Essays on Invention Value: Firm Capabilities and the Location of R&D

Abstract

This dissertation examines how inventive capabilities and offshoring decisions influence the value of corporate inventions across three essays. The first essay investigates whether large firms produce more valuable inventions, and if so, why. After confirming that large firms indeed produce more valuable inventions, we consider two possible sources: a superior ability to invent, or a superior ability to extract value from their inventions. We develop a simple model that discriminates between the two explanations. Using a sample of 2,786 public corporations, and measures of both patent quality and patent value, we find that, while average invention value rises with size, average invention quality declines, suggesting, per our model, that the large firm advantage is not due to superior inventive capability, but due to the superior ability to extract value. We provide evidence suggesting that this superior ability to extract value is due to the greater commercialization capabilities of larger firms. The second essay explores the offshoring of R&D over the past four decades, focusing on how the value of overseas inventions changes with changes in the cost of inventing at home. Over the last 40 years, corporate R&D has globalized, with U.S. firms increasingly relying on overseas inventors. I examine how rising domestic costs affect invention value, particularly given restrictive U.S. immigration policies. Prior studies suggest firms offshore their lower-value inventions as high penalties from coordination costs and knowledge leakage are justified only by lower overseas costs of R&D talent. If only lower-value inventions were offshored, a rise in domestic costs should increase overseas invention value. Contrary to expectations, this essay finds that higher domestic costs reduce the value of overseas inventions. This lower value is likely due to inventions with high offshoring penalties being offshored after home costs increase. This essay also explores which types of firms are less affected when domestic costs increase. Analysis of U.S. public firms shows centralized firms offshore fewer inventions but shift more overseas when costs rise. Larger firms are less responsive to cost increases, but decentralized and larger firms extract more value from overseas R&D. When domestic costs of inventing rise, firms increase their inventive activity in emerging market countries and countries with weaker IPR regimes. Moreover, the value of inventions in countries with weak IPR declines under rising domestic costs. The third essay delves into the specific offshoring penalties arising from coordination costs and potential knowledge leakage in weak IPR countries. Using a measure of patent technical quality to capture coordination costs and a measure of private value to reflect both coordination costs and knowledge leakage, this essay finds that coordination costs are universally significant, while knowledge leakage is particularly problematic in weak IPR regimes. Moreover, we find weak evidence that engaging in inventive activity in strong IPR countries can create local value via companion patents filed in the inventor’s country. Finally, large firms experience a greater home–overseas value gap despite facing similar coordination costs, pointing again to their superior ability to capture value.