Organize to Innovate: Intellectual Property Regimes, Technology Adoption and Firm Structure

Abstract

We use The Patents (Amendment) Act, 2002 in India as a quasi-natural experiment to identify the causal effect of higher incentives for innovation on a firm's compensation structure. We find that stronger intellectual property (IP) protection has a sharper impact on the demand for managerial skill for technologically advanced firms. Firms that were apriori above the industry median (in terms of technology adoption) see a rise in the share of managerial compensation by 1.3-8.3% higher than the rest. This effect is completely driven by the firms between 60th-90th percentile. The increase in wage inequality can partly be attributed to a stronger performance pay for high-tech firms. Associatedly, the reform also leads to a significant reallocation of resources between firms. The high-tech firms invested more in technology adoption, started to produce more product varieties at higher quality and filed for more product patent claims. Broadly, we demonstrate that stronger IP protection leads to higher wage inequality between firms.