BUS 430 – D100
Critical Reflection on National Innovation Systems
Team 5
Rupam Rishi – 301090091
Mike Macdonald – 301142976
Joel Thom – 301088663
Karli McDougall – 301092642
Instructor: Rajiv Krishnan Kozhikode
January 28, 2013
Introduction
Given the topic of national innovation systems, the assigned articles “Leveraging
Knowledge Across Geographic Boundaries” by Stephen Tallman and Anupama Phene and
“International Patenting and the Less-Developed Countries” by Edith Penrose are an interesting
segway into the relationship between innovation and the flow of knowledge. Both articles
provide a discussion on the topic of knowledge transfer between countries from which patents
and geography can be identified as two contributing factors. In order to offer further insight into
this topic, the articles “Patent Collaboration and International Knowledge Flow” by Jiancheng
Guan and Zifeng Chen and “Patents revisited: Their function in developing countries” by
Constantine Vaitsos are also taken into consideration. Throughout these articles, we identified
patents and geography as influential factors which affect knowledge sharing and ultimately
innovation.
Literature Review
The insights made by Tallman and Phene (2007), in “Leveraging Knowledge Across
Geographic Boundaries”, are lackluster. To be quite frank, “Leveraging Knowledge Across
Geographic Boundaries”, is long-winded which overcomplicates what could be a much simpler
topic. Tallman and Phene (2007) immediately pose the question of whether or not geographic
proximity determines the flow of knowledge. With that being said, they uncover that four
distinctive dimensions influence knowledge flow: (i) technological similarity, (ii) recognized
value, (iii) prior firm-level knowledge flows, and (iv) originating firm innovativeness.
Tallman and Phene (2007) are sure to outline the methodology used for their research. In
particular, they recognize the limited scope of their research noting that their findings are
|Page
2
generalized. Moreover, they are not necessarily applicable to the entirety of knowledge flow, as
their study was specific to the US Biotechnology Industry during a snapshot in time. Expanding
upon their methodology, it was difficult to follow due to a lack of clarity in defining the three
categories of geographic interaction. Although they briefly explain the concept of a cluster, as
defined by Porter (as cited by Tallman & Phene, 2007), they do not go into much detail
explaining the three cluster segments. The conclusions made in this particular article were not
groundbreaking by any means, and are short of being insightful. After reviewing this article, the
reader is left underwhelmed, but also curious about how patents influence innovation and
knowledge sharing in less-developed and developing nations.
Edith Penrose’s (1973) “International Patenting and the Less-Developed Countries” to an
extent fills a void resulting from an unclear relationship between patents and knowledge sharing.
This article primarily focuses on the impact of patents on the transfer of technology for both
developed and less-developed nations. For the purpose of this critical reflection, “the transfer of
technology” is synonymous with “the transfer of knowledge.” The author uses past studies and
reports to present both sides of the argument en route to reaching her final conclusion. Penrose
(1973) begins by mentioning that patents are important for attracting foreign investment and
promoting the transfer of knowledge which are both necessary for innovation to occur in lessdeveloped countries. However, many believe that more investments can only occur through
competition, an element that cannot coexist with patent protection systems. In rebuttal to the
notion that patents help facilitate the transfer of knowledge, Penrose (1973) notes that it is widely
believed that the transfer of knowledge depends on the absorptive capacity of the country
granting the permit; furthermore, they will not benefit if they do not have the technological
know-how to learn the foreign country’s innovations. Although Penrose (1973) acknowledges
|Page
3
that she cannot support any argument with “hard” empirical evidence, she concludes her article
supporting the view that patents have little significance in promoting the transfer of knowledge
and/or foreign investments.
This article presents both sides of the arguments pertaining to the role of patents in
influencing knowledge transfer and innovation. However, this is the one and only strength
demonstrated. A major shortcoming in Penrose’s (1973) article is that her findings are based
primarily on theoretical reasoning rather than quantitative facts and therefore, fail to provide a
definitive conclusion. Additionally, the article was published in 1973 and makes use of
information from studies and reports from the 1960s, which may denote that the information
included in these studies may be obsolete.
