The rate at which knowledge diffuses outward from the institutional setting and geographic location in which it is created has important implications for the modeling of technological change and economic growth, and for science and technology policy. Models of endogenous economic growth, such as Romer (1990) or Grossman and Helpman (1991), typically treat knowledge as completely diffused within an economy, but implicitly or explicitly assume that knowledge does not diffuse across economies. In the policy arena, ultimate economic benefits are increasingly seen as the primary policy motivation for public support of scientific research. Obviously, the economic benefits to the U.S. economy of domestic research depend on the fruits of that research being more easily or more quickly harvested by domestic firms than by foreign firms. Thus for both modeling and policy-making purposes it is crucial to understand the institutional, geographic and temporal dimensions of the spread of newly created knowledge.

There is an existing empirical literature on international technology flows. Much of this literature focuses on what might be described as “technology” diffusion rather than knowledge diffusion. For example, Teece (1977) discusses the difficulties that a multinational firm has in applying technology developed in one country to its operations overseas. Park (1995) and Coe and Helpman (1995) examine the impact on a country’s productivity growth of the trade-weighted R&D of other countries. Generally, a positive effect is found, which can be interpreted as reduced-form evidence of knowledge spillovers across international boundaries. While the mechanism for such spillovers is not identified, it seems reasonable that many forms of communication and information transfer would be correlated with bilateral trade flows. In these analyses, however, it is difficult to distinguish the effect of “pure” knowledge flows from the effect of technology flows embodied in advanced capital goods sold from one country to another. This distinction is crucial.