Recombinant innovation and the boundaries of the firm

There is considerable interest in understanding how important market frictions are in stiffing the transmission of ideas from one firm to another. Although the theoretical literature emphasizes the importance of these frictions, direct empirical evidence on them is limited. We use comprehensive patent data from the European Patent Office and a multiple spells duration model to provide estimates that suggest that they are substantial. It is around 30% more costly to successfully discover and utilize new ideas created in another firm than in your own. This compares to the increased costs of accessing new ideas across national borders of around 5%, and across technologies of around 20%. These result point towards substantial imperfections in the market for technology.