Intellectual property rights and innovation in vertically related industries

Abstract This paper examines the economic impact of intellectual property rights in the context of complementary vertical innovation by firms in upstream and downstream industries. Empirical patterns suggest that industry downstreamness is associated with a greater relative importance of patents versus trade secrecy in firm appropriation strategies. Using a novel model of endogenous growth, I show that strengthening patent protection generates downstream‐biased technical change in most cases. The corresponding reallocation of resources creates distributional effects from patent policy that existing analysis do not account for. I examine the impact of these effects on economic growth, welfare, and optimal patent policy.