Does Trading Spur Specialization? Evidence from Patenting

Exploiting staggered establishments of patent exchanges in China, we examine how patent trading affects firm innovation and specialization. Our findings demonstrate that the market for technology induces (i) specialization between patent buyers and sellers, (ii) specialization between patent licensors and licensees, and (iii) specialization based on a firm's R&D efficiency. All these three specialization patterns indicate that a firm's response to an emerging market for technology hinges on its comparative advantages. Firms with a comparative advantage in creating innovation redirect their resources from advertising to patenting activities, whereas firms with a comparative advantage in commercializing innovation switch their effort from patenting to advertising activities. Our findings suggest patent trading promotes comparative-advantage- based specialization and enhances firm performance. Relieving trading friction in the market for technology mitigates the negative consequences induced by capital market friction. Our findings shed light on how the market for technology contributes to the aggregate economy via the specialization-promoting channel.