The quality of innovation and the extent of the market

Abstract

Abstract I present a comprehensive model of international trade in technology that considers both the demand for inventions and the supply of inventions. On the demand side, domestic and foreign firms make strategic technology adoption decisions. On the supply side, inventors compete to sell licenses for their technology to domestic and foreign firms. Countries benefit from international trade in technology because they obtain the best invention from a larger pool of inventions. International trade in technology increases the extent of the market for inventions and thereby improves the quality of innovation. Technology trade lowers prices, increases outputs, and increases the volume of trade in differentiated products. When traded products are not close substitutes, international markets for technology generate gains from trade. The results of the analysis are robust to the possibility of technology transfer either through expropriation or imitation. Protection of intellectual property rights preserves incentives for entry of inventors and improves the quality of innovation.