Foreign R&D Satellites as a Medium for the International Diffusion of Knowledge

We examine the extent to which foreign R&D satellites of multinational firms act as a medium for the international diffusion of knowledge. Using patents from the United States Patent and Trademark Office, we compare the frequency with which headquarters patents are cited by third-party firms in the satellite's host country relative to a control group of patents, and this both before and after the establishment of the satellite (using a difference in differences approach). The results suggest that the satellite increases the flow of knowledge from the multinational's headquarters to firms in the satellite's host country. This satellite effect on knowledge diffusion is largest in host countries and sectors with strong but not world-class capabilities that have both the motivation and absorptive capacity to learn from foreign parties. The findings also suggest that knowledge diffusion is greatest when satellites are staffed with inventors that have previously either patented with other local firms (thus having stronger local social networks) or with the headquarters (thus having headquarters knowledge)