Fact of the Week: Indian Firms That Collaborated With Foreign Firms to Create One Patent Application Later Applied for More Patents Themselves and Increased Profitability Growth by 28 Percent

Source: Nanditha Mathew, Lorenzo Napolitano, and Ugo Rizzo, “The role of domestic firm knowledge in foreign R&D collaborations: evidence from co-patenting in Indian firms,” Maastricht Economic and Social Research Institute on Innovation and Technology, October, 2020.

Commentary: When domestic firms collaborate with foreign firms, domestic firms can benefit from knowledge spillovers, which has the potential to improve their performance. This is especially important if the domestic firm is in a developing country, as it allows the firm to “catch up” to world leaders, which boosts economic growth. Three researchers at Maastricht University examined firm collaboration through the lens of R&D collaboration between Indian and non-Indian firms, looking at its effects on a range of performance indicators. Using firm-level data accounting for 70 percent of India’s industrial output from 1995 to 2012, the team found that, when controlling for sector and time lags, and taking into account absorption costs, if an Indian and non-Indian firm apply jointly for a patent, domestic profit growth increases by 28 percent and 0.15 more domestic patents are filed. These strong effects of knowledge spillovers highlight the transformative effect that innovation can have on firm performance and future innovation. Furthermore, if these profits are reinvested in further collaborative R&D spending, it could lead to a virtuous cycle of increased profits, technological progress, and economic growth.