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International technology Diffusion: A Gravity Approach

We adapt gravity methods from the empirical trade literature to study international technology diffusion in a novel way. First, we derive a theory-based gravity-type equation that describes the main fundamentals of international technology diffusion under perfect enforcement of intellectual property rights (IPR). We then estimate the gravity equation using bilateral royalty payments data—for a sample of 53 countries and the period 1995-2012—to infer the amount of technology diffusion predicted by the gravity model. Differences between the model and the data are mainly driven by characteristics of the importing-technology country that are not captured by the model. Controlling for the importer’s (i) intellectual property rights protection, (ii) structure of production, and (iii) taxation and legal system significantly improves the fit of the model: (i) and (ii) are especially relevant for developing economies, whereas (iii) is important for tax havens. A back-of-the-envelope counterfactual exercise shows that, had China had the same quality of IPR protection as the United States, technology transfer from the United States would have been, on average during 1995-2012, 57% higher. Our results are robust to the use of instrumental variables that address potential endogeneity concerns.

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