International Legal Institutions and the Globalization of Innovation

Bo Bian, Jean-Marie Meier, and Ting Xu

October 11, 2019

Abstract
We study how innovation goes global in response to the establishment of strong international  legal institutions that reduce cross-border contracting frictions. We construct novel measures of the globalization of innovation at the country-pair level using 70 million patents from more than 100 patent offices. Exploiting the staggered signing of Bilateral Investment Treaties (BITs), we find that stronger international legal institutions increase a country’s technology adoption and sourcing from its BIT partner country and the R&D collaborations between them, resulting in the convergence of the directions of their innovations. The results are particularly strong for countries with weak domestic institutions, for technological laggards, and for process innovation. Increases in the mobility of financial and human capital appear to be the key mechanisms.