To overcome the lack of empirical data supporting arguments made for and against the
role patents play in promoting knowledge transfer, “Patents revisited: Their function in
developing countries” by Constantine Vaitsos (1972) is considered. Vaitsos (1972) analyzes and
discusses the effect of patent systems on the economy of a developing country. The discussion
surrounding the use of patent systems to promote knowledge transfer has been quite qualitative
thus far and lacks thoughtful economic analysis. The article attributes this to the fact that the
arguments and rationale for patent systems are mainly derived by lawyers and business
executives. According to Vaitsos (1972), the majority of the patents in developing countries are
owned by foreign corporations for the purpose of enhancing market control, limiting
competition, and achieving a monopoly. Between 1957 and 1961, on average, the national
patents belonging to developing countries amounted to one percent of the total patents granted by
these countries (Vaitsos, 1972). By pursuing such objectives, foreign corporations hinder the
transfer of knowledge (i.e. skills and technology) and decrease the amount of inventive and
|Page
4
innovative behaviour exhibited by individuals in developing countries. Ultimately, such actions
stagnate the economic growth of the country. Although the implementation of a patent system
often leads to such behaviour, it is important to understand that the patent itself is not the
contributing factor. A patent is a “document which gives an exclusive privilege to undertake
production, make sales or import specified products of processes which meet certain legal
requirements” and therefore, has no more to do with knowledge transfer than a factory lease
(Vaitsos, 1972, p.80). Thus, Vaitsos (1972) argues that knowledge transfer between two
countries is dependent on the presence of particular conditions or lack thereof, which go
unmentioned.
This article presents a coherent argument by drawing upon both quantitative and
qualitative data. In addition, Vaitsos (1972) illustrates an alternative perspective on the influence
of patents on knowledge sharing by discussing patents as a tangible item versus a legal system.
That being said, the article did not clarify which particular conditions lead a patent system to be
successful in transferring knowledge. Moreover, the article failed to explain the criteria used to
determine a “developing country”. Although the article provides empirical data, it does not
successfully explain it.
Lastly, the article, “Patent Collaboration and International Knowledge Flow” by
Jiancheng Guan and Zifeng Chen (2011) studies international patent collaborations as an
indicator of knowledge transfer across borders. Countries are divided into two groups. The first
is the Organization for Economic Cooperation and Development (OECD) group, also known as
the knowledge creators, which consists of 30 countries that are strong innovators. The second
group is the non-OECD group in which the countries are known as the knowledge users. For the
purpose of this critical reflection, the OECD group is synonymous with developed countries and
|Page
5
the non-OECD group is synonymous with developing countries. The study takes place in three
five-year time periods to demonstrate changes over time. Four facets are used to measure
knowledge flow: (i) overall distribution of knowledge transfers between countries, (ii) ability to
take part in and facilitate knowledge transfers, (iii) distribution of knowledge transfer between
developed and developing countries, and (iv) bilateral knowledge sharing relationships. The
outcomes of the study show that knowledge transfer primarily occurs between developed
countries; however, developing countries play a significant role in facilitating knowledge transfer
between other countries and are continuously increasing participation in patent collaboration. In
sum, patent collaboration and knowledge transfer are positively impacting economic
competitiveness.
The article by Guan and Chen is advantageous as it demonstrates knowledge transfer at
an international level without limiting industries and over three periods of time. The strong
results of the study allowed for an easier analysis of international collaborations and knowledge
transfer. However, the equations, diagrams, and tables used in this study were difficult to
understand, leading to guesswork for the reader.
Impact of Patents on Innovation and Knowledge Sharing
Patents play a key role with respect to innovation; however, this role greatly differs
among developing and developed worlds. Both Vaitsos (1972) and Penrose (1973) mention that
in less-developed countries, a majority of patents are granted to foreign countries. This results in
the differing roles amongst the nation granting the patent and the foreign patentee. In developing
nations, it is found that patents undermine innovation, whereas in developed countries patents are
known to fuel knowledge flow. Moreover, in developed nations, patents protect the innovators
|Page
6
and thus, encourage further innovation. According to Guan and Chen (2011), cross-border
patents are important for knowledge transfer which in turn promotes innovation. However, it is
widely believed that knowledge transfer is dependent on a country’s absorptive capacity which is
low in some less-developed countries.
