Can industrial policy buy ideas? investment promotion and innovation

This paper argues that innovation can be facilitated by policies promoting inflows of foreign direct investment. It examines the relationship between national investment promotion efforts targeting particular sectors and the number of patent applications (or patents granted) for innovations involving at least one local inventor filed at the US Patent and Trademark Office in the technology class belonging to the targeted sector. The difference-in-differences results suggest that innovation increases in sectors explicitly targeted by investment promotion agencies. This relationship is stronger for more R&D-intensive industries belonging to the targeted sector. Focusing on an interaction between an industry characteristic and the policy instrument allows to control for country-sector-year fixed effects that absorb all the unobservables that may determine the choice of targeted sectors in a given year in a given country.