For Chinese firms, gaining patents for innovations may be a promising way to gain influence in the international arena, according to HKUST’s Jiatao Li and a co-researcher. Such patents act as a powerful signal of technological quality and market potential for U.S. firms who seek to introduce such innovations at home. This research offers novel insights into the role of patents in reducing information asymmetry between countries and provides practical guidance for knowledge transfer across international boundaries.

In 2003, the Chinese firm Quanfeng Holdings Ltd developed and patented a novel laser alignment device for drills. The technological knowledge associated with this invention was subsequently adopted by Black & Decker in the U.S. The authors describe this process as “reverse knowledge adoption.” “Reverse innovations,” they explain, “are technologies originated in and developed for an emerging economy before being adopted in an advanced country.”

This can benefit all parties. Through reverse knowledge adoption, firms in emerging countries such as China and India can gain a foothold in the world’s ever more competitive technology market. Meanwhile, the authors note, firms in developed countries such as the U.S. can “preempt local firms in emerging markets from creating low-cost products to disrupt them at home.”

However, this process is not always smooth. “Before developed-country firms can develop suitable technological products to cater to major emerging markets or adapt these products to similarly low-priced segments at home,” note the authors, “an accurate assessment and understanding of the unique local conditions and customer needs in emerging markets are necessary.” This may prove difficult, because technological conditions and market institutions in developing countries are less transparent and more fluid than those in developed countries, leading to information asymmetry.

Patents may offer a solution. As patents are important signals of the quality and value of innovation, firms can learn a lot about a company from the patents it receives. “Patenting a technology in an emerging market can influence the reverse adoption of the technology by other firms in developed countries,” suggest the authors. It does so by “bridging the information gap” between countries, enabling “outsiders” in developed countries to acquire accurate knowledge of potential customers and competitors in emerging markets.

To test their ideas, the researchers collected and analyzed more than 4,000 patent applications to identify “China–U.S. patent dyads” (patents awarded first in China and subsequently granted in the U.S.). The results were clear. “The granting of the China patent to a focal firm increases reverse knowledge adoption by other firms by approximately 60%,” report the researchers. Interestingly, this effect was most pronounced in very complex technology sectors such as the computer and information sector, in which information asymmetry is especially high.

In sum, say the authors, patents awarded to firms in emerging markets “provide precise information about the suitability and potential of technologies for these markets.” They not only protect a firm’s intellectual property rights (IPR) but also send a strong signal overseas of its “technology potential and market opportunity.” This can benefit developed and emerging markets alike. Indeed, these findings have important strategic and managerial implications for all entrepreneurial firms that seek to integrate and transfer technological knowledge across international and geographical boundaries—especially in highly complex sectors. “Managers and decision-makers should consider transnational patenting as a crucial component of their overall IPR strategies,” say the authors.