Penrose (1973) notes that many believe patent protection increases the amount of foreign
investment in less-developed countries. The increased investment discloses information via
publication, promoted manufacturing, and investment in the countries granting the patents. This
is believed to lead to the transfer of knowledge from developed countries to less-developed
countries. However, Penrose (1973) argues that many patents are granted by developing
countries to large foreign corporations that have no intention to work in these countries. Rather,
these foreign companies want to simply protect their market share by preventing competitors
from producing and/or selling in these markets. Similarly, Vaitsos (1972) states that unexploited
patents in developing countries allow corporations to secure import markets and block
competition from close substitutes. In addition, these patents limit the amount of knowledge
transferred between foreign corporations and developing countries (Vaitsos, 1972). As foreign
firms are primarily concerned with protecting their export market from competition, they are not
concerned with “working” the patent (i.e. manufacturing in the developing country). For
example, in the Republic of Colombia, out of a total of 3,513 patented processes, only 10 were
produced in the country in 1970 (Vaitsos, 1972). Consequently, there is no opportunity for
knowledge pertaining to the foreign firm’s manufacturing technology, business “know-hows”, or
strategy to be shared between the countries or industries.
Penrose (1973) argues that patents actually decrease foreign investment in less-developed
countries as they prevent other competitors from entering the market and making possible
|Page
7
investments. Similarly, Vaitsos (1972) states that patents create an obstacle in stimulating foreign
investment and if corporations do invest in developing countries, it’s for the purpose of acquiring
local companies. A foreign corporation is able to achieve this by licensing the use of patents to a
nationally-owned company for a specific period of time. Once the development and marketing
channels have been established for the patented products, the licenses are suspended. This forces
local firms to sell part or all of its stock to the foreign corporation. As a result, foreign
corporations are able to establish a monopoly and strengthen their market position. For example,
41 percent of all U.S. investments in the Colombian chemico-pharmaceuticals industry, between
1958 and 1967, took the form of acquisitions (Vaitsos, 1972).
Therefore, from the arguments presented by Vaitsos (1972) and Penrose (1973) it can be
concluded that patents are insignificant in promoting adequate knowledge transfer and foreign
investment between developed and developing countries.
Geographic Influence on Innovation and Knowledge Sharing
Through these articles, particularly Tallman & Phene (2007) and Guan & Chen (2011), it
was found that geography does not play a significant role in innovation and knowledge sharing,
but can be used to assess knowledge transfer.
Prior to considering Tallman and Phene’s (2007) findings, it was hard to believe that
geographic boundaries would limit innovation and act as a barrier to knowledge flow, as their
hypothesis suggested. Their research uncovers that geographic proximity is not a determinant in
knowledge sharing and thus, not a determinant of innovation.
With respect to innovation, Tallman and Phene (2007) note that the firms found to be
more innovative have patents cited more often, highlighting their importance with respect to
|Page
8
fueling innovation and knowledge sharing in developed nations, such as the US. Further on that
notion, Guan and Chen (2011) note that the US has the highest number of international
collaborations and bilateral knowledge sharing relationships, which, in turn, fuels knowledge
transfers amongst developed and developing nations. Moreover, Tallman and Phene (2007) state
that the capacity to innovate acts as a signal for firms to seek out knowledge sharing. In essence,
patents are facilitating the transfer of knowledge in these developed nations, further fuelling
innovative practices. This should come as no surprise, as most of the largest and most successful
organizations of the world are often copied or mimicked. Furthermore, “international patent
citations are more likely than inter-cluster patent citations” (Tallman and Phene, 2007, p.256). In
a globalized environment, it is found that organizations seek to adapt best practices and look
elsewhere to continue innovating. Guan and Chen (2011) expand on this notion by stating that
external knowledge is increasingly important for domestic innovation. Innovators within
countries may not possess all the expertise and knowledge to successfully innovate; however,
through knowledge transfer, countries can use complementary international information to
successfully innovate.
According to Guan and Chen (2011), geography is an evaluative criterion for which
countries are participating in knowledge transfer, but not a determinant of knowledge transfer.
