The Determinants of National Innovative Capacity

Motivated by differences in innovation intensity across advanced economies, this paper presents an empirical examination of the determinants of country-level production of international patents. We introduce a novel framework based on the concept of national innovative capacity. National innovative capacity is the ability of a country to produce and commercialize a flow of innovative technology over the long term. National innovative capacity depends on the strength of a nation’s common innovation infrastructure (cross-cutting factors which contribute broadly to innovativeness throughout the economy), the environment for innovation in a nation’s industrial clusters, and the strength of linkages between these two. We use this framework to guide an empirical exploration into the determinants of country-level differences in innovation intensity, examining the relationship between international patenting (patenting by foreign countries in the United States) and variables associated with the national innovative capacity framework. While there are important measurement issues arising from the use of patent data, the results suggest that the production function for international patents is well-characterized by a small but nuanced set of observable factors. We find that while a great deal of variation across countries is due to differences in the level of inputs devoted to innovation (R&D manpower and spending), an extremely important role is played by factors associated with differences in R&D productivity (policy choices such as the extent of IP protection and openness to international trade, the share of research performed by the academic sector and funded by the private sector, the degree of technological specialization, and each individual country’s knowledge “stock”). Further, national innovative capacity influences downstream commercialization, such as achieving a high market share of high-technology export markets. Finally, there has been convergence among OECD countries in terms of the estimated level of innovative capacity over the past quarter century. Journal of Economic Literature Classification: Technological Change (O3); Technological Change: Choices and Consequences (O33); Economic Growth and Aggregate Productivity: Comparative Studies (O57).