The Role of Invention in U.S. Metropolitan Productivity

Abstract

At the regional scale, human capital and agglomeration forces are assumed to shape innovative capacity, but there are likely to be more direct channels like the development and commercialization of new products. This article examines the relationship between inventive activity and productivity at the level of U.S. metropolitan economies, using a patents database that links inventors to their residence. Examining the 1980 to 2010 period, we find robust evidence that patenting is correlated with and Granger causes higher productivity in metropolitan areas. A standard deviation increase in patents predicts a 6 percent increase in productivity over 10 years. Higher-quality patents enhance the effect. We attempt to identify a cross-sectional causal effect of patenting on productivity and wages using various historical instruments from the early 20th Century and controls for the selection of high-skilled workers into the area. Two-stage least squares regressions show an even stronger causal effect, but we can not rule out the possibility that historic advantages in manufacturing and scientific research continue to affect productivity through both patenting and some un-identified channel. We conclude that inventive activity plays an important role in regional prosperity.