consistent with BITs reducing investment frictions, the results are particularly strong for process innovation and for countries with weak domestic institutions. Foreign investments with high frictions, such as inter-firm investments in R&D-active sectors, are most responsive to BITs.

Keywords: Innovation, technology diffusion, globalization, cross-border institutions, bilateral investment treaties

JEL Classification: F21, F61, G18, G38, K33, O31, O33