Internationalization of Innovation: Patents and Firm Performance in the Pharmaceuticals Industry

Under the trend of globalization, utilizing foreign research and development resources has become a common practice. However, the economic relations behind this phenomenon have not been well analyzed. In this paper, we study this phenomenon from the perspective of multinational enterprises. We use patent and financial data from the pharmaceutical industry to examine the effects of internationalization of innovation on profitability and the channels through which the effects take place. We define international innovation in multinational enterprises as hiring scientists overseas. Therefore, our measure of international innovation is based on patents with the first inventor with addresses outside of the country where the headquarter of the company is located. Estimation results from dynamic panel data models do not find clear effects of internationalization of innovation on profitability. However, in our analysis of the effects of international innovation on innovation output, we find that internationalization of innovation increases firm patent counts. This indicates that internationalization of innovation could increase the profitability of firms through increasing product innovation output. We discuss the possible reasons for the insignificant effects of internationalization of innovation on profitability.