The Gravity of Knowledge

Wolfgang Keller, Stephen R. Yeaple

NBER Working Paper No. 15509
Issued in November 2009, Revised in February 2012
NBER Program(s):Economic Fluctuations and Growth, International Trade and Investment, Productivity, Innovation, and Entrepreneurship

How large are spatial barriers to transferring knowledge? We analyze the international operations of multinational firms to answer this fundamental question. In our model firms can transfer bits of knowledge to their foreign affiliates in either embodied (traded intermediates) or disembodied form (direct communication). Knowledge transfer costs interact with the knowledge intensity of production to determine the geographic structure of multinationals' input sourcing as well as its competitiveness in foreign markets. The model shows how data on observable trade costs and features of multinationals' global operations reveal the size and nature of knowledge transfer costs. Our empirical analysis confirms the model's predictions using firm-level data, quantifies the aggregate implications of the model for the structure of multinationals' operations, and demonstrates that transfer costs shape the knowledge content of intra-firm trade flows.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w15509

Published: Wolfgang Keller & Stephen Ross Yeaple, 2013. "The Gravity of Knowledge," American Economic Review, American Economic Association, vol. 103(4), pages 1414-44, June. citation courtesy of

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