Cross-Border Dynamics of IP Modularity: International Patenting in LEDs and Lithium-Ion Secondary Battery Technology.

Date01 Abril 2023
AuthorBican, Peter M.

1 Introduction

Globalization and intellectual property (IP) rights affect not only international trade but also dispersed knowledge generation and international knowledge flows (Branstetter et al., 2015; Ernst et al., 2022; Jaffe & Trajtenberg, 1999; Maskus & Penubarti, 1995; Rafiquzzaman, 2002). Modern innovation systems are characterized by cross-border research and development (R&D) organization and by increasing internationalization (De Rassenfosse & Thomson, 2019; Papanastassiou & Pearce, 2009; Zhao, 2006). This internationalization fosters access to additional knowledge and new partners, as well as the realization of cost reductions and productivity gains (Eaton & Kortum, 1996a, 1996b; Harhoff et al., 2014). Multinational enterprises (MNEs), in particular, profit from these developments (Cantwell & Mudambi, 2000; Dasgupta, 2012; Luo, 2005).

Decentralized, international R&D functions place a strong emphasis on IP to protect and appropriate their knowledge (Granstrand & Holgersson, 2014; Jacobides et al., 2006; Reitzig & Puranam, 2009). Herein, various options for value appropriation exist, and IP modularity is a valuable approach when technology ownership is partitioned among various stakeholders (Baldwin & Henkel, 2015; Henkel et al., 2013). IP modularity builds on the general concept of modularity as developed by Baldwin and Clark (2000), which describes the division of systems into individual parts (or modules), allowing all or most other modules to remain unchanged as changes occur in a focal module.

IP modularity is primarily used to assess how MNEs can collaborate and capture value, particularly in business environments with complex technologies in which various inventions come together and are owned by various industry players (Baldwin & Clark, 2000; Gomes & Joglekar, 2008; Langlois, 2003; Sanchez & Mahoney, 1996; Simon, 1962; Von Hippel, 1990). Creating a modular value appropriation strategy allows the MNE to master the tradeoff between owning too much IP in a technology, hampering innovation, or owning too little or the "wrong" invaluable IP and being leapfrogged by competitive businesses (Baldwin & Henkel, 2012, 2015; Henkel & Baldwin, 2009; Henkel et al., 2013; Waltl et al., 2012).

However, the strategic application of IP modularity has drawbacks, as MNEs still lose control of parts of their IP (Shaw & Stock, 2011). As part of their internationalization strategies, MNEs decide where to patent their inventions and, hence, benefit from temporary exclusivity (Conley et al., 2013; Putnam, 1996). Herein, they generate patent families with multiple member documents from various countries (1) (European Patent Office, 2017b). Still, research on IP modularity has primarily focused on firmlevel decisions, neglecting value appropriation concerns for MNEs with internationally dispersed inventive activities (Almeida et al., 2002; Dechezlepretre et al., 2015; Morescalchi et al., 2015). This is occurring despite the extant literature's awareness of IP's legal frameworks and countries' limitations. For example, Baldwin and Henkel (2015) acknowledged worldwide patents, paving the way for further recognition of these territorial rights' implications and drawbacks for IP modularity value appropriation strategies. The problem of cross-border legal limitations addresses one of the key constituents of IP modularity in enabling value capture "in situations where knowledge and value creation are distributed across many actors" (Henkel & Baldwin, 2009). Thus, our research question becomes: How do MNEs' cross-border inventive activities affect the successful application of IP modularity?

We approach this research question by relying on an inductive, multiple case study design and incorporating two levels of analysis - the firm and the country level - to focus on the different geographical origins of patent filings (Paavilainen-Mantymaki & Hassett, 2015; Stake, 1995, 2013). Herein, we evaluate two distinct, self-compiled samples of 42,806 patent families in the light-emitting diode (LED) industry that are owned by 7760 MNEs and of 50,746 patent families in the lithium-ion secondary battery technology industry that are owned by 7733 MNEs. These patent families come from various key markets, including China, Germany, Japan, South Korea, Taiwan, and the United States of America.

Examining multiple analyses over three decades, we trace the development of inventive activities at the firm and country levels via patent filings in these two focal technologies through the lenses of IP modularity. Herein, we observe shifts from countries like Japan toward China, detect differences in technology focus based on Internationa] Patent Classification classes, and detect where MNEs' inventive activity occurs. Thus, we observe a geographical shift in value creation and, subsequently, value capture.

