Does Trading Spur Specialization? Evidence from Patenting

We study how the market for technology (facilitated by the establishment of patent exchanges in China) affects innovation specialization. We find that the market for technology induces (i) specialization between patent buyers and sellers, (ii) specialization between patent licensors and licensees, and (iii) specialization based on a firm’s research and development efficiency. All these three specialization patterns indicate that the market for technology promotes comparative advantage–based innovation specialization. Firms with a comparative advantage in creating innovation redirect their resources toward producing patents, whereas firms with a comparative advantage in commercializing innovation switch their effort toward launching new products. A firm also shrinks its scope of innovation and invents in technological fields with greater proximity. Financial friction hampers innovation specialization and relieving trading friction in the market for technology mitigates such negative consequences.

This paper was accepted by Lin William Cong, finance.

Funding: P. Han acknowledges financial support from the China’s Natural Science Foundation [Grant 72103003]. C. Liu acknowledges financial support from the China’s Natural Science Foundation [Grant 72202034]. X. Tian acknowledges financial support from the China’s Natural Science Foundation [Grant 72425002].

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03174.