Internationalization of innovation and firm performance in the pharmaceutical industry

Firms' strategies and investments related to foreign research and development and innovation have expanded considerably in recent decades. However, studies on the economic effects of this phenomenon remain limited. As there are both benefits and costs to the internationalization of innovation, the final effect on firms' profits is uncertain. We compile a rich dataset containing information on multinational enterprises in the pharmaceuticals industry in the US and Europe, and use the firms' patents to construct multidimensional measures of internationalization of innovation related to intensity, experience, and diversity. We then link the patents data to firms' financials. Our estimates from the dynamic panel and Poisson models reveal that firms' international innovation activities contribute meaningfully to their profits. Our estimates also reveal that the main channel through which this effect works is enhanced innovation. Based on our empirical results, we discuss business strategies related to the internationalization of innovation.