IMF Working Papers

A well-functioning market for technology, or ideas, is an important determinant for the type, scope, and distribution of innovation activities. We use a panel of 20 industries across 24 European countries to study the key determinants driving the market for technology. We explore whether the expenditures on external knowledge depends on the sectoral pattern of innovation and an industry’s distance to the global technological frontier. Disseminating knowledge and technology within the industry, bringing it closer to the global technological frontier, tends to reduce the expenditures for external knowledge except in supplier-dominated industries. We also find important complementarity effects in the market for external knowledge. Industries with high R&D spending, with increasingly large firms, and with large investments in machinery and software foster growth of the market for technology. Our findings suggest tailoring innovation policies to help expand both the size of the market for technology and the use of these markets in specific industries.