## How Knowledge Spreads

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**Canonical URL:** [How Knowledge Spreads](https://www.imf.org/-/media/files/publications/fandd/article/2018/september/globalization-and-how-knowledge-spreads-eugster.pdf)

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### Overview
- Topic: More rapid diffusion of know-how as an important benefit of globalization.
- Key assertion: Globalization and advances in information technology have increased the potential for knowledge to travel faster and further, opening greater opportunities for emerging market economies to learn from technologically advanced countries and build innovation capacity.
- G5 technology leaders defined: United States, Japan, Germany, France, United Kingdom.

### Measurement and evidence of diffusion
- Data source and scope:
  - Citations obtained from the worldwide patent database PATSTAT covering more than 100 million patent documents.
  - Cross-patent citations are used as a direct measure of knowledge flows (with noted limitations: excludes informal flows and patent infringement).
- Historical pattern:
  - From 1995 to 2014, three-quarters of the world’s patented innovations originated in the Group of 5 (G5) technology leaders.
  - In 1995, the United States, Europe, and Japan dominated global patent citations; by recent years Korea and China have made increasingly large use of the global stock of knowledge as measured by their patent citations.
- Formal analysis findings:
  - The share of knowledge spreading from the G5 to emerging market economies (beyond China and, formerly, Korea) has increased over the past two decades.
  - The share of knowledge radiating from the G5 to other advanced economies has been broadly flat—even declining somewhat since the global financial crisis.
- Quantitative effect on recipients:
  - 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.
  - The strength of this effect has increased over time, especially for emerging market economies.

### Emergence of new global innovators
- Korea and China:
  - Both have joined the top-five innovating countries, whether measured by patenting activity or spending on R&D.
  - Korea became an advanced economy in 1997.
- Patenting levels (international patent families, patent-count measure requiring applications to at least two distinct patent offices):
  - China and Korea each patent about 20,000 inventions a year.
  - Japan and the United States each patent about 60,000 inventions a year.
  - Patenting activity in China and Korea is comparable to the average of France, Germany, and the United Kingdom.
- Sectoral pattern:
  - 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 well.

### Role of domestic R&D and education
- Dual purpose of domestic R&D: spurring development of new technologies and helping countries absorb existing foreign technologies.
- China R&D spending:
  - 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).
  - China’s 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 R&D spending:
  - Korea spends $70 billion a year on R&D, close to the average of large European countries such as France, Germany, and the United Kingdom.
- Education: increases people’s ability to understand and apply technology, enabling absorption of foreign know-how.

### Competition, effects on traditional technology leaders, and knowledge snowballing
- Direct and indirect benefits to technology leaders:
  - Direct: selling technologies and licensing patents to other countries (conditional on intellectual property rights being respected).
  - Indirect: higher productivity and incomes abroad raise demand for exports, benefiting technology leaders.
- Nonrival nature of knowledge:
  - Knowledge is a “nonrival” good; knowledge gained by one party does not prevent others from knowing and improving on it.
  - Knowledge gained worldwide is expected to increase the productivity of future research efforts.
- Evidence of bidirectional flows:
  - Cross-patent-citations data show inventors in G5 countries increasingly cite Chinese patents; these citations are approaching the same order of magnitude as those from G5 to other advanced economies.
  - Knowledge flows are not one-directional; traditional technology leaders benefit from each other’s innovations and reap even greater benefits than other (nonleader) countries do.
- Competition as a stimulant:
  - 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 for most countries and sectors examined (advanced and emerging market economies outside the G5).

### Innovation trends and implications
- US trends:
  - Aggregate R&D spending in the United States has continued its robust rise.
  - Patenting activity and total factor productivity show signs of leveling off.
  - Reduced productivity growth more likely reflects a temporary slowdown 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.
- Chart note (patent-citation visualization):
  - For visibility in the figure, the increase in citations over time could not be reflected proportionally (approximate scaling factor 2014 vs. 1995 is 1.5 in the figure; actual is 2.5).

### Policy implications and recommendations
- Intellectual property rights:
  - A fair and level playing field is essential; intellectual property rights must be well designed and enforced.
  - Respect for intellectual property rights is crucial to ensure innovators can recoup costs and to encourage multinationals’ technology transfer and domestic inventors’ ingenuity.
- Concerns and enforcement:
  - Many G5 concerns—especially with respect to China—revolve around forced transfer of technology at nonmarket, unfavorable terms in exchange for access to large and fast-growing markets.
- Long-run outlook:
  - The explosion of Chinese patenting is an encouraging sign that, as China develops valuable innovations of its own, it may come to recognize and protect intellectual property rights.

*Authors: JOHANNES EUGSTER, GIANG HO, FLORENCE JAUMOTTE, and ROBERTO PIAZZA.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/september/globalization-and-how-knowledge-spreads-eugster.pdf_