There is a gap between developed and developing economies in terms of innovation and
technologies. The transfer of knowledge from developed countries to developing countries
allows this gap to be filled as developing countries gain knowledge to improve their technologies
and in turn, better their economies. The results of the study by Guan and Chen show that 90
percent of international collaborations are between developed countries; however, it is also
concluded that developing countries have shown increasing numbers of international
|Page
9
collaborations. Between 2001 and 2005, China and Taiwan (non-OECD group) were ranked
fourth and fifth, respectively, in knowledge transfer between developed and developing groups.
In addition, China and Taiwan ranked at 16 and 12 for the number of international
collaborations. This knowledge transfer between the two groups and the number of international
collaborations allowed China and Taiwan to gain technologies allowing their economies to thrive
today.
One particular area where there seems to be a discrepancy between the two articles is
with regards to knowledge sharing and prior relationships. Tallman and Phene’s (2007) studies
found that their hypotheses are not supported and thus, prior relationships are not influential
upon knowledge flow, whereas Guan and Chen (2011) say otherwise. Their study shows that
relationships between innovators and the networks created within each group allow for an easier
transfer and diffusion of knowledge across borders.
Dimensions Applicable to Factbook
The articles presented by both Penrose (1973) and Vaitsos (1972) illustrate how patents
can be used as a reference point for comparison between two industries. On a macro level,
countries can be analyzed to determine the following: (i) whether they have more domestic
versus foreign owned patents, (ii) do they collaborate with other countries when developing
patents, (iii) do they have a specific patent system implemented, and if so (iv) does it require
“know-how” contracts and/or specific “working” requirements. On a micro level, industries can
be assessed to determine the following: (i) whether or not patents are used, (ii) whether patent
protection leads to increased profitability, market share, and foreign investment, and (iii) whether
the implementation of a patent system is necessary for the firm to consider foreign-investment.
| P a g e 10
The article by Guan and Chen (2011) can be used to assess how countries are using
knowledge transfer to better their economy. Countries can be assessed based on the following: (i)
how much they are sharing knowledge, (ii) which countries they are sharing with, and (iii)
whether they take part in knowledge sharing or facilitate it. In addition, according to Tallman
and Phene (2007), countries must be assessed based on: (i) their technological similarities, (ii)
value and costs of knowledge transfer, (iii) innovative capability, and (iv) prior engagement with
other countries. Analyzing countries based on these dimensions will provide insights into their
economic strength as knowledge sharing allows developing countries to reduce the gap between
their economies and those of developed countries (Guan & Chen, 2011).
Strategic Conclusion
Industrialized nations are leading the way of innovation, with non-industrialized and
developing nations seeking out knowledge and facilitating knowledge transfer. Industrialized and
developed nations have the opportunity to provide a foundation for innovation in the global
market. However, the current state of patent use in developing nations does not coincide with
developmental practices. The issue at hand is that patents and knowledge sharing are not entirely
beneficial to both developing and developed nations. In fact, it is far more beneficial for those
who already have a strong foothold within an industry without actual operations. Many of the
developed nations choose to claim patents in developing nations to create a barrier for other
organizations. To overcome such an issue, developing nations should look towards patent policy
regulation requiring a foreign firm to at least maintain operations in that country. This creates
better opportunity to drive the economy in developing nations, allowing them to strengthen their
own foothold in the global market.
| P a g e 11
References
Guan, J., & Chen, Z. (2011). Patent collaboration and international knowledge flow. Information
Processing & Management, 48, 170-181.
doi: http://dx.doi.org/10.1016/j.ipm.2011.03.001
Penrose, E. (1973). International patenting and the less-developed countries. The Economic
Journal, 80(331), 768-786. Retrieved from http://www.jstor.org/stable/2230670
Tallman, S., & Phene, A. (2007). Leveraging knowledge across geographic boundaries.
Organization Science, 18(2), 252-260. doi: 10.1287/orsc.1060.0227
Vaitsos, Constantine (1972). Patents revisited: Their function in developing countries. The
Journal of Development Studies, 9:1. 71-97.
doi: http://dx.doi.org/10.1080/00220387208421432
| P a g e 12