Cumulative innovation—building on existing ideas to create new innovations—is key to technological and economic development. Unsurprisingly, the process is geographically localized: innovations tend to be developed by innovators located nearer to their predecessors. Yet research has thus far failed to account for the strengthening of this effect in recent decades. Taking a novel legal perspective, HKUST’s Yanfeng Zheng and a colleague shed light on the “distance puzzle” in cumulative innovation.

Scholars primarily attribute the localization effect to the cost of knowledge transmission. With major recent advancements in technology and transportation, barriers to knowledge transmission have rapidly declined—a phenomenon dubbed the “death of distance.” One might expect the localization effect to have weakened in tandem, yet the opposite appears to be true—“a puzzling trend,” say the authors, “given the decreasing cost of knowledge transmission.”

Focusing on patents, they set out to determine why the negative impact of distance on spillovers has strengthened over time. While patents incentivize initial breakthroughs, they create legal hurdles for subsequent innovators. As patent regimes have grown increasingly stringent since the 1980s, the researchers asked whether these legal dynamics could be driving the persistent localization of cumulative innovation.

Their stylized model illustrates that pro-patent regimes shift profits to the original innovators, discouraging distant followers and thus strengthening the localization of cumulative innovation. They test their model with an unexpected pro-patent regime change in the U.S. “Follow-on innovations became more localized after patents were strengthened in litigation,” the researchers report.”

Their finding that a country’s patent regime can shape the geography of cumulative innovation provides crucial insights for firms and policymakers. “Unravelling this puzzle offers practical implications,” the researchers explain, “because distant technology diffusion is essential for reducing regional disparities, producing breakthrough innovation, and sustaining economic vibrancy.”