Environmental regulation and the cross-border diffusion of new technology: evidence from automobile patents

We examine the impact of environmental regulation on the international diffusion of new technology through the patent system. We employ a dataset of automobile emission standards between 1992 and 2007 and corresponding data on cross-border patent inflows of technologies developed to comply with these standards. Our analysis, based on a research design of country pair years, shows it is “regulatory distance” between countries rather than absolute regulatory stringency per se that matters for cross-border patent inflows: the transfer of compliance technologies rises when regulatory standards in the inventor and the recipient countries become “closer”. Consistent with this main result, we find that in aggregate destination countries only receive a larger total inflow of patents as a consequence of regulatory tightening if their previous regulatory standard is below that of the major innovating source countries.