When inventors file a patent
application to protect their intellectual property, they must cite
related prior knowledge on which their innovation builds, such as
patents from other inventors.
A Chinese company built a 10-house village with a 3-D printer in less than
one day in 2014. A stretch of solar-power highway that converts sunlight
into electricity and transfers it directly to the power grid opened in
Jinan, eastern China, just last year. And a few years back, Korea switched
on a road that wirelessly recharges online electric vehicles as they drive
over it. These are just a few examples of the impressive technological
advances that countries like Korea and—more recently—China have made in
Until recently, production of the global stock of knowledge and technology
was concentrated in a few large industrialized economies. From 1995 to 2014,
three-quarters of the world’s patented innovations originated in the Group
of 5 (G5) technology leaders—namely the United States, Japan, Germany,
France, and the United Kingdom. With globalization and advances in
information technology, however, the potential for knowledge to travel
faster and further has increased dramatically, opening up greater
opportunities for emerging market economies to learn from other,
technologically advanced, countries and build their own innovation capacity.
In our research, which builds on the work of Giovanni Peri (2005), we
examine the strength of technology diffusion and its evolution over the past
two decades and the implications of these developments for the innovation
landscape. Understanding exactly how this diffusion takes place is
essential: technology transfer is the key to spreading knowledge and lifting
incomes and living standards across the world.
New Innovators Emerging
When inventors file a patent application to protect their intellectual
property, they must cite related prior knowledge on which their innovation
builds, such as patents from other inventors. The number of cross-patent
citations is therefore a direct measure of knowledge flows. Our research
examined citations obtained from the worldwide patent database PATSTAT
covering more than 100 million patent documents. This measure is not without
drawbacks and does not capture all knowledge flows—for example, it excludes
hard-to-measure informal knowledge flows and patent infringement. However,
it is a good starting point for gauging the spread of know-how across
countries, as it is measurable and recorded systematically.
In 1995, the United States, Europe, and Japan dominated global patent
citations, but in more recent years, Korea and China have made increasingly
large use of the global stock of knowledge as measured by their patent
A more formal analysis of these cross-patent citations—to estimate the
intensity of knowledge diffusion—also shows that the share of knowledge
spreading from the G5 technology leaders to emerging market economies
(beyond China and, formerly, Korea) has increased over the past two decades.
In contrast, the share of knowledge that radiates from the G5 to other
advanced economies has been broadly flat—even declining somewhat since the
global financial crisis.
Emerging market economies have been able to capitalize on this greater
access to global knowledge to enhance their innovation capacity and
productivity. Knowledge flows from the G5 are found to give a significant
boost to domestic innovation (as proxied by patenting) and productivity in
both advanced and emerging market economies. For example, a 1 percent
increase in knowledge flows from the G5 is associated on average with about
a 1/3 percent increase in patenting activity by the recipient country-sector
if the amount of domestic research and development (R&D) is held constant.
And the strength of this effect has increased over time, especially for
emerging market economies.
As a result of this catch-up, new global innovators have emerged. Although
our results apply broadly to emerging market economies, Korea—an advanced
economy since 1997—and China stand out, in part because they are large
economies. Both have joined the top-five innovating countries, whether
measured by their patenting activity or their amount of spending on R&D.
This success in part reflects learning through knowledge and technology
transfer, but it was also made possible by substantial investment in
domestic R&D and more generally by education that increased people’s ability
to understand and apply that technology.
Emerging market economies have been able to capitalize on this
greater access to global knowledge to enhance their innovation
capacity and productivity.
Domestic R&D serves a dual purpose—it can spur the development of new
technologies and also help countries absorb existing foreign technologies.
According to the Organisation for Economic Co-operation and Development—the
main source for these data—China has increased its spending on R&D ninefold
since the early 2000s, to $375 billion a year (in constant and
purchasing-power-parity- adjusted terms). Its R&D spending is now second
only to that of the United States ($460 billion) and is much larger than
Japan’s ($150 billion). Korea, at $70 billion a year, spends close to the
average of large European countries such as France, Germany, and the United
Another measure of the rise of Korea and China is growth in their patenting
activity. An examination of international patent families—using a
patent-count measure that includes only applications to at least two
distinct patent offices, in order to exclude low-value patents—shows that
China and Korea each patent about 20,000 inventions a year. Although this is
still substantially below patenting in Japan and the United States (about
60,000 each), patenting activity in China and Korea is comparable to the
average of France, Germany, and the United Kingdom. A deeper investigation
into the types of patents by economic sector reveals that the rise of
patenting in China and Korea is particularly pronounced in the electrical
and optical equipment sectors and, in Korea, for machinery equipment as
Competition: Good or Bad?
The emergence of Korea and, more recently, China as global innovators is a
striking development that promises to lift living standards for a large
share of the global population. But do these developments discourage
innovation in the traditional technology leaders, and could that have
contributed to the global productivity slowdown? Our research does not
address this question directly, but we do not believe that it has. Here’s
First, technology leaders benefit both directly and indirectly from
exporting their technology and knowledge.
They benefit directly by selling their technologies (whether embodied in
machinery or through the licensing of patents) to other countries. Of
course, this assumes that intellectual property rights are respected so that
the acquirer pays a fair price for the technology. But technology leaders
can also benefit indirectly: higher productivity in other economies means
higher incomes, which fosters demand for exports more generally, including
from traditional technology leaders.
Second, and more subtly, an important characteristic of knowledge—unlike
most goods—is that it is a “nonrival” good. The fact that one
person knows something and uses that information does not prevent others
from knowing and improving on it. Knowledge gained, then, from past research
efforts—whether domestic or foreign—is expected to increase the productivity
of future research efforts (Grossman and Helpman 1991). As inventors in
China and Korea develop new ideas and add to the global stock of knowledge,
innovators in the traditional technology leaders (and, of course, the world
more generally) can also benefit from that new knowledge.
Cross-patent-citations data suggest that this knowledge snowballing may
already be taking place: for example, inventors in G5 countries increasingly
cite Chinese patents. These citations are today approaching the same order
of magnitude as those from G5 to other advanced economies. In our analysis,
we find that knowledge flows are not one-directional from technology leaders
to other countries. Traditional technology leaders benefit from each other’s
innovations and reap even greater benefits than other (nonleader) countries
do (Chen and Dauchy 2018).
Third, growing competition from China and other emerging market economies in
global markets has been a stimulating force for innovation and technology
Although the relationship between competition and innovation is complex, our
analysis shows that, for most countries and sectors, increased
competition—measured either by import penetration from China or by the
decline in global sales concentration associated with the rise of emerging
market firms—has spurred innovation and adoption of foreign technologies.
This evidence is based on the experience of advanced and emerging market
economies outside the G5, but it nevertheless suggests that competition has
been a positive force for innovation.
Level Playing Field
A look at trends in US innovation shows that aggregate R&D spending has
continued its robust rise. Patenting activity and total factor productivity,
however, show signs of leveling off. But this reduced productivity growth
more likely reflects a temporary slowdown in innovation during the
transition between two major innovation waves—the mid-1990s information and
communication technology revolution and the much-anticipated automation and
artificial intelligence revolution (Brynjolfsson, Rock, and Syverson 2017).
Other structural and cyclical factors also likely contributed (Adler and
In summary, technology diffusion and the emergence of new global innovators
probably do not harm traditional innovating countries; competition has long
been a key driver of ingenuity and innovation. But a fair and level playing
field is essential: intellectual property rights must be well designed and
enforced. Many G5 country concerns—especially with respect to China—revolve
around forced transfer of technology at nonmarket, unfavorable terms in
exchange for access to one of the largest and fastest-growing markets in the
Ultimately, innovation and technology diffusion are best served by respect
for intellectual property rights. Without it, the world could see
breakthroughs decline when innovators are unable to recoup their costs.
Protection of intellectual property rights is no less important for emerging
market economies if they want to benefit from multinationals’ technology
transfer and their own inventors’ ingenuity. The explosion of Chinese
patenting is perhaps an encouraging sign that, as the country develops
valuable innovations of its own, it will come to recognize the value of
intellectual property protection.