Importantly, we address issues related to internationalization strategy, industry evolution, and IP modularity dynamics. We make four key contributions: First, we integrate internationalization and IP strategies by expanding the current view on IP modularity with cross-border IP modularity, in that it becomes relevant to making decisions on where and when to protect the modules. Second, we contribute the concept of dynamic packaging of IP modules, expanding the focus on defining modules and decisions related to keeping or sharing certain modules in order to enable appropriation while spurring innovation as a dynamic decision. This addresses not only modules that are currently valuable but also modules that will become valuable if kept providently. Third, we contribute a multi-level analysis on the firm and country levels, showing various options for MNEs and policymakers on how to successfully apply an international IP modularity strategy for sustainable value appropriation. Fourth, we incorporate time-variant dynamics across multiple time periods to simultaneously assess the current and future importance of certain IP modules, introducing the Dynamic IP Modularity Application Matrix to guide researchers and practitioners alike.

2 Literature

2.1 Internationalization, R&D Organization, and Intellectual Property

Cross-border R&D organization and growing internationalization characterize modern innovation systems (Branstetter et al., 2018a; Papanastassiou & Pearce, 2009; Zhao, 2006). The globalization of R&D is driving productivity growth, enabling cost reductions, and is providing access to new knowledge and networks (De Rassenfosse & Thomson, 2019; Eaton & Kortum, 1996a; Harhoff et al., 2014). This development is driven by two major factors, residing inside and outside of MNEs: (1) firm-specific advantages and (2) country-specific advantages.

International business theory differentiates between firm- and country-specific advantages that contribute to MNEs' value-added services (Matysiak et al., 2018; Rugman et al., 2011). Among others, firm-specific advantages comprise proprietary technologies and intangible assets and refer to "the firm dimension of international business" (Hymer, 1960; Matysiak et al., 2018; Rugman & Verbeke, 2003). Country-specific advantages comprise natural resources and other endowment factors and refer to "the country dimension of international business" (Matysiak et al., 2018; Rugman, 1981). For MNEs that are operating across multiple countries, home and host country-specific advantages shape how firm-specific advantages are managed in each country (Rugman et al., 2011). This management comprises decisions on how R&D activities are organized, including which technologies to foster and where to subsequently protect proprietary corporate knowledge - for example, via IP.

As described by the World Intellectual Property Organization (2015), IP "refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce." Proprietary knowledge, new inventions, and other intellectual assets are protected by different IP regimes, such as patents, copyrights, trademarks, and trade secrets (Bican et al., 2017). Approximately 80 percent of all technological content is only found in patents, meaning they constitute one of the most comprehensive, and valuable, windows into R&D activities globally (Asche, 2017).

Patents protect inventions' functions and yield temporary exclusivity for up to 20 years, allowing their owners to exclude others from commercially profiting from their inventions (Conley et al., 2013; Somaya, 2012). They are based on exclusion rather than use facilitation (Smith, 2006). Patents are territorial rights, wherein country-specific governing bodies each define patents' breadth and enforceability (Dreyfuss et al., 2008). Managing these patents over their lifetimes, which includes regular maintenance decisions to uphold patents' enforceability, is a dynamic capability that involves strategic considerations (Al-Aali & Teece, 2013; Conley, 2017; Conley et al., 2013; Eisenhardt & Martin, 2000; Somaya, 2012; Teece et al., 1997).

Publicly available patents reveal information on corporate strategies: for example, on MNEs' technological focus, the development of new technologies, industrial evolution, and tracing of technological change (Basberg, 1987; Guderian, 2019; Pavitt, 1985). Patent data on application, citation, or grant counts have been used to estimate the development stage within technologies' life cycles (Gao et al., 2013; Su, 2018). In the same vein, patent data are also used to trace countries' developments and cross-border interdependencies (Choi & Park, 2009; Griliches, 1990; Tong & Frame, 1994; Wieandt, 1994). This research traces international co-invention and knowledge flows (Branstetter & Maskus, 2022; Branstetter et al., 2015; Ernst et al., 2022; Jaffe & Trajtenberg, 1999), and patents are also often analyzed to measure MNEs' aforementioned R&D and internationalization decisions (Branstetter et al., 2018b). For